HomeMy WebLinkAbout2020-03-05 Utilities Advisory Commission Agenda PacketAMERICANS WITH DISABILITY ACT (ADA)
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NOTICE IS POSTED IN ACCORDANCE WITH GOVERNMENT CODE SECTION 54954.2(a) OR 54956
I.ROLL CALL
II.ORAL COMMUNICATIONS
Members of the public are invited to address the Commission on any subject not on the agenda. A reasonable time
restriction may be imposed at the discretion of the Chair. State law generally precludes the UAC from discussing or acting
upon any topic initially presented during oral communication.
III.APPROVAL OF THE MINUTES
Approval of the Minutes of the Utilities Advisory Commission Meeting held on February 5, 2020
IV.AGENDA REVIEW AND REVISIONS
V.REPORTS FROM COMMISSIONER MEETINGS/EVENTS
VI.UTILITIES DIRECTOR’S REPORT
VII.COMMISSIONER COMMENTS
VIII.UNFINISHED BUSINESS - None
IX.NEW BUSINESS
1.Discussion of Resilience Workshops: Follow Up and Next Steps Discussion
2.Staff Recommendation That the Utilities Advisory Commission Recommend That the City Action
Council Adopt a Resolution Approving the Fiscal Year 2021 Water Utility Financial Plan,
Including Proposed Reserve Transfers and an Amendment to the Water Utility Reserves
Management Practices, With no FY 2021 Water Rate Increase
3.Discussion of the Presentation of Preliminary Wastewater Collection Rates for FY 2021 Discussion
4.Discussion and Update of Advanced Metering Infrastructure (AMI) and Fiber Network Discussion
Expansion Planning
5.Staff Recommendation That the Utilities Advisory Commission Recommend That the City Action
Council Adopt a Resolution Amending the City's Electric Supply Portfolio Carbon Neutral Plan
6.Discussion of Proposed Building Electrification Work Plan for 2020-2021 Discussion
7.Selection of Potential Topic(s) for Discussion at Future UAC Meeting Action
NEXT SCHEDULED MEETING: April 1, 2020
ADDITIONAL INFORMATION - The materials below are provided for informational purposes, not for action or
discussion during UAC Meetings (Govt. Code Section 54954.2(a)(2)).
Informational Reports 12-Month Rolling Calendar Public Letter(s) to the UAC
•2020 Sustainability and Climate Action Plan (S/CAP) Update
UTILITIES ADVISORY COMMISSION – SPECIAL MEETING
THURSDAY, March 5, 2020 – 7:00 P.M.
COUNCIL CHAMBERS
Palo Alto City Hall – 250 Hamilton Avenue
Chairman: Michael Danaher Vice Chair: Lisa Forssell Commissioners: Donald Jackson, A.C. Johnston, Greg Scharff, Lauren Segal, and Loren Smith Council Liaison: Alison Cormack
Presentation
Presentation
Presentation
Utilities Advisory Commission Minutes Approved on: Page 1 of 8
UTILITIES ADVISORY COMMISSION MEETING
MINUTES OF FEBRUARY 5, 2020 REGULAR MEETING
CALL TO ORDER
Chair Danaher called the meeting of the Utilities Advisory Commission (UAC) to order at 7:00 p.m.
Present: Chair Danaher, Vice Chair Forssell, Commissioners Jackson, Johnston, Segal, and Smith
Absent: Commissioner Scharff
ORAL COMMUNICATIONS
None.
APPROVAL OF THE MINUTES
Commissioner Jackson clarified his comments under Reports from Commissioner Meetings/Events noting
that the data from the online customer portal is not computer readable, where the draft minutes said “easily
readable.” He was referring to the need for the data to be available in a CSV or similar format.
Commissioner Jackson moved to approve the minutes of the December 4, 2019 meeting as amended.
Commissioner Segal seconded the motion. The motion carried 6-0 with Chair Danaher, Vice Chair Forssell
and Commissioners Jackson, Johnston, Segal, and Smith voting yes, and Commissioner Scharff absent.
AGENDA REVIEW AND REVISIONS
None.
REPORTS FROM COMMISSIONER MEETINGS/EVENTS
None.
GENERAL MANAGER OF UTILITIES REPORT
Jonathan Abendschein, Assistant Director of Resource Management, delivered the General Manager’s
Report.
Gridshift Hackathon - Our Utilities team partnered with Bay Area clean energy providers including Silicon
Valley Clean Energy, Peninsula Clean Energy, East Bay Clean Energy, and an early-stage venture firm,
Powerhouse, to co-sponsor a "hackathon" January 31 through February 1. Over a 24-hour period of time, the
“Gridshift Hackathon” brought together teams of software developers, energy experts, and others to develop
code to reduce or eliminate the carbon footprint in the building, transportation, and utility sectors. Over 120
participants registered, and 16 teams completed apps to compete for prizes. $16,000 in cash prizes were
awarded to the three winning teams. The submissions, code, video and photos are available online and can
be sent out. Lena Perkins represented Palo Alto on the judging panel as she manages the Program for
Emerging Technologies. You can reach her for further details at Lena.Perkins@cityofpaloalto.org.
DRAFT
Utilities Advisory Commission Minutes Approved on: Page 2 of 8
Nissan Leaf Rebates for Public Power Customers - Thanks to a partnership with the American Public Power
Association (APPA), City of Palo Alto Utilities customers are eligible for special rebates on Nissan Leaf electric
vehicles for a limited time. The rebates were originally available through the beginning of January but have
been extended to March 31, 2020. This is a great opportunity to consider making the switch to an electric
vehicle and help support the City and Utilities Department’s sustainability and climate action goals. Details
at cityofpaloalto.org/EV.
Soft Launch of the MyCPAU New Online Customer Site - CPAU is starting a soft launch roll out for our new
online utility account management service, called MyCPAU. This improved customer website will replace the
existing online My Utilities Account. MyCPAU offers a fast and secure way to pay your bill online and set up
automatic or recurring payments. Customers will be able to view monthly utility usage, learn about
opportunities to lower their bills, set notification preferences and alerts, and receive direct digital support
from Customer Service staff. Commissioners have been invited to participate in the soft launch and help us
beta test the new service. We are excited about this much-needed upgrade to our online utility customer
services and thank you in advance for any feedback you care to share. Visit cityofpaloalto.org/MyCPAU for
more information.
The Great Race for Saving Water and Earth Day Festival – We are excited to announce that this year's Earth
Day Festival and Great Race for Saving Water will be held on Saturday, April 25 at the Palo Alto Baylands
Athletic Center. Join us for a day of fun with community partners for a 5K, 10K fun run and walk plus kids
dash. Following the race is an expo celebrating the 50th anniversary of the first Earth Day, including live
music, food trucks, EV ride & drive, nature activities, raffle drawings, and more! Come join the fun while
learning as we raise awareness, build education, and community engagement for climate action and
protection of Earth's natural resources. To register and learn more, please visit cityofpaloalto.org/earthday.
Fiber to the Home Update – Staff has received five proposals in response to the Request for Proposals (RFP)
and interviewed three proposers. Staff is conducting background checks on the three proposers. A contract
will be presented to the Council in March. Thanks to Commissioners Smith and Jackson for their assistance in
reviewing the proposals.
In response to Vice Chair Forssell's query, Councilmember Cormack indicated the Nissan Leaf rebates range
from $1,500 to $3,500.
COMMISSIONER COMMENTS
Commissioner Smith noted that MyCPAU is a tremendous improvement over My Utilities Account.
Vice Chair Forssell added that usage data can be downloaded through MyCPAU.
UNFINISHED BUSINESS
None.
NEW BUSINESS
ITEM 1: ACTION: Staff Recommends the Utilities Advisory Commission (UAC) Recommend that Council Accept
the Northwest County Recycled Water Strategic Plan Report.
Karla Dailey, Acting Utility Program Services Manager/Senior Resource Planner, reported acceptance of the
Northwest County Recycled Water Strategic Plan Report (Report) will not result in approval of any projects.
Negotiating the regional water reuse project agreement among the City, Valley Water, and the City of
Mountain View would have been difficult without the Report. The Report lays the foundation for future
regional decisions and projects. Projects contained in the Report should be incorporated into a Water
Integrated Resources Plan and may be included in a broader “One Water” report that covers all flows of
water into and out of Palo Alto and their various uses within Palo Alto.
Utilities Advisory Commission Minutes Approved on: Page 3 of 8
In reply to Commissioner Johnston's inquiry regarding a timeframe for the local salt removal facility, Dailey
advised that an RFP will be released any day now. Staff anticipates construction will begin in early 2021 and
be completed in 2023. With respect to Commissioner Johnston's query about the options in Table 1 of the
staff report, Dailey indicated the options will not be viable if Valley Water exercises its option. At this time,
Valley Water has not made a decision about its option, and Valley Water has ten years to make the decision.
Alternatively, Valley Water can pay the City $1 million a year for ten years without taking the water, but at
the end of ten years Valley Water does not have any rights to the water. Commissioner Johnston commented
that it could be 10 or 20 years before the viability of some options are known.
In answer to Commissioner Smith's question regarding planning for a worst-case scenario in the context of
the Valley Water Transfer, Dailey related that options not consistent with the Valley Water Transfer will not
be included in concept options in a One Water Report. Commissioner Smith inquired whether Options A1,
A2, and A3 described in the staff report are unaffected by the new plant and the sale of effluent, to which
Dailey replied yes. Commissioner Smith requested any reasons, excluding funding, for not implementing
Options A1, A2, and A3. Dailey stated funding is the main issue.
In response to Commissioner Segal's inquiry about installing pipelines for Option A1 during construction of
other underground projects, Dailey explained that installing trunk lines without Council approval would be
quite expensive, even during construction of other projects. Jonathan Abendschein, Assistant Director of
Resource Management, added that a trench would be needed for the trunk lines, which would be a large
additional cost.
Councilmember Cormack noted the Cubberley Draft Concept Plan discusses the potential use of recycled
water.
Chair Danaher suggested the idea of how much insurance the community would buy to ensure sufficient
water is available for gardens and tree canopy be incorporated into the requirements for options, and
suggested staff combine Tables 1 and 3 in the staff report, placing Options C1, C2, and C3 at the bottom as
potential future options, and add a column for years to complete. In response to his question about the
analysis of needs and an incremental amount to protect tree canopy and gardens, Dailey advised that the
Report and a decision about the overall portfolio overlap with actions taken in a drought. Drought resilience
will be an attribute incorporated into the One Water evaluation of the full supply portfolio.
ACTION: Commissioner Johnston moved to recommend the Council accept the Northwest County Recycled
Water Strategic Plan Report. Vice Chair Forssell seconded the motion. The motion carried 6-0 with Chair
Danaher, Vice Chair Forssell and Commissioners Jackson, Johnston, Segal, and Smith voting yes, and
Commissioner Scharff absent.
ITEM 2: ACTION: Staff Recommends that the Utilities Advisory Commission (UAC) Recommend the Council
Adopt an Amendment to the Carbon Neutral Plan.
Jonathan Abendschein, Assistant Director of Resource Management, recalled that the UAC has discussed
hourly accounting for evaluating the carbon content of the Electric Supply Portfolio. Staff will present a
proposal to memorialize the policy. The item could be considered as having two primary components:
choosing whether or not to amend the Carbon Neutral Plan to move to hourly accounting, and discussing the
exchange of California renewables for out-of-state renewables and using the funds for a variety of carbon-
reducing activities. He recommended the UAC focus on the first component and consider the second if it
resolves the first component.
Chair Danaher noted one policy issue is the sale of excess renewables. The UAC has reached consensus that
excess resources should be sold to capture the economic benefit. The discussion should address a definition
of excess and whether to fill a shortfall in accounting with a more costly or less costly approach.
Utilities Advisory Commission Minutes Approved on: Page 4 of 8
Jim Stack, Senior Resource Planner, reported the two major changes staff proposes are (1) to move from an
annual carbon accounting methodology to one based on hourly average emissions factors and (2) to permit
the use of Renewable Power Supply (RPS)-eligible, unbundled RECs (Renewable Energy Certificates), also
known as Bucket 3 RECs, to neutralize any residual emissions resulting from the change in carbon accounting
methodology. The cost impact is relatively small at approximately $150,000 per year. Staff proposes these
changes because the grid has changed dramatically since 2013; the emissions intensity of grid electricity
varies dramatically by hour and season; and periods of surplus energy generally align with periods when
electricity on the grid is relatively clean. The community, organizations, and regulators have raised questions
of whether the City of Palo Alto Utilities (CPAU) can credibly and accurately claim to be a carbon neutral
utility on the basis of an annual accounting approach. Shifting to an hourly accounting framework will provide
additional credibility to CPAU's claim to be a carbon-neutral utility. Additional community engagement on
the proposed changes may be needed. Under Alternative 1, the UAC would adopt hourly accounting without
the use of Bucket 3 RECs, in which case a certain amount of surplus supplies would need to be maintained.
Alternative 1 would save approximately $1.7 million per year over ten years. Under Alternative 2, the UAC
would adopt hourly accounting with the use of Bucket 3 RECs. Alternative 2 would save an additional
$500,000-$600,000 per year. Staff recommends Alternative 2. Alternative 3 is to retain the annual
accounting approach. In this case, staff sees no reason to maintain any of the surplus supply. Alternative 3
would save approximately $2.4 million per year total (approximately $100,000 more than Alternative 2).
Chair Danaher clarified that the $2.4 million savings is actually the earnings from the sale of surplus RECs.
The cost of offsetting hourly accounting with Bucket 1 RECs is $700,000. The cost of offsetting hourly
accounting with Bucket 3 RECs is $100,000. Stack confirmed this understanding.
Stack continued the presentation, stating Alternative 4 is business as usual with the UAC reconsidering hourly
accounting in a year. Staff would sell surplus Bucket 1 supplies down to load in 2020; report emission totals
under an hourly accounting framework; and consider using the hourly accounting framework to evaluate
supply and demand resources.
In response to Vice Chair Forssell's request for additional information about using hourly accounting
internally to evaluate supply and demand resources, Abendschein explained that staff evaluates the cost of
energy efficiency programs against the cost of buying new electric supply. This concept could also be applied
to carbon. Staff may be able to use hourly accounting for carbon to evaluate demand-side measures and
supply resources to determine the dollars-per-ton of carbon savings for each measure. If the UAC chooses
not to adopt hourly accounting, staff will continue to explore internal uses of hourly accounting. Under the
hourly accounting methodology, a supply resource that generates a lot of energy in the summer hours would
have a lower carbon impact than a resource that generates the same amount of energy in off-season periods.
Two resources that do not compare favorably on price per kWh may compare favorably in dollars-per-ton
savings. Stack added that staff does not currently evaluate supply resources in terms of dollars per ton of
carbon. With this concept, staff could look at grid emissions that are avoided by bringing new supply
resources online.
In reply to Commissioner Jackson's query regarding the severability of the two issues (the adoption of hourly
accounting and the use of Bucket 3 RECs for compliance), Stack advised that the two issues are independent,
and a decision on the first component will not affect a decision on the second component.
In answer to Commissioner Johnston's comparison of the options in the presentation and in the staff report,
Stack indicated Option A corresponds to Alternative 1, Option B to Alternative 2, and Option C to Alternative
2a about additional swapping.
Vice Chair Forssell related that she is inclined to support hourly accounting because it is a more accurate
reflection of carbon emissions. CPAU can make the biggest difference in the City's carbon footprint by
obtaining long-term contracts for carbon-free energy. She expressed concern that CPAU has taken on more
and more solar power when it is not clear that solar helps the grid. She expressed interest in Alternative 4c
Utilities Advisory Commission Minutes Approved on: Page 5 of 8
shown in the presentation (the use of hourly accounting for internal decision making), but any of the
alternatives are acceptable if they drill down on Alternative 4c and have the most impact.
Commissioner Segal remarked that hourly accounting information should be disclosed because ratepayers
have misperceptions about it and may make different decisions if they know their decisions will have an
impact.
Bret Andersen, Carbon Free Palo Alto, remarked that using hourly accounting to drive decisions about supply
purchases and demand management will reduce local greenhouse gas emissions. The definition of carbon
neutrality is directedly contracted renewable power in California, which may be Bucket 1 RECs. The real
action is to have 100-percent renewable contracts that cover power needs. If one is convinced that a Bucket
1 REC is the same as a Bucket 3 REC, then a lot of money is available. Carbon Free Palo Alto proposes staff
include a social cost of carbon in decision-making and engage the community regarding Bucket 3 RECs.
Moving to hourly accounting would be great.
Chair Danaher indicated under hourly accounting, residual emissions will have to be covered with $700,000
of the $2.4 million or with the purchase of Bucket 3 RECs at a cost of $100,000. Purchasing Bucket 3 RECs
has some benefit.
In answer to Commissioner Jackson's query regarding adopting Alternatives 1 or 2 (the adoption of hourly
accounting with and without Bucket 3 RECs for the electric portfolio) and pursuing Alternative 4c at the same
time, Stack indicated the UAC could do that. Chair Danaher noted staff is already working on Alternative 4c.
Commissioner Johnston agreed that adopting hourly accounting is logical because it would provide a more
accurate picture of carbon and the energy portfolio.
Commissioner Jackson commented that adopting hourly accounting and incurring a cost of $100,000 through
Alternative 2 is acceptable.
Stack presented part 2 of the item. Option 1 is the sale of some surplus renewables, which will generate $1.7
million per year in savings. Option 2 is the sale of all surplus renewables and the purchase of a small amount
of Bucket 3 RECs, which will generate $2.3 million in savings. Option 3 is the sale of all surplus renewables
and a trade of in-state renewables for out-of-state renewables, which will generate $3.3 million in savings.
However, the RPS level will decrease to 50 percent, 45 percent, and 39 percent for Option 1, Option 2, and
Option 3 respectively. The emissions intensity, using hourly accounting, will be 0 for Option 1, 42 for Option
2, and 131 for Option 3. Emissions intensity for Option 2 would be 0 with the purchase of unbundled RECs.
The emissions intensity shown on the Power Content Label (PCL) will be 10, 9, and 65 for Options 1-3
respectively.
In answer to Commissioner Jackson's question regarding the total savings, Stack indicated Option 3 would
generate about $37 million, Option 2 about $25 million, and Option 1 about $18 million.
Vice Chair Forssell noted the retail rate impact would be a 2-percent rate savings when rate increases over
the past few years have been 4-9 percent. Abendschein related that staff equates a $1.2 million per year
cost increase with a 1-percent rate increase.
Stack further reported the emissions intensity shown on the PCL would be a small number for each option,
but the numbers for the options would be considerably less than the grid average. Next steps include Council
approval and community engagement.
In reply to Commissioner Jackson's inquiry about use of the savings, Abendschein advised that savings may
be directed to carbon-reducing activities such as electric vehicle (EV) charging, promoting EVs, building
Utilities Advisory Commission Minutes Approved on: Page 6 of 8
electrification, and demand response or flexible loads. Chair Danaher added that savings may be used to
purchase energy storage for the grid.
Commissioner Johnston did not favor the concept of selling all surplus renewables because it feels like CPAU
is taking the minimum action to comply with RPS. With respect to Options 1 and 2, he expressed difficulty in
understanding the difference between the environmental qualities of Bucket 1 and Bucket 3 RECs. He would
feel better if the Option 3 savings would support a program that led to further carbon neutrality of the
community. Abendschein advised that staff could return with guidelines for use of that set of savings.
Commissioner Jackson commented that after learning about Bucket 3 RECs, he could consider them rather
than dismiss them out of hand. The concept should be marketed as a $37 million program to electrify and
green Palo Alto that is funded by the use of Bucket 3 RECs.
Commissioner Smith added that this is a substantial amount of money that can be used to benefit the
community. He preferred allocating funds to programs that electrify California. If the utility moves to hourly
accounting, it should capture the savings and use it for the community.
Vice Chair Forssell recalled a discussion of hourly accounting showing the utility to be browner than
anticipated and the need to purchase RECs to offset the carbon emissions. She did not understand how
switching accounting and purchasing RECs would save money. Chair Danaher explained that the utility has
approximately $2.4 million in surplus that can be sold. Vice Chair Forssell asked if banked RECs would be
sold. Stack clarified that 10 percent of supply is surplus to the load and can be sold. The surplus is worth
about $2.4 million in savings. Under hourly accounting, the utility would purchase some number of RECs to
cover residual emissions. If Bucket 1 RECs are purchased, the utility has to pay $700,000 to cover the
emissions. The $2.4 million savings less the $700,000 purchase results in a $1.7 million savings. Vice Chair
Forssell stated excess RECs would be sold rather than banked.
Commissioner Segal indicated the difference between Bucket 1 and Bucket 3 RECs seems to be local carbon
savings versus carbon savings elsewhere, but the amount of carbon savings is equal. Stack advised that staff
held that opinion, even though it is not widely held in the industry. Abendschein added that the exchange of
a California REC for an out-of-state REC is a wash with respect to carbon. The discussion of Bucket 3 RECs
often occurs in the context of requiring local agencies and utilities within California to build more renewable
energy rather than purchasing out-of-state RECs. If these agencies are able to buy lower cost out of state
RECs from existing renewable resources to fulfill their mandates, less new renewable energy will be built in
California. That critique is not applicable to CPAU. CPAU has helped build new renewable energy sources in
California with enough output to fulfill any mandate currently in effect or that is scheduled to come into
effect in the future, and does not plan to release its contracts. Staff does not believe these short-term
exchanges of California for out of state renewables will have a carbon impact; although, it does have a public
perception impact.
In reply to Chair Danaher's question about Option 3, Stack explained that to obtain the Bucket 1 REC
premium, the REC has to be sold with the energy. The purchase of an unbundled REC would have unspecified
power. Chair Danaher advised that the UAC seems to support hourly accounting as being more honest.
Covering residual emissions with Bucket 1 or Bucket 3 RECs would cost $100,000 or $700,000. The Council
would be more likely to support moving to hourly accounting if the extra cost is covered with Bucket 3 RECs
and CPAU continues to produce sufficient power to cover the load under the annual accounting basis. The
more difficult and controversial decision is whether to sell to the RPS level.
Vice Chair Forssell favored moving conservatively and slowly. She supported Option 1, hourly accounting
without Bucket 3 RECs. More aggressive actions can be taken in the future with an understanding of the use
of savings and the programs they can fund.
Utilities Advisory Commission Minutes Approved on: Page 7 of 8
Council Member Cormack commented that the way the information is presented to the Finance Committee
will be important. The Council may find the nuances difficult to absorb and consequently focus on the dollars.
The presentation will be important to prevent the discussion from focusing on finances alone.
Chair Danaher noted consensus for hourly accounting and inquired whether Commissioners support the sale
of $2.4 million in surplus and purchase of $100,000 of Bucket 3 RECs or the sale of $1.7 million in surplus and
not use Bucket 3 RECs.
Commissioner Smith supported Column 2 (hourly accounting using Bucket 3 RECs).
Commissioner Johnston supported Column 1 (hourly accounting using Bucket 1 RECs). If that proves feasible,
Bucket 3 RECs can be reconsidered.
Commissioner Jackson supported Column 2 (hourly accounting using Bucket 3 RECs).
Commissioner Segal supported Column 2 (hourly accounting using Bucket 3 RECs).
Vice Chair Forssell supported Column 1 (hourly accounting using Bucket 1 RECs).
Chair Danaher supported hourly accounting using Bucket 3 RECs for the marginal amount.
Abendschein reported staff will sell any surplus above the 104.5-percent level during the year regardless of
this action.
Chair Danaher requested the next staff report include an update regarding the charging program.
ACTION: A straw poll was taken to continue the item to the March meeting. The motion carried 6-0 with
Chair Danaher, Vice Chair Forssell and Commissioners Jackson, Johnston, Segal, and Smith voting yes, and
Commissioner Scharff absent. By acclamation, the UAC continued the item to the March meeting.
ITEM 3: DISCUSSION: Presentation of the Utilities 2019 Year in Review.
Catherine Elvert, Communications Manager, highlighted 2019 accomplishments including Upgrade
Downtown, Stanford Hospital expansion, Colorado Substation upgrades, installation of new customer service
lines, leak repairs, reducing sanitary sewer overflows, flushing miles of sewer mains, Water Reuse Agreement
with Valley Water and the City of Mountain View, customer survey regarding distributed energy resources
and energy efficiency and resulting programs, continued use of the Strategic Plan and the Sustainability and
Climate Action Plan, an Energy Reach Code, Municipal Services Center open house, HP solar project, home
electrification expo, Great Race for Saving Water and Earth Day Festival, EV ride and drive events, and
resiliency workshop. CPAU received the National Energy Innovator Award and the Smart Energy Provider
Designation from APPA and the Treeline USA Award. Innovations include the automated metering
infrastructure (AMI) project, MyCPAU, and mobile workforce applications.
ACTION: None.
ITEM 4: DISCUSSION: Presentation Looking Forward into the 2020 Year to Come.
Catherine Elvert, Communications Manager, highlighted 2020 priorities, goals, and plans, including MyCPAU,
expansion of the fiber network, Phase II of AMI, meter survey, SAP upgrades, new home energy and water
reports, update of the Water Integrated Resource Plan and the Urban Water Management Plan, review of
the Western Area Power Administration contract, evaluation of RPS options, update of the Sustainability and
Climate Action Plan, evaluation of the impact of electrification on the gas and electric utilities, wastewater
cost of service analysis, water main replacements, rehabilitation of the Mayfield and Corte Madera
Reservoirs, replacement of ABS services, gas and sewer line safety inspections, replacement of wastewater
mains in the Charleston-Meadows neighborhood, a new GIS system, substation upgrades, wildfire mitigation
Utilities Advisory Commission Minutes Approved on: Page 8 of 8
practices, recruitment and succession planning, monitoring of legislative actions, and continued application
of the Strategic Plan.
ACTION: None
ITEM 5: ACTION: Selection of Potential Topic(s) for Discussion at Future UAC Meeting.
Commissioner Segal requested an update regarding findings for the fatal accident involving a City employee
and information about the permitting of electrification projects. Jonathan Abendschein, Assistant Director
of Resource Management, advised that staff discusses permitting issues with Development Services and
engineers. Resolution of issues may be slow due to limited staff and competing priorities. Staff is working
on resolving issues related to electrical panel upgrades and energy storage systems.
In reply to Commissioner Jackson's inquiry regarding an electric-only rate plan, Abendschein indicated the
billing system and Proposition 26 limitations on rate design are challenges to implementation of an electric-
only rate. Commissioner Jackson shared questions regarding AMI and asked that they be addressed at an
appropriate time.
Commissioner Johnston wanted to discuss the resiliency workshop prior to discussing a second transmission
line.
Vice Chair Forssell wished to better understand the outages profile as part of the educational update.
Chair Danaher requested a discussion of RPS and Bucket 3 RECs in the next several months, an update on the
charging network, a report about vehicle-to-home discharging, and a review of the AMI schedule.
ACTION: None
NEXT SCHEDULED MEETING: March 5, 2020
Meeting adjourned at 9:15 p.m.
Respectfully Submitted
Tabatha Boatwright
City of Palo Alto Utilities
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 1 of 11
UTILITIES ADVISORY COMMISSION MEETING
MINUTES OF MARCH 5, 2020 SPECIAL MEETING
CALL TO ORDER
Chair Danaher called the meeting of the Utilities Advisory Commission (UAC) to order at 7:00 p.m.
Present: Chair Danaher, Vice Chair Forssell, Commissioners Jackson, Scharff, Segal, and Smith
Absent: Commissioner Johnston
ORAL COMMUNICATIONS
David Coale remarked that the new MyCPAU portal looks great and should include on-bill financing because
it will facilitate building electrification. Two solar companies have stated they will not install facilities in Palo
Alto because of the permitting process. The challenges of the permitting process will inhibit electrification.
APPROVAL OF THE MINUTES
Commissioner Segal moved to approve the minutes of the February 5, 2020 meeting as presented.
Commissioner Jackson seconded the motion. The motion carried 6-0 with Chair Danaher, Vice Chair Forssell,
and Commissioners Jackson, Scharff, Segal, and Smith voting yes and Commissioner Johnston absent.
AGENDA REVIEW AND REVISIONS
Dean Batchelor, Utilities Director, advised that Item Number 3 regarding wastewater collection rates has
been continued.
REPORTS FROM COMMISSIONER MEETINGS/EVENTS
None.
UTILITIES DIRECTOR'S REPORT
Dean Batchelor, Utilities Director, delivered the Utilities Director’s Report.
Coronavirus Update – The City has been tracking the evolution of the emerging infectious disease known as
Coronavirus (technical name COVID-19). There are currently no cases in Palo Alto. The Office of Emergency
Services (OES) is participating in the Santa Clara County briefings as well as monitoring advisories issued by
the U.S. Centers for Disease Control and Prevention. OES has also been in contact with Stanford Health Care
and other hospitals and clinics to coordinate preparation and contingency planning. Practicing basic hygiene
and self-care are important to help prevent the spread of respiratory illnesses. The City will provide updates
on the situation at cityofpaloalto.org/coronavirus.
2020 Sustainability and Climate Action Plan Update – This year the City updates its Sustainability and Climate
Action Plan, also known as the S/CAP. The process will kick off with a community meeting on Tuesday, March
31 from 5:30 to 7:00 pm at the Mitchell Park Community Center. At that meeting the City will seek public
input on the 2020 S/CAP Priorities, Goals, and Key Actions. An informational report on the update process
was provided to City Council on February 10 and is included as an informational item in the UAC packet
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 2 of 11
tonight. Utilities staff are heavily involved in the Buildings, Electric Vehicle, and Water elements of the S/CAP.
We encourage the UAC to attend the March 31 kickoff meeting and will involve the UAC in various policy
discussions that directly relate to the City’s S/CAP goals. If you are unable to join the community workshop,
but wish to provide input, you may send comments to sustainability@cityofpaloalto.org or directly to me
(Director Batchelor). We welcome your thoughts on the draft Goals and Key Actions, as well as
recommendations for other actions we should consider.
California Rainfall Levels are Low - As of the end of February, precipitation levels in central California are
only 43% of average for this point in the water year. As a result, hydroelectric generation levels for calendar
year 2020 are projected to be 17% below long-term average levels, which translates to a supply cost impact
of about $3.5 million. The Hydro Stabilization Reserve (HSR) currently has funds that can be used to help
mitigate the costs of dry hydrologic conditions to the Electric portfolio in 2020. Based on reserve forecasts,
the City is unlikely to be in a position of having to implement a Hydro Rate Adjuster for fiscal year 2021. As
for water supply planning, 100% of Palo Alto’s potable water supply is from the Hetch Hetchy Regional Water
System. As of the end of February, reservoir storage in that system was 85% of maximum storage, which is
above normal for this time of the year. While we do not expect there will be any immediate water supply
impacts to Palo Alto, we will continue to closely monitor water supplies as precipitation and snowpack are
below long-term average levels.
Special Nissan Leaf Rebates for Palo Alto Utilities Customers – The American Public Power Association
(APPA) is partnering with Nissan to offer public power utility customers special rebates on Nissan Leaf electric
vehicles (EV). For a limited time only, through March 31, 2020, public power utility customers and utility
employees are eligible for rebates on the 2019 Nissan Leaf Standard and 2019 Nissan Leaf ePlus. Visit our
website at cityofpaloalto.org/EV to find more information on this special offer.
Earth Day and the Great Race for Saving Water - The City of Palo Alto’s Earth Day Festival and Great Race
for Saving Water 5K, 10K, and Kids Dash fun run and walk is on Saturday, April 25. This year we are celebrating
the 50th anniversary of the first Earth Day. After the races, join us for a free festival with live music, food
trucks, yoga, outdoor games, electric vehicle ride and drive, zoo animals, bike expo with e-bike test rides,
safety lessons, blender bike, tune-ups and repairs, plus raffle drawings, community booths, environmental
and public safety demos. Volunteer and financial sponsorship opportunities are available. Please visit
cityofpaloalto.org/EarthDay for details and registration.
Batchelor indicated a resident has complained about temporary passwords for the MyCPAU site being
provided via email, which is not secure. Staff decided to utilize email because the temporary passwords
expire after two weeks. In response to the resident's comments, Staff has corrected issues with the customer
service email address and links directed to the old system. The goal is to launch MyCPAU to all customers by
the end of March.
COMMISSIONER COMMENTS
In reply to Commissioner Jackson's query regarding the appropriate time for the UAC to engage in the S/CAP
update, Dean Batchelor, Utilities Director, encouraged Commissioners to attend the March 31 meeting. A
further discussion with the UAC can be scheduled after March 31.
In response to Commissioner Scharff's question about official advisories, community outreach, and the
coronavirus, Batchelor advised that staff has discussed locations and limiting in-person attendance at all City
meetings to 100-125 people. A limit on participants may not be necessary for outdoor events.
UNFINISHED BUSINESS
None.
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 3 of 11
NEW BUSINESS
ITEM 1: DISCUSSION: Discussion of Resilience Workshops: Follow Up and Next Steps.
Debra Lloyd, Acting Assistant Director of Utilities Engineering, reported the feedback from the second
resilience workshop in November 2019 indicated the vision and goals are on track; staff should emphasize or
prioritize projects that address high-probability and high-consequence events; and the community's general
agreement with projects listed in the Capital Improvement Program (CIP) for the next five years, projects
underway, or projects being considered. Staff is working on wildfire mitigation measures, smart grid
implementation, electric and pipeline replacement and hardening, water storage and reuse enhancements,
and prioritization of outages and restorations.
Vice Chair Forssell requested staff update the UAC about prioritization of outages and restorations and
inquired about a prioritization plan for distributing stored water. Lloyd advised that there is not a
prioritization plan. During a shortage, the concern is about the amount allocated more than who receives
water. Jonathan Abendschein, Assistant Director of Resource Management, added that City reservoirs
contain about 8 hours of water supply depending on usage for firefighting and demand. Groundwater wells
can handle a significant amount of load for an indefinite period of time. In response to Vice Chair Forssell's
question regarding possible pilot programs for facilities with a solar panel and battery for community access
to power and for connecting EV owners with homebound residents, Lloyd related that Goal 1, establish a
resource for individuals requiring home help and provide mobile services, captures those types of programs.
In reply to Commissioner Scharff's inquiry regarding the City paying the Santa Clara Valley Water District for
groundwater, Abendschein replied that the City pays for groundwater pumped from the wells. The City can
activate one well at any time and the remaining five wells in a short timeframe but only for emergencies. In
answer to Commissioner Scharff's request, Dean Batchelor, Utilities Director agreed to provide an
informational report about water reservoirs and groundwater wells.
In answer to Commissioner Segal's query regarding staffing during the first few hours after an emergency,
Lloyd indicated that is captured in the plan for the first few hours. Commissioner Segal suggested community
members rather than service professionals may be needed to implement a plan during the first few hours.
Councilmember Cormack suggested staff may want to include duration in the risk assessment matrix.
Chair Danaher suggested the process of fuel cells turning natural gas into electricity should be investigated
as a backup system for critical City facilities and suggested staff provide interim reports by category. Batchelor
indicated he would explore that and integration with the goals.
ACTION: None
ITEM 2: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend that the City
Council Adopt a Resolution Approving the Fiscal Year 2021 Water Utility Financial Plan, Including Proposed
Reserve Transfers and an Amendment to the Water Utility Reserves Management Practices, with No FY 2021
Water Rate Increase.
Lisa Bilir, Senior Resource Planner, reported staff proposes a 0% rate increase for the Water Utility for 2021.
Much of the work scheduled in the CIP for 2020 and 2021 was budgeted in prior years, and funding has been
placed in reserves to pay for much of the work. About half of the costs for the Water Utility are due to supply
costs and half due to distribution costs. The San Francisco Public Utilities Commission's (SFPUC) program to
make the system more resilient to earthquakes puts an upward pressure on rates. On the distribution side,
operations and capital costs put upward pressure on rates. Backup generators will be a significant increase
to operations costs once they are installed. Staff has developed two strategies to increase rate stability and
to ensure funding for CIP projects is available when needed. The first strategy is to provide an annual, steady
stream of funding to the CIP Reserve and utilize the Reserve more. The second strategy is to make more use
of the Rate Stabilization Reserve during the five-year CIP because SFPUC is planning large rate increases
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 4 of 11
beginning in 2023. Staff recommends slight modifications to reserve guidelines to accommodate the
strategies. The orange bars in the Water Cost and Revenue Projections graph become steady in 2023, 2024,
and 2025 as annual contributions are made to the CIP Reserve. One-time CIP contributions in 2020, 2021,
and 2022 make the trajectory not quite as smooth. Projections for revenue go up steadily but slightly less
than cost increases due to utilization of the Rate Stabilization Reserve. For 2019-2021, the Operations
Reserve is at the maximum guideline level. Staff plans to utilize funds exceeding the maximum guideline.
Palo Alto's monthly residential water bill is 11 percent higher than a comparison average of bills in
surrounding cities in the medium usage category.
In reply to Commissioner Segal's question about flat CIP expenses when larger projects are planned for every
other year, Bilir explained that CIP expenses will be reflected in the CIP Reserve. The annual contribution to
fund the expenses will be reflected in the Operations Reserve. Fluctuations should be reflected in the CIP
Reserve. In Table 3 of the Financial Plan, capital program contributions are shown in lines 9 and 10 while the
planned CIP expenditures are shown in in line 12. Line 12 will show the fluctuations. In response to
Commissioner Segal's inquiry about the number of full-time equivalents (FTE) allocated to resource
management expenses in Figure 10 of the Financial Plan, Jonathan Abendschein, Assistant Director of
Resource Management, advised that water efficiency programs are included in resource management, and
approximately 3 FTE are allocated for those programs.
In answer to Commissioner Scharff's questions about planned rate increases, CIP projects, and transfers, Bilir
stated Table 7 shows the planned rate increases from 2019. There are many reasons for the change in the
trajectory of rate increases including use of the Rate Stabilization Reserve and 2019 end-of-year reserve fund
balances, which were higher than projected. Reserve fund balances were higher because planned CIP
projects were delayed. In 2020 staff planned $18-$19 million of CIP work, $5 million of which was funded
from rates and the remainder from reserves. Dean Batchelor, Utilities Director, added that the delay in some
work resulted in employee cost savings and fluctuating operational costs. Commissioner Scharff remarked
that the CIP projects will cost more due to increasing construction and employee costs. Abendschein
explained that the change in CIP schedules may not reflect 100% of project costs in one year but over two or
more years. In response to Commissioner Scharff's question regarding transfers to the Rate Stabilization
Fund leaving insufficient funding for CIP projects, Bilir explained that funding for rate stabilization comes
from rate increases. The trajectory for rate increases is designed to save additional funds in the Rate
Stabilization Reserve to reduce rate increases in the future. Commissioner Scharff requested the rationale
for staff recommending no rate increase when costs are increasing 4%. Bilir clarified that the Rate
Stabilization Reserve balance exceeds the maximum guideline level, and funding is available to stabilize rates.
Additionally, SFPUC reduced its rate trajectory after preparation of the staff report, and water sales are
increasing. Therefore, the numbers will change. Batchelor added that explaining a rate increase to the public
is difficult when SFPUC rates are projected to decrease and the reserve balance is above the maximum
guideline level. Abendschein stated staff anticipates additional one-time savings and costs decreasing over
the next few years.
In response to Commissioner Jackson's inquiry about the backup generators being a capital cost, Bilir related
that staff categorized it as an operating cost. Abendschein added that tentative plans are to lease rather
than buy the generators, which makes them an operating expense. In reply to Commissioner Jackson's query
regarding the typical Palo Alto customer paying more for water and less for electricity than customers in
nearby cities, Bilir explained that some cities do not purchase all their water supplies from SFPUC. Staff is
studying costs to determine the factors that contribute to Palo Alto's higher water rates. Abendschein added
that one factor is CPAU's higher level of spending for capital replacement projects.
In answer to Chair Danaher's question about the $3 million cost due to the drought, Batchelor advised that
it affected the electric budget. In reply to Chair Danaher's query regarding the ability to increase spending
for capital projects should construction costs decrease, Abendschein indicated additional spending depends
upon the utility. The Water Utility has a Capital Reserve Fund that could be used. Chair Danaher suggested
staff explore the possibility of increasing capital projects should construction costs decrease. Batchelor
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 5 of 11
added that the economies of scale from the every-other-year replacement projects could result in savings
that could fund additional replacements.
Commissioner Scharff commented that the issuance of bonds, if needed, could be timely with the collapse in
rates. Abendschein reported staff is reviewing outstanding bonds for an opportunity to refinance them.
Commissioner Scharff suggested the Finance Committee consider the 0% increase and future rate increases
carefully. Batchelor agreed to present the suggestion to the Finance Committee. Vice Chair Forssell indicated
the UAC budget subcommittee had the same question but felt the Reserve Funds exceeding the maximum
levels justified a 0% rate increase. Commissioner Scharff preferred to push the subsidy of rates out further
and not to reduce the Reserve Fund to zero.
ACTION: Vice Chair Forssell moved to recommend the City Council adopt a Resolution approving the Fiscal
Year 2021 Water Utility Financial Plan, proposed Reserve transfers, amendments to the Water Utility
Reserves Management Practices, the maintenance of a balance in the Rate Stabilization Reserve through FY
2028, and no FY 2021 water rate increase. Commissioner Jackson seconded the motion. The motion carried
6-0 with Chair Danaher, Vice Chair Forssell, and Commissioners Jackson, Scharff, Segal, and Smith voting yes
and Commissioner Johnston absent.
ITEM 3: DISCUSSION: Discussion of the Presentation of Preliminary Wastewater Collection Rates for FY 2021.
This item was continued.
ITEM 4: DISCUSSION: Discussion and Update of Advanced Metering Infrastructure (AMI) and Fiber Network
Expansion Planning.
Jeff Hoel recalled in June 2019 staff discussing two approaches for meters to communicate with collectors
and inquired about the approach staff selected. If staff has not selected an approach, he asked if the Request
for Proposals (RFP) sought bidders' opinions of the two approaches.
Herb Borock understood the City Council would select a proposer to negotiate with and award a contract to.
However, staff appears to be negotiating with a proposer. The Council directed the UAC to advise staff on
fiber issues. He inquired whether the UAC is advisory to staff and to Council on fiber and how that affects its
freedom of action.
Dave Yuan, Strategic Business Manager, reported the RFP for automated metering infrastructure (AMI) will
be complex with five components.
In response to Vice Chair Forssell's question about components 2, 3, and 4, Yuan indicated component 4
pertains to installation services for water, gas, and electric meters and component 2 pertains to meter
equipment.
In reply to Commissioner Segal's inquiry regarding the inclusion of apps in the RFP, Yuan advised that the
meter data management (MDM) company offers a portal for use of meter data, and staff is investigating
MyCPAU for displaying meter data. Staff is attempting to understand the use of meter data in order to
determine an appropriate method to make it available to the customers.
In answer to Chair Danaher's queries, Yuan related that the RFP will be issued in March. The Legal
Department has reviewed the draft RFP, and Administrative Services will review it next.
Commissioner Jackson wanted to review the RFP prior to its release.
Commissioner Scharff suggested a mobile app for customers to review meter data in real time. Yuan
explained that the MDM system can provide customers with alerts and notifications. The CM portal could
be downloaded toa smartphone or tablet and provide alerts. Jonathan Abendschein, Assistant Director of
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 6 of 11
Resource Management, added that staff has set up home energy and water reports to display interval data
in the MyCPAU portal and in a mobile format. Pilot programs have demonstrated that the data could be used
to conserve energy.
In response to Vice Chair Forssell's inquiries about the interval being fixed or variable, Yuan understood the
interval is flexible, but staff is recommending 15-minute intervals for electric and an hour interval for water
and gas. The interval can be changed, but shorter intervals may affect battery life. Vice Chair Forssell
remarked regarding the ability to see the carbon intensity of usage at 5-minute intervals.
Yuan continued his presentation, stating the RFP will help guide staff in selecting a mesh network or a point-
to-point network. Because of the complexity of the RFP, responses will be due about 10 weeks after its
release. Staff will interview vendors over the summer, complete contract negotiations by the end of the year,
and seek Council approval of a contract in early 2021. Initial installation and software testing will occur in
2021-2022 with full deployment in 2022-2024.
In reply to Chair Danaher's inquiries, Yuan reported the RFP contains requirements categorized as critical,
important, or nice to have. Vendors can suggest additional functions, and functionality can be added to the
platform.
Commissioner Smith concurred with Commissioner Segal in that staff should understand and determine uses
for data and include components in the RFP that will facilitate customers' use of data.
Commissioners requested a discussion of the capabilities and benefits of different applications.
In answer to Commissioner Jackson's query regarding meter reading, Yuan indicated a basic function of AMI
is to obtain usage data electronically, which will eliminate monthly meter reading. Commissioner Jackson
urged staff to consider providing a real-time application programming interface (API) to customers or
developers so that many apps can be developed and provided to customers. Commissioner Scharff raised
privacy concerns about sharing customer data. Yuan clarified that data would contain usage and meter
number only, not any personal information.
Yuan further stated a contract for fiber network expansion has been tentatively scheduled for Council
approval in April. Phases 1 and 2 of the scope of work pertain to building out the network to support City
services. Phases 3 and 4 pertain to expansion of the network for Fiber to the Premise. The Council must
approve each phase prior to implementation of the next phase. Phase 1 is scheduled for the summer of 2020,
Phase 2 for September 2020 to March 2021, and Phases 3 and 4 in 2021 and 2022.
In reply to Commissioner Segal's inquiry about AMI and fiber, Yuan explained that Phase 1 is design, and
Phase 2 is expansion of the fiber network to the AMI collectors.
Councilmember Cormack suggested staff provide side-by-side timelines of the AMI and fiber projects and
depict the intersections of the two. There is some question as to whether AMI and fiber are separate projects
or if one has to be completed before or in conjunction with the other.
In answer to Commissioner Segal's query regarding the relationship of fiber and AMI, Yuan advised that staff
believes the AMI collectors will be located near substations, and expanding fiber to those locations will be
good for a mesh network. Transmission of data from the meter to the collector will occur via wireless, and
transmission from the collector to the MDM will occur via fiber. Collectors will be purchased and installed
and need connections to the fiber network. Commissioner Segal expressed concern about community
pushback if collectors are similar to wireless antennas. Chair Danaher reported the signal strength for AMI
will be lower than for wireless.
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 7 of 11
Commissioner Jackson inquired regarding the power needed for collectors to connect to individual meters;
the City's ability to control individual meters through AMI; and radio technologies used between meters and
collectors and security of those links. Yuan reported those details will be available when the RFP is awarded,
but staff can provide the options for those details.
ACTION: None
ITEM 5: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend that the City
Council Adopt a Resolution Amending the City's Electric Supply Portfolio Carbon Neutral Plan.
Lena Perkins, Senior Resource Planner, reported staff proposes to utilize unbundled Renewable Energy
Certificates (REC) to neutralize any residual emissions caused by the use of hourly accounting through 2024.
Prior to 2024, staff will reevaluate the methodology.
Chair Danaher noted general consensus among Commissioners to utilize hourly accounting and requested
additional information regarding the funding of expenses caused by the use of hourly accounting. Prior UAC
discussions have revealed that most Commissioners prefer the use of Bucket 3 RECs and the sale of any excess
RECs. Commissioner Johnston had informed him via email that he now supports the use of Bucket 3 RECs.
Vice Chair Forssell advised that she is now firmly in support of the use of Bucket 3 RECs.
In response to Commissioner Jackson's inquiry about additional options providing more than $2 million in
revenues, Perkins related that the window of opportunity for the additional options is limited and has passed
for the current year. However, it may be available in the future. The amendment to the Carbon Neutral Plan
to allow the use of Bucket 3 RECs is good until 2024, which is distinct from a discussion about selling less than
100% of load for existing resources. Jonathan Abendschein, Assistant Director of Resource Management,
added that a conversation about the proposal to sell load such that it affects the Power Content Label (PCL)
will be necessary.
In reply to Commissioner Smith's question regarding the purpose of reevaluating the policy prior to 2024,
Perkins indicated CPAU does not have any agreements that will expire and be replaced with Bucket 1 RECs
until approximately 2024. In 2023, staff will review the entire portfolio.
In answer to Commissioner Scharff's questions about Emissions Intensities of 13, 9, 9, and 10, Perkins advised
that a regulatory change from the California Energy Commission (CEC) attributes non-zero emissions to
electricity generation from landfill gas. The current portfolio has a carbon intensity of 13 pounds of CO2 per
megawatt hour (MWh). Staff's recommendation will reduce the carbon intensity to 9 pounds of CO2 per
MWh. The proposal assumes the sale of equal amounts of Bucket 1 resources, but staff could explore options
to preferentially sell landfill gas.
Commissioner Jackson suggested staff lead with the use of revenues generated through REC sales for
beneficial greenhouse gas (GHG) reduction and electrification programs rather than the technical intricacies
of REC exchange.
Abendschein indicated the main cleanup items are removal of residual sections of the Carbon Neutral Plan.
In answer to Vice Chair Forssell's inquiries regarding Sections 3.b.iii, 3.c.ii, 3.d.i and 6.c, Perkins reported the
Green Book study appears to represent that the output of hydroelectric projects is about 10% less for the
base resource than previously thought. The decrease was included in planning for the supply portfolio.
Abendschein understood anthropogenic GHG emissions are related to potential residual emissions
associated with landfill gas projects. Because transactions are made in advance of electric generation, staff
may not sell all surplus renewables. Any RECs that exceed load can be banked. Abendschein added that
Section 3.d.i concerns balancing from year to year as hydroelectric varies. Staff will review the language of
Section 3.d.i. The reporting provision is part of current practice and mandated by the CEC.
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 8 of 11
ACTION: Commissioner Scharff moved to 1) adopt a Resolution to amend the Carbon Neutral Plan to a)amend
the definition of carbon neutrality to use an hourly carbon emissions accounting standard; b) if needed, for
calendar years 2020 through 2024, authorize limited short-term exchanges of existing California-based
renewable energy (Bucket 1 RECs) for out-of-state renewable energy (Bucket 3 RECs) to neutralize any
residual emission resulting from the difference between emissions calculated under an annual accounting
and hourly accounting methodology; and c) revisions to the Carbon Neutral Plan; and 2) direct staff to return
to Council with a review of the Carbon Neutral Plan by the end of 2024 to evaluate the effectiveness of these
policy changes and to modify them if necessary. Commissioner Jackson seconded the motion. The motion
carried 6-0 with Chair Danaher, Vice Chair Forssell, and Commissioners Jackson, Scharff, Segal, and Smith
voting yes and Commissioner Johnston absent.
Abendschein reported the sale of surplus energy will generate about $2 million annually in earnings. Staff is
exploring redirecting half of the earnings to a reserve fund designated for local carbon reduction. The Council
delegated authority to the City Manager to direct revenues from the sale of allowances allocated to the
Electric Utility under the Cap and Trade Program. Much of the funds will likely be used for building
electrification. Spending the funds will be part of future budget proposals.
Bret Andersen suggested staff minimize communication of changes to the Carbon Neutral Plan because the
Electric Utility will remain carbon neutral. Local efforts to decarbonize should be prioritized over rate
reductions. Electrification will increase the demand for electricity, reduce costs per kilowatt, and avoid the
stranded asset of natural gas infrastructure.
Commissioner Scharff concurred with the staff recommendation. He questioned the use of funds if they are
not used for rate reduction. He asked if allocating funds to the AMI project would be the same as a rate
reduction. Dean Batchelor, Utilities Director, related that the Calaveras Reserves are funding the AMI project.
The AMI project will not cause an electric rate increase. Abendschein advised that some funds could be
utilized for EV infrastructure or flexing loads to reduce carbon. Fund will be used primarily for reducing
electric rates and building electrification.
Commissioner Segal expressed difficulty in supporting use of the funds without more specificity about
electrification and decarbonization programs. Perhaps more funding could be allocated to programs that
facilitate high-priority changes in the City. Having costs associated with electrification programs would be
beneficial.
Vice Chair Forssell strongly supported funding building electrification and decarbonization programs and EV
infrastructure investment/incentives. The AMI project is underway, and $2.1 million is far too little funding
for a second transmission line. Reducing electric rates probably will not be a key factor in people's decisions
to switch from natural gas to electric.
Commissioner Jackson believed the funds should be expended for green programs such as electrification,
decarbonization, and EV infrastructure. He had no interest in using the funds for reducing electric rates.
Perkins clarified that early and aggressive contracting for renewables and the decline in loads have resulted
in the surplus. In answer to Vice Chair Forssell's question, Perkins indicated very aggressive electrification
could reduce or eliminate the surplus.
Commissioner Smith concurred with Commissioner Jackson's comments, specifically building electrification.
Chair Danaher requested staff include amounts of carbon avoided per dollar spent in future presentations of
spending plans.
In reply to Vice Chair Forssell's query regarding utilizing the funds for related projects in other City
departments, Perkins stated the funds are intended to support holistic solutions.
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 9 of 11
Commissioner Smith questioned whether the funds could be used to analyze and/or address efficiencies and
inefficiencies in the City's permitting process.
Chair Danaher agreed with Commissioner Smith's comment.
Councilmember Cormack appreciated Attachments C and D and believed they would facilitate
communications with the public.
ITEM 6: DISCUSSION: Discussion of Proposed Building Electrification Work Plan for 2020-2021.
Christine Tam, Senior Resource Planner, reported the Work Plan contains new customer programs to
encourage electrification and a series of impact analyses to assist with planning and preparing for
electrification efforts. The Sustainability and Climate Action Plan (S/CAP) assumes a 50% reduction in natural
gas consumption from the 1990 baseline by 2030. Building electrification is the primary strategy to meet the
City's GHG reduction goal and is projected to account for 43% of GHG reductions by 2030. Barriers to
electrification include consumer awareness, upfront costs, contractor engagement, and funding support. The
barriers are not insurmountable; however, electrification may cause strategic and operational challenges for
the Electric Utility. Staff proposes a Building Electrification Work Plan for 2020 and 2021 to accelerate
electrification and plan for changes to the Electric and Gas Utilities. The Council adopted a mandate for all-
electric residential new construction projects, and it becomes effective April 1, 2020. By the end of 2020,
staff will present the Council with a proposed mandate for all-electric nonresidential new construction
projects. The goals of the Work Plan are to provide support for early adopters through rebate programs and
technical assistance; build experience among staff to implement electrification programs; streamline City
processes; and evaluate impacts of electrification on utility and municipal operations. Jonathan Abendschein,
Assistant Director of Resource Management, emphasized the importance of building staff experience and
streamlining processes sooner rather than later. Tam further stated staff will prepare a long-term
Electrification Work Plan once the S/CAP is adopted in 2021. Over the next two years, staff will engage in
community outreach, solicit goals and key actions, and conduct an impact analysis for the S/CAP update.
Staff is currently seeking approval of funding and staffing for Work Plan programs. In fiscal year 2021, staff
will begin conducting an impact analysis of electrification concurrently with expanding programs. Types of
customer programs range from education/pilot programs and rebates to on-bill financing and subsidized
direct install. Administration and costs for the customer programs will increase with the complexity of
programs. Existing customer programs offer heat pump water heater rebates, electrification readiness
assessments, loans of induction cooktops, and replacement of gas furnaces with heat pumps for one low-
income, multifamily building. The Work Plan focuses on single-family homeowners because they are
interested in helping the City meet its goals. Staff will propose a 1,000 heat pump water heater challenge
and a program to seek electrification of a block subject to a gas pipeline replacement. Abendschein added
that staff will attempt to overcome barriers and demonstrate substantive progress in the single-family sector.
Staff will conduct a range of analyses of the impacts of electrification on the Gas and Electric Utilities. The
top priority is addressing aging electric infrastructure. A second priority is to determine the impacts of
building electrification on the Gas Utility's finances and infrastructure, the Electric Utility's finances and
infrastructure, and municipal workload. Another important topic is achieving large-scale building
electrification in the most cost-effective way possible. Proposals for funding and staffing will be presented
in the near term. Staff does not anticipate the Work Plan having a rate impact.
In reply to Commissioner Scharff's query regarding the impact of achieving S/CAP goals on Gas Utility
revenues, Abendschein indicated the impact analysis for that will be conducted under the Work Plan.
Commissioner Scharff wanted to understand the timeframe for the Gas Utility's viability in relation to the
2030 S/CAP goal.
Commissioner Jackson felt the UAC, Council, and CPAU should clearly state the goals and priorities of the
Electrification Work Plan to increase consumer awareness. The City needs to motivate, mandate, and
incentivize electrification; expand Reach Code electrification requirements to remodel projects; promote an
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 10 of 11
all-electric rate plan; streamline and simplify the permitting process; and expand rebate plans. On-bill
financing will be extremely important for electrification. Homeowners will have to demand all-electric
appliances rather than waiting for contractors to offer them.
Bret Andersen believed the City should mandate participation in programs, but the programs must be
inclusive, affordable, and simple. On-bill financing with no credit checks will be important. To meet the goal
of an 80% reduction by 2030, 2,000-2,500 water heaters should be converted annually to heat pump water
heaters.
Councilmember Cormack wanted to see metrics for the Work Plan, particularly in terms of dollars or GHG
emissions avoided.
Commissioner Segal concurred with Commissioner Jackson's comments. The heat pump water heater rebate
program has garnered little participation. Mandating electrification for residential remodel projects is
important. Tam reported the Planning Department is exploring mandates for substantial remodel projects
to comply with Reach Code requirements. Commissioner Segal expressed concern about the delay in
implementing programs.
Vice Chair Forssell supported prior comments.
Chair Danaher recommended the analyses include metrics such as dollar per avoided ton of carbon.
Abendschein referred Commissioners to the analysis in Attachment D, which does not include the full range
of carbon alternatives. Single-family homeowners are well served by the existing EV industry. However,
multifamily buildings provide few, if any, EV chargers. Programs for that market will be extremely expensive
based on dollars per ton but will align with a government agency's role to serve underserved markets.
Metrics are needed, but discussion of programs will cover multiple dimensions. The proposals will be
included in budget and rate discussions with the UAC.
Commissioner Jackson commented that the Work Plan is a great start. The UAC and Council need to motivate
and set the direction for the community.
Commissioner Smith agreed with the focus on single-family homeowners. The desire to build momentum
and create an impact with programs is great, but barriers need to be eliminated, specifically the current
permitting process. If funding and willingness are available, programs can have a large impact.
Chair Danaher did not believe conservation and building efficiency should be considered independently. Tam
explained that energy efficiency savings are included in the business-as-usual scenario. As part of
electrification efforts, staff will promote the slogan "efficiency first."
In answer to Vice Chair Forssell's inquiry regarding a requirement to replace a water heater with a heat pump
water heater, Tam did not believe the City had the authority to require that. Staff at the Bay Area Air Quality
Management District (BAAQMD) is determining whether gas furnace or water heater replacement will need
to meet minimum NOx standards.
Commissioner Smith raised the issue of electrical blackouts affecting homeowners with all-electric appliances
and the need for a second transmission line. Commissioner Scharff clarified that recent blackouts were not
caused by transmission line failures. California currently has no reliable electricity source.
Commissioner Scharff suggested community education about the small risk of rolling blackouts in Palo Alto.
ACTION: None
Utilities Advisory Commission Minutes Approved on: April 15, 2020 Page 11 of 11
ITEM 7: ACTION: Selection of Potential Topic(s) for Discussion at Future UAC Meeting.
Chair Danaher noted Commissioners have requested an update regarding EV chargers, reliance reports by
utility, reviews of emergency water supply and water supply in drought situations, information regarding on-
bill financing and permitting, details of the AMI project and its capabilities, and a discussion of the sale of
additional Bucket 1 RECs.
Dean Batchelor, Utilities Director, advised that the Development Services Department handles permitting
and could present information to the UAC. The two departments collaborate frequently. Staff can present
information about water supply and AMI in June and Bucket 1 RECs in the fall.
Commissioner Scharff requested a discussion of the long-term future of the Gas Utility. Jonathan
Abendschein, Assistant Director of Resource Management, indicated fall would be a good time for the
discussion.
Councilmember Cormack related that the Home Genie pop-up at Mitchell Park was packed with people
earlier in the day.
ACTION: None
NEXT SCHEDULED MEETING: April 1, 2020
Meeting adjourned at 10:16 p.m.
Respectfully Submitted
Tabatha Boatwright
City of Palo Alto Utilities
City of Palo Alto (ID # 11074)
Utilities Advisory Commission Staff Report
Report Type: Meeting Date: 3/5/2020
City of Palo Alto Page 1
Summary Title: Resilience Workshops Follow Up
Title: Discussion of Resilience Workshops: Follow Up and Next Steps
From: City Manager
Lead Department: Utilities
Recommendation
Staff is providing a briefing on the second Utilities Resilience Workshop from November 2019,
and is seeking feedback from the Utilities Advisory Commission (UAC) on the framework,
priorities, and next steps described in this report. No recommendation to Council is required at
this time.
Executive Summary
The purpose of this report is to summarize key findings from the November 13, 2019 workshop,
present the draft resilience vision and goals for the Utilities Department for the UAC’s review
and feedback, and discuss next steps.
Generally, the initial resilience framework captured the community’s priorities and goals as
represented at the workshops, although there was some refinement, and clarification of terms.
Staff’s lists of projects were also recognized as important for meeting the goals. The following
types of projects emerged as the highest priorities from participants:
• Projects that address the high probability / high consequence events such as
earthquakes, regional wildfires, and sea level rise.
• Health and safety projects.
• Review zoning and codes for support of goals and priorities.
• Mobile power solutions for use in emergencies.
• Provide emergency locations with solar power generation back up and storage.
• Reconsider how projects are organized/ planned/ prioritized.
Background
The UAC hosted the second community resilience workshop on November 13, 2019 with the
objective to review and refine the Utility Resilience Framework that was developed during the
first resilience workshop in 2018 (August 2018 Workshop Agenda and Summary). The
Framework helps to prioritize future projects and efforts to improve community resilience
City of Palo Alto Page 2
related to the City of Palo Alto Utilities Department. Approximately 40 community members,
city staff, and Commissioners attended the meeting.
At the conclusion of the official UAC meeting on November 13, Staff started the Resilience
Workshop #2. The meeting started with introductions and moved into the objectives of the
meetings, and a summary of Workshop #1 Resilience Framework (Attachment A), common
themes, vison, and goals, and a discussion of risk assessment.
The meeting continued with presentations on the Resilience Framework and the Utility projects
that would help to address those goals. Small group discussions were used to prioritize and
consider the Utilities projects per each goal. Attendees were given comment cards as well as a
link to an online survey to collect feedback.
Mindy Craig, BluePoint Planning (consultant), facilitated and graphically recorded the meeting.
The workshop was video recorded by the City of Palo Alto.
Discussion
After presenting the draft resilience vision and goals, participants asked a few questions and
made comments:
• The proposed vision states: Support Palo Alto Community Resilience by advancing the Utility
to become a “Smart” Utility, able to assist the City prepare, respond , support, and rebound
from manmade and natural disasters. What does it mean to be “smart”?
➢ Opposite of dumb, 21st century vs. 20th century
➢ Smart grid: Identifying outages, smart meter
➢ Advanced
• The Goal 1 identification of Community Hubs is recognized as important but we also need to
help individuals who require at home help (e.g., the elderly, those with oxygen needs)
• Consider if Schools and Community Facilities are “critical” facilities
• Cell Towers need to be operational
• Training/education is important., e.g. how to power your home from electric vehicles
• In a major disaster how fast can we assess buildings and get people back in?
• Solar panels and storage in homes will make them more resilient.
The following comments were made regarding the proposed framework:
• Define SMART to include “no tech” solutions
• Prioritize function
• More robust Commercial/Industrial load curtailment
• Identification of public gathering places
• Education to PV owners to safely isolate their systems
• Coordination of City Utilities/Emergency planning with local companies
• Cell tower outage plan
• Identify critical businesses and have a plan/agreement with them for supplies
City of Palo Alto Page 3
As part of the presentation a risk assessment chart was discussed with high/low probability and
high/low impact with different issues.
Attachments have been linked within the report as well as below in an effort to reduce waste.
Attachment A - Amended Framework
Attachment B - Goals and Projects List
Attachment C - Workshop Wall Graphics and Flip Charts
Attachment D - Comment Cards From Workshop 2
After comments on the risk assessment, the presentation continued with prevention, recovery,
and survivability strategies. Below is a summary of the comments on the Risk Assessment:
• Sea Level Rise should be a high probability!
• The chart is not inclusive of all issues
• Urban fires are more like earthquakes
• PSPS (Public safety power shutdown)
➢ Where does that fit in? high probability, high impact?
➢ Not as big an issue within Palo Alto
After the presentation that involved a review of the Resilience Framework, Goals 1-3, the
attendees broke into small groups (approx. 8-10 people per group) and discussed priorities of
projects per goal. Each group had a table facilitator, a list of programs to prioritize per goal
(Attachment B, Goals and Project List). The small groups reported back to the large group their
top priorities and comments. The group notes and the facilitator’s wallgraphic notes are
captured in Attachment C.
City of Palo Alto Page 4
Goal 1: Stay in Place
• Communications
• Wildfire management
• Portable toilets
• Mobile services
• Incentivize electrification
➢ Be careful not to have alternative resilience (gas) and GHG
➢ How do you manage in an outage?
• Have a better system for renewable power use
• SMART inverters
➢ Code enforcement training
• Microgrids at community facilities – link to cell tower connections
➢ Sustainability
➢ Grid independences what does that look like?
• Safe and affordable water and pump resources
➢ Quality of water
• Rebates for solar and storage
• Low tech communications and solutions
➢ Communicate in advance what to do
➢ Sirens/ loud speakers
➢ Radio
Goal 2: Prioritize Critical Facilities
• Water tanks and well water withstanding earthquakes
• Larger electric storage
• Second transmission line (second connection location)
• How does natural gas fit?
• “Roofster”(individual) vs. community scale PV/ storage
Goal 3: Enhance Utilities Resilience
• DERS
• Communication
• Transportation – coordination
• Schools
• Training!
• Integration and coordination with cities
Potential Prioritization Criteria
• High probability / high impact
• Community resilience
• Utility resilience and City sustainability to be linked
• More holistic approaches:
City of Palo Alto Page 5
➢ How does utility infrastructure interface with community?
➢ Work with community, resident, hospitals
➢ Not just a utility plan
Other projects to be considered:
• Investigate vulnerabilities
• Landscape maintenance
• Use of electric vehicles as storage
• Top qualified professionals
• Broad “scope” to include gas/water/wastewater. Not just electric. Inte rdependencies
• Codes/incentives to encourage solar installation and operation off the grid during power
outages
Comment cards were distributed and collected at the end of the workshop (Attachment D).
Timeline, Resource Impact, Policy Implications
From the final framework, staff will propose new projects and priorities in future CIP plans.
Already in progress are wildfire mitigation measures, smart grid implementation , overall
electric grid and pipeline replacement and hardening, water storage and reuse enhancements,
and prioritization for power outages and restoration. These are projects identified and
budgeted in the annual budget process. Future capital projects w ill be identified and budgeted
in the same way.
City of Palo Alto (ID # 11068)
Utilities Advisory Commission Staff Report
Report Type: Meeting Date: 3/5/2020
City of Palo Alto Page 1
Summary Title: Financial Plans / Rate Proposals for Water
Title: Staff Recommendation That the Utilities Advisory Commission
Recommend That the City Council Adopt a Resolution Approving the Fiscal
Year 2021 Water Utility Financial Plan, Including Proposed Reserve Transfers
and an Amendment to the Water Utility Reserves Management Practices,
With no FY 2021 Water Rate Increase
From: City Manager
Lead Department: Utilities
RECOMMENDATION
Staff requests that the Utilities Advisory Commission (UAC) recommend that the Council:
1. Adopt a resolution (Attachment A) approving:
a. The Fiscal Year (FY) 2021 Water Utility Financial Plan (Attachment B); and
b. Up to a $3 million transfer from the Operations Reserve to the CIP Reserve in FY
2020; and
c. Up to a $5 million transfer from the Operations Reserve to the Rate Stabilization
Reserve in FY 2020; and
d. Up to an $8 million capital program contribution from the Operations Reserve to the
CIP Reserve in FY 2021; and
e. Amendments to the Water Utility Reserves Management Practices relating to the
CIP Reserve (as set forth in the Financial Plan, with a redline provided as Attachment
C); and
f. Approve the maintenance of a balance in the Rate Stabilization Reserve through FY
2028 in order to provide greater rate stabilization to customers
EXECUTIVE SUMMARY
The FY 2021 Water Utility Financial Plan includes projections of the utility’s costs and revenues
for FY 2020 through FY 2025. Costs are projected to rise by about 4% per year over the next
several years.
Capital projects were deferred in FY 2019 leading to lower capital costs than budgeted. Many
of these deferred capital projects are anticipated to be completed in FY 2020 or FY 2021 and
City of Palo Alto Page 2
reserve CIP funds are available for those in the year end 2019 balances. Although capital
investment needs will fluctuate from FY 2021 through FY 2025, there are enough funds
currently in reserves to hold rates steady in FY 2021 while still fully funding budgeted capital
investments.
The SFPUC is projecting no increases in water supply rates until FY 2023. At that point the
SFPUC projects a water supply rate increase of 9% followed by 13% in FY 2024 and 5% in FY
2025. These increases, together with capital investment needs such as one -time needed
reservoir replacements, will place upward pressure on Palo Alto’s water rates. To fund these
increasing costs while minimizing rate increases for the City’s water customers, staff
recommends transferring funds in FY 2020 and FY 2021 to the Rate Stabilization Reserve so
that funds will be available in that reserve to allow for projected customer rate increases of
only 3% to 4% per year between FY 2022 and FY 2025.
BACKGROUND
Every year staff presents the UAC with Financial Plans for the Electric, Gas, Water, and
Wastewater Collection Utilities. The Financial Plans recommend rate adjustments required to
maintain the financial health of these enterprises. These Financial Plans include a
comprehensive overview of the operations of each enterprise, both retrospective and
prospective, and are intended to be a reference for UAC and Council members as they review
the budget and staff’s rate recommendations. Each Financial Plan also contains a set of
Reserves Management Practices describing the reserves for each utility and the management
practices for those reserves.
Most of the City’s water comes from the San Francisco Public Utilities Commission (SFPUC)’s
Hetch Hetchy water system. This same system serves San Francisco and several other Bay Area
cities. The system is run by San Francisco, but as much as two thirds of the water is used
outside of San Francisco by 26 cities, water districts, and private utilities. These agencies,
including CPAU, are frequently referred to as the “wholesale customers” (as compared to the
SFPUC’s “retail customers” in San Francisco). The Bay Area Water Supply and Conservation
Agency (BAWSCA) represents the wholesale customers and negotiates with the SFPUC on their
behalf. BAWSCA also ensures contract compliance through regular review of the SFPUC’s
accounting and capital expenditures.1
The Water Utility has two main costs: water supply costs (primarily the cost of water delivered
to Palo Alto from the Hetch Hetchy water system) and the costs of operating the distribution
system (the system of pipes, pumps, reservoirs, and other infrastructure that carries water to
Palo Alto customers). As discussed in previous years, both cost components have been
increasing and are expected to continue to increase.
For many years the largest cost increases have been on the water supply side. This is due
primarily to major capital investments the SFPUC has made since 2010, partly due to pressure
1 For a video summary of BAWSCA’s activities, see https://vimeo.com/283596665/5619ce2c11
City of Palo Alto Page 3
from wholesale customers. The Water System Improvement Program (WSIP) is a $4.8 billion
capital improvement program, one of the largest in the country, to rehabilitate and seismically
strengthen the lower portions of the Hetch Hetchy water system. One of the goals is to achieve
the capability to return to service within 24 hours after a major earthquake. Although much of
the work is complete (the program was 98.2% complete as of September 2019), some of the
projects are still under construction and bond financing of WSIP projects over the next several
years will continue to drive wholesale rates up. The program has greatly improved the
resiliency of the Hetch Hetchy water system but has also led water supply costs to double.
By contrast, CPAU’s capital and operational costs have increased roughly at inflation for the last
five years. This financial plan projects that capital and operational costs will co ntinue to
increase at approximately 4% per year over the next five years.
The UAC reviewed preliminary financial forecasts at its December 4, 2019 meeting.
City of Palo Alto Page 4
DISCUSSION
Staff’s annual assessment of the financial position of the City’s water utility is co mpleted to
ensure adequate revenue to fund operations, in compliance with the cost of service
requirements set forth in the California Constitution (Proposition 218). This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. The
current rate proposals are also based on the cost of service (COS) methodology described in the
2012 Palo Alto Water Cost of Service & Rate Study, which was updated in 2015, and the 2015
Drought Rate memorandum completed by Raftelis Financial Consultants, which was updated in
2019 and titled “Proposed FY 2020 Water Rates,” (see Attachment Q to staff report 10295.2)
Staff proposes no adjustment to water rates in FY 2021. Tables 1 through 3 below illustrate the
current rates that would remain unchanged under this financial plan. The rate s shown below
are in addition to the pass-through commodity rate that is charged to customers based on
SFPUC supply charges. The pass-through commodity rate is currently $4.10 per CCF. SFPUC is
not anticipated to increase its supply charges in FY 2021.
Table 1: Current Water Consumption Charges in $/CCF (No Change is Proposed for FY 2021)
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 2.56
Tier 2 Rates 5.97
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 5.50
2 A cost of service study (COS) is a study using industry-standard techniques to determine how the costs of running
the utility should be recovered from its customers; charges to each customer are set in proportion to the cost of
serving that customer.
City of Palo Alto Page 5
Table 2: Current Monthly Service Charges for W-1, W-4 and W-7
Meter
Size
Monthly Service Charge ($/month based on
meter size)
Residential (W-1) Commercial (W-4)
and Irrigation (W-7)
5/8” 20.25 17.71
3/4” 20.25 23.67
1” 20.25 35.59
1 ½” 65.40 65.40
2” 101.17 101.17
3” 214.44 214.44
4” 381.37 381.37
6” 780.79 780.79
8” 1,436.57 1,436.57
10” 2,271.20 2,271.20
Table 3: Current Monthly Service Charges for Fire Services (W-3)
Meter
Size
Monthly Service Charge
($/month based on meter
size)
Current (7/1/19)
2” $4.17
4” $25.81
6” $74.96
8” $159.74
10” $287.27
12” $464.02
Bill Impact of Proposal
There is no bill impact for water utility customers.
FY 2021 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 4 shows the projected rate adjustments over the next five years and their impact on the
annual median residential water bill for 5/8” customers. These projected rate adjustments
include the impact of projected changes to the pass-through commodity rate.
City of Palo Alto Page 6
Table 4: Projected Rate Adjustments, FY 2021 to FY 2025 (5/8” meter)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Water Utility 0% 3% 3% 4% 4%
Estimated Bill Impact ($/mo)1 $0 $2.70 $2.80 $3.80 $4.00
1) estimated impact on median residential water bill for customers with 5/8” meter, which is
currently $90.42.
Figures 1 and 2 below illustrate the projected increases in the Water Utility’s costs between FY
2020 and FY 2025.
Figure 1: FY 2020 and FY 2025 costs
City of Palo Alto Page 7
Figure 2: Percentage of Total Cost Increase From FY 2020 to FY 2025
Attributed to Supply, Capital, and Operations Costs
Note that Figure 1 reflects the capital funded by rate revenue in FY 2020, while the 2025 bar
shows the capital program contribution to the CIP Reserve in 2025, if Council approves the
proposal in this Financial Plan. In addition, $15 million in capital investments is planned in FY
2020, above what is listed in Figure 1, which will be funded with existing reserves.
A major driver for the increase in the water utility’s costs (and therefore rates) over the next
several years is operations cost. Inflationary increases of 2 to 4% per year are factored into
these changes, and also larger benefit cost increases to reflect a 6.2% discount rate for pension
liabilities per Council’s recommendation. Salaries and benefits account for less than 20% of the
water fund’s overall costs, so while these benefits assumption changes do crea te larger expense
projections, they are not significantly higher than they would have been under prior
assumptions. Operations costs are projected to increase by around 4.5% overall over the
forecast period.
The cost of water is also a major driver. Wholesale water costs are adopted by the SFPUC, and
generally have changed on an annual basis. Costs are projected to increase annually on average
by 3.4% per year from FY 2020 to FY 2025. The SFPUC is currently engaged in a $4.8 billion
Water System Improvement Program (WSIP) for both local (San Francisco) and regional
City of Palo Alto Page 8
projects. As of September 30, 2019, 43 of the 52 regional projects were complete or in close -
out while 6 of the regional projects were under construction and 1 was in pre-construction.3
This has resulted and will continue to result in large increases in the annual debt service costs
assigned to wholesale customers like Palo Alto. After each WSIP project is completed,
wholesale customers must start paying the debt service costs within 3 to 4 yea rs. For the
majority of those costs, funded with bond financing, the costs will be paid off over
approximately 30 years. The WSIP completion date approved by the SFPUC is December 30,
2021, as adopted by the SFPUC in March of 2018. However, the latest qu arterly report forecasts
overall WSIP completion by June 2022.
The regional WSIP project remaining in pre-construction is the Alameda Creek Recapture
project where environmental impact report work is currently ongoing. Current major projects
underway are the regional groundwater storage and recovery project and fish passage facilities
within the Alameda Creek Watershed. As WSIP projects are completed, SFPUC is pursuing a
suite of other capital improvement work; dam safety improvements and Mountain Tunne l
repairs are rate increase drivers during the next 10-year timeframe. Future and in-progress
construction work will require bond funding, and the SFPUC’s financial plans show debt service
cost for the water enterprise growing by 31% between FY 2020 and FY 2025, and by nearly 50%
by FY 2028.4 Initial wholesale rate increase projections are 5.5% per year on average through FY
2025 to cover increasing costs, primarily debt service from ongoing capital investments.
Changes in usage due to drought, or recovery from drought, can make the magnitude of future
increases difficult to predict. The SFPUC’s costs to operate the Regional Water System are
primarily fixed costs, so the water rate charged to wholesale customers like the City of Palo Alto
is highly dependent on usage by all users of the Regional Water System. The City’s FY 2021
Water Utility Financial Plan assumes that, while the drought has ended and usage has
increased, consumption will not fully return to pre-drought levels. This assumption is based on
CPAU’s experience following past droughts.
The SFPUC is currently working on its budget for FY 2021, and the long-range changes to
wholesale costs are subject to change. Because wholesale sales of water by the SFPUC in
recent years were higher than projected during the drought, the SFPUC has been collecting
funds in its Balancing Account. The SFPUC will use these funds to offset rate increases. Based
upon SFPUC’s current estimates, SFPUC does not anticipate needing to raise wholesale rates
until FY 2023.
There remains some uncertainty in the forecasts of capital costs for the water utility in coming
years. Water main replacement costs have risen substantially in recent years. The regional and
even national focus on infrastructure improvement has created labor shortages, leading to
3 First Quarter FY 2019-20 WSIP Regional Quarterly Report,
https://sfwater.org/Modules/ShowDocument.aspx?documentid=14501
4 FY 2018-19 & FY 2019-20 Adopted SFPUC Budget,
https://sfwater.org/modules/showdocument.aspx?documentid=13147
City of Palo Alto Page 9
higher bid prices than were seen in the past. Several factors go into main replacement cost,
such as location as well as the length of main segments. The projects in FY 2019 and FY 2020,
although of smaller segment size than in later years, are also located in higher traffic areas
which require enhanced strategic planning and coordination are (such as University Avenue).
Consistent with the FY 2020 financial plan, this plan includes larger main replacement
construction projects every other year instead of smaller projects annually. This main
replacement schedule will allow CPAU to meet its main replacement needs and addresses
challenges in the current construction market while optimizing current staffing resources. This
shift to larger main replacement construction projects every other year is anticipated to attract
more contractors to bid on the larger projects. Additionally, this main replacement project
schedule for water will be staggered with wastewater and gas (water and wastewater
construction every even year and gas construction every odd year), which will ease scheduling
difficulties for inspection coverage due to shared inspection staff across water, wastewater,
gas, and large development services projects. Beyond this, work has begun on the design of
Corte Madera reservoir replacement project in FY 2019, and staff estimates the construction
work for Corte Madera, together with design for the replacement of Dahl and Park reservoirs
will cost an additional $2 million in FY 2021. The replacements planned for the Dahl and Park
reservoirs in FY 2023 and 2026 are estimated to cost $3.5 to $3.7 million each.
Although the revised main replacement schedule is important for the reasons described above,
fluctuations in capital expenditures can lead to fluctuations in customer rates. To promote rate
stability and provide continuity in water expenditure levels, this plan establishes a consistent
annual contributions from the Operations Reserve to the CIP Reserve. CIP projects will then be
charged to the CIP Reserve, which will experience fluctuations in its balance as a result of
projects carried over from past years (but already funded) and as a result of the two -year
project cycle. This should enable rate increases to remain relatively smooth. Figure 3 below
shows the projected CIP Reserve balances under this Financial Plan.
Staff proposes modifications to the Water Utility Reserves Management Practices to
synchronize them with the staggered main replacement schedule, as well as annual funding
based on staff’s estimate of annual CIP work for the next 48 months. Specifically, the
modifications would set a new maximum CIP Reserve guideline level equal to the average
annual (12 month) CIP budget, for 48 months of budgeted CIP e xpense.5 Staff also proposes
that the Water Utility Reserves Management Practices be amended to provide that if there are
funds in this reserve in excess of the maximum level, staff must propose in the next Financial
Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a
specific use of the funds for CIP investments that will be made by the end of the next Financial
Planning Period. The proposed amendment would also authorize Staff to seek City Council
approval to hold funds in this reserve in excess of the maximum level if they are held for a
specific future purpose related to the CIP.
5 Each month is calculated based upon 1/12 of the annual budget.
City of Palo Alto Page 10
Although this Financial Plan includes a forecast period of five years, or 60 months, an even
number of years (48 months or 4 years) is used for the CIP Reserve maximum calculation,
because of the staggered main replacement schedule including a larger main replacement
project every other year.6 The new minimum CIP Reserve level is 20% of the maximum CIP
Reserve guideline level. This maximum in FY 2021 is $9.6 million and the minimum in FY 2021 is
$1.9 million. Table 5 below shows the planned capital spending in row 12 fluctuating from year
to year with the staggered main replacement schedule, and shows the stable capital program
contributions to the CIP Reserve in rows 9 and 10. The Operations Reserve is shown as
combined with unassigned funds, because when the Operations Reserve reaches its maximum
level, any further additions to the Water Utility’s Fund Balance are considered unass igned. In
accordance with the Water Utility Reserves Management Practices, the attached Financial Plan
includes a plan to assign these funds to both rate stabilization and capital investment purposes.
Figure 4 shows the amount of funds that are considered unassigned during the forecast period,
together with reserve balance changes for each reserve from FY 2019 and projected through FY
2025.
6 For example, in this Financial Plan for FY 2021, the 48 month period to use to derive the annual average is FY
2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use to derive the annual average
would be FY 2022 through FY 2025 etc.
City of Palo Alto Page 11
Figure 3: Projected Capital Reserve Balances FY 2021 to FY 2025
Figure 4: Actual Reserve Levels for FY 2019 and Projections through FY 2025
City of Palo Alto Page 12
Table 5: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending
Balances, Revenues, Transfers To/(From) Reserves, Capital Program Contribution To/(From)
Reserves, and Operations Reserve Guideline Levels for FY 2020 to FY 2025 ($000)
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Starting Balance
(1) Operations/Unassigned 20,652 18,583 14,496 12,126 11,332 11,889
(2) Rate Stabilization 4,069 9,069 12,569 12,569 12,569 9,500
(3) CIP 2,726 5,726 9,466 8,601 9,890 5,851
Revenues
(4) Total Revenue 49,655 49,005 49,815 50,641 51,958 53,310
(5) Transfers In 550 561 572 584 595 607
Transfers
(6) Operations/Unassigned (8,000) (5,000) (3,500) - 3,069 3,000
(7) Rate Stabilization 5,000 3,500 - - (3,069) (3,000)
(8) CIP 3,000 1,500 3,500 - - -
Capital Program
Contribution
(9) Operations/Unassigned - (8,000) (8,240) (8,487) (8,742) (9,004)
(10) CIP - 8,000 8,240 8,487 8,742 9,004
Expenses
(11) Total Expenses other than
CIP (38,694) (40,196) (40,553) (43,057) (45,841) (47,136)
(12) Planned CIP (5,132) (5,760) (12,605) (7,199) (12,780) (7,376)
(13) Transfers Out (447) (456) (465) (474) (484) (494)
Ending Balance
(1)+(4)+(5)+(6)
+(9)+(11)+(13)* Operations/Unassigned 18,583 14,496 12,126 11,332 11,889 12,172
(2)+(7) Rate Stabilization 9,069 12,569 12,569 12,569 9,500 6,500
(3)+(8)+(10)+
(12)* CIP 5,726 9,466 8,601 9,890 5,851 7,479
Operations Reserve
Guideline Levels
(14) Minimum 6,808 7,064 7,131 7,552 8,019 8,242
(15) Maximum 12,721 13,215 13,332 14,156 15,071 15,497
* Note: The current year, FY 2020, differs from FY 2021 through FY 2025 in that Planned CIP
(item 12) is reflected as an expense in the Operations Reserve; the proposal in this Financial
Plan for FY 2021 – FY 2025 reflects Planned CIP (item 12) as an expense in the CIP Reserve.
Capital Projects & Reserve
Higher bid cost and delays in project schedules resulted in a deferment of main replacement
projects in FY 2017 through FY 2019, temporarily lowering CIP expenditures. This resulted in the
Operations Reserve being filled to the maximum guideline level. As current Operations Reserve
levels are sufficient to fund deferred capital projects and as supply costs are anticipated to
remain relatively flat until FY 2023, staff recommends transferring up to $3 million from the
Operations Reserve to the CIP Reserve in FY 2020, and projects the need for reserve transfers of
up to $1.5 million to the CIP reserve in FY 2021 and up to $3.5 million to the CIP reserve in FY
City of Palo Alto Page 13
2022. Staff is currently requesting Council to approve the $3 million transfer from the
Operations Reserve to the CIP Reserve in FY 2020 and will request Council approval for any
further transfers to the CIP Reserve in the FY 2022 Water Utility Financial Plan once the year-
end FY 2020 reserve balances are known. Beginning in FY 2021, capital projects will be funded
from CIP Reserves. Having these funds in place will address uneven annual fundin g associated
with ongoing CIP projects, and will be a source for one -time or immediately needed projects.
This funding is equivalent to the amount needed to fund one-time reservoir replacements for
each of the following years: $2.4 million of new funding in FY 2020, $2 million in FY 2021, and
$3.5 million in FY 2023 for a total of nearly $8 million. By transferring $3 million to the CIP
Reserve in FY 2020, $1.5 million to the CIP Reserve in FY 2021, and $3.5 million to the CIP
Reserve in FY 2022, although it will not all be needed for the reservoir replacements until FY
2023, this will ensure the reserve has sufficient funding for budgeted CIP as fluctuating annual
amounts of capital investment occur going forward.
Table 5 above shows the anticipated CIP Reserve transfers in FY 2020 through FY 2025. There is
also approximately $15 million in CIP that was budgeted in 2019 or prior years that is
reappropriated or carried forward from previous years and is currently in the CIP
Reappropriations and CIP Commitments Reserves. That total includes approximately $1.4
million in commitments (CIP Commitments Reserve), $4.1 million for one -time projects, $8.2
million for water main replacements, and $1.4 for ongoing projects (CIP Reappropriations
Reserve). See Appendix B of the Water Utility Financial Plan for detailed information.
Additionally, the attached Financial Plan proposes that a capital program contribution would be
made annually from the Operations Reserve to the CIP Reserve ($8 million in FY 2021, and $8
million in FY 2022 and future years plus annual inflationary increases) to adequately fund the
CIP budget.
Rate Stabilization Reserve
This Financial Plan recommends funding the Rate Stabilization Reserve by transferring up to $5
million from the Operations Reserve in FY 2020, and projects the need for reserve transfers of
up to an additional $3.5 million in FY 2021. Staff is currently requesting Council to approve the
$5 million transfer from the Operations Reserve to the CIP Reserve in FY 2020 and will request
Council approval for the FY 2021 transfer from the Operations Reserve to the Rate Stabilization
Reserve in the FY 2022 Water Utility Financial Plan. The Rate Stabilization Reserve will be used
to buffer rate impacts that would have occurred from the utility’s need to pay for a series of
large wholesale supply rate increases that are anticipated to begin annually in FY 2023.
Beginning in FY 2024, CPAU expects to transfer funds annually from the Rate Stabilization
Reserve to the Operations Reserve to limit water rate increases. Although the existing council-
approved reserve practices call for rate stabilization reserves to be spent within five years of a
transfer, this schedule would leave the Rate Stabilization Reserve with some funds beyond FY
2025. It is recommended that the City Council approve this deviation from the guidelines in
City of Palo Alto Page 14
order to allow rate smoothing to occur in FY 2024 through 2028, when it is anticipated to be
needed.
Water Bill Comparison with Surrounding Cities
Table 6 compares water bills for residential customers to those in surrounding communities as
of January 2020 (under current the City’s current water rates). Palo Alto customers have some
of the highest monthly bills of the group, although bills for smaller water users ar e lower than
in some surrounding communities. It is unclear at this time what water rate changes may be
implemented in surrounding communities for FY 2021. The average calculated in the following
table is the mean of the six surrounding communities listed. These communities are the same
six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas and
Electric industries.
Table 6: Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of January 2020
Palo
Alto
Menlo
Park
Mountain
View Hayward Redwood
City
Santa
Clara Los Altos
Average of
Surrounding
Communities
4 $46.89 $56.69 $37.92 $37.20 $54.04 $43.69 $41.26 $45.13
(Winter
median) 7
$70.28 $85.35 $58.74 $54.60 $72.43 $62.44 $59.17 $65.46
(Annual
median) 9
$90.42 $104.46 $72.62 $67.54 $85.91 $74.94 $71.10 $79.43
(Summer
median) 14
$140.77 $150.03 $107.32 $103.24 $122.66 $106.19 $99.75 $114.87
25 $251.54 $249.10 $225.26 $181.78 $217.76 $174.94 $167.27 $202.69
*Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable
water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87%
for Mountain View, 10% for Santa Clara and 100% for Hayward. Los Altos does not
receive water supply from SFPUC.
Changes from Last Year’s Financial Forecast
Table 7 compares current rate projections to those projected in the Financial Plans from the
last two years. As shown, the current rate projections for FY 2021, FY 2023 and FY 2024 are
lower than projected last year while FY 2022 is the same. Delays in water main replacement
and reservoir replacement resulted in an increase in reserves, which together with the use of
the Rate Stabilization Reserve and the level approach to funding CIP through the CIP Reserve
enables the more gradual increases projected in the current plan.
City of Palo Alto Page 15
Table 7: Projected Water Rate Trajectory for FY 2021 to FY 2025
Projection FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
Current
(FY 2021 Financial Plan) 0% 3% 3% 4% 4%
Last year
(FY 2020 Financial Plan) 2% 3% 6% 6% -
Two years ago
(FY 2019 Financial Plan) 7% 6% 4% 4% -
Changes to Reserve Guidelines
Staff proposes modifications to the Water Utility Reserves Management Practices to
synchronize them with the water utility’s staggered main replacement schedule, as well as the
capital program contributions to the CIP Reserve. The new maximum and minimum CIP
Reserve guideline levels as well as the funding plans are describ ed above and in detail in the
attached Financial Plan.
Staff further proposes to modify the Water Utility Reserves Management Practices to provide
that if there are funds in the CIP Reserve in excess of the maximum level staff must propose in
the next Financial Plan to transfer these funds to another reserve, return the funds to
ratepayers, or designate a specific use of the funds for CIP investments that will be made by the
end of the next Financial Period. Staff may also seek City Council to approve holding funds in
this reserve in excess of the maximum level if they are held for a specific future purpose related
to the CIP.
Additionally, staff proposes that Council approve, pursuant to the last sentence of Section 6 of
the Management Practices, to maintain funds in the Rate Stabilization Reserve through FY
2028.
NEXT STEPS
The Finance Committee is scheduled to review the FY 2021 Water Financial Plan in April 2020.
Assuming the Finance Committee supports staff’s recommendation, no notification of rat e
increases would be necessary because the current rates would not increase.
RESOURCE IMPACT
Normal year sales revenues for the Water Utility will not be impacted by this proposal to
maintain the current rates for FY 2021. The FY 2021 Budget is being developed concurrent with
these rates and, depending on the final rates, adjustments to the budget may be necessary
later. See the attached FY 2021 Water Financial Plan for a more comprehensive overview of
projected cost and revenue changes for the next five years.
City of Palo Alto Page 16
POLICY IMPLICATIONS
Maintaining the current rates for FY 2021 is consistent with Reserve Management Practices and
exemptions included in the Financial Plans and described above, and the rates were developed
using a cost of service study and methodology consistent with the cost of service requirements
of Proposition 218.
ENVIRONMENTAL REVIEW
The UAC’s review and recommendation to Council on the FY 2021 Water Financial Plan and rate
adjustments does not meet the definition of a project requiring California Environmental
Quality Act (CEQA) review under Public Resources Code Section 21065 thus no environmental
review is required.
Attachments:
• Attachment A: Resolution Adopting Water FY 2021 Financial Plan
• Attachment B: FY 2021 Water Financial Plan
• Attachment C: Water Utility Reserves Management Practices
Attachment A
* NOT YET APPROVED *
6055334
Resolution No.
Resolution of the Council of the City of Palo Alto Approving the
FY 2021 Water Utility Financial Plan and Amending the
Water Utility Reserves Management Practices
R E C I T A L S
A. Each year the City of Palo Alto (“City”) regularly assesses the financial position of
its utilities with the goal of ensuring adequate revenue to fund operations. This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. The City
does this with the goal of providing safe, reliable, and sustainable utility services at competitive
rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and made
part of the Financial Plans.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby adopts the FY 2021 Water Utility Financial Plan.
SECTION 2. The Council hereby approves the following transfers as described in the FY
2021 Water Utility Financial Plan:
a. Up to $3,000,000 in FY 2020 from the Operations Reserve to the
Capital Improvement Projects Reserve;
b. Up to $5,000,000 in FY 2020 from the Operations Reserve to the Rate
Stabilization Reserve;
SECTION 3. The Council hereby approves a capital program contribution to the Capital
Improvement Projects Reserve from the Operations Reserve (system revenues) of up to
$8,000,000 in FY 2021. Annual rate-funded contributions beyond FY 2021 will be approved by
Resolution annually.
SECTION 4. The Council hereby approves the amendments to the Water Utility
Reserves Management Practices as shown in Attachment C.
SECTION 5. The Council hereby approves the maintenance of a balance in the Rate
Stabilization Reserve through FY 2028 in order to provide greater rate stabilization to customers.
Attachment A
* NOT YET APPROVED *
6055334
SECTION 6. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act’s (CEQA) definition of a project under Public Resources
Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative
governmental activity which will not cause a direct or indirect physical change in the
environment, and therefore, no environmental review is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
FY 202 1 WATER
UTILITY
FINANCIAL PLAN
FY 20 2 1 TO FY 202 5
M a r c h 2020 2 | P a g e
FY 202 1 WATER UTILITY
FINANCIAL PLAN
FY 20 2 1 TO FY 20 2 5
TABLE OF C ONTENTS
Section 1: Definitions and Abbreviations................................................................................ 4
Section 2: Executive Summary and Recommendations ........................................................... 4
Section 2A: Overview of Financial Position .................................................................................. 4
Section 2B: Summary of Proposed Actions .................................................................................. 8
Section 3: Detail of FY 2021 Rate and Reserves Proposals ....................................................... 9
Section 3A: Rate Design ............................................................................................................... 9
Section 3B: Current and Proposed Rates ..................................................................................... 9
Section 3C: Proposed Reserve Transfers .................................................................................... 11
Section 4: Utility Overview .................................................................................................. 12
Section 4A: Water Utility History ............................................................................................... 13
Section 4B: Customer Base ........................................................................................................ 14
Section 4C: Distribution System ................................................................................................. 14
Section 4D: Cost Structure and Revenue Sources ...................................................................... 14
Section 4E: Reserves Structure ................................................................................................... 15
Section 4F: Competitiveness ...................................................................................................... 15
Section 5: Utility Financial Projections ................................................................................. 16
Section 5A: Load Forecast .......................................................................................................... 16
Section 5B: FY 2015 to FY 2019 Cost and Revenue Trends ........................................................ 18
Section 5C: FY 2019 Results ....................................................................................................... 19
Section 5D: FY 2020 Projections ................................................................................................ 19
Section 5E: FY 2021 – FY 2025 Projections ................................................................................ 20
Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 23
Section 5G: Alternate scenario .................................................................................................. 24
Section 5H: Long-Term Outlook ................................................................................................. 24
M a r c h 2020 3 | P a g e
Section 6: Details and Assumptions ..................................................................................... 25
Section 6A: Water Purchase Costs ............................................................................................. 25
Section 6B: Operations .............................................................................................................. 26
Section 6C: Capital Improvement Program (CIP) ....................................................................... 27
Section 6D: Debt Service ............................................................................................................ 32
Section 6E: Other Revenues ....................................................................................................... 33
Section 6F: Sales Revenues ........................................................................................................ 33
Section 7: Communications Plan .......................................................................................... 33
Appendices ......................................................................................................................... 35
Appendix A: Water Utility Financial Forecast Detail ................................................................. 36
Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 38
Appendix C: Water Utility Reserves Management Practices ..................................................... 39
Appendix D: Description of Water Utility Operational Activities ............................................... 42
Appendix E: Sample of Water Utility Outreach Communications ............................................. 43
M a r c h 2020 4 | P a g e
SECTION 1 : DEFINITIONS AND ABBREVIATIONS
BAWSCA Bay Area Water Supply and Conservation Agency
CCF The standard unit of measurement for water delivered to water customers, equal to
one hundred cubic feet, or roughly 748 gallons.
CIP Capital Improvement Program
CPAU City of Palo Alto Utilities Department
O&M Operations and Maintenance
RFC Raftelis Financial Consultants, Inc.
SFPUC San Francisco Public Utilities Commission
SFWD San Francisco Water Department
UAC Utilities Advisory Commission
WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the
transmission lines of the Hetch Hetchy Regional Water System.
SECTION 2 : EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City’s Water Utility for FY 2021 through FY 2025.
This Financial Plan provides for revenues to cover the costs of operating the utility safely over
that period while adequately investing for the future. It also addresses the financial risks facing
the utility over the short term and long term and includes measures to mitigate and manage
those risks.
SECTION 2 A : OVERVIEW OF FINANCIAL POSITION
Staff expects overall costs in the Water Utility to rise on average by about 4% per year from fiscal
year (FY) 2021 to 2025. Operations cost projections rise on average by about 3% annually through
the projection period. Water supply costs are based on current SFPUC projections and are the
largest individual component of the utility’s costs. The cost of the City’s SFPUC water supply is
increasing over the forecast period due to a series of major capital projects on the Hetch Hetchy
Regional Water System. However, the SFPUC’s water supply rates will remain relatively flat
through FY 2022 as SFPUC returns to customers reserves it accumulated in prior years, with rates
rising steeply after FY 2022. See Section 6A: Water Purchase Costs for more information. Capital
costs were lower than budgeted in FY 2019. In FY 2020 many of the budgeted capital projects
that were deferred from previous years are anticipated to be completed and reserve funds are
available for those. For this reason, funds needed are lower than originally budgeted in staff’s
projection for FY 2020. For FY 2021 through 2025, capital expenditures will fluctuate for several
reasons including one-time reservoir replacement projects and the switch the a two-year cycle
(rather than an annual cycle) for main replacement construction projects. This main
replacement schedule is important allow CPAU to meet its main replacement needs while
addressing challenges in the current construction market and optimizing current staffing
resources. However, fluctuations in capital expenditures can lead to fluctuations in customer
rates. To promote rate stability and provide continuity in water expenditure levels, this plan
incorporates a stable annual “capital contribution” from the Operations Reserve that is set aside
in the capital reserve to absorb annual spending fluctuations. Section 6C: Capital Improvement
Program (CIP) provides more detail. Table 1 below shows the costs for the Water Utility from FY
2019 through FY 2025.
M a r c h 2020 5 | P a g e
Table 1: Expenses for FY 2019 to FY 2025 (Thousand $’s)
Expenses
($000)
FY
2019
(act.)
FY
2020
(est.)
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
Water
Purchases 21,210 21,662 21,371 21,085 22,471 24,794 25,633
Operations 16,623 17,479 19,281 19,933 21,061 21,530 21,997
Capital
Projects 11,791 5,132 8,000 8,240 8,487 8,742 9,004
TOTAL 49,625 44,274 48,652 49,258 52,019 55,067 56,634
This proposed Financial Plan projects that the Water Utility will need the rate increases shown in
Table 2 to ensure that revenues cover costs and reserves remain healthy. Staff projects a need
for sales revenue increases averaging about 3% per year through FY 2025. This is because water
supply costs are projected to increase beginning in FY 2023, water sales are projected to decline
somewhat, and little or no increase is expected in non-sales revenue (e.g. interest, connection
fees).
Table 2 also shows rate projections from the last two Financial Plans for FY 2020 and FY 2019,
which projected higher rate increases. Delays in water main replacement and reservoir
replacement projects resulted in an increase in reserves. In addition, the lack of projected
increases from SFPUC until FY 2023, together with use of the Rate Stabilization Reserve to offset
increases from SFPUC once they begin in FY 2023 will enable the more gradual rate increases
projected in the current plan.
Table 2: Proposed and Projected Water Rate Changes for FY 2021 to FY 2025
Projection FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
Current 0% 3% 3% 4% 4%
FY 2020 Plan 2% 3% 6% 6% -
FY 2019 Plan 7% 6% 4% 4% -
The Water Utility’s Rate Stabilization Reserve can be used to smooth rate increases over several
years. This Financial Plan recommends further use of this reserve by transferring funds from the
Operations Reserve to the Rate Stabilization Reserve in FY 2020 and FY 2021 , and using those
funds to mitigate rate increases that will begin annually in FY 2023. The use of the Rate
Stabilization Reserve in this way, together with the cost and revenue projections in this Financial
Plan will allow CPAU water rates to increase by 4% or less annually over the next five years. This
Financial Plan projects that these reserves will be exhausted by the end of FY 2028.
The Water Utility also has a Capital Improvement Program (CIP) Reserve that is used to manage
cash flow for capital projects and acts as a reserve for capital contingencies. Staff proposes
modifications to the Water Utility Reserves Management Practices to synchronize them with the
staggered main replacement schedule, as well as annual funding based on staff’s estimate of
annual CIP work for the next 48 months. Specifically, the modifications would set a new
maximum CIP Reserve guideline level equal to the average annual (12 month) CIP budget, for 48
M a r c h 2020 6 | P a g e
months of budgeted CIP expense.1 Staff also proposes that the Water Utility Reserves
Management Practices be amended to provide that if there are funds in this reserve in excess of
the maximum level, staff must propose in the next Financial Plan to transfer these funds to
another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP
investments that will be made by the end of the next Financial Planning Period . The proposed
amendment would also authorize Staff to seek City Council approval to hold funds in this reserve
in excess of the maximum level if they are held for a specific future purpose related to the CIP.
Appendix C, section 5, reflects the new maximum and minimum CIP Reserve guideline levels.
Although this Financial Plan includes a forecast period of five years, or 60 months, an even
number of years (48 months or 4 years) is used for this calculation, because of the staggered
main replacement schedule including a larger main replacement project every other year.2 The
new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level. This
maximum in FY 2021 is $9.6 million and the minimum in FY 2021 is $1.9 million. Previously, the
minimum and maximum CIP Reserve guideline levels were 12 and 24 months of budgeted CIP
expenditure, respectively.
The 2020 Financial Plan anticipated replenishing the CIP Reserve by $5 million in FY 2020 and $4
million in FY 2021. This Financial Plan recommends transferring up to $3 million from the
Operations Reserve to the CIP Reserve in FY 2020, and projects the need for reserve transfers of
up to $1.5 million to the CIP Reserve in FY 2021 and up to $3.5 million to the CIP Reserve in FY
2022. Staff is currently requesting Council to approve the $3 million transfer from the Operations
Reserve to the CIP Reserve in FY 2020 and will request Council approval for the other transfers
to the CIP Reserve in the FY 2022 Water Utility Financial Plan once the year-end FY 2020 reserve
balances are known. Beginning in FY 2021, capital projects will be funded from CIP Reserves.
Having these funds in place will address uneven annual funding associated with ongoing CIP
projects, and will be a source for one-time or immediately needed projects. This funding is
equivalent to the amount needed to fund one-time reservoir replacements for each of the
following years: $2.4 million of new funding in FY 2020, $2 million in FY 2021, and $3.5 million in
FY 2023 for a total of nearly $8 million. By transferring $3 million to the CIP Reserve in FY 2020,
$1.5 million to the CIP Reserve in FY 2021, and $3.5 million to the CIP Reserve in FY 2022, although
it will not all be needed for the reservoir replacements until FY 2023, this will ensure the reserve
has sufficient funding for budgeted CIP as fluctuating annual amounts of capital investment occur
going forward.
Figure 11 shows the projected CIP Reserve balances and guideline levels for FY 2021 through FY
2025. These modifications will make full use of the CIP reserve to manage fluctuations in capital
investments while stabilizing customer rates.
Higher bid cost and delays in project schedules resulted in a deferment of main replacement
projects in FY 2017 through FY 2019, temporarily lowering costs. This resulted in the Operations
1 Each month is calculated based upon 1/12 of the annual budget.
2 For example, in this Financial Plan for FY 2021, the 48 month period to use to derive the annual
average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use
to derive the annual average would be FY 2022 through FY 2025 etc.
M a r c h 2020 7 | P a g e
Reserve being filled to the maximum guideline level, with surplus reserves available to phase in
rate increases more slowly over the forecast period. The maximum guideline level for the
Operations Reserve equals 120 days of operations and maintenance and commodity expense. At
year end FY 2019, the maximum guideline level equaled $12.3 million while the total Operations
Reserve plus Unassigned Reserve funds equaled $20.7 million, which is $8.4 million more than
the maximum guideline level. Table 3 shows that the balance at the start of FY 2020 in the CIP
Reserve is approximately $2.7 million (in row 3) and in the Operations Reserve plus Unassigned
Reserve combined is $20.7 million (in row 1). Figure 7 shows the water utility reserve balances
including the Unassigned Reserve balance at year end for FY 2019 and projected through FY 2025.
However, these funds will be needed to adequately fund CIP investments and the CIP Reserve in
FY 2020 through FY 2022, bringing the Operations Reserve within guidelines by the end of FY
2022. Table 3 shows the starting and ending balances for the Operations & Unassigned Reserves
combined, Rate Stabilization Reserve, and CIP Reserve together with the Transfers To/(From)
projected reserve transfers over the forecast period. See Section 3D: Proposed Reserve Transfers
for more details.
M a r c h 2020 8 | P a g e
Table 3: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending
Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution
To/(From) Reserves for FY 2020 to FY 2025 ($000)
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Starting Balance
(1) Operations/Unassigned 20,652 18,583 14,496 12,126 11,332 11,889
(2) Rate Stabilization 4,069 9,069 12,569 12,569 12,569 9,500
(3) CIP 2,726 5,726 9,466 8,601 9,890 5,851
Revenues
(4) Total Revenue 49,655 49,005 49,815 50,641 51,958 53,310
(5) Transfers In 550 561 572 584 595 607
Transfers
(6) Operations/Unassigned (8,000) (5,000) (3,500) - 3,069 3,000
(7) Rate Stabilization 5,000 3,500 - - (3,069) (3,000)
(8) CIP 3,000 1,500 3,500 - - -
Capital Program
Contribution
(9) Operations/Unassigned - (8,000) (8,240) (8,487) (8,742) (9,004)
(10) CIP - 8,000 8,240 8,487 8,742 9,004
Expenses
(11) Total Expenses other than
CIP (38,694) (40,196) (40,553) (43,057) (45,841) (47,136)
(12) Planned CIP (5,132) (5,760) (12,605) (7,199) (12,780) (7,376)
(13) Transfers Out (447) (456) (465) (474) (484) (494)
Ending Balance
(1)+(4)+(5)+(6)
+(9)+(11)+(13)* Operations/Unassigned 18,583 14,496 12,126 11,332 11,889 12,172
(2)+(7) Rate Stabilization 9,069 12,569 12,569 12,569 9,500 6,500
(3)+(8)+(10)+
(12)* CIP 5,726 9,466 8,601 9,890 5,851 7,479
Operations Reserve
Guideline Levels
(14) Minimum 6,808 7,064 7,131 7,552 8,019 8,242
(15) Maximum 12,721 13,215 13,332 14,156 15,071 15,497
* Note: The current year, FY 2020 differs from FY 2021 through FY 2025 in that Planned CIP (item
12) is reflected as an expense in the Operations Reserve; the proposal in this Financial Plan for
FY 2021 – FY 2025 reflects Planned CIP (item 12) as an expense in the CIP Reserve.
SECTION 2 B : SUMMARY OF PROPOSED ACTIONS
Staff proposes the following action for the Water Utility in FY 2020 and FY 2021:
1. Transfer up to $3 million in FY 2020 from the Operations Reserve to the CIP Reserve. See
Section 3D: Proposed Reserve Transfers for more details.
2. Transfer up to $5 million in FY 2020 from the Operations Reserve to the Rate Stabilization
Reserve. See Section 3D: Proposed Reserve Transfers for more details.
3. An up to $8 million rate-funded contribution from the Operations Reserve to the CIP
Reserve in FY 2021. See Section 6C: Capital Improvement Program (CIP) for more details.
4. Amendments to the Water Utility Reserves Management Practices relating to the CIP
Reserve reflected in Appendix C, Section 5 and described above in Section 2A: Overview
of Financial Position.
M a r c h 2020 9 | P a g e
5. Approve the maintenance of a balance in the Rate Stabilization Reserve through FY 2028
in order to provide greater rate stabilization to customers. See Appendix C, Section 6 and
description in Section 2A: Overview of Financial Position
SECTION 3 : DETAIL OF FY 20 2 1 RATE AND RESERVES PROPOSALS
SECTION 3 A : RATE DESIGN
The Water Utility’s rates are evaluated and implemented in compliance with the cost of service
requirements and procedural rules set forth in Article XIII D of the California Constitution
(Proposition 218) and applicable statutory law. The City structured current rates based on staff’s
assessment of the financial position of the Water Utility, and updated current rates using the
methodology from the March 2012 Palo Alto Water Cost of Service & Rate Study by Raftelis
Financial Consultants, Inc. (RFC) (Staff Report 2676), RFC’s 2015 Memorandum: Proposed Water
Rates updating the 2012 Study and analyzing drought rates (Staff Report 5951), as well as RFC’s
2019 Memorandum updating the 2012 study (Staff Report 10295). Staff plans to update the cost
of service study in 1 to 2 years, unless any major changes occur to the utility’s operations or
customer base that would necessitate an earlier study. Before conducting any new cost of service
study, staff will review current rates and the scope of the study with the Utilities Advisory
Commission (UAC) and Council to determine the City’s policy priorities.
SECTION 3 B : CURRENT AND PROPOSED RATES
The current rates and surcharges became effective on July 1, 2019. CPAU has five rate schedules:
separately metered residential customers (W-1), commercial and master-metered multi-family
residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in
buildings and private hydrants (W-3), and service to fire hydrant rental meters used for
construction (W-2). All customers pay a monthly service charge based on the size of their inlet
meter. This charge represents meter reading, billing, and other customer service costs, and also
the cost of maintaining the capability to deliver a peak flow for that customer based on their
meter size.
All customers are also charged for each CCF (one hundred cubic feet) of water used. Separatel y
metered residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF
for a 30 day billing period) charged at the first tier price per CCF, and all additional units charged
a higher tier price per CCF. Commercial customers, including most multi-family customers, pay a
uniform price for each CCF used. A separate rate per CCF exists for separately metered irrigation
service.
For July 1, 2020, staff is proposing no rate increase. Water rates are composed of two general
types of costs: commodity and distribution. Commodity costs are mainly volumetric in nature
and charged by the San Francisco Public Utilities Commission (SFPUC). In April 2019, the SFPUC
provided an estimate that their W-25 wholesale rate for agencies with long-term contracts would
remain at $4.10/CCF in FY 2021. The SFPUC will not determine its final rate until May or June,
2020. Staff is using the SFPUC’s April 2019 estimate in this forecast for no rate increase. If
M a r c h 2020 10 | P a g e
SFPUC’s final rate for FY 2021 does increase, the City must notify customers 30 days in advance
of the pass-through rate increase.
Distribution rates cover all the costs to deliver water within the City, such as operations,
maintenance, metering, billing, and capital improvements. In the past, the distribution costs
would fluctuate depending on capital improvement spending. However, this plan provides a
steady amount of capital improvement funding to the capital reserve beginning in FY 2021. Going
forward, the CIP Reserve will reflect actual fluctuations in CIP expenditures (money spent on
actual projects in a given year) beginning in FY 2021. Previously, CIP expenditures were reflected
in the Operations Reserve. Table 3 reflects this change; in FY 2021 (row 12) shows planned CIP
expenditures and the CIP Reserve balance is calculated by taking the starting balance for the CIP
Reserve (row 3), adding the one-time transfers (row 8) and capital program contributions (row
10) and subtracting planned CIP expenditures (row 12). Section 5E: FY 2021 – FY 2025 Projections
contains a more detailed description of this change. In this way, although CIP expenditures
fluctuate from year to year, the capital program contribution to the CIP reserve is projected to
remain fairly constant over the next five years, increasing by 3% per year on average. Operations
costs are discussed in Section 6B: Operations, below.
Customers have a separate commodity rate for purchased water from SFPUC relative to the rest
of the distribution-related portion of the volumetric rates. This charge passes-through any future
SFPUC rate increases to customers. All customers will pay this separate commodity cost for each
unit of water in addition to the volumetric rate that is applicable for their customer class. The
rates shown below are in addition to the pass-through commodity rate that is charged to
customers based on SFPUC supply charges. The pass-through commodity rate is currently $4.10
per CCF. SFPUC is not anticipated to increase its supply charges in FY 2021. This automatically
adjusting pass-through charge is effective July 1, 2019 through July 1, 2024 pursuant to
Resolution 9844 “Resolution of the Council of the City of Palo Alto Adopting a Water Rate
Increase and Amending Utility Rate Schedules W-1, W-2, W-3, W-4 and W-7, June 17, 2019.
Table 4 shows the current consumption charges, which, like the rates in Tables 5 and 6, are not
proposed to change for FY 2021.
Table 4: Water Consumption Charges ($/CCF)
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rates 2.56
Tier 2 Rates 5.97
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 3.61
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 5.50
M a r c h 2020 11 | P a g e
Table 5 shows the current monthly service charges for rate schedule W-1, W-4 and W-7.
Table 5: Current Monthly Service Charges for W-1, W-4 and W-7
Meter
Size
Monthly Service Charge ($/month based on
meter size)
Residential (W-1) Commercial (W-4)
and Irrigation (W-7)
5/8” 20.25 17.71
3/4” 20.25 23.67
1” 20.25 35.59
1 ½” 65.40 65.40
2” 101.17 101.17
3” 214.44 214.44
4” 381.37 381.37
6” 780.79 780.79
8” 1,436.57 1,436.57
10” 2,271.20 2,271.20
Table 6 shows the current monthly service charges for rate schedule W-3
Table 6: Current Monthly Service Charges for Fire Services (W-3)
Meter
Size
Monthly Service Charge
($/month based on meter
size)
Current (7/1/19)
2” $4.17
4” $25.81
6” $74.96
8” $159.74
10” $287.27
12” $464.02
SECTION 3 C : PROPOSED RESERVE TRANSFERS
In the FY 2018 Financial Plan, staff proposed transferring $1.87 million from the Rate Stabilization
Reserve to the Operations Reserve in FY 2018. This transfer was not necessary as increased sales
during FY 2017 resulted in larger than expected revenues , largely from the drought surcharge.
The drought surcharge was discontinued on July 1, 2017. Customer sales recovery after the
drought in FY 2018 was more robust than staff’s initial projections, and in FY 2019 revenues were
similar to projections and the Operations Reserve has remained healthy.
The Rate Stabilization Reserve has a year-end FY 2019 balance of $4.07 million. This Financial
Plan recommends further funding of this reserve by transferring $5 million from the Operations
Reserve to the Rate Stabilization Reserve in FY 2020 and projects the need to transfer $3.5 million
from the Operations Reserve to the Rate Stabilization Reserve in FY 2021. With these transfers,
the Rate Stabilization Reserve would be available to fund a series of large wholesale supply rate
M a r c h 2020 12 | P a g e
increases that are anticipated to begin annually in FY 2 023. The use of the Rate Stabilization
Reserve in this way will allow CPAU water rates to increase by 4% or less annually over the next
five years. Funds from the Rate Stabilization Reserve would be drawn down annually beginning
in FY 2024 to minimize the need for a rate increase triggered by increasing costs. See Table 3
above, row 7, for a summary of the reserve transfers into and out of the Rate Stabilization
Reserve. SFPUC projects wholesale rate increases from $4.10 per CCF currently to $4.47 per CCF
in FY 2023, $5.06 per CCF in FY 2024, and $5.33 per CCF in FY 2025 with increases continuing
beyond FY 2025.
The Water Utility Reserves Management Practices states that if there are funds in the Rate
Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial Plan
must result in the withdrawal of all funds from this reserve by the end of th e Financial Planning
Period. Once the funds are withdrawn under this plan, they will help keep rates lower by funding
operations and supply costs. However, due to the ongoing large increases in supply rates
expected to be passed through from SFPUC beyond 2025, staff recommends making a change to
the regular approach. Specifically, staff requests approval to hold the funds in the Rate
Stabilization Reserve until FY 2028 in order to help keep rates lower and gradually increase rates.
The proposed modifications to the Water Utility Reserves Management Practices shown in
Appendix C reflect this change.
Based upon current reserve levels and capital budget needs staff recommends a transfer of $3
million from the Operations Reserve to the CIP Reserve in FY 2020, and projects a transfer of $1.5
million from the Operations Reserve to the CIP Reserve in FY 2021, and a transfer of $3.5 million
from the Operations Reserve to the CIP Reserve in FY 2022 will be needed. The CIP Reserve
currently contains $2.726 million. Table 3 above shows these proposed reserve transfers in row
8. Having these funds in place will address uneven annual funding associated with ongoing CIP
projects, and will be a source for one-time or immediately needed projects. This funding is
equivalent to the amount needed to fund one-time reservoir replacements for each of the
following years: $2.4 million of new funding in FY 2020, $2 million in FY 2021, and $3.5 million in
FY 2023 for a total of nearly $8 million. The projected one-time spending needs for reservoir
replacement are shown in Appendix B on the line labeled “WS -09000 Seismic Water System”.
Through these one-time transfers to the CIP Reserve, although the funds will not all be needed
for the reservoir replacements until FY 2023, this will ensure the reserve has sufficient funding
for budgeted CIP as fluctuating annual amounts of capital investment occur going forward. In
addition, the funds will help to stabilize rate fluctuations for customers resulting from
fluctuations in capital spending.
Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail shows
details of reserves levels.
SECTION 4 : UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It provides general background
information and helps readers better understand the forecasts in Section 5: Utility Financial
Projections and Section 6: Details and Assumptions.
M a r c h 2020 13 | P a g e
SECTION 4 A : WATER UTILITY HISTORY
The Water Utility was established on May 9, 1896, two years after the city was incorporated.
Voters of the 750-person community approved a $40,000 bond to buy local, private water
companies who operated one or more shallow wells to serve the nearby residents. The city grew
and the well system expanded until nine wells were in operation in 1932. Palo Alto began
receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these
sources.
A 1950 engineering report noted, “the capricious alternation of well waters and the San Francisco
Water Department water…has made satisfactory service to the average customer practically
impossible”. By 1950, only eight wells were still in operation. Despite this, groundwater
production increased in the 1950’s leading to lower groundwater tables and water quality
concerns. In 1962, a survey of water softening costs to CPAU customers determined that CPAU
should purchase 100% of its water supply needs from the SFWD. CPAU signed a 20-year contract
with SFWD, and CPAU’s wells were placed in standby condition. The SFWD later became known
as the SFPUC. Since 1962 (except for some very short periods) CPAU’s entire supply of potable
water has come from the SFPUC.
As the city grew, so did the number of mains in the water system, while existing sections of the
system continued to age. In the mid-1980s, the number of breaks in cast iron mains install ed
during the 1940s and earlier started to accelerate. In FY 1994, to combat deterioration of older
sections of the system, CPAU performed an analysis of cost-effective system improvements and
increased the rate of main replacement from one mile per year to three. CPAU began a plan to
replace 75 miles of deficient mains within 25 years.
In 1999, a study of system reliability concluded that the distribution system needed major
upgrades to provide adequate water supply during a natural disaster. This ultimately resulted in
the $40 million Emergency Water Supply and Storage Project, completed in 2013, which involved
a new underground reservoir in El Camino Park, the siting and construction of several emergen cy
supply wells, and the upgrade of several existing wells and the Mayfield pump station. Upon
completion, the city began to focus reliability efforts on its system of water storage reservoirs
and transmission lines in the Foothills.
At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in
consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy Regional
Water System, which crosses two major fault lines between the Sierras and the Bay Area. That
evaluation concluded that major upgrades to the system were required. This planning process
culminated in the SFPUC’s $4.8 billion Water System Improvement Project (WSIP), which is
ongoing. This has resulted and will continue to result in large increases in the annual debt service
costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed,
wholesale customers must start paying the debt service costs within 3 to 4 years. The majority
of those costs, funded with bond financing, will be paid off over approximately 30 years. The
SFPUC continues to evaluate its aging system for other needed infrastructure improvements;
future major improvements include dam safety and Mountain Tunnel repairs.
M a r c h 2020 14 | P a g e
SECTION 4 B : CUSTOMER BASE
CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a
handful of residential customers not in Palo Alto (primarily in Los Altos Hills). Approximately
20,100 customers are connected to the water system. Approximately 16,200 (81%) of these are
separately metered residential customers and approximately 3,900 (19%) of these are
commercial, master-metered residential, irrigation and fire service customers.
Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is used
for irrigation, and that consumption is heavily weather dependent. It also varies significantly by
season. As a result of these two factors, there is significant variability in the amount of water that
is demanded from the system month to month and year to year.
SECTION 4 C : DISTRIBUTION SYSTEM
To deliver water to its customers, CPAU owns and operates roughly 233 miles of mains (which
transport the water from the SFPUC meters at the city’s borders to the customer’s service laterals
and meters), eight wells (to be used in emergencies), five water storage reservoirs (also for
emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow
and demand (due to fire suppression, heavy usage times, etc.). These represent the vast majority
of the infrastructure used to distribute water in Palo Alto.
SECTION 4 D : COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 1, water purchase
costs accounted for 43% of the Water
Utility’s costs in FY 2019, Operational
costs represented 33%, and capital
investment was responsible for the
remaining 24%. Staff projects these
percentage distributions to remain similar
over the forecast period.
The Water Utility’s revenue is primarily
from sales of water and the remainder
from capacity and connection fees,
interest on reserves, and other sources.
Appendix A: Water Utility Financial
Forecast Detail shows more detail on the
utility’s cost and revenue structures.
Approximately 19% of the utility’s
revenues come from fixed service
charges, though most of its costs are
fixed.
Figure 1: Cost Structure (FY 2019)
43%
33%
24%
Supply
Operations
Capital
Figure 2: Revenue Structure (FY 2019)
90%
10%
Sales of Water
Other Revenue
M a r c h 2020 15 | P a g e
SECTION 4 E : RESERVES STRUCTURE
CPAU maintains six reserves for its Water Utility to manage various types of contingencies. The
descriptions below summarize these reserves; see Appendix C: Water Utility Reserves
Management Practices for more detailed definitions and guidelines for reserve management:
• Reserve for Commitments: A reserve equal to the utility’s outstanding contract liabilities
for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
• Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including the
General Fund, have a Reappropriations Reserve.
• Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate
funds for future expenditure on CIP projects, as well as to manage cash flow for ongoing
capital projects. This reserve can also act as a contingency reserve for the CIP. This type
of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well.
• Rate Stabilization Reserve: This reserve is intended to be empty unless the city
anticipates one or more large rate increases in the forecast period. In that case, funds can
be accumulated to spread the impact of those future rate increases across multiple years.
This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection)
as well.
• Operations Reserve: This is the primary contingency reserve for the Water Utility, and is
used to manage yearly variances from the budget for operational water supply costs. This
type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as
well.
• Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and
is normally empty.
SECTION 4 F : COMPETITIVENESS
Table 7 shows the current water bills for single-family residential customers compared to what
they would be under surrounding communities’ rate schedules. CPAU is among the highest
monthly bills of the group, although bills for smaller water users are less than in some
surrounding communities. These comparison cities were selected because they are the cities
CPAU compares itself to in the annual budget across all industries.
M a r c h 2020 16 | P a g e
Table 7: Single-Family Residential Monthly Water Bill Comparison
Usage
(CCF/month)
Residential monthly bill comparison ($/month)*
As of January 2020
Palo
Alto
Menlo
Park
Mountain
View Hayward
Redwood
City
Santa
Clara
Los
Altos
4 $46.89 $56.69 $37.92 $37.20 $54.04 $43.69 $41.26
(Winter median) 7 $70.28 $85.35 $58.74 $54.60 $72.43 $62.44 $59.17
(Annual median) 9 $90.42 $104.46 $72.62 $67.54 $85.91 $74.94 $71.10
(Summer median) 14 $140.77 $150.03 $107.32 $103.24 $122.66 $106.19 $99.75
25 $251.54 $249.10 $225.26 $181.78 $217.76 $174.94 $167.27
* Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable water
supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain
View, 10% for Santa Clara and 100% for Hayward. Los Altos does not receive water supply from
SFPUC.
SECTION 5 : UTILITY FINANCIAL PROJECTIONS
SECTION 5 A : LOAD FORECAST
Figure 4 shows 40 years of water consumption history. Average water use has trended downward
over time even as Palo Alto’s population has grown. Significant water use reductions over the 40-
year history were in response to requests to reduce water use in the 1976 -77 and 1988-92
drought periods. During these periods, customers invested in efficient equipment and modified
behavior to achieve water reduction goals. Reductions in usage achieved during these drought
periods endured even after those periods. More recently, water sales decreased substantially
during the 2007-2009 recession and during the 2014-2017 drought. Usage has started to return
to pre-drought levels, though the level at which usage will finally plateau is unknown.
M a r c h 2020 17 | P a g e
Figure 3: Historical Water Consumption
Figure 4 shows the forecast of water consumption through FY 2025 and beyond, as denoted by
the dotted line.
Figure 4: Forecast Water Consumption
M a r c h 2020 18 | P a g e
During the recent drought, the State mandated a 24% water use restriction for Palo Alto until
May 2016. Customers continue to conserve, but water usage has been increasing. Based on
patterns experienced in previous droughts, this forecast assumes consumption will only rebound
by 50% of the difference between pre-drought and drought levels, then resume with the previous
trend of decreasing usage over time.
SECTION 5 B : FY 20 1 5 TO FY 2019 COST AND REVENUE TRENDS
Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs
have changed during the last five years as well as how staff projects they will change over the
next decade.
The annual expenses for the water utility rose substantially between 2015 and 2019. The
increases were primarily related to water purchase costs, which increased 35% from $15.7 million
in FY 2015 to $21.2 million in FY 2019. Section 6A: Water Purchase Costs contains a more in-depth
discussion of water purchase costs. Operations costs have remained fairly steady since FY 2015,
increasing by about 6%, while CIP costs have generally increased but fluctuated down in certain
years. For example, in FY 2017, a water main replacement project that CPAU put out for bid
resulted in very few contractors competing, and project bids that were higher than budgeted.
This led to delays due to the changing market conditions and rising CIP costs.
M a r c h 2020 19 | P a g e
Figure 5: Water Utility Expenses, Revenues, and Rate Changes:
Actual Expenses through FY 2019 and Projections through FY 2025
SECTION 5 C : FY 201 9 RESULTS
Actual revenues for FY 2019 were very close to projected ($49.4 million vs. $49.6 million).
Operating costs were lower during FY 2019, mainly due to deferrals of capital spending, savings
in water purchases due to sales volumes below projected , and savings in operations and
maintenance costs. Table 8 summarizes the variances from forecast.
Table 8: FY 2019, Actual Results vs. Financial Plan Forecast
Net Cost/
(Benefit) (000)
Type of
change
Deferrals of capital spending $ (1,903) Cost savings
Water purchases lower than expected $ (1,401) Cost savings
Operations and Maintenance costs lower than expected $ (1,434) Cost savings
Net Cost / (Benefit) of Variances $ (4,739)
SECTION 5 D : FY 2020 PROJECTIONS
Estimated sales revenues are expected to be slightly lower than forecasted in the FY 2020
Financial Plan by about $0.6 million. This is because of the updated sales forecast that takes into
account the lower actual water sales in FY 2019. However, interest income was higher in FY 2019
M a r c h 2020 20 | P a g e
and the updated projection for FY 2020 brings up the overall revenue forecast to $1.3 million
higher than projected in FY 2020.
On the expense side, the most notable change from the FY 2020 Financial Plan is changes to CIP
expenditures. Approximately $13.7 million in projects budgeted in FY19 or earlier are slated to
be re-appropriated to FY2020, the largest being main replacement project 27, estimated at $7.1
million, and some seismic water system upgrades, estimated at $2.9 million. The FY 2020
Financial Plan estimated the CIP expenditure for FY 2020 to be $16.9 million while the current
estimated CIP expenditure for FY 2020 is $20.8 million, of which $5.1 million will be funded
through rate revenue, $13.7 will be funded through reappropriations and $1.3 million through
committed funds. Table 9 below shows the difference between the $16.9 million projected in
last year’s Financial Plan and the $5.1 million projected in this year’s Financial Plan as the delay
of capital project spending. Operations & Maintenance expense decreases are anticipated from
lower than expected budgets. Table 9 summarizes the changes from the FY 2020 forecast.
Table 9: FY 2020 Change in Projected Results, 2020 Forecast vs 2021 Forecast
Net Cost/
(Benefit)
Type of
Change
Sales Revenue 588 Revenue decrease
Other Revenue (Including Interest Income) (1,935) Revenue increase
Higher Total Revenue ($1,348) Revenue increase
Delay of Capital Project Spending budgeted in FY
2019 ($11,812) Cost decrease
Operations & Maintenance Costs ($1,131) Cost decrease
Lower Total Expense ($12,943) Cost decrease
Net Cost / (Benefit) of Variances ( $14,291)
SECTION 5 E : FY 20 2 1 – FY 202 5 PROJECTIONS
Figure 5 above shows that on average the costs for the Water Utility are increasing through the
rest of the forecast period, though mainly after FY 2022 based on current estimates from the
SFPUC. Water supply costs are the largest component, and are generally projected to grow by
about 3.4 percent on average over the forecast period. Operations and capital investment costs
are also expected to increase at the same rate of inflation used in the City’s long-term financial
plans (3% to 5% per year), which also take into account higher estimated pension costs. While
future CIP costs have been revised upwards to reflect the higher construction costs seen in recent
projects, there is still uncertainty with regard to the utility’s future costs for main replacement.
See Section 6: Details and Assumptions for more detail on the costs that make up these
projections, as well as the various assumptions underlying the projections.
As shown in Figure 5, above the Water Utility requires rate increases of between 0% and 4% per
year through FY 2025 to provide sufficient revenues to fund annual expenses. This forecast
assumes the use of the Rate Stabilization Reserve annually beginning in FY 2024 to spread the
series of large water supply rate increases expected from the SFPUC over multiple years. In
addition, the CIP Reserve is used to assist in funding Capital Improvements going forward as well
as in stabilizing rates.
Annually, beginning in FY 2021, a fixed funding amount ($8 million in FY 2021 and $8 million in
FY 2022 – FY 2025, plus annual inflation), will be provided from the Operations Reserve to the
M a r c h 2020 21 | P a g e
CIP Reserve to fund capital improvements. Table 3 shows this capital program contribution to
the CIP Reserve in rows 9 and 10. This amount is an estimate of the amount of CIP work there is
in a given year, spread out over the forecast period. It was derived by calculating the approximate
average annual CIP budget for FY 2021 through FY 2025 less an allowance for unspent funds and
excluding the one-time reservoir replacement costs. The reservoir replacement costs will be
funded through the one-time transfers of $3 million in FY 2020, $1.5 million in FY 2021 and $3.5
million in FY 2022 from the Operations Reserve to the CIP Reserve. Table 3 shows these transfers
in row 8. This approach will provide stability to the Operations Reserve by providing for a steady
funding stream for CIP work and by reflecting fluctuations due to CIP such as project delays or
accelerations in the CIP Reserve; ultimately, this stability should provide more stable customer
rates. The use of the CIP Reserve in this way will isolate fluctuations due to CIP delays or
accelerations and allow those to be viewed together in the CIP Reserve. Conversely, other trends
or factors affecting the Operations Reserve will be easier to identify and communicate in that
reserve. Without this change, the relative stability of total costs, and revenues shown in Figure
5 would fluctuate greatly from year to year as shown below in Figure 6.
Figure 6: Water Utility Expenses, Revenues, and Rate Changes:
Actual Expenses through FY 2019 and Projections through FY 2025
Note that the fluctuations in CIP show a mismatch in many forecasted years between revenues
and costs. Isolating fluctuations in capital investment in the CIP Reserve not only helps to ensure
adequate funding for needed capital improvements but also shows a more realistic view of the
relationship between costs and revenues as shown in Figure 5.
M a r c h 2020 22 | P a g e
Figure 7 below shows reserves trends based on these cost and revenue projections. The figure
shows credits to the Rate Stabilization Reserve in FY 2020 and FY 2021 and the contributions from
the Rate Stabilization Reserve to the Operations Reserve in FY 2024 and FY 2025. Staff projects
transfers from the Operations Reserve to the CIP Reserve of $3 million in FY 2020, $1.5 million in
FY 2021 and $3.5 million in FY 2022.
This estimate decreased from the recommended level in the FY 2020 Financial Plan of $5 million
in FY 2020 and $4 million in FY 2021. In the FY 2020 Financial Plan no transfer to the CIP Reserve
was planned for FY 2022. Assuming the projected increases in revenue, staff expects the
Operations Reserve, the main contingency reserve, to be within the target range by the end of
FY 2022 and for the remainder of the forecast period, and that this reserve will be adequate to
meet all identified risks, as discussed in Section 5F: Risk Assessment and Reserves Adequacy. In
addition, the Unassigned Reserve reflects reserve funds in the Operations Reserve above the
maximum guideline level. With the expected increase in costs in FY 2020 and FY 2021 and with
the infusion of funds to the CIP Reserve and Rate Stabilization Reserve, these excess reserves will
be utilized by the end of FY 2022 and must be used before Rate Stabilization Reserve funds are
utilized. In accordance with the Water Utility Reserves Management Practices, this Financial Plan
includes a plan to assign these funds to both rate stabilization and capital investment purposes.
Figure 7: Water Utility Reserves
Actual Reserve Levels for FY 2019 and Projections through FY 2025
M a r c h 2020 23 | P a g e
SECTION 5 F : RISK ASSESSMENT AND RESERVES ADEQUACY
The Water Utility currently has one contingency reserve, the Operations Reserve, and this
Financial Plan proposes using funds and raising rates slowly such that reserves remain well within
the guideline levels throughout the forecast period, as shown in Figure 8. Staff will consider funds
in the Operations Reserve in excess of the maximum as of the end of FY 2020 to be unassigned.
The Operations Reserve is projected to exceed both the minimum reserve level and the short
term risk assessment level throughout the forecast period.
Figure 8: Operations Reserve Adequacy
Table 10 summarizes the risk assessment calculation for the Water Utility through FY 2025. The
risk assessment includes the revenue shortfall that could accrue due to lower than forecasted
sales revenue. Because of the proposal in this Financial Plan for an annual capital contribution
to the CIP Reserve, staff proposes to change the water risk assessment by reflecting the r isk of
increased CIP expenditures in the CIP Reserve instead of in the Operations Reserve. Specifically,
the risk assessment calculation previously included an estimate for an increase of 10% of planned
system improvement CIP expenditures for the budget year. The revised calculation shown below
does not include that component because the CIP risk is being captured in the CIP Reserve.
M a r c h 2020 24 | P a g e
Table 10: Water Risk Assessment ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Total non-commodity revenue $25,985 $27,018 $26,471 $25,495 $25,970
Max. revenue variance, previous ten years 13% 13% 13% 13% 13%
Risk of revenue loss $2,386 $2,481 $2,431 $2,341 $2,385
Total Risk Assessment value $2,386 $2,481 $2,431 $2,341 $2,385
SECTION 5 G : ALTERNATE SCENARIO
There is no alternate scenario presented in this Financial Plan.
SECTION 5 H : LONG -TERM OUTLOOK
CPAU has put its Water Utility on strong footing by investing in its distribution system
infrastructure and emergency water facilities over the last 20 years. The Water System Master
Plan, recently completed and under review, will give CPAU a better picture of the long-term
outlook for its infrastructure and will result in a plan for an appropriate schedule for
infrastructure replacement and upgrades. In addition, CPAU’s water supplier, the SFPUC, has
replaced and seismically strengthened its water transmission infrastructure , which will benefit
Palo Alto and all Hetch Hetchy Regional Water System customers over the long term.
The opportunities for CPAU’s Water Utility to obtain additional supplies over the long term may
be in alternative water supplies such as recycled water, groundwater, and water from Valley
Water. These alternatives have been analyzed in the past, and were analyzed again most recently
in the 2017 Water Integrated Resource Plan 3 . Some of these alternatives may provide cost
savings or increased drought protection. For example, in November, 2019, the City of Palo Alto
entered into an agreement with Valley Water and the City of Mountain View that will provide (1)
funding for a salt removal facility at the Regional Water Quality Control Plant in Palo Alto to
improve the quality of non-potable recycled water used in Palo Alto and Mountain View, (2) a
transfer of treated wastewater from Palo Alto to Valley Water for use in the county south of
Mountain View, and (3) Palo Alto and Mountain View will have a future option to request new
potable or non-potable water supply from Valley Water if needed.
Climate change may begin to present challenges for the Wa ter Utility over the next 20 to 40
years. Availability of water from SFPUC’s Regional Water System may change with changing
seasonal precipitation patterns. Water consumption patterns may change. Consumption could
increase due to drier weather or decrease as customers become even more focused on water
conservation. Droughts may become more frequent. The risk of wildfire in the foothills could
increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level
3 2017 Water Integrated Resource Plan: https://www.cityofpaloalto.org/civicax/filebank/documents/56088
M a r c h 2020 25 | P a g e
rise could result in greater exposure of utility infrastructure to inundation, possibly resulting in
higher maintenance and replacement costs. As part of the Sustainability/Climate Action Plan,
CPAU is currently working on a Climate Change Adaptation Roadmap that will begin to assess
some of these risks.
SECTION 6 : DETAILS AND ASSUMPTIONS
SECTION 6 A : WATER P URCHASE COSTS
CPAU purchases all of its potable water supplies from the SFPUC, which owns and operates the
Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water from
the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation Agency
(BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA member
agencies.
The Hetch Hetchy Regional Water System begins with a system of reservoirs and tunnels in the
high Sierra in Yosemite County and water is transported by a gravity-fed pipeline to the Bay Area.
Currently, the SFPUC is in the midst of a $4.8 billion bond-financed capital improvement program
(the Water System Improvement Program, or WSIP) to seismically retrofit the facilities that
transport water to the Bay Area. As of December 31, 2018, nearly 96% of the WSIP regional
projects are complete.4 This has resulted and will continue to result in large increases in the
annual debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project
is completed, wholesale customers must start paying the debt service costs within 3 to 4 years.
The currently estimated WSIP completion date is December 30, 2021, as adopted by the SFPUC
in March of 2018. In large part because of these WSIP-related debt service costs, the SFPUC’s
wholesale water rate has already increased from $1.43 per CCF in FY 2009 to $4.10 per CCF in FY
2019, and is forecast to increase to slightly more than $5 per CCF by FY 2024 (these projections
are subject to change based on future SFPUC budget estimates). Figure 9 shows the SFPUC’s
actual wholesale water rate since FY 2009 and a projection through FY 2024 and beyond. Note
that the wholesale water rate decreased in FY 2014, but the apparent rate decrease is due to a
debt the BAWSCA agencies owed to SFPUC being directly paid by the BAWSCA agencies via bond
financing. This cost is in addition to the wholesale water rate and adds about $0.35 to $0.45 per
CCF to the wholesale rate.
Parts of SFPUC’s system not included in the WSIP will also need rehabilitation after the WSIP is
completed, and some of these projects are already included in the SFPUC’s rate projections, such
as additional Transmission, Supply & Storage and Treatment system upgrade projects,
particularly dam safety work slated to occur during the next 10 years. The SFPUC is also
conducting condition assessments of other “up-country” facilities, located in the Sierras, in the
coming years. Current estimates are that $1.8 billion will be needed between FY 2019 and FY
2028 primarily for these non-WSIP projects, but if these assessments identify other facilities that
need replacement, it may result in additional rate increases as new debt is issued to finance the
projects.
4 Second Quarter FY 2018-19 WSIP Regional Quarterly Report, http://www.sfwater.org/index.aspx?page=307
M a r c h 2020 26 | P a g e
In January 2020, the SFPUC provided an informal estimate for FY 2021 wholesale water rates to
remain at $4.10 per CCF. However, there is uncertainty surrounding the level of continued water
usage by the BAWSCA agencies as staff continues to analyze the drought rebound level.
Sales have been increasing on average since the end of the drought in 2017. If that trend
continues in upcoming years, rate projections may level out. However, if snow and rain do not
materialize in future years further calls for restricted usage may reoccur.
Figure 9: Historical and Projected SFPUC Wholesale Water Rate
During FY 2017 through FY 2019, the balancing account for SFPUC’s wholesale customers built
up an over-collection of revenue due to wholesale customer revenues exceeding costs. This is
because SFPUC sold more wholesale water than its sales projection used for rate setting.
Additional reasons for the balancing account balance are the cost savings in the wholesale
revenue requirement due to the SFPUC’s debt refinancing, and credits applied to the balancing
account due to BAWSCA’s annual review of the wholesale revenue requirement calculations.
These balancing account funds will be refunded approximately between FY 2021 and FY 2023,
which allows some rate stabilization of SFPUC’s wholesale rates. If it weren’t for this rate
stabilization effect of the balancing account, Palo Alto would pay higher rates in FY 2021 for water
purchased from SFPUC.
SECTION 6 B : OPERATIONS
CPAU’s Water Utility operations include the following activities:
• Administration, a category that includes charges allocated to the Water Utility for
administrative services provided by the General Fund and for Utilities Department
administration, as well as debt service and other transfers. Additional detail on Water
Utility debt service is provided in Section 6D: Debt Service
M a r c h 2020 27 | P a g e
• Customer Service
• Engineering work for maintenance activities (as opposed to capital activities)
• Operations and Maintenance of the distribution system; and
• Resource Management
Appendix D: Description of Water Utility Operational Activities includes detailed descriptions of
the work associated with each of these activities.
From FY 2015 to FY 2019, overall Operations costs increased 2% per year on average (see Figure
10). Operations and Maintenance costs were the main driver, followed by Administration and
Resource Management costs. Transfers have varied from year to year, but staff expect transfers
to remain relatively low and stable through the forecast period.
Staff project inflationary increases for all operations costs with underlying assumptions for salary
and benefit costs, consumer price index, and other cost projections that match the City’s
long-range financial forecast.
Figure 10: Historical and Projected Operational Costs
SECTION 6 C : CAPITAL IMPROVEMENT PROGRAM (CIP)
The Water Utility’s CIP consists of the following types of projects:
M a r c h 2020 28 | P a g e
• One-time projects, or large, non-recurring replacement of system assets (such as
reservoir rehabilitation).
• Water main replacement, which represents the ongoing replacement of aging water
mains and the services associated with those mains.
• Ongoing projects, which represent the cost of replacing aging and under-recording
meters and degraded boxes and covers, minor replacements of various types of
distribution system equipment, and the cost of capitalized tools and equipment.
• Customer connections, which represents the cost when the Water Utility installs new
services or upgrades existing services at a customer’s request in response to
development or redevelopment. CPAU charges a fee to these customers to cover the cost
of these projects.
Table 11 shows the FY 2020 projected budget and the five year CIP spending plan, although these
figures are preliminary pending budget discussions starting in May. The ‘committed’ column
represents funds committed to contracts for which work has not yet been completed or invoices
paid. As mentioned earlier in this report, $13.7 million of funds in the Current Budget column will
be carried over to FY 2021.
Table 11: Budgeted Water Utility CIP Spending ($000)
This budget does not include allocated overhead, which is estimated to be $0.83 million in 2020
and escalating at 2-4% annually thereafter as shown in the table below. Allocated overhead is
shown below, and added to the capital budget as a capital expenditure.
Table 12: Allocated Overhead
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
Allocated Overhead $831,481 $851,636 $889,380 $914,372 $936,994 $960,456
The water main replacement program funds the replacement of deteriorating water mains or
water mains in liquefaction zones. The water system consists of over 236 miles of mains,
approximately 2,000 fire hydrants, and over 20,000 metered service connections spanning 9
pressure zones over a 26 square mile service area. In recent years, CPAU has already replaced
many miles of the most leak-prone and deteriorated pipes. CPAU is currently pursuing a pipe
replacement program of mains that are subject to recurring breaks based on maintenance history
and 13.5 miles of mains that were identified in the 2016 water system study. CPAU also
coordinates with the Public Works street maintenance program to avoid cutting into newly
repaved streets. The main replacement schedule in this financial plan will allow CPAU to replace
these mains on schedule.
Project Category
Current
Budget*
Spending,
Curr. Yr
Remain.
Budget**Committed FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
One Time Projects 6,117 (164) 5,953 384 2,000 - 3,500 - -
Water Main Replacement 8,159 (294) 7,865 546 - 9,350 - 9,350 -
Ongoing Projects 3,587 (349) 3,238 430 2,589 2,035 2,083 2,132 2,132
Customer Connections 750 (362) 388 11 775 800 825 850 850
TOTAL 18,613 (1,169) 17,444 1,372 5,364 12,185 6,408 12,332 2,982
*Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year
**Equal to CIP Reserves (Reserve for Reappropriations + Reserve for Commitments).
M a r c h 2020 29 | P a g e
Costs for the water main replacement program are increasing for a variety of reasons:
• Fire Code regulations now mandate fire sprinklers for n ew residential units. To
accommodate increased fire flows, new main replacement projects require larger
diameter pipe.
• CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs
for this material are slightly higher, though lifecycle costs are lower, and the material
performs better. Joints in distribution mains are the most likely place for failure, and
sections of HDPE pipe can be fused together rather than connected with fittings. In the
long run, this will reduce losses and maintenance costs.
• To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along with
the water mains with new HDPE services. In the past, the existing services were
reconnected, regardless of the material. This new practice costs more in the short run,
but will provide long term benefits.
• Lastly, costs have escalated after the recession. The regional and even national focus on
infrastructure improvement has created labor shortages in the construction market,
leading to higher bids than were seen in th e past.
These factors have created some uncertainty in future water main replacement costs. As bids for
new projects, such as upgrades to University Avenue, have consistently come in higher over the
last few years, future main replacement project budgets have been increased from prior year’s
estimates to reflect expected bid estimates. If the cost of water main replacement continues to
rise at its current levels, budgets may need to be revised further. In 1993, the long term water
main replacement program focused on replacing the oldest and most degraded parts of the
system. Roughly 25% of the system has been replaced, and the rate of water leaks has decreased
50%. CPAU initiated a master planning process in FY 2015 that was completed in 2016 to evaluate
the current state of the distribution system and determine the necessary rate of main
replacement in the next 20 years. This study factored in seismically vulnerable mains as well as
the remaining old mains. Mains with recurring maintenance issues are added to projects as they
are identified. Preparing for the future, CPAU is in the process of evaluating the utility’s asbestos
cement pipe (ACP) mains. Over half the mains in the system are ACP. The ACP pipe has
performed very well, but CPAU wants to verify its life expectancy and plan for its future
replacement in 20 to 30 years.
This financial plan addresses these challenges in a way that will allow CPAU to meet its main
replacement needs. This financial plan includes approximately $8.5 million every other year for
main replacement construction instead of $5.7 million annually. This shift to larger main
replacement construction projects every other year will allow CPAU to meet its main
replacement needs while attracting more contractors to bid on the larger projects. Additionally,
this main replacement project schedule for water will be staggered with wastewater and gas
(water and wastewater construction every even year and gas construction every odd year), which
will ease scheduling difficulties for inspection coverage due to shared inspection staff across
water, wastewater, and gas utilities.
Included in the one-time project budget are seismic water system upgrades and/or replacement
for the Corte Madera, Park, Boronda and Dahl reservoirs to improve earthquake resistance. This
work will improve protection from water loss at these reservoirs in a seismic event. If an
M a r c h 2020 30 | P a g e
earthquake caused a significant water leak, this could lead to loss of water for firefighting, loss of
water storage for drinking, property damage from flooding or mudslides, and environmental
damages. Work has begun on this design of Corte Madera reservoir replacement project in 2019
and staff estimates the construction work and design for the replacement for Dahl and Park
reservoirs will cost an additional $2 million in FY 2021. AMI projects are now planned to begin in
2024 and will be included as an inter-fund transfer to the electric fund, or a loan payment to the
Electric Special Projects Reserve.
One project not included in this forecast is protecting the large water transmission line in the
foothills from seismic events. Staff has engaged a consultant to investigate alternatives for this
project. The consultant is analyzing an alternative that involves installing a valve and hose system
that could be used to bypass breaks in the line while they are repaired after an earthquake. This
is a relatively low-cost alternative that would not substantially affect the financial forecast.
However, storing and maintaining several thousand feet of hose was not an ideal solution, since
multiple breaks could be a possibility. The alternative to the future replacement of the
transmission line is to move storage to locations that are not depend ent on the transmission line
or replace the transmission lines with a pipe that is more earthquake resistant (HDPE). CPAU has
already replaced two tanks in the foothills and have to maintain fire service to the area, so
replacement is a more likely option. To date the concrete cylinder pipe has performed well and
is not in need of immediate replacement. Once the storage issues are addressed, the focus will
be to address the transmission main replacement. It could cost between $15 million and $20
million, which would likely require bond financing and would substantially affect the financial
forecast.
Ongoing Projects and Customer Connections are projected to cost approximately $2.9 million in
FY 2021 and increase to approximately $3 million per year through the end of the forecast period.
Actual expenses for these projects fluctuate annually depending on how many defective meters
are discovered and replaced during routine maintenance, as well as how much development and
redevelopment is going on that prompts the replacement or upgrade of water services. It is worth
noting that property owners pay a fee for water service replacement or expansion during
redevelopment, so when the number of projects go up (meaning higher costs for this activity), so
does fee revenue.
Aside from customer connections, the CIP plan for FY 2021 to FY 2025 is funded by revenue from
utility rates and capacity fees. Appendix B: Water Utility Capital Improvement Program (CIP)
Detail shows the details of the plan.
Figure 11 below shows the projected CIP Reserve balances from FY 2021 through FY 2025. Figure
12 below shows the projected CIP expenditure fluctuating from year to year with the staggered
main replacement schedule, relative to the more steady capital program contributions to the CIP
Reserve. In FY 2021, the capital program contribution to the CIP Reserve is $8 million. The capital
program contribution increases with inflation at a projected level of 3%. Appendix A: Water
Utility Financial Forecast Detail shows the amount of the capital program contributions under
“Expenses” for FY 2021 through FY 2025.
M a r c h 2020 31 | P a g e
Figure 11: Projected CIP Reserve Balances FY 2021 to FY 2025
Figure 12: Projected CIP Expenditure,and Projected Capital Program Contribution,FY 2021 to
FY 2025
M a r c h 2020 32 | P a g e
SECTION 6 D : DEBT SERVICE
The Water Utility’s annual debt service is roughly $3.2 million per year. This is associated with
two bond issuances, one requiring payments through 2026, the other through 2035. CPAU is in
compliance with all covenants on both bonds.
The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance
construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new
wells, and rehabilitation of existing wells and tanks) which will be retired by 2035. As part of the
‘Build America’ bond program, there is an interest payment subsidy from the Federal
Government of 35%. There is always the possibility that the federal government will choose to
stop offering this subsidy. The automatic federal spending cuts under the Budget Control Act
(BCA) of 2011 have already reduced the subsidy by $50,000 per year, and if planned cuts through
2021 proceed without amendment, staff estimates that the subsidy would be reduced by over
$200,000 per year by 2021. The Bipartisan Budget Act of 2013, which relieved some of the
discretionary spending cuts in the 2011 BCA, did not affect automatic cuts to the subsidy, and
actually extended the automatic cuts through 2023.
The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be
retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond
issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital
improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8
million.
Table 13 shows the cost of debt service for the Water Utility’s share of these bond issuances for
the financial forecast period:
Table 13: Water Utility Debt Service ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
2009 Water Revenue Bonds,
Series A (net of grants)
2,097 2,114 2,132 2,151 2,151
2011 Utility Revenue Bonds,
Series A
654 656 657 658 658
Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available
Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available Reserves
shall be at least 5 times the maximum annual debt service. Note that “Available Reserves,” as
defined for both bonds, include the reserves for the Gas and Electric systems, not just the Water
system. This Financial Plan maintains compliance with these covenants throughout the forecast
period, as shown in Appendix A: Water Utility Financial Forecast Detail.
The net revenues (but not the reserves) of the Water Utility are also pledged for one other bond
as shown in Table 14 below, even though the Water Utility is not responsible for the debt service
payments. The Water Utility’s reserves or net revenues would only be called upon if the
responsible utilities are unable to make their debt service payments. St aff does not currently
foresee this occurring. Amounts advanced from one utility to pay debt service for another utility
would be repaid by the borrowing fund.
M a r c h 2020 33 | P a g e
Table 14: Other Issuances Secured by the Water Utility’s Revenues or Reserves
Bond Issuance Responsible
Utilities
Annual Debt
Service ($000)
Secured by Water Utility’s:
Net Revenues Reserves
1995 Series A Utility
Revenue Bonds Storm Drain $680 Yes No
SECTION 6 E : OTHER REVENUES
The Water Utility receives most of its revenues from sales of water. The next largest source in FY
2019 was interest income, which was higher than forecasted and represented 45% of revenue
from sources other than water sales; connection and capacity fees represented 37% of revenue
from sources other than water sales. The remainder consisted of a variety of miscellaneous
charges, transfers, and grants.
Revenues from connection and capacity fees have more than doubled since FY 2009. Connection
fees are charged to new developments that need new or replacement service connections, while
capacity fees are charged to development that put additional demands on the water distribution
system. Revenue from these sources decreased slightly during the recession, but increased
substantially since then. Staff is forecasting revenue from these sources to increase at an average
of 2% per year in subsequent years.
Other revenue sources are projected to stay stable through the forecast period, though interest
income always fluctuates depending on changes in interest rates. Some uncertainty also exists
related to the Federal government’s commitment to continuing to pay the interest subsidy on
the Build America Bonds.
SECTION 6 F : SALES REVENUES
Staff based the sales revenue projections on the load forecast in Section 5A: Load Forecast and
the projected rate changes shown in Figure 5. Except where stated otherwise, these load
forecasts are based on normal precipitation. Precipitation can vary substantially, and this can
affect revenues substantially. In dry years customers use more water, increasing revenues, and
in wet years they use less. One factor that is difficult to predict is customer usage recovery post-
drought. It appears that customer irrigation usage has resumed, although total usage has not
reached pre-drought levels. FY 2019 usage levels were lower than FY 2018 usage levels across
commercial, residential and irrigation customer classes. This may be due to normal weather
variations rather than an indication of stabilizing post-drought usage levels. It remains uncertain
whether the ongoing pattern of usage declines will continue at the same levels seen before the
drought occurred. Staff will continue to monitor these patterns and adjust projections
accordingly.
SECTION 7 : COMMUNICATIONS PLAN
In FY 2021, the communications focus for water utility rates will continue to be on cost drivers
for any rate increases, what CPAU is doing to keep costs down, and the value of our customers’
investment through their rates. One of the main reasons for water utility rate increases over the
past decade has been the infrastructure costs from the Water System Improvement Pro gram
M a r c h 2020 34 | P a g e
(WSIP), which raised rates for all San Francisco Public Utilities Commission (SFPUC) customers.
Rising costs from our wholesale water supplier increase costs to CPAU, which must be recovered
through rates. Additionally, CPAU has made improvements in the local water distribution system
through capital projects to replace, upgrade or maintain the infrastructure. Market economics
have continued to drive up labor and material costs for such projects. As a not for profit, public
utility, CPAU must recover its costs through revenue generated by rates.
Staff maintain a dedicated webpage at cityofpaloalto.org/ratesoverview to provide an overview
on all utility rates, including information on costs, utilities supply resources, infrastructure
projects, and the value of what customers get for what they pay. Outbound marketing and
communication channels include bill inserts, web content, email newsletters, online videos,
print and digital ads, presentations to customer groups and social media. For all utility
outreach, while print materials and webpages still feature prominently, CPAU is placing more
emphasis on digital advertising content, direct mail, and in-person attendance at community
outreach events, festivals, and safety and emergency preparedness fairs.
For the water utility, CPAU will continue its outreach on making water conservation a way of life,
regardless of drought or rain conditions, which is in line with the State of California’s current
outreach campaign. CPAU promotes available water use efficiency rebates, incentives and easy
water-saving behaviors. Messaging reinforces the importance of water use efficiency, and that
although rates are increasing, efficient usage can help customers avoid seeing a significant water
cost increase on the utility bill. The City is also exploring opportunities to expand water reuse,
such as through recycled water, to further reduce demands on potable water supplies. To keep
customers apprised of the status and accomplishments of capital improvement projects, CPAU
maintains a network of project webpages at cityofpaloalto.org/utilityprojects Safety topics are
also emphasized year-round.
The communications team will provide rates information to internal and external stakeholders
including City staff who may interact with the public, the City Manager’s Office, Utilities Advisory
Commission (UAC), City Council, business and residential customers. Rates communications will
include a substantial update to the web, discussion in the Proposition 218 public hearing notice,
utility bill inserts, educational updates to Customer Service staff, and addition of a “breaking
news” page on the Utilities home website. Other communication methods will involve updates
to financial plans, presentations to UAC, Finance Committee, City Council and any media
coverage provided as a result of any rate increases.
WATER UTILITY FINANCIAL PLAN
M a r c h 2020 35 | P a g e
APPENDICES
Appendix A: Water Utility Financial Forecast Detail
Appendix B: Water Utility Capital Improvement Program (CIP) Detail
Appendix C: Water Utility Reserves Management Practices
Appendix D: Description of Water Utility Operational Activities
Appendix E: Sample of Water Utility Outreach Communications
APPENDIX A : WATER UTILITY FINANCIAL FORECAST DETAIL
1 FISCAL YEAR FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
2
3 WATER SUPPLY
4 Purchases (CCF)5,507,153 4,671,433 4,127,085 4,172,038 4,859,576 4,600,987 4,730,282 4,659,327 4,589,437 4,520,596 4,452,787 4,385,995
5 Sales (CCF)5,047,148 4,433,016 3,858,825 3,852,185 4,609,893 4,411,473 4,511,342 4,443,672 4,377,017 4,311,361 4,246,691 4,182,991
6
7 BILL AND RATE CHANGES
8 Variable Charge (Supply)25%22%9%7%-6%0%0%0%0%9%13%5%
9 Residential Variable Charge (Distribution)-16%15%5%-2%-4%4%0%2%5%0%-2%4%
10 System Average Rate 0%14%7%2%1%1%0%0%3%3%4%4%
11 Average Customer Bill (projected)1%0%3%3%4%4%
12
13 STARTING RESERVES
14 Reappropriations (Non-CIP)- - - - - - 258,000 258,000 258,000 258,000 258,000 258,000
15 Commitments (Non-CIP)2,000 347,000 347,000 177,273 177,273 284,034 442,000 442,000 442,000 442,000 442,000 442,000
16 Restricted for Debt Service 3,225,000 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000
17 Emergency Plant Replacement 1,000,000 1,000,000 - - - - - - - - - -
18 Reappropriations & Commitments 10,423,000 10,847,000 9,656,000 10,530,000 13,266,000 11,326,000 15,090,505 6,930,333 6,930,333 6,930,333 6,930,333 6,930,333
19 Capital Reserve - - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 9,466,020 8,600,934 9,889,525 5,851,185
20 Rate Stabilization Reserve 17,272,000 20,133,000 6,567,000 1,877,437 4,069,437 4,069,437 4,069,437 9,069,437 12,569,437 12,569,437 12,569,437 9,500,000
21 Operations Reserve - - 11,663,836 14,606,828 12,734,948 13,741,000 12,294,351 12,721,406 13,215,248 12,126,287 11,332,404 11,888,718
22 Unassigned - - - - 7,056,052 7,182,707 8,357,649 5,861,621 1,281,096 - - -
23 TOTAL STARTING RESERVES 31,922,000 35,658,000 35,549,836 33,216,828 43,289,806 42,589,274 46,498,038 44,268,893 47,422,134 44,186,991 44,681,700 38,130,237
24
25 REVENUES
26 Net Sales 39,029,262 33,654,549 36,136,644 41,657,382 44,078,960 44,134,246 44,905,506 44,204,516 44,963,993 45,738,009 46,978,598 48,252,866
27 Other Revenues and Transfers In 4,053,920 7,504,848 3,258,936 5,829,851 4,116,200 5,218,976 5,299,292 5,361,211 5,423,739 5,486,826 5,574,801 5,664,347
28 TOTAL REVENUES 43,083,182 41,159,397 39,395,579 47,487,233 48,195,160 49,353,223 50,204,798 49,565,727 50,387,732 51,224,835 52,553,399 53,917,213
29
30 EXPENSES
31 Water Purchases 15,705,288 15,669,935 17,626,020 20,075,322 21,957,711 21,210,399 21,662,358 21,371,446 21,084,897 22,470,747 24,794,443 25,632,532
32 Operating Expenses 679.9%2.9%5.8%-54.7%
33 Administration
34 Allocated Charges 2,366,077 2,342,985 2,953,291 3,151,373 2,809,112 2,626,526 2,759,271 2,826,156 2,951,411 3,034,346 3,109,415 3,187,275
35 Rent 2,192,454 2,249,457 1,803,087 1,720,711 1,775,774 1,832,599 1,880,246 2,305,182 2,365,116 2,426,609 2,489,701 2,554,434
36 Debt Service 3,220,208 3,218,869 3,222,606 3,219,316 3,222,669 3,220,858 3,220,638 3,222,843 3,223,563 3,834,553 3,834,553 3,834,553
37 Transfers and Other Adjustments 335,808 63,612 (377,200) (256,608) 393,607 438,322 447,088 456,030 465,151 474,454 483,943 493,622
38 Subtotal, Administration 8,114,546 7,874,923 7,601,785 7,834,792 8,201,161 8,118,304 8,307,243 8,810,210 9,005,241 9,769,961 9,917,612 10,069,883
39 Resource Management 570,040 488,331 592,744 868,038 922,558 963,976 1,038,462 1,075,972 1,122,949 1,160,062 1,192,973 1,225,207
40 Operations and Mtc 4,986,274 5,283,426 5,038,570 5,290,549 5,725,236 5,964,589 6,420,642 7,650,244 7,984,407 8,247,094 8,480,157 8,708,782
41 Engineering (Operating)381,502 358,128 282,472 355,852 354,597 383,877 407,321 419,100 437,566 450,715 462,510 474,452
42 Customer Service 1,677,926 1,821,447 2,076,559 1,616,008 1,625,332 1,620,421 1,764,007 1,836,613 1,916,285 1,983,643 2,042,974 2,099,891
43 Allowance for Unspent Budget - - - - - (427,929) (458,667) (511,175) (533,555) (550,704) (565,963) (581,051)
44 Subtotal, Operating Expenses 15,730,288 15,826,254 15,592,128 15,965,239 16,828,885 16,623,240 17,479,008 19,280,964 19,932,892 21,060,771 21,530,262 21,997,163
45 Capital Program Contribution^8,335,605 8,580,372 9,082,021 4,110,131 8,169,097 11,791,292 5,132,404 8,000,000 8,240,000 8,487,200 8,741,816 9,004,070
46 TOTAL EXPENSES 39,771,182 40,076,561 42,300,170 40,150,692 46,955,693 49,624,930 44,273,771 48,652,410 49,257,790 52,018,717 55,066,522 56,633,765
47 9.04
48 ENDING RESERVES
49 Reappropriations (Non-CIP)- - - - - 258,000 258,000 258,000 258,000 258,000 258,000 258,000
50 Commitments (Non-CIP)347,000 347,000 177,273 177,273 284,034 442,000 442,000 442,000 442,000 442,000 442,000 442,000
51 Restricted for Debt Service 3,331,000 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000
52 Emergency Plant Replacement 1,000,000 - - - - - - - - - - -
53 Reappropriations & Commitments 10,847,000 9,656,000 10,530,000 13,266,000 11,326,000 15,090,505 6,930,333 6,930,333 6,930,333 6,930,333 6,930,333 6,930,333
54 Capital Reserve - 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 9,466,020 8,600,934 9,889,525 5,851,185 7,479,328
55 Rate Stabilization Reserve 20,133,000 6,567,000 1,877,437 4,069,000 4,069,437 4,069,437 9,069,437 12,569,437 12,569,437 12,569,437 9,500,000 6,500,000
56 Operations Reserve - 11,663,836 14,606,828 12,734,948 13,741,000 12,294,351 13,215,248 12,126,287 11,332,404 11,888,718 12,172,166
57 Unassigned - - - 7,056,052 7,182,707 8,357,649 5,861,621 1,281,096 - - - -
58 TOTAL ENDING RESERVES 35,658,000 35,549,836 33,216,828 43,289,369 42,589,274 46,498,038 31,547,487 47,422,134 44,186,991 44,681,700 38,130,237 37,041,828
*For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the
reserves of other utilities to meet its debt covenants.
^ Capital Reserve Contribution represents levelized amount of CIP funding for the Capital reserve beginning in FY 2021
Appendix A (continued)
1 FISCAL YEAR FY 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
2
3 REVENUES
4 Net Sales 91%82%92%88%91%89%89%89%89%89%89%89%
5 Other Revenues and Transfers In 9%18%8%12%9%11%11%11%11%11%11%11%
6 TOTAL REVENUES 100%100%100%100%100%100%100%100%100%100%100%100%
7
8 EXPENSES
9 Water Purchases 39%39%42%50%47%43%49%44%43%43%45%45%
10 Operating Expenses
11 Administration
12 Allocated Charges 6%6%7%8%6%5%6%6%6%6%6%6%
13 Rent 6%6%4%4%4%4%4%5%5%5%5%5%
14 Debt Service 8%8%8%8%7%6%7%7%7%7%7%7%
15 Transfers and Other Adjustments 1%0%-1%-1%1%1%1%1%1%1%1%1%
16 Subtotal, Administration 20%20%18%20%17%16%19%18%18%19%18%18%
17 Resource Management 1%1%1%2%2%2%2%2%2%2%2%2%
18 Operations and Mtc 13%13%12%13%12%12%15%16%16%16%15%15%
19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1%
20 Customer Service 4%5%5%4%3%3%4%4%4%4%4%4%
21 Allowance for Unspent Budget 0%0%0%0%0%-1%-1%-1%-1%-1%-1%-1%
22 Subtotal, Operating Expenses 40%39%37%40%36%33%39%40%40%40%39%39%
23 Capital Program Contribution 21%21%21%10%17%24%12%16%17%16%16%16%
24 TOTAL EXPENSES 100%100%100%100%100%100%100%100%100%100%100%100%
25
26 RISK ASSESSMENT DETAIL
27 Distribution Revenue Variance 1,684,153 1,826,395 1,877,534 1,877,534 1,638,217 2,424,977 2,386,086 2,480,918 2,430,627 2,341,048 2,384,662
28 10% CIP Program Contingency 858,037 908,202 411,013 816,910 1,179,129 - - - - - -
29 Total Risk Asssessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,424,977 2,386,086 2,480,918 2,430,627 2,341,048 2,384,662
30 Projected Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,000 12,294,351 12,721,406 13,215,248 12,126,287 11,332,404 11,888,718 12,172,166
31 Operations Reserve, % of Risk Value 459%534%556%510%436%525%554%489%466%508%510%
32
33 OPERATIONS RESERVE
34 Min (60 days of non-capital expenses)- 5,230,611 5,145,323 6,320,551 6,704,783 6,585,497 6,807,792 7,063,654 7,131,338 7,552,327 8,019,411 8,242,017
35 Target (90 days of non-capital expenses)- 9,395,240 8,698,557 9,527,750 10,222,892 9,439,924 9,764,599 10,139,451 10,231,856 10,854,037 11,545,173 11,869,404
36 Max (120 days of non-capital expenses)- 13,559,870 12,251,790 12,734,948 13,741,000 12,294,351 12,721,406 13,215,248 13,332,374 14,155,747 15,070,936 15,496,791
37 Risk Assessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,424,977 2,386,086 2,480,918 2,430,627 2,341,048 2,384,662
38
39 DEBT SERVICE COVERAGE RATIO
40 Net Revenues (125% of Debt Service)876%878%931%1020%1104%1075%1115%1161%1172%1035%1108%1142%
41 Available Reserves (5x Debt Service)*9.9 9.9 9.2 12.4 12.1 13.2 12.5 13.5 12.5 10.6 8.9 8.6
42
*For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of
other utilities to meet its debt covenants.
WATER UTILITY FINANCIAL PLAN
M a r c h , 2 0 20 38 | P a g e
APPENDIX B : WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Project #Project Name
Reappropriated / Carried
Forward from Previous
Years
Current Year
Funding
Proposed Budget
Amendments
Spending, Current
Year
Remaining in CIP
Reserve Fund Commitments FY 2021 FY 2022 FY 2023 FY 2024 FY 2025
ONE TIME PROJECTS
WS-07000 Regulation Station Imp.797,100 - - (17,861) 779,239 - - - - - -
WS-07001 Water Recycling Facilities 395,649 - - (4,629) 391,020 - - - - - -
WS-08001 Water Reservoir Coating 55,532 - - (12,795) 42,737 - - - - - -
WS-09000 Seismic Water System 2,868,532 2,000,000 - (128,881) 4,739,651 383,656 2,000,000 - 3,500,000 - -
WS-08002 Emergency Water Supply - - - - - - - - - - -
Subtotal, One-time Projects 4,116,813 2,000,000 - (164,166) 5,952,647 383,656 2,000,000 - 3,500,000 - -
WATER MAIN REPLACEMENT PROGRAM
WS-12001 WMR- Project 26 505,400 - - (210,201) 295,199 546,315 - - - - -
WS-13001 WMR - Project 27 7,068,638 - - (84,203) 6,984,435 1 - - - - -
WS-14001 WMR - Project 28 585,107 - - - 585,107 - - 8,500,000 - - -
WS-15002 WMR - Project 29 - - - - - - - 850,000 - 8,500,000 -
WS-16001 WMR - Project 30 - - - - - - - - - 850,000 -
Subtotal, Water Main Replacement Prog.8,159,145 - - (294,404) 7,864,741 546,316 - 9,350,000 - 9,350,000 -
ONGOING PROJECTS
WS-80014 Services/Hydrants - 400,000 - (82,054) 317,946 49,673 400,000 400,000 400,000 400,000 400,000
WS-80015 Water Meters 777,700 515,000 - (33,322) 1,259,378 - 530,450 546,364 562,755 579,638 579,638
WS-02014 W-G-W Utility GIS Data 280,222 456,177 - (130,324) 606,075 329,878 469,862 483,958 498,477 513,431 513,431
WS-13002 Equipment/Tools - 50,000 - - 50,000 - 50,000 50,000 50,000 50,000 50,000
WS-11003 Dist. Sys. Improvements 185,000 261,620 - (83,481) 363,139 48,851 269,469 277,553 285,880 294,456 294,456
WS-11004 Supply Sys. Improvements - 261,620 - (19,777) 241,843 1,707 269,469 277,553 285,880 294,456 294,456
WS-19000 Mayfield Reservoir 200,000 200,000 - (5,603) 200,000
PLC Upgrade 400,000 360,000
Subtotal, Ongoing Projects 1,442,922 2,144,417 - (348,958) 3,238,381 430,109 2,589,250 2,035,428 2,082,992 2,131,981 2,131,981
CUSTOMER CONNECTIONS (FEE FUNDED)
WS-80013 Water System Extensions - 750,000 - (361,876) 388,124 11,424 775,000 800,000 825,027 850,000 850,000
Subtotal, Customer Connections - 750,000 - (361,876) 388,124 11,424 775,000 800,000 825,027 850,000 850,000
GRAND TOTAL 13,718,880 4,894,417 - (1,169,404)17,443,893 1,371,505 5,364,250 12,185,428 6,408,019 12,331,981 2,981,981
Funding Sources
Connection/Capacity Fees 929,348 - 985,946 1,015,524 1,045,990 1,195,819 1,195,819
Other Utility Funds (Asset Mgmt, GIS Systems)295,260 - 268,418 295,260 304,118 313,242 322,640
Utility Rates 4,894,417 - 4,109,886 10,874,644 5,057,911 10,822,920 1,463,522
CIP-RELATED RESERVES DETAIL
6/30/2019
Actual
6/30/2019
(Unaudited)
Reappropriations (excl. Bond Funded)13,718,880 16,072,388
Commitments (excl. Bond Funded)1,067,702 1,371,505
WATER UTILITY FINANCIAL PLAN
M a r c h , 2 0 20 39 | P a g e
APPENDIX C : WATER UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Water Utility
Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, for the Water Utility Financial Plan
delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial
Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets
as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Water Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Water Utility’s Capital
Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves and
shall be returned to ratepayers or assigned a specific purpose as described in Section 8
(Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to
the total remaining spending authority for all contracts in force for the Water Utility at that
time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal
to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section
2.28.090.
Section 5. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following practices:
WATER UTILITY FINANCIAL PLAN
M a r c h , 2 0 20 40 | P a g e
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period and approved by Council
resolution.
Minimum Level 20% of the maximum CIP Reserve guideline
level
Maximum Level Average annual (12 month)5 CIP budget, for 48
months of budgeted CIP expenses6
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added or removed from to that reserve as
a result of a change in contractual commitments related to CIP projects. Any other
additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level: If, at the end of any fiscal year, the minimum guideline is not met, staff
shall present a plan to the City Council to replenish the reserve. The plan shall be delivered
by the end of the following fiscal year, and shall, at a minimum, result in the reserve
reaching its minimum level by the end of the next fiscal year. For example, if the CIP
Reserve is below its minimum level at the end of FY 2017, staff must present a plan by
June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In addition,
staff may present, and the Council may adopt, an alternative plan that takes longer than
one year to replenish the reserve, or that does so in a shorter period of time.
d) Maximum Level: If there are funds in this reserve in excess of the maximum level staff
must propose in the next Financial Plan to transfer these funds to another reserve, return
the funds to ratepayers, or designate a specific use of the funds for CIP investments that
will be made by the end of the next Financial Planning Period. Staff may also seek City
Council to approve holding funds in this reserve in excess of the maximum level if they
are held for a specific future purpose related to the CIP.
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and
held to manage the trajectory of future year rate increases. Withdrawal of funds from the
Rate Stabilization Reserve requires Council action. If there are funds in the Rate
Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial
Plan must result in the withdrawal of all funds from this Reserve by the end of the next
Financial Planning Period. The Council may approve exceptions to this requirement, when
proposed by staff to provide greater rate stabilization to customers.
5 Each month is calculated based upon 1/12 of the annual budget.
6 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual
average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use
to derive the annual average would be FY 2022 through FY 2025 etc.
WATER UTILITY FINANCIAL PLAN
M a r c h , 2 0 20 41 | P a g e
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves
described in Section 3-Section 6 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for that
year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months of
the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Water Utility shall be designed to
return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Water Utility’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section 8,
below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City
Council must include a plan to assign them to a specific purpose or return them to the Water
Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For
example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next
Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall include a plan
to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may
present an alternative plan that retains these funds or returns them over a longer period of
time.
WATER UTILITY FINANCIAL PLAN
M a r c h , 2 0 20 42 | P a g e
APPENDIX D : DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES
This appendix describes the activities associated with the various operational activities referred
to in Section 6B: Operations of this Financial Plan.
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City’s General Fund staff, as well as shared communications services, CPAU administrative
overhead, and billing system maintenance costs. This category also includes Water Utility debt
service and rent paid to the General Fund for the land associated with res ervoirs and various
other facilities.
Customer Service: This category includes the Water Utility’s share of the call center, meter
reading, collections, and billing support functions. Billing support encompasses staff time
associated with bill investigations and quality control on certain aspects of the billing process. It
does not include maintenance of the billing system itself, which is included in Administration.
This category also includes CPAU’s key account representatives, who work with large commercial
customers who have more complex requirements for their water services.
Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
Operations and Maintenance: This category includes the costs of a variety of distribution system
maintenance activities, including:
• investigating reports of damaged mains or services and performing emergency repairs;
• testing and operating valves;
• monitoring water quality and reservoir levels;
• monitoring the status of the different pressure zones;
• flushing water at hydrants and other closed end points of the system;
• building and replacing water services for new or redeveloped buildings; and
• testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
• the Field Services team (which does field research of various customer service issues);
• the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal tanks and reservoirs); and
• the General Services team (which manages and maintains equipment, paves and restores
streets after gas, water, or sewer main replacements, and provides welding services)
Resource Management: This category includes water procurement, contract management,
water resource planning, interaction with BAWSCA, the SFPUC, and Valley Water, and tracking of
legislation and regulation related to the water industry.
M a r c h , 2 0 20 43 | P a g e
APPENDIX E : SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS
HOW CAN I
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UTILITY RATE CHANG
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SATURDAY, APRIL 13, 20,19
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0U1DC)OA i:AMr$ I UIO WM.IC I fl'.IJJJIU I ONIR:Olfi ,.-N'lM ANO
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reuse w/po~nt1al agrttmcm w/ :.J}'Jalleyw-tcr
TO~·~ PALO ALTO .,. ~rJ UTll .. lllh
lr11er ed in lea rrir19 more, ,0·11 vs at an i Io meefr19
lu We d. 10,123, 6-30pm. Details li1t lyf..,2A,_' T ... 16 _____ ....... _ _._ __ ..._._...._ ..... -............. ----1
Imagine a Day
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... ~ ....... ~.,, f(la"llai&~ ....... ~ .. ~ . ..,.,., __ _.."".,..-.. ,.... ......... _.. .,.......~ ........... --'Iii-· ............... ~ .................. -·~--
Spnng. IS '" tht-a,r Join us fo{ a t'ftt workshop this
Sat urday t o learn hO'iN to crea te a b eauti low water
use ,,cl low ma in1e11aoce I mdse.ape wi native p,ant'S.
Learn more a nd registe at bnws<.a 9/.:1 .. .,.,~ .2 f· 1.
ATTACHMENT C
M a r c h , 2 0 20 1 | P a g e
APPENDIX A : WATER UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Water Utility
Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, for the Water Utility Financial Plan
delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial
Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets
as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Water Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 4 (Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Water Utility’s Capital
Improvement Program (CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves and
shall be returned to ratepayers or assigned a specific purpose as described in Section 8
(Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to
the total remaining spending authority for all contracts in force for the Water Utility at that
time.
Section 4. Reserve for Re-appropriations
At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal
to the amount of all remaining capital and non-capital budgets, if any, that will be re-
appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section
2.28.090.
ATTACHMENT C
M a r c h , 2 0 20 2 | P a g e
Section 5. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period based on the levels of CIP
expense budgeted for that yearand approved by Council resolution.
Minimum Level 20% of the maximum CIP Reserve guideline
level 12 months of budgeted CIP expense
Maximum Level
Average annual (12 month)1 CIP budget, for 48
months of budgeted CIP expenses2 24 months
of budgeted CIP expense
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added or removed from to that reserve as
a result of a change in contractual commitments related to CIP projects. Any other
additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level:
d)c) Funds held in the Reserve for Commitments may be counted as part of the CIP
Reserve for the purpose of determining compliance with the CIP Reserve minimum
guideline level.
i) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve reaching
its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is
below its minimum level at the end of FY 2017, staff must present a plan by June 30,
2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff
may present, and the Council may adopt, an alternative plan that takes longer than
one year to replenish the reserve, or that does so in a shorter period of time.
e)d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no
funds may be added to this reserve. If there are funds in this reserve in excess of the
maximum level staff must propose in the next Financial Plan to transfer these funds to
another reserve, or return the funds to ratepayers, or designate a specific use of the funds
for CIP investments that will be made by the end of the next Financial Planning Periodm
to ratepayers in the next Financial Plan. Staff may also seek City Council to approve
holding funds in this reserve in excess of the maximum level if they are held for a specific
future purpose related to the CIP.
1 Each month is calculated based upon 1/12 of the annual budget.
2 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual
average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use
to derive the annual average would be FY 2022 through FY 2025 etc.
ATTACHMENT C
M a r c h , 2 0 20 3 | P a g e
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and
held to manage the trajectory of future year rate increases. Withdrawal of funds from the
Rate Stabilization Reserve requires Council action. If there are funds in the Rate
Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial
Plan must result in the withdrawal of all funds from this Reserve by the end of the next
Financial Planning Period. The Council may approve exceptions to this requirement, when
proposed by staff to provide greater rate stabilization to customers.
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves
described in Section 3-Section 6 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for that
year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level
90 days of O&M and commodity expense
Maximum Level
120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months of
the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Water Utility shall be designed to
return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Water Utility’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section 8,
below.
ATTACHMENT C
M a r c h , 2 0 20 4 | P a g e
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City
Council must include a plan to assign them to a specific purpose or return them to the Water
Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For
example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next
Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall include a plan
to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may
present an alternative plan that retains thes e funds or returns them over a longer period of
time.
City of Palo Alto (ID # 11131)
Utilities Advisory Commission Staff Report
Report Type: Agenda Items Meeting Date: 3/5/2020
City of Palo Alto Page 1
Council Priority: Fiscal Sustainability
Summary Title: Preliminary Wastewater Rates for FY 2021
Title: Discussion of the Presentation of Preliminary Wastewater Collection
Rates for FY 2021
From: City Manager
Lead Department: Utilities
Executive Summary
Due to last minute revisions to the Wastewater Cost of Service study, staff will present the
Wastewater Financial Plan and rates at the April 1, 2020 Utilities Advisory Commission meeting.
At the March 5, 2020 meeting, staff will present draft cost of serv ice results for FY 2021 rate
changes and preliminary rate change projections for FY 2021 through FY 2025.
The slides will be delivered as an At-Places memo.
City of Palo Alto (ID # 11085)
Utilities Advisory Commission Staff Report
Report Type: Meeting Date: 3/5/2020
City of Palo Alto Page 1
Summary Title: AMI and Fiber Planning Update and Discussion
Title: Discussion and Update of Advanced Metering Infrastructure (AMI) and
Fiber Network Expansion Planning
From: City Manager
Lead Department: Utilities
Attached for UAC discussion is a PowerPoint presentation summarizing the high level
scope of work and tentative timeline of the advanced metering infrastructure (AMI) and
fiber network expansion projects.
Attachments:
• Attachment A: Presentation
1
Update and Discussion of AMI and
Fiber Planning
Utilities Advisory Commission
March 5, 2020
2
AMI RFP Outline
COMPONENT 1: AMI Network, electric meters,
gas/water meter radios
COMPONENT 2: Water Meters: Up to 8,600
replacements > 20 years old
COMPONENT 3: Gas Meters: Up to 11,900
replacement > 30 years old
COMPONENT 4: Installation Services (Electric, Gas
and Water)
COMPONENT 5: MDM software and interfaces to CIS,
GIS, MyCPAU
3
AMI Tentative Timeline*
Issue RFP: March 2020
Proposal Deadline: June 2020
Vendor Interviews: July -Sept 2020
Contract Negotiations: Oct –Dec 2020
Council Approval: Q1 2021
Initial Installation and Software Interface
Testing: 2021 - 2022
Full Deployment: 2022 – 2024
*AMI Implementation timeline is highly dependent on CIS
Implementation timeline.
4
Fiber Network Expansion
Scope of Work
Phase 1: Planning and High Level Design for AMI,
SCADA and internal Wireless Network
Phase 2: Detailed Aerial and Underground Design;
Construction Standards and Bid Package
Phase 3: Fiber-to-the-Premise Business Case;
Market and Needs Assessment; Financial
Planning; Partnership Opportunities
Phase 4: Detailed Aerial and Underground Design
for FTTP; Construction Standards and Bid Package
5
Fiber Tentative Timeline*
Contract Negotiations: Feb/Mar 2020
Council Approval: Mar/Apr 2020
Phase 1 (AMI, SCADA and Wireless Design): May-Aug
2020
Phase 2 (AMI, SCADA and Wireless Construction
Package): Sept 2020 –Mar 2021
Phase 3 (FTTP Business Case, Market Assessment,
Financial Plan, Partnership): Apr 2021 –Sep 2021
Phase 4 (FTTP Design and Construction Package): Oct
2021 –Sep 2022
* Each phase must be approved by Council before City proceeds
with the next phase.
City of Palo Alto (ID # 11124)
Utilities Advisory Commission Staff Report
Report Type: Agenda Items Meeting Date: 3/5/2020
City of Palo Alto Page 1
Summary Title: Carbon Neutral Plan Update
Title: Staff Recommendation That the Utilities Advisory Commission
Recommend That the City Council Adopt a Resolution Amending the City's
Electric Supply Portfolio Carbon Neutral Plan
From: City Manager
Lead Depart ment: Utilities
RECOMMENDATION
Staff recommends that the Utilities Advisory Commission (UAC) recommend that the City
Council:
1) Adopt a resolution1 to amend the Carbon Neutral Plan to:
a. Amend the definition of carbon neutrality to use an hourly carbon emiss ions
accounting standard;
b. If needed, for calendar years 2020 through 2024, authorize limited short-term
exchanges of existing California-based renewable energy (Bucket 1 RECs) for out-of-
state renewable energy (Bucket 3 RECs) to neutralize any residual emissions resulting
from the difference between emissions calculated under an annual accounting and
hourly accounting methodology; and
2) Direct staff to return to Council with a review of the Carbon Neutral Plan by the end of 2024
to evaluate the effectiveness of these policy changes and to modify them if necessary.
1 Resolution not included as an attachment. A resolution will be written and presented to Council at a later date
reflecting the staff and UAC recommendation that is approved.
City of Palo Alto Page 2
Staff is also considering allocating up to $1 million per year in revenues from the sale of carbon
allowances freely allocated to the electric utility under the State’s Cap and Trade Program to
building electrification and other local carbon reduction activities. This action would be
performed under existing Council-approved City Manager authority and would have little to no
impact on rates due to the Council action above (specifically, the exchanges of California
renewable energy for out of state renewable energy). Staff wants to make the UAC aware of this
potential plan and use this meeting to invite discussion of the best uses for that local carbon
reduction fund.
EXECUTIVE SUMMARY
This report is a follow-up to a series of reports to the UAC covering the topics of carbon
emissions accounting and Renewable Portfolio Standard (RPS) procurement strategy (e.g.,
reports from May 2019, June 2019, August 2019 and February 2020). The two topics are not
only highly complex and esoteric, but also highly interrelated. Further, policy decisions related
to these two topics can have potentially significant impacts on supply costs, retail rates, and
funding for customer programs. As a result, staff, the UAC, and a number of community
members have had extensive discussions about these topics in an attempt to arrive at a policy
position that balances the City’s sustainability goals with its desire to lower costs and rates .
In the current report, staff presents a proposal that attempts to find such an optimal solution.
Under the staff proposal, the City would use an hourly carbon accounting methodology for both
internal decision-making and for the definition of carbon neut rality under the Carbon Neutral
Plan. While staff recommends the use of this methodology in the long term, staff notes that the
current electric portfolio is optimized for an annual accounting methodology, meaning that
adopting this hourly carbon accounting methodology would result in higher supply costs than
an annual accounting methodology in the short term without notable changes in the City’s
portfolio composition. The City’s next clear opportunity to rebalance its electric portfolio is at
the end of 2024, when the City has the opportunity to reduce or eliminate its contracted share
of Central Valley Project hydropower generation (the Western Base Resource contract). To
minimize the cost impact of the change in the carbon neutrality definition, staff pro poses the
use of out-of-state renewable energy (Bucket 3 RECs) to address any residual emissions
resulting from the use of the hourly accounting methodology through 2024. Staff recommends
against relying on California-based (Bucket 1) renewables to address the residual emissions
associated with the switch to an hourly carbon accounting approach due to the large price
differential between in-state and out-of-state renewables at this time. Staff recommends re-
evaluating the effectiveness of this carbon accounting policy before 2024—at the same the City
considers whether to renew its share of the Western Base Resource project or rebalance its
portfolio.
If the City enables the exchanges noted above, it has an opportunity to redirect some additional
funding to local carbon reduction activities like building electrification without significantly
City of Palo Alto Page 3
impacting utility rates. This action would be undertaken by the City Manager under existing
Council-approved policy. Staff is soliciting input from the UAC on this potential plan.
An alternative decision the UAC could make would be to use the hourly carbon accounting
standard for internal decision making, and explore its use for supply - or demand-related
decision-making purposes when staff evaluates whether to renew the City’s share of the
Western Base Resource project or rebalance its portfolio.
BACKGROUND
When Council approved the Carbon Neutral Plan in March 2013 (Staff Report 3550, Resolution
9322), it defined carbon neutrality as a portfolio that “will demonstrate annual net zero
greenhouse gas (GHG) emissions, measured at the Citygate, in accordance with The Climate
Registry’s Electric Power Sector protocol for GHG emissions measurement and reporting.” In
effect, this means that if the City’s carbon neutral supplies (in megawatt -hours (MWh)) equal or
exceed the City’s total load on an annual basis then the electric supply would be deemed to be
carbon neutral. At the time, this accounting methodology was considered the most accurate
accounting methodology that could be achieved—or needed. This was in part because in 2013
there was very little solar generation connected to the California Independent System Operator
(CAISO) grid, and therefore the grid’s average emissions factors did not vary in the extreme
manner that they do today—for example, as in the emissions rate chart shown in Figure 1
below, for CAISO emissions on February 12, 2020. But, more practically, CAISO did not begin to
publish hourly grid emissions factor data until 2018, and th erefore a more granular accounting
methodology was not feasible at that time.
Figure 1: CAISO Average CO2 Emissions Rates for February 12, 2020
City of Palo Alto Page 4
In addition, the 2013 Carbon Neutral Plan (CN Plan) did not contemplate the type of situation
the City finds itself in today, where, on an annual basis, it has an ongoing surplus of carbon
neutral supplies (under normal hydro conditions) relative to its load. The original CN Plan
addressed the City’s strategies for obtaining carbon neutral supplies equal to its annual load
(specifically, it authorized the purchase of unbundled RECs on a short-term basis, with an
ultimate goal of procuring enough long-term renewable supplies to fully satisfy the City’s
annual load). In this report, staff seeks feedback on various strategies it can pursue to sell its
supplies that are surplus to its annual load—because in the last couple of years the City has
found robust market demand for these renewable energy supplies, thanks in part to the growth
of Community Choice Aggregator agencies (CCAs). Staff also seeks direction on how to use the
proceeds of such sales. Finally, staff seeks direction on whether to change the accounting
standard used in the CN Plan to a more granular (hourly) approach, given the dr amatic changes
to the emissions profile of grid electricity since 2013. As discussed previously, the surplus sales
issue and the carbon accounting methodology issue are highly interrelated.
DISCUSSION
The policy options under consideration in this report can be simplified down to a set of three
interrelated choices:
1) Whether to use hourly or annual accounting for making long-term portfolio decisions;
2) Whether to use hourly or annual accounting for measuring the carbon content of the
City’s electric supply portfolio; and
3) If using hourly accounting for determining carbon neutrality, whether to utilize
California-based Bucket 1 renewables or out-of-state unbundled RECs as the tool for
neutralizing the hourly residual emissions that may result from using this hou rly
accounting approach.
Separately, there is also a decision to be made regarding the use of proceeds from surplus sales.
Hourly vs. Annual Carbon Accounting
At the February 2020 UAC meeting, there was a consensus opinion that hourly accounting
should be used by staff for the evaluation of different supply and demand resources. Staff
strongly supports this position too, believing that an hourly accounting framework is the right
way to think about long-term procurement decisions.2 Staff thinks that hourly grid carbon
emissions rates are important to incorporate into our internal decision-making and reporting in
a variety of ways. There will be no immediate cost associated with incorporating hourly
accounting into internal decision-making; doing so simply prepares the City for when energy
markets and regulations shift to a more granular carbon accounting paradigm.
On the other hand, adopting hourly carbon accounting instead of annual accounting for
measuring the carbon content of the City’s electric supply portfolio, will have a modest financial
2 One way to streamline incorporating emissions into long-term planning is to assign a monetary value to carbon
emissions—that topic can be addressed at a later date.
City of Palo Alto Page 5
impact.3 The reason for the additional cost associated with this approach is that, in holding the
City’s electric supply portfolio up to a stricter carbon accounting standard, this hourly
accounting approach is likely to show, in an average year, that the City’s portfolio is responsible
for a small amount of “residual” emissions, even though its supplies match its load on an annual
basis.4 And in order to maintain the carbon neutral status of its electric supply under this
accounting framework, the City would have to purchase additional resources in order to
neutralize these residual emissions. If the City were to adopt the use of hourly accounting for its
portfolio decisions right now, staff recommends minimizing the cost impact associated with
adopting an hourly accounting framework by authorizing the purchase of out-of-state
renewable energy (also called “unbundled, Bucket 3 RECs”) on a short-term basis to neutralize
these residual emissions from hourly accounting. Based on current market prices for unbundled
RECs, staff estimates the cost associated with neutralizing these residual emissions from hourly
accounting to be $140,000/year.
In-state, Bundled Renewable Energy (Bucket 1 RECs) vs. Out-of-state, Unbundled Renewable
Energy (Bucket 3 RECs)
The fundamental difference between bundled renewables (or “Bucket 1 RECs”) and unbundled
(Bucket 3) RECs, as the diagram in Figure 2 illustrates, is that with bundled renewables both the
energy and the REC (which represents the environmental value of the energy) are sold together
to the same entity. With unbundled RECs, the energy and the REC are sold separately to
different entities. Because Bucket 1 RECs must be physically delivered to California, Bucket 1
RECs are almost always produced by in-state renewable generators, while Bucket 3 RECs are
produced by out-of-state renewable generators. Also, because of limitations placed on the use
of Bucket 3 RECs for compliance purposes in the state’s RPS legislation, and because of strong
demand for Bucket 1 resources as CCAs ramp up their energy purchases, Bucket 1 RECs
currently carry a significant price premium relative to Bucket 3 RECs, although these two
resources represent equivalent amounts of renewable energy.
3 As described in the February 2020 UAC report, the accounting methodology proposed by staff entails an hourly
comparison of the City’s supplies and load, with each hourly net load/supply value assigned the average hourly
carbon emissions intensity of the CAISO grid to convert it to an hourly emissions total that the City’s electric
portfolio is responsible for. These hourly emissions totals (which can be positive or negative, depending on if the
City’s load exceeds its carbon neutral supplies for that hour) would then be summed across the hours in a year.
4 These “residual emissions” occur because the City has a heavy concentration of solar resources in its supply
portfolio. Thus, the periods when the City has a surplus of resources relative to its load tend to be in periods when
the grid is relatively clean overall; conversely, the periods when the City typically has supply deficits relative to its
load tend to be at times when the grid is dirtier overall. Based on 2018 grid emissions and generation data for the
City’s resources, staff calculated these residual emissions to be approximately 16,000 MT CO 2 for the year.
City of Palo Alto Page 6
Figure 2: Bundled (Bucket 1) vs. Unbundled (Bucket 3) RECs Diagram5
If the community prefers to implement an hourly carbon accounting framework using California-
based Bucket 1 renewables in the long-term, staff can optimize the electric portfolio to
minimize costs under this policy. However, the City will not have an easily available opportunity
to rebalance the electric portfolio until 2024. As a result, implementing hourly accounting using
Bucket 1 renewables today has significant downsides. The principal drawback to this approach is
the high cost. Due to the aforementioned price premium for Bucket 1 RECs right now, staff
estimates the cost of neutralizing the residual emissions with Bucket 1 RECs to be about
$620,000/year, as shown in Table 1 below, which is $480,000/year greater than the cost of using
Bucket 3 RECs for this purpose. In staff’s view, this represents a significant increase in costs (and
therefore a significant reduction in funds that could be allocated either to local decarbonization
efforts or rate reduction) with little to no additional environmental value to show for it.6 In the
short-term, utilizing Bucket 1 renewables to neutralize residual emissions will not result in the
construction of any new renewables, just additional expenditures. Use of Bucket 3 RECs in the
short-term, however, has a minimal rate impact and enables the City to adopt hourly accounting
for its electric portfolio in anticipation of long-term portfolio rebalancing.
5 Source: Pinkel, D., and Weinrub, A., “What the Heck is a REC?” October 2013.
http://www.localcleanenergy.org/files/What%20the%20Heck%20is%20a%20REC.pdf
6 For a full discussion of the environmental merit of Bucket 3 RECs relative to Bucket 1 renewables, please see
Attachment B of this August 2019 UAC report. In short though, Bucket 3 RECs represent all of the environmental
attributes of the underlying generation, including its emissions profile. And within California there is current ly an
over-supply of renewable energy at many times of the year, while neighboring states retain a significant reliance
on coal and natural gas generators; as a result, out-of-state renewable generation can be more valuable
environmentally than in-state renewable generation.
City of Palo Alto Page 7
Table 1: Summary Comparison of Carbon Accounting Methodology Options
Option 1:
Annual Accounting
(Sell All Surplus)
Option 2:
Staff’s Preferred Approach
Hourly Accounting
(with Bucket 3 RECs)
Option 3:
Hourly Accounting
(with Bucket 1 RECs)
Surplus Sales Revenue
($M) $ 2.24 $ 2.24 $ 2.24
Hourly Residual
Emissions Abatement
Cost ($M)
$ - $ 0.14 $ 0.62
Net Revenue ($M) $ 2.24 $ 2.10 $ 1.62
Rate Impact (%)* -1.5% -1.4% -1.1%
Renewable Supply (%)**
(Bucket 1 Only) 45% 45% 50%
Energy Supply Level
(% of Annual Load) 100% 105% 105%
PCL Emissions Intensity
(lb CO2/MWh) 9.4*** 9.4*** 10.4***
Hourly Accounting
Emissions Intensity
(lb CO2/MWh)
42.3 42.3 -
*Note 1: “Rate Impact” assumes all net revenue is devoted to rate reduction.
Revenue and cost values are annual averages over the 2020-2030 time period.
**Note 2: “Renewable Supply %” is only referencing what will show as our renewable percentage
on the Power Content Label (PCL). Bucket 2 and Bucket 3 RECs are both renewable
energy and both count towards RPS procurement standards.
***Note 3: This “PCL Emissions Intensity” is due to the City’s long-term electricity supply contracts
from landfill gas electricity generation being assigned an emissions intensity going
forward.
Furthermore, committing to the use of Bucket 1 renewables in the near-term to neutralize the
portfolio’s residual emissions under an hourly accounting approach forces the City to incur a
relatively large increase in supply costs to address the emissions impact of procurement
decisions made long ago—at a time when the varying hourly emissions profiles of different
types of resources was not foreseeable. Rather than imposing such a large cost on the City to
account for portfolio decisions made years ago, staff recommends taking hourly emissions
accounting impacts into account for future portfolio decisions, as well as reconsidering the use
of Bucket 1 renewables for neutralizing the portfolio’s residual emissions the next time the City
has an opportunity to significantly rebalance its supply portfolio—which should be around
2024, when the City will make a final decision on whether or not to renew its Western Base
Resource hydro contract. By that time, market conditions and regulations related to Bucket 1
City of Palo Alto Page 8
and Bucket 3 RECs may have changed, and the price premium of Bucket 1 renewables relative to
Bucket 3 RECs may be lower than it is today.
In considering the use of Bucket 3 RECs for neutralizing residual emissions, it’s important to
note that the original Carbon Neutral Plan established a goal of obtaining Bucket 1 renewable
supplies equal to the City’s load on an annual basis, and it allowed for the use of Bucket 3 RECs
to address the reduction in carbon neutral generation that occurs in low hydro years. However,
the Plan did not contemplate a scenario where the City has an overall surplus of supplies on an
on-going basis (or where grid emissions rates vary significantly over the course of the year).
Using Bucket 3 RECs for neutralizing residual emissions remains true to that original Carbon
Neutral Plan: the City would still have Bucket 1 renewable supplies equal to its load on an
annual basis. This approach simply augments the original Plan by addressing what to do with
the City’s supplies that exceed its annual load, and how to address the fact that grid emissions
now vary dramatically from hour to hour and season to season.
Use of Revenues from Sale of Surplus Renewables
In the August 2019 UAC presentation on this topic, staff presented a list of potential uses of the
revenue from the sale of surplus renewable resources. (As Table 1 outlines, the net revenue
from these sales could be up to $2.24 million per year, on average, over the 2020 -2030 time
period.) That list of potential uses included:
• Rate reduction
• Decarbonization efforts (e.g., building electrification or electric vehicle charging
infrastructure or incentives)
• Investments in smart grid infrastructure
• A second transmission line connecting the City’s distribution system to the bulk
transmission system
In discussions since that time with the UAC and the community, the focus for the use of this
new revenue stream has largely been on the first two items: rate reduction and local
decarbonization. Both are admirable objectives, and both are entirely appropriate (and legally
acceptable) uses of these funds.
Staff is considering reserving a portion of the earnings from the sale of surplus renewables (up
to $1 million per year) and allocating these earnings to a fund reserved for local decarbonization
efforts. Staff is looking for UAC feedback on this possibility. Doing so will enable the City to make
significant headway on its ambitious Sustainability Implementation Plan (SIP) goals related to
Energy and Electric Vehicles. To ensure that these funds are only used to support local
electrification and carbon reduction efforts, staff would recommend to the UAC and Council in
the FY 2021 Electric Utility Financial Plan the creation of a Local Decarbonization Reserve to
store these revenues. The specific funding source for the Local Decarbonization Reserve would
be revenues generated from sales of allowances freely allocated to the electric utility under the
State’s Cap and Trade program. The Council’s January 2015 policy on the use of these revenues
(Attachment B) gives the City Manager authority to designate the use of these funds among a
City of Palo Alto Page 9
range of purposes, including local carbon reduction, so no Council action is required. These
revenues are currently allocated 100% to renewable energy purchases. In prior years these
revenues could not be reallocated to local carbon reduction without increasing costs, and
indirectly incurring a rate increase. However, the City’s commencement of sales of its renewable
energy surplus presents a unique opportunity to reallocate some of these funds without
incurring a rate increase.
Given the continuing concerns of many in the community about fis cal sustainability, staff
recommends that a portion of the proceeds from sales of surplus renewables also be devoted
to rate reduction. Staff is anticipating over $1.1 million per year can be dedicated to rate
reduction (equivalent to about a 1% change in rates) even if $1 million per year is dedicated to
local carbon reduction. If either “Option 1” or “Option 2” is adopted this will allow CPAU to
make a significant investment in jumpstarting local decarbonization efforts while actually
helping to lower electric supply costs (rates may still increase due to other upward pressures on
rates).
City of Palo Alto Page 10
Policy Alternatives
If there is significant discomfort with staff’s preferred proposal to exchange Bucket 1 renewables
for Bucket 3 RECs to deal with residual emissions (“Option 2” in Table 1), staff instead proposes
maintaining the annual accounting approach for determining the City’s compliance with the
Carbon Neutral Plan through 2024, while still reporting on the City’s electr ic supply emissions
under an hourly accounting approach, and using hourly emissions accounting for internal
resource planning purposes (“Option 1” shown in Table 1 above). This approach would enable
the City to devote significantly more funding to rate reduction and/or local carbon reduction
efforts than if it switched to an hourly carbon accounting approach and relied on Bucket 1
renewables for neutralizing residual emissions (“Option 3” shown in Table 1). Staff strongly
recommends against the approach “Option 3” shown in Table 1.
To recap, staff is currently considering a compromise approach with respect to the use of the
sales revenue from the sales of its excess renewable supplies: devoting roughly half of the
surplus sales revenue to local decarbonization with the other half going towards rate reduction.
This will enable the community to devote some of the savings from selling its surplus
renewables to local carbon reduction initiatives, while reserving the rest for rate reduction. Staff
hopes that this will be an acceptable compromise for the next few years and will represent a
step forward to support the community’s environmental sustainability goals. The community
can then revisit its long-term policy on the use of hourly carbon accounting for compliance with
the Carbon Neutral Plan in 2023 or 2024.
Finally, staff wants to acknowledge that the concepts presented in this report (carbon
accounting methodologies and the different types of RECs) are somewhat nuanced and
esoteric. In recognition of this, staff is in the early stages of developing a set of infographics
(presented in Attachments C and D) to begin the discussion of how to communicate these
subjects to the community.
NEXT STEPS
In the coming weeks, staff will take the UAC’s recommendation regarding amendments to the
Carbon Neutral Plan to the Finance Committee and the City Council for approval. In the latter
half of 2020, staff will also seek to sell the City’s surplus renewable energy supplies for the year
(to the extent that such surpluses are expected, which will depend on hydro conditions). In
addition, staff will report on the portfolio’s total emissions under both an hourly and an annual
carbon accounting framework in the annual report to the City Council on the City’s Renewable
Procurement Plan, Renewable Portfolio Standard Compliance, and Carbon Neutral Electric
Supplies (expected in Q4 of 2020).
Furthermore, in the next couple of years staff plans to carry out a broader and longer-term
analysis of potential options for rebalancing the City’s electric supply portfolio. This analysis will
be presented in the context of making a decision on whether to renew the City’s Western Base
Resource hydro contract after the current one expires at the end of 2024. It will also take into
City of Palo Alto Page 11
account options for utilizing the City’s share of the California -Oregon Transmission Project, after
that resource reverts to the City’s control at the end of 2023.
RESOURCE IMPACT
Staff estimates that switching to an hourly carbon accounting methodology, using average
hourly emissions intensity factors, and using Bucket 3 RECs to neutralize the residual emissions
resulting from this change to hourly accounting, which will result in an increase in supply costs
of approximately $140,000 in an average hydrological year. However, staff estimates that sales
of the City’s surplus renewable energy supplies would bring in about $2.24 million in revenue
per year through 2030. So overall, staff’s proposal is expected to yield $2.1 million in new net
revenue per year through 2030. Staff seeks feedback on the idea of allocating $1 million per
year of these earnings toward local decarbonization efforts and the remainder to electric supply
cost reduction. This approach would yield electric supply cost savings equivalent to a rate
reduction of about 0.7%, or 0.12 cents/kWh, while also providing substantial funding for local
carbon reduction. Note that rates may still increase in the future due to other upward pressures
on rates, but those increases would be lower due to the electric supply cost reductions.
POLICY IMPLICATIONS
This report satisfies Initiatives #4 and #5 of the EIRP Work Plan. This report is also in line with
the Sustainability and Climate Action Plan goals of continuing to lower the carbon footprint of
the community.
ENVIRONMENTAL REVIEW
The Utilities Advisory Commission’s discussion of the City’s carbon accounting methodology and
RPS procurement strategy does not meet the definition of a project under Public Resources
Code 21065 and therefore California Environmental Quality Act (CEQA) review is not required.
Attachments:
• Attachment A: Revised Carbon Neutral Plan
• Attachment B: City Policy on Use of Cap and Trade Allowances
• Attachment C: Hourly Carbon Accounting Infographic
• Attachment D: Unbundled RECs Infographic
ATTACHMENT A
1
Adopted by City Council on March 4, 2013
Revised by City Council on _______________
City of Palo Alto Utilities
Electric Supply Portfolio Carbon Neutral Plan
1. Carbon Neutral Definition
A carbon neutral electric supply portfolio will demonstrate annual net zero greenhouse gas
(GHG) emissions, measured at the Citygate1, in accordance with The Climate Registry’s Electric
Power Sector protocol for GHG emissions measurement and reporting. by applying the average
hourly carbon emissions intensity of the electricity on the CAISO grid to the City’s net load for
each hour of the year.
2. Carbon Neutral Plan Objective
Reduce the City of Palo Alto’s overall community GHG emissions by achieving carbon neutrality
for the Electric Supply Portfolio starting in calendar year 2013 within an annual rate impact not
to exceed 0.15 cents per kilowatt-hour (₵/kWh) primarily through the: 1) engagement of
customers to increase energy efficiency; 2) expansion of long-term renewable resource
commitments; 3) promotion of local renewable resources; 4) continued reliance on existing
hydroelectric resources; and 5) meeting short-term balancing requirements and/or neutralizing
residual carbon through the use of short-term purchases of renewable resources and/or
renewable energy certificates (RECs).
3. Resource Strategies
a. Energy Efficiency
i. Continue to pursue energy efficiency strategies as identified in the Council-
approved ten-year Energy Efficiency Plan.
b. Long-term Renewable Resources
i. Continue to pursue the City’s Renewable Portfolio Standard (RPS) goal to
purchase renewable energy to supply at least 3360% of retail sales by 2015 2030
while ensuring that the retail rate impact of these purchases does not exceed 0.5
₵/kWh.
ii. Continue to pursue local renewable resources through the Palo Alto CLEAN and
PV Partners programs.
iii. Pursue additional RPS-eligible, long-term renewable resources (beyond the RPS
goals) to achieve a target of 100% carbon-free resources based on average year
hydroelectric generation.
1 Citygate is the location of the City’s main meter where the City interconnects to the Pacific Gas and Electric
transmission system. Emissions associated with of the output of the locally sited fossil gas fired combustions units
(COBUG), while not measured at Citygate, will be neutralized.
ATTACHMENT A
2
c. Short-term Renewable Resources and Renewable Energy Certificates
i. For calendar years 2013 2020 through 20162024, procure short-term
renewables, if the price is comparable to that of an un-bundled REC;
ii.i. For calendar years 2013 through 2016, procure or RPS-eligible, un-bundled RECs
as needed to achieve carbon neutrality based on actual load and resources;
iii.ii. Neutralize anthropogenic GHG emissions associated with renewable resources
with RPS-eligible unbundled-RECs, which may or may not be RPS-eligible.
d. Banking and Truing Up
i. In the event that there are surplus renewables beyond the load in a particular
year, bank as many RECs as allowable under the TCR EPS protocol from
qualifying renewables from that year to minimize the need for purchasing RECs
in subsequent years.
ii. Neutralize emissions associated with market purchases resulting from deviations
between expected and actual load and renewable and hydroelectric generation
resources with RPS-eligible unbundled-RECs, which may or may not be RPS-
eligible.
ii.iii. For calendar years 2020 through 2024, neutralize residual emissions that result
from applying an hourly emissions accounting methodology, rather than a net
annual generation methodology, with RPS-eligible unbundled-RECs.
4. Hydroelectric Resources
a. Continue to preserve and advocate for existing carbon-neutral hydroelectric generation
resources that provide approximately 50% of average year resource needs.
b. Plan for and acquire carbon neutral resources assuming average hydroelectric
conditions going forward.
c. Under adverse hydroelectric conditions, procure RPS-eligible unbundled-RECs, which
may or may not be RPS-eligible, to achieve carbon neutrality up to the 0.15 ₵/kWh rate
impact limit and seek Council direction if carbon neutrality cannot be achieved within
the rate impact limit.
d. Under favorable hydroelectric conditions, where carbon neutral resources are expected
to be surplus to needs, even after allowable banking, then pursue selling short-term
renewable energy, or the renewable attributes, associated with one or more carbon-
neutral resources in the portfolio.
5. Financial and Rate Payer Impacts
a. In addition to the RPS annual rate impact limit of 0.5 ₵/kWh, the cost of achieving
carbon neutrality shall not exceed 0.15 ₵/kWh based on an average hydro year.
b. Revenues collected from surplus energy sales related to hydroelectric resources under
favorable conditions (e.g. wet years), will be maintained within reserves to adjust for the
cost of achieving carbon neutrality under adverse hydroelectric years.
c. To the extent available and allowable, revenues from the auction of cap-and-trade
allowances may be used to fund resources acquired to meet the carbon neutrality goals.
ATTACHMENT A
3
6. Reporting and Communication
a. Develop a communication plan for stakeholders to inform them of the City’s efforts
towards achieving a carbon neutral electric supply.
b. Submit an annual, verified report of the carbon content of the electric supply portfolio
to The Climate Registry.
c. Provide customers a report of the electric supply portfolio’s carbon content to
supplement the mandated Power Content Label.
d. Inform large commercial and/or corporate customers of the City’s carbon neutral
portfolio and its relevance to their individual corporate sustainability goals.
e.b.
7. Implementation Plan
The tasks that need to be completed in the next two years pending Council approval of the
Carbon Neutral Plan in February 2013 are listed in the table below.
Item Timeframe
1. Modify electric supply portfolio models and Energy Risk
Management Policies, Guidelines and Procedures to account for
Carbon Neutral objectives, balancing, banking of renewable
attributes, reporting and financial impacts.
By April 2013
2. Modify the Long-term Electric Acquisition Plan (LEAP) to include
the carbon neutral objective
By June 2013
3. Develop communication plan to inform customers and
stakeholders of Carbon Neutral Plan and efforts.
February to April
2013
4. Based on response to the Fall 2012 request for proposals, seek
approval of new renewable power purchase agreements to meet
the City’s RPS up to approximately 100% of the long-term resource
needs in average hydro years.
December 2012 to
June 2013
5. Determine resource needs for CY 2013 through CY 2016 and
develop plan to acquire short-term renewable resources.
By June 2013
6. Determine long-term renewable purchase volumes for beyond CY
2016 and develop plan to acquire long-term renewable resources.
By September 2013
7. Procure RECs as needed to neutralize carbon emissions based on
actual load and resources for CY 2013.
By May 2014
8. Along with annual Power Content Label, produce and report to
customers the carbon intensity of the electric supply portfolio.
May/June 2014 and
annually thereafter
9. Produce and submit Electric Power Sector (EPS) and Local
Governments Operation Protocol (LGOP) reports to The Climate
Registry (TCR) for CY 2013.
July and October
2014 and annually
thereafter
10. Get independent verification of TCR reports and submit audited
reports to TCR.
By December 2014
and annually
thereafter
11. Redesign the PaloAltoGreen program according to Council
direction.
By December 2013
ATTACHMENT A
4
ATTACHMENT B
EXHIBIT A TO RESOLUTION NO. 9487
ADOPTED BY COUNCIL ON: January 26, 2015
CITY OF PALO ALTO POLICY ON THE USE OF FREELY ALLOCATED ALLOWANCES
UNDER THE STATE’S CAP-AND-TRADE PROGRAM
This Policy applies to freely allocated greenhouse gas (GHG) emission allowances from the
California Air Resources Board (CARB) to the City of Palo Alto’s electric and natural gas
distribution utilities (“Allocated Allowances”). The City Manager or his designee is authorized
to use Allocated Allowances and any resulting revenue in any lawful manner consistent with
this policy.
The City’s Policy on the Use of Freely Allocated Allowances for the Electric Utility is as follows:
1. The City shall abide by CARB’s regulations by using the auction proceeds and allowance
value obtained from the City’s allocated allowances for the exclusive benefit of the City’s
electric retail ratepayers, consistent with the goals of the Global Warming Solutions Act,
also known as Assembly Bill 32 (AB 32), and not for the benefit of entities or persons other
than such ratepayers.
2. The following uses of the City’s auction proceeds are permitted:
a) Purchases or investment in renewable resources (outside Palo Alto or locally) for the
electric portfolio;
b) Investment in energy efficiency programs for the electric portfolio and retail customers;
c) Investment in other carbon reduction activities, including those required to achieve a
carbon-neutral electric portfolio; and
d) Rebates to electric retail ratepayers.
3. Allocated allowances may also be used to meet the City’s electric utility’s compliance
obligations for electricity scheduled into the California Independent System Operator
Markets, should state law eventually permit this action.
4. Council will receive annual reports on the allowance revenues and expenditures associated
with complying with CARB regulations and this policy.
5. Additional Council approval will be required for any rebates to electric ratepayers proposed
under this Policy.
The City’s Policy on the Use of Freely Allocated Allowances for the Gas Utility is as follows:
1. The City shall abide by CARB’s regulations by using the auction proceeds for the
exclusive benefit of the City’s natural gas retail ratepayers, consistent with the goals of
ATTACHMENT B
EXHIBIT A TO RESOLUTION NO. 9487
ADOPTED BY COUNCIL ON: January 26, 2015
CITY OF PALO ALTO POLICY ON THE USE OF FREELY ALLOCATED ALLOWANCES
UNDER THE STATE’S CAP-AND-TRADE PROGRAM
the Global Warming Solutions Act, also known as Assembly Bill 32 (AB32), and not for
the benefit of entities or persons other than such ratepayers.
2. A portion of the Allocated Allowances can be used to meet the City’s natural gas utility’s
compliance obligations, and the remaining Allocated Allowances will be consigned to
auction.
3. The following uses of the City’s auction proceeds from the sale of Allocated Allowances
are permitted, with a preference that greenhouse gas reduction measures be pursued
before providing rebates:
a. Investment in energy efficiency programs for the natural gas portfolio and retail
customers;
b. Purchases or investment in cost effective renewable bio-gas resources for the gas
portfolio;
c. Investment in other carbon reduction activities for the natural gas utility, including
system maintenance or replacement to reduce fugitive gas emissions;
d. Rebates to natural gas retail ratepayers. Rebates, if provided, must be allocated on
a non-volumetric basis as stated in Title 17 CCR Section 95893 (d)(3).
4. Council will receive annual reports on the use of Allocated Allowances, including the use
of auction revenues and expenditures associated with complying with CARB regulations
and this policy.
5. Additional Council approval will be required for any rebates to natural gas ratepayers
proposed under this policy.
Grid Power
(Mix of Fossil /
Carbon Free)
Palo Alto
Palo Alto
Renewables
Other Utflitfes 165 GWh
summer
surplus
What is Carbon Neutrality?
Carbon neutrality means Palo Alto buys as much renewable energy in a year as it uses. Palo Alto used about 165 GWh of
grid power in the winter and sold 165 GWh of surplus renewables to other utflitfes in the summer, displacing grid power.
The carbon reductfons from displacing grid power in the summer roughly equaled the emissions from winter grid power.
Palo Alto
Palo Alto
Renewables
Other Utflitfes
Grid Power
(Mix of Fossil /
Carbon Free)
165 GWh
winter
deficit
Grid Power
(Mix of Fossil /
Carbon Free)
Palo Alto
Palo Alto
Renewables
Other Utflitfes 165 GWh
summer
surplus
Problems with the carbon neutrality definitfon in 2020
In 2013 the above definitfon worked. But in 2020 it does not work as well, since solar makes the carbon content of grid
power much lower in summer than in winter. If Palo Alto uses about 165 GWh of grid power in the winter and puts 165
GWh of surplus renewables into the system in the summer, displacing grid power, it would not be carbon neutral.
SUMMER SURPLUS WINTER DEFICIT NET
(165 GWh) 165 GWh 0 GWh CARBON NEUTRAL
(Annual)
(55,000 MT CO2) 55,000 MT CO2 0 MT CO2 CARBON NEUTRAL
(Hourly)
SUMMER SURPLUS WINTER DEFICIT NET
(165 GWh) 165 GWh 0 GWh CARBON NEUTRAL
(Annual)
(35,000 MT CO2) 52,000 MT CO2 17,000 MT CO2 CARBON NEUTRAL
(Hourly)
Palo Alto
Palo Alto
Renewables
Other Utflitfes
Grid Power
(Mix of Fossil /
Carbon Free)
165 GWh
winter
deficit
Attachment C
Palo Alto
Palo Alto
Renewables
Other Utflitfes
Grid Power
(Mix of Fossil /
Carbon Free)
165 GWh
winter
deficit
Grid Power
(Mix of Fossil /
Carbon Free)
Palo Alto
Palo Alto
Renewables
Other Utflitfes 205 GWh
summer
surplus
The Solutfon—Adopt an Hourly Accountfng Standard
An hourly accountfng standard uses carbon rather than kWh to measure carbon neutrality, ensuring that the electric
portiolio has no net carbon emissions, regardless of how the carbon content of the electric grid changes over tfme.
SUMMER SURPLUS WINTER DEFICIT NET
(205 GWh) 165 GWh 0 GWh CARBON NEUTRAL
(Annual)
(52,000 MT CO2) 52,000 MT CO2 0 MT CO2 CARBON NEUTRAL
(Hourly)
Why not just match every hour of the day with Carbon-Free electricity?
One obvious questfon is why we need these exchanges in the first place. Why not just have 100% carbon -free electricity at
every hour of the year? While this feels intuitfvely right , it turns out to be expensive and can be less beneficial for the en-
vironment. Let’s explore an example that illustrates why that is:
Palo Alto displaces more carbon by using hydroelectricity
to follow price rather than following consumption
Load vs. Hydro, Carbon Neutral portiolio Load vs. Hydro under Carbon Free portiolio
With a carbon free portiolio Palo Alto would schedule its hydroelectric resources to match its electric use. Currently Palo
Alto schedules as much generatfon as possible in the highest cost hours of the day, which also happen to be when carbon
emissions are highest. Under a carbon free portiolio Palo Alto would schedule to match its load, leading to lost revenue for
the community and less carbon reductfon. This is the simplest example of how a carbon free portiolio can result in higher
costs and/or less carbon reductfon, but there are many others.
High price & high carbon value hours
What the Heck is a REC?
A Renewable Energy Certfficate (a REC) is the environmental attribute associated with one unit (a Megawatt -hour) of re-
newable electricity generatfon. In other words, it represents the “greenness” of a unit of renewable power, and can be
separated from the electrical energy itself. In the utflity industry, RECs are the universally accepted means for tracking (and
trading) renewable electricity generatfon.
Tracking and Trading RECs
In the Western US, RECs are created, tracked, and transferred in a single independent, web -based system called the West-
ern Renewable Energy Generatfon Informatfon System (WREGIS). If a REC is sold together (or “bundled”) with the electri-
cal energy that it was associated with — or if it is matched up with other electrical energy later — the owner can claim to
be “powered by renewable energy.” But if the owner of the renewable power “unbundles” the REC and sells it to someone
else they can no longer claim to be renewable powered.
Renewable Energy Electrical Energy REC
ATTACHMENT D
Types of RECs in California
In California, all utflitfes must comply with a law called the Renewable Portiolio Standard — requiring them to obtain at
least 60% of their retail electricity sales from renewable resources by 2030. But under the RPS law there are three differ-
ent categories (or “buckets”) of renewable energy.
Bucket 3 RECs
The third category is for “unbundled” renewable energy, produced by a renewable energy generator in the WECC region
(the Western Electricity Coordinatfng Council, which covers the Western US and parts of Canada and Mexico). Utflitfes are
permitted to satfsfy up to 10% of their RPS requirement using Bucket 3 renewables. Because of the very broad geographic
area they can be drawn from, the tfght limit on their use under the RPS law (which diminishes the demand for them), and
their ability to be unbundled and sold separately from the underlying electricity, Bucket 3 RECs are by far the least expen-
sive type of renewable energy in California — even though they represent the environmental value of a unit of renewable
energy generatfon, just like Bucket 1 renewables.
Bucket 1 RECs
The first category is for “bundled” renewable energy, produced by a renewable energy generator in California (or deliv-
ering its energy directly to California as it is generated). Utflitfes need to satfsfy at least 75% of their RPS requirement
using Bucket 1 renewables. Because of the geographic limitatfon on these resources, and the very high threshold for
their use under the RPS law, Bucket 1 renewables are by far the most expensive type of renewable energy in California.
City of Palo Alto (ID # 11106)
Utilities Advisory Commission Staff Report
Report Type: Meeting Date: 3/5/2020
City of Palo Alto Page 1
Summary Title: Building Electrification 2020 -2021 Work Plan
Title: Discussion of Proposed Building Electrification Work Plan for 2020 -2021
From: City Manager
Lead Department: Utilities
Request
Staff seeks UAC feedback on the proposed building electrificat ion work plan for 2020 and 2021
and on the resource allocation to implement the proposed plan. No action is required.
Executive Summary
As of 2018, Palo Alto community-wide GHG emissions are 36% below 1990 levels1, primarily
achieved through procuring carbon neutral electric supplies. Further reduction in community
emissions requires considerable increase in the adoption of electric vehicle (EV) and building
electrification measures. Emissions from road travel and natural gas use in buildings currently
make up 64% and 31% of the remaining community GHG emissions respectively.
Over the past three years, City of Palo Alto Utilities Department (CPAU) staff have taken on
additional program areas to lower the community’s GHG emission while continuing to
implement a wide portfolio of residential and commercial customer programs related to energy
efficiency, conservation, solar PV, and community training and outreach. In September 2019,
staff presented a 3-year (2019-2021) EV workplan to increase adoption of EV. Staff has also put
in place a few building electrification programs, but more are needed to make progress on the
community’s sustainability goals.
Separately, the community is also updating its Sustainability and Climate Action Plan (S/CAP).
This plan contains ambitious goals for electric vehicles and building electrification. The building
electrification goals in particular have significant potential impacts to municipal and utility
operations, require significant funding, and have potential implications for resiliency and
reliability. There are a number of impact analyses that need to be done in parallel with the
S/CAP update to highlight some of these issues and identify potential mitigations.
1 This excludes the emission reductions from Palo Alto Green Gas (PAGG) offsets. When including the PAGG
offsets, the community GHG emissions in 2018 are 56% below 1990 levels.
City of Palo Alto Page 2
This report lays out a 2-year (2020-2021) building electrification workplan that covers customer
programs and outreach activities, as well as strategic planning to position the electric and gas
utility to adapt to changing demand in the coming decades (Attachments A, B and C). The
recommended workplan also outlines the estimated staffing and budget to implement these
customer programs over the next 2 years.
Staff is seeking UAC input on the proposed short-term building electrification work plan
provided in Attachments A, B and C and also on the resource allocation to implement the
proposed workplan. Staff expects to establish a longer-term building electrification work plan
based on community input received as part of the S/CAP update.
Background
City of Palo Alto has long established its leadership in sustaina bility, with the adoption of the
city’s first climate action plan in 2007. On April 16, 2016, City Council unanimously approved an
ambitious goal of reducing the community’s GHG emissions by 80% from the 1990 levels by
2030 (“80x30”) for the city’s Sustainability and Climate Action Plan (S/CAP). This goal takes into
account the head start provided by the City’s Carbon Neutral Plan, that requires carbon
neutrality for the electric supply portfolio since 2013. As of 2018, the community’s GHG
emissions are 36% below 1990 levels. Figure 1 below shows the sources of emissions across the
years from 1990 to 2018. Emissions from the use of natural gas have remained largely
unchanged over the years, representing 31% of the community emissions in 2018. Beginning
July 2017, the Carbon Neutral Gas Plan, approved by City Council in 2016, neutralizes the GHG
emissions from natural gas use with the use of carbon offsets. The use of carbon offsets,
however, serves only as a transition strategy. The City’s S/CAP is committed to the long-term
goal of reducing natural gas use through efficiency and building electrification.
Figure 1: Palo Alto Municipal Operations and Community GHG Emissions
City of Palo Alto Page 3
City staff is currently planning a 2020 S/CAP Update, with the goal of recommendi ng an
updated plan to Council for adoption by April 20212. As part of this S/CAP Update process, staff
plans to engage the community to solicit feedback on the proposed goals and key actions for
each of the 7 sustainability areas – Energy, Mobility, EV, Water, Climate Adaptation, Natural
Environment and Zero Waste. The 2020 S/CAP will update the strategies and the
implementation plan to reduce natural gas consumption under the Energy area beginning in
2022. In the interim, staff proposes this short-term workplan to pursue building electrification
and to evaluate the impacts of various electrification scenarios.
Discussion
Central Role Played by Building Electrification to Meet City and State’s GHG Reduction Goals
The total billed gas consumption in Palo Alto in FY2019 was 29 million therms. The current
S/CAP Framework assumes more than a 50% reduction in natural gas use by 2030, or a total
consumption of approximately 13 million therms. Staff will be re-examining these assumptions
in the 2020 S/CAP update, but one thing is certain: large decreases in natural gas use are
needed to achieve the community’s goal of reducing emissions 80% below 1990 levels by 2030
(Palo Alto’s 80x30 goal). Gas efficiency will play a part in reducing emissions. Council adopted a
ten-year gas efficiency goal of 5.1% for the period of 2018 to 2027; this represents
2 Informational Report to City Council, February 10, 2020.
City of Palo Alto Page 4
approximately 1.5 million therms of gas efficiency savings in 2027. Building electrification,
however, will need to play an even larger role, even though it is one of th e more expensive
forms of GHG reduction available (see Attachment D). Space heating and water heating in
buildings are two dominant use of natural gas, followed by commercial cooking, and a
significant amount of conversion to electricity will need to be done for these uses. Staff
presented the Energy Sustainability Implementation Plan to the UAC in June 2019 (see
Attachment E), which included goals to make progress in this area. However, staffing and
funding constraints have limited progress.
At the statewide level, building electrification will also play a critical role for California to meet
its goal of reaching 80% reductions in emissions levels below 1990 levels by 2050 (State’s 80x50
goal). Based on a recent study commissioned by the California Energy Commission (CEC),
building electrification using efficient space and water heating technologies can reduce natural
gas consumption by roughly 60%, and is the lowest-cost and lowest-risk pathway to meet the
state’s decarbonization goal3. The CEC also examined an alternative “no building electrification”
scenario, in which the building sector will need to rely on biomethane, hydrogen and synthetic
natural gas. These resource alternatives, particularly synthetic natural gas, are projected to
remain more costly than building electrification. Long-term, the report asserts that biomethane
and hydrogen are likely to be used primarily for industry, power generation and heavy -duty
transportation where electrification is more difficult, rather than in residential and commercial
buildings.
Benefits & Barriers to Building Electrification and Strategies to overcome the barriers
In addition to GHG emissions reduction, building electrification has the benefit of improving
indoor air quality by avoiding the combustion of methane and other chemicals that result in
nitrogen oxides and carbon monoxide inside the home4. The operation of electric equipment
such as induction cooktop improves safety compared to the use of gas stove. Many
electrification technologies allow load-shifting from peak demand times through programmable
or real-time control. This grid flexibility is valuable to utilities to support the integration of
renewable energy.
There are a myriad of commercially available technologies that supplant conventional gas
equipment in both the residential and commercial sectors. For water heating and space
heating, heat pump technologies are key to building electrification. A heat pump cycle absorbs
heat from a source and transfers it to a sink. In the case of a water heater, the heat pump cycle
utilizes the surrounding air as the heat source, and transfers the energy to the water. Most heat
pump water heaters (HPWH) have a coefficient of performance of over three, i.e. 1 unit of
energy input provides 3 units of energy output. This is because, rather than using the electricity
to directly provide heat, as in an electric resistance heater, a heat pump uses electricity to run a
3 The draft results of the E3 study “Future of Natural Gas Distribution in California” can be found here.
4 “Exposures from Natural Gas Cooking Burners: A Simulation-Based assessment for Southern California”, January
2014. Link to report.
City of Palo Alto Page 5
refrigeration cycle, extracting heat from the surrounding air. It is essentially the reverse pro cess
used by a refrigerator. By comparison, a standard gas tank water heater operates at 60 -65%
efficiency (1 unit of energy input yields 0.6 to 0.65 units of energy output). Heat pumps also
have the ability to operate in reverse, so a heat pump system that provides space heating
during the winter can also provide space cooling in the summer.
Despite the fact that efficient heat pump water and space heating technologies and induction
cooking equipment have been commercially available and widely deployed in Europe and Asia,
the adoption rate for these technologies in the United States has remained low. There are
significant barriers to building electrification, especially among existing buildings. From the
building owner perspective, low awareness of these efficient electric alternatives to gas
appliances and the associated health and environmental benefits have been a key barrier.
Retrofitting gas appliances in existing buildings can be significantly more expensive than a like -
for-like a gas appliance replacement5, especially in cases where electrical infrastructure
upgrade is necessary. Besides the higher upfront purchase cost of heat pump equipment
compared, the operational cost of heat pump equipment may also be higher than comparable
gas equipment depending on the utility rate tier that the customer is billed at. Outside of Palo
Alto, only a handful of California utilities currently offer customer rebates to promote building
electrification.
From the supply chain perspective, contractors typically prefer like-for-like replacement jobs. In
the case of replacing a gas water heater with a heat pump water heater, the contractor will
need to hold both a C36 plumbing license as well as a C10 electrical license. The higher heat
pump equipment cost also results in a higher inventory cost for contractors, which is another
disincentive for contractors to promote heat pump technologies.
To overcome these electrification barriers, Palo Alto will need to coordinate with other utilities
and local governments to promote and facilitate adoption of building electrification
technologies on a regional level. A regional program approach can catalyze market
transformation and address the many persistent barriers that cannot be addressed on a local
scale. With the recent decision by the California Public Utilities Commission that lifts the
restrictions on the use of energy efficiency program funds for building electrification measures6,
staff expects other utility service providers and energy efficiency program service pro viders to
begin offering new electrification rebates7.
Achievements to Date
5 Based on Palo Alto’s Heat Pump Water Heater pilot statistics to date, t he average cost to retrofit a gas water
heater with a heat pump water heater is 3 times the cost of a like-for-like replacement of a gas water heater, at
around $4,500. This does not include the cost of master electric panel upgrade.
6 CPUC Decision 19-08-009 Decision Modifying the Energy Efficiency Three-Prong Test Related to Fuel Substitution
7 Through SB 1477 (2018), an additional $50 million per year of electrification funding is made available beginning
2020 for 4 years.
City of Palo Alto Page 6
CPAU kicked off its building electrification efforts with the launch of the Heat Pump Water
Heater Pilot in spring 2016, offering rebates of up to $1500 for a HPWH installation . To date,
CPAU has processed 47 rebates with an additional 60+ homeowners who have shown interest
in the rebate. In July 2018, CPAU was awarded a 2018 Climate Protection Grant from the Bay
Area Air Quality Management District to implement a Multifamily G as Furnace to Heat Pump
Retrofit pilot program. The pilot program will identify the technical and logistical hurdles of
retrofitting gas wall furnaces in apartment units with heat pump equipment, and will serve as a
case study for future projects. Since fall 2019, CPAU has partnered with Acterra to administer
an Induction Cooktop Loaner program, with 12 units of portable induction cooktop available for
a 3-weeks loan period8. In late 2019, CPAU’s Home Efficiency Genie program began offering a
home electrification assessment service to Palo Alto residents interested in electrifying their
home9. At around the same time, CPAU also unveiled a home electrification webpage10 that
serves as a resource to homeowners on how to electrify their house and the companion
website on upgrading the electric panel.
In addition to customer programs, CPAU has been running education campaigns to raise
awareness of efficient electric alternatives to gas appliances and the benefits of going electric
(#GoElectric). Between 2017 and 2018, the City hosted two HPWH workshops with
representatives from HPWH manufacturers to provide an overview of their products for
homeowners, contractors and building professionals. In 2019, the City, in collaboration with
neighboring Community Choice Aggregators (CCAs) and environmental advocacy groups,
hosted its first Electrification Expo, with over 300 attendees. CPAU has also occasionally run
publicity blitzes through bill inserts, mailings and its social media channels to promote HPWHs.
Based on a residential survey conducted during summer 2018, only 26% of residents consider
themselves somewhat familiar with HPWH, and 71% not familiar (3% responded Don’t Know).
Clearly, there’s still much work to be done to educate the community on different buildi ng
electrification technologies.
Despite the best efforts by staff to promote HPWHs, the adoption rate has remained low. Staff
is keenly aware of the many persistent supply chain barriers that cannot be addressed by local
programs. To overcome these barriers, CPAU is partnering with the Bay Area Regional Energy
Network (BayREN), a non-profit collaborative covering nine Bay Area counties that delivers
energy efficiency programs, to implement a regional HPWH market transformation program to
provide contractor training and incentivize contractors for installing HPWHs. Staff expects that
this regional HPWH program will be launched in mid 2020, and that the project cost of
retrofitting a gas water heater with a HPWH will decline as more contractors embrace this
technology.
8 During the first six months of the program, Acterra processed 61 loans, of which 40 were loaned to Palo Alto
residents and the remaining to residents from other cities, with 58 waitlisted loan requests.
9 Between October 2019 and Jan 2020, a total of 11 home electrification assessments were completed.
10 http://cityofpaloalto.org/electrification
City of Palo Alto Page 7
On November 4, 2019, Council unanimously adopted an all-electric mandate for residential new
construction projects with an effective date of April 1, 202011. Staff is working to develop a
similar mandate for non-residential new construction projects by the end of 2020. As part of its
November 2019 decision, Council recognizes that an all-electric home is cheaper to build and
operate over the lifetime of the building, and helps the City meets its GHG reduction goal. The
all-electric mandate currently does not apply to existing buildings, which represent a much
larger share of carbon emissions, but staff is working on options to present Council for
potentially extending this mandate to cover significant remodel projects.
Proposed Building Electrification Work Plan for 2020-21
Staff is proposing a range of activities in 2020 and 2021 to lay the groundwork for more
ambitious electrification efforts after the S/CAP update is complete. These activities will achieve
a number of goals:
• Provide more support for “early actors” – those highly engaged customers willing to
electrify their homes or businesses right now, before Palo Alto has a fully developed set of
electrification programs.
• Develop experience among staff members with running electrification programs and
develop improvements in program delivery methods and communications.
• Surface issues with permitting and interconnection and identify other processes that staff
may need to streamline prior to mass electrification.
• Surface unexpected impacts on utility and municipal operations resulting from building
electrification
• Quantify some of the known impacts of large-scale electrification and identify potential
mitigations. Some of these analyses could potentially inform community decision making
about electrification goals as part of the 2020 S/CAP update.
The work plan will cover two primary areas: 1) new programs to encourage building
electrification and 2) analyses of the impact of electrification.
New Programs to Encourage Electrification
There is a full spectrum of program designs that can be deployed to drive voluntary
electrification in existing single-family homes. These range from customer education
campaigns, pilot programs, conventional customer rebate programs, to midstream incentive
programs (i.e. rebate is offered to distributor or contractor), to direct install programs and on -
bill financing programs. These different program designs have varying degree of customer
engagement, administration complexity, and costs for the City, and will require different
business processes and tracking systems. As an example, while a pilot program may be
relatively straightforward to implement, an on-bill financing program requires a customer
billing system that can track the outstanding loan. Based on staff’s prior experience with energy
efficiency programs, the choice of program design depends on the technology’s current phase
of adoption lifecycle as well as the available resources to implement a program. Figure 3
11 See link to Staff Report
City of Palo Alto Page 8
overlays the program spectrum with current building electrification programs (in blue-shaded
boxes) and proposed programs in the next two years (in grey-shaded boxes).
Figure 3: Current & Proposed Building Electrification Programs
With only 10 years remaining to meet the S/CAP’s GHG emissions reduction goal, staff will need
to continue to drive voluntary electrification in existing buildings while at the same time
planning for future changes to the electric and gas utilities. Staff proposes pursuing a number of
customer programs and activities over the next two years to accelerate progress toward the
goal. These proposed programs expand on the scope of ongoing programs and outreach
activities to include additional gas end uses such as space heating and cooking, as well as the
commercial building sector. Staff selected these programs based on a number of factors:
required resources to implement the program, incremental customer costs to electrify, GHG
emissions reduction potential, lowering barriers to future electrification projects, and informing
the tactical roadmap to electrification. Single-family residents are the primary focus of these
programs, since projects in single-family homes are less complex and can be undertaken by a
single committed homeowner, but staff is also looking to create program options for multi-
family buildings and small and large commercial facilities.
Below is a summary of these proposed programs:
City of Palo Alto Page 9
Programs Focused on Single-Family Homes
• Work with Development Services to support implementation of Reach Code requiring
all-electric residential new construction.
• Expand residential rebates for existing buildings to cover heat pump space heating &
cooling, electric panel upgrades, induction cooktops, and clothes dryers.
• Participate in the Regional HPWH Market Transformation Program
• Lead ambitious community program(s) such as:
• Group action (e.g. a “1000 Heat Pump Water Heater Challenge”)
• Electrification of an entire block (street)
Programs for Multi-family Residential Buildings
• Work with Development Services to support implementation of Reach Code requiring
all-electric new residential construction.
• Complete the Multifamily Gas Furnace to Heat Pump Retrofit Pilot.
• Consider expanding the existing Multifamily Plus Program to cover the direct installation
of electrification measures.
Programs for Commercial Facilities and City Buildings
• Work with Development Services to establish Reach Code requirements for all -electric
new commercial construction.
• Develop electrification incentives for commercial customers and possible integration
into the existing Small/Medium Business program (which includes direct installation of
equipment and financing options)
• Electrification planning support for key account customers
• Assist Public Works with evaluation of electrification opportunities in City buildings
Attachment A lists these programs in a work plan format, and Attachment B summarizes
current and proposed programs by customer sector.
Analyses of the Impact of Electrification
In addition to these proposed customer programs and outreach activities, staff also seek to
undertake a number of studies to prepare for the impact of electrification on the electric and
gas systems as well as the workforce in different City departments. Grid resiliency will become
an increasingly important issue as the frequency of power outages increases due to climate
change, so staff will also need to evaluate options to increase grid resiliency. Staff propose
initiating the following studies to support electrification over the next two years:
Gas and Electric System and Municipal Services impact analyses
• Assess electric system maintenance and replacement needs and implications for
reliability, especially with the added stresses of electrification
• Assess long-term options to improve grid resiliency
City of Palo Alto Page 10
• Evaluate the impacts of electrification, such as electric distribution system capacity
impacts, utility workforce impacts and impacts on municipal workload, and impacts on
the financial health of both the electric and gas utilities
Financial impact analyses
• Evaluate the community cost to achieve different scenarios of electrification and ways
to reduce the cost including allowances from the Low Carbon Fuel Standard program
• Explore funding sources for community-wide building electrification
• Explore ways to pair electrification with other infrastructure efforts to achieve economic
efficiencies
Attachment C provides a description of the proposed studies related to the strategic planning
of building electrification.
Resource Impact
Staff expects to be able to complete the impact analyses with existing staff and consulting
budgets. Expansion of electrification programs requires a commitment of approximately 1.6 FTE
in 2020 and 2021. Much of this work will fall to the Utilities Department workgroup that
focuses on customer programs, Utilities Program Services (UPS). Approximately 0.1 to 0.3 FTE
of work can be absorbed with existing staff (primarily work associated with commercial
programs), and 0.3 to 0.5 FTE of work can be absorbed by other workgroups. The remaining
0.75 to 1.0 FTE of staffing needs cannot be absorbed by existing staff in the UPS workgroup.
This workgroup is staffed to handle traditional utility energy efficiency programs and major
account services, but has, in recent years, been tasked with additional sustainability work. It has
managed to absorb a certain amount of S/CAP work without additional staffing. The team has
automated its internal processes, reassigned some responsibilities to other workgroups, and
found ways to more efficiently deliver efficiency programs, broadening the services it offers
while reducing the staff time needed to deliver those services. By doing all this it has managed
to absorb about 0.75 FTE of sustainability work primarily focused on EVs. Implementing this
building electrification work plan, however, will require an additional 0.75 to 1.0 FTE of staffing
to launch and maintain the electrification incentive and technical assistance programs. This
represents the internal staff work needed to design the programs, develop im plementation and
launch plans, partner with other Departments and Divisions on permitting, interconnection,
and other issues that have customer impacts, and develop and implement marketing plans,
including overseeing design of marketing materials. Staff ha s included a proposal in the FY 2021
budget to add an additional staff member. The proposal is for a working manager position to
report to the UPS Manager, which will provide additional capacity to the group for program
implementation while also alleviating some issues related to the group’s organizational
structure (e.g. poor development pathways and large span of control).
The cost of the additional staff capacity will be offset by redirecting funding from two other
sources: electric allowance revenue and Low Carbon Fuel Standard (LCFS) funds. The latter
funding source is not yet fully utilized, so there will be no rate or programmatic impact from
redirecting the funds. Electric allowance revenue amounting to over $5 million per year is
City of Palo Alto Page 11
currently used to fund renewable energy purchases12, but due to decreases in Palo Alto electric
consumption, the City has a surplus of renewable energy. As staff begins to sell these surpluses,
the City will be able to redirect up to $1.8 million in annual electric allowance revenue to other
carbon reduction programs without affecting rates (staff only intends to propose to redirect a
portion of these funds). The proposal to apply LCFS funds requires only City Manager approval,
and has already been approved13. The proposal to redirect electric allowance revenue also
requires only City Manager approval14, but has not yet been approved.
In addition to staff time, funding is needed for incentives, consultant time to deliver technical
assistance to individual customers, and graphic design. The startup cost for these programs is
expected to be $700,000 in 2020 and $1.2 million in 2021 (if all programs are implemented).
Note that some of these programs are more tentative than others. Much of this funding can
come from from cap-and-trade-related electric allowance revenue as described above. A small
amount of funding, up to $250,000 per year, will come from LCFS funds for rebates and
technical assistance related to electric panel upgrades. Any remaining needed funding will
tentatively come from existing Public Benefits funds, which are accrued via a rate surcharge
amounting to over $3 million annually that is legislatively manded to be used to fund a variety
of customer programs. Some internal staff work is still required to develop a legal and analytical
framework for the use of Public Benefits funds, but work is being done at the State level to
develop these frameworks for use by investor-owned utilities, and staff expects to be able to
draw on these for its own work.
Policy Implications
The proposed building electrification work plan meet s Council policy on greenhouse reductions
under the current Sustainability and Climate Action Plan. The proposed work plan also meets
the directives of the Utilities Strategic Plan as set out in: (a) Priority 2 Strategy 1 Action 4 -
Partner with community stakeholders to facilitate large scale residential building electrification
(beyond rebate scale); (b) Priority 2 Strategy 4 Action 2 – Coordinate on regional utility
programs to streamline processes, achieve mutual objectives, and realize greater impacts; and
(C) Priority 4 Strategy 4 Action 1 – Work with other City Departments to establish an
implementation plan to achieve the City’s S/CAP goals.
Attachments:
• Attachment A: Proposed Customer Programs and Outreach Activities in 2020 and 2021
• Attachment B: Summary of Current and Proposed Building Electrification Programs by
Customer Sector
• Attachment C: Proposed Strategic Planning Efforts for Building Electrification in 2020 -
2021
• Attachment D: Cost Effectiveness of Residential Electrification Options
12 See link to Staff Report on Cap-and-Trade Revenue Utilization Policy, adopted by Council on Dec 10, 2012.
13 Staff memo on “City Manager Approval of 2019-2021 LCFS Program”, dated July 26, 2019, approved by City
Manager on August 8, 2019.
14 Resolution 9487 grants the City Manager or designee the authority to implement the Cap-and-Trade Revenue
Utilization Policy.
City of Palo Alto Page 12
• Attachment E: 2018-2020 Energy Sustainability Implementation Plan
ATTACHMENT A: PROPOSED CUSTOMER PROGRAMS/OUTREACH ACTIVITIES IN 2020 and 2021
The table below lists the proposed customer programs and outreach activities in 2020 and 2021 promote
voluntary electrification and to implement Palo Alto’s all-electric reach code requirements. Staff plans to
enlist 3rd party vendors to support program implementation where feasible.
Dept/Division
2020
UTL Staff
(FTE) +
Budget
2021
UTL Staff
(FTE) +
Budget
Heat Pump Water Heater Rebate Program
(New campaign) Kick off the “1000 Heat Pump
Water Heater Challenge” to meet a goal of 1,000
HPWH units installed in Palo Alto by 2022
UTL – Utilities Program
Services
0.25
$150,000
0.25
$250,000
Induction Cooktop Loaner Program
Partnership with Acterra to loan out portable
induction cooktops.
UTL – Utilities Program
Services
0.05
$10,000
0.05
$10,000
Electrification Outreach & Marketing
Electrification Expo, Electrification webpage, Reach
Code publicity, collaborate with other city
governments and Building Decarbonization
Coalition to develop statewide consumer
marketing campaign
UTL- Utilities Resource
Planning & Utilities
Program Services,
PLANNING -
Development Services
0.25
$75,000
0.25
$50,000
(NEW) Regional Heat Pump Water Heater Market
Transformation Program
Collaborate with BayREN to implement a regional
program to provide HPWH training to contractors
and incentivize contractors to promote HPWHs to
homeowners. (CPAU will lower the HPWH rebate
to homeowners if we join the regional program)
UTL- Utilities Resource
Planning & Utilities
Program Services
0.05
$200,000
0.05
$400,000
(NEW) Expand residential electrification rebates
Launch new rebates for residential customers to
electrify space heating, cooking and clothes
drying.
UTL- Utilities Resource
Planning & Utilities
Program Services
0.4
$100,000
0.25
$200,000
(NEW) Electric Panel Upgrade Rebate
Launch new rebate for residential customers to
upgrade electric panel and installing a smart EV
charger. This will also cover streamlining the
customer process to upgrade electric panel and
disconnect gas meter.
Utilities Program
Services
0.25
$100,000
0.2
$200,000
(NEW) Explore/Pilot “Electrify a Block” through the
Cool Block Program
Collaborate with the Cool Block Program to
explore interest levels from customers on gas
distribution lines that are scheduled for
replacement to fully electrify their homes.
UTL - Utilities Program
Services, Engineering
0.1
$10,000
0.2
(NEW) Provide electrification incentives for
commercial buildings
Launch new rebate for commercial customers to
replace gas water heating and space heating
systems with efficient electric heat pump
alternatives.
UTL- Utilities Program
Services
0.2
$100,000
0.2
$200,000
(NEW) Engage with key account customers to
determine need for electrification planning
support
Solicit feedback from key account customers to
gauge their interest in electrification planning
support services from CPAU. Solicit 3rd party to
provide service if warranted.
UTL- Utilities Program
Services
0.05
$25,000
0.1
$50,000
(NEW) Explore electrification of city-owned
facilities and associated costs
Evaluate the technical feasibility and estimate the
cost to electrify city-owned facilities in lieu of
business-as-usual replacement of gas
equipment. By pursuing electrification of city
facilities, Palo Alto can lead by example.
UTL- Utilities Program
Services
0.05 0.05
Estimated Total 1.65 FTE
~$0.7M
1.6 FTE
~1.2M
ATTACHMENT B: SUMMARY OF CURRENT AND PROPOSED BUILDING ELECTRIFICATION (BE) PROGRAMS BY CUSTOMER SECTOR
Customer Type
Most Cost-Effective
BE Measures Existing Programs 2020 / 2021 Proposed Utilities Programs
Notable Barriers to
Electrification
Residential
New Residential
Buildings
All-electric new
construction
• 2020 Reach Code
(effective April 2020)
• Partner with Planning Department on
education and outreach
• Lack of awareness
Single-Family
(Existing Homes)
Heat pump water and
space heating
• Education and
outreach
• Heat pump water
heater rebate
• Induction cooktop
loaner program
• Home Efficiency Genie
electrification
assessment
• Expand education and outreach
• Permit streamlining
• Full suite of electrification rebates and
technical assistance
• Regional mid-stream incentive (rebate to
contractor, not consumer)
• Ambitious community program(s) such as:
o Group action, e.g. “1000 heat pump
water heater challenge” group buy
o Electrify an entire block, e.g. target
electrification where gas main
replacements are planned
• Lack of awareness
• Cost
• Building configuration
• Complexity
• Lack of industry support
Multi-Family
(Existing Buildings)
Heat pump space
heating
• Multifamily Heat
Pump Retrofit Pilot in
progress
• Complete MF Heat Pump Retrofit Pilot
• Depending on pilot results, evaluate
expanding the program more broadly
• Similar to single-family
• Landlord/tenant split
incentives
Non-Residential
New Commercial
Buildings
Analysis in progress.
New all-electric small
commercial buildings
are cost-effective
• All-electric Reach
Code requirements to
be adopted by end of
2020
• Partner with Planning Department on
education and outreach
• Lack of awareness. Some
builders are already
voluntarily choosing to build
all-electric
Small and Medium
Commercial Buildings
(Existing Buildings)
Packaged rooftop
heat pump units
None • New Small and Medium Business efficiency
program starting in 2020. Evaluate adding
select electrification measures to program.
• Lack of awareness
• More research needed to
identify all barriers
Large Facilities Site-dependent –
depends on building
size and heating
system configuration
• Some outreach to
large facility owners to
educate and assess
interest
• Consider new program to assess
electrification potential for large facility
owners.
• Seek partnership opportunities to
undertake at least one electrification
project with interested facility owners.
• Lack of awareness
• More research needed to
identify all barriers
City Facilities Site-dependent –
depends on building
size and heating
system configuration
• Partnering with Public
Works on evaluating
electrification
opportunities
• Partnering with Public Works to set goals
and electrify City buildings where
opportunities present themselves.
• Funding, staffing
• Building configuration
ATTACHMENT C: PROPOSED ELECTRIFICATION STRATEGIC PLANNING ACTIVITIES IN 2020 and 2021
Dept/Division
UTL Effort
Level
Evaluate the impacts of electrification on the electric and gas utilities
This study will cover both the rate impact and workforce impact on
both the gas and electric utilities, as well as the workload impact on
Development Services, based on different electrification scenarios.
This will coincide with a similar assessment recently initiated by the
California Public Utilities Commission, to address issues arising from
the state’s transition away from natural gas.
UTL – Resource
Planning, UTL -
Engineering
MEDIUM/
HIGH
Assess electric system maintenance and replacement needs that arise
from electrification
This study will evaluate the maintenance and replacement needs to
the electric system based on the added load from electrification.
UTL -
Engineering
MEDIUM
Assess options to improve grid resiliency
As building systems become more dependent on electricity, the need
for grid resiliency will increase. This study will examine the options and
associated costs to improve grid resiliency.
UTL -
Engineering
LOW
Evaluate the technical electrification potential within the city, and the
community cost to achieve the electrification goals
This is an assessment of the total building electrification potential
within Palo Alto based on commercially available technologies as of
2020, the cost of electrification and incremental GHG abatement cost
for different gas end use systems. The study results, along with GHG
abatement cost projections of alternative S/CAP strategies, will inform
the update of the electrification goals in the 2020 S/CAP.
UTL – Resource
Planning
LOW
Explore funding sources for community-wide building electrification
Based on the study findings on the community cost to achieve the
electrification goals, staff will explore funding sources and financing
mechanisms to electrify target building sectors.
UTL, LEGAL MEDIUM
ATTACHMENT D: COST EFFECTIVENESS OF RESIDENTIAL ELECTRIFICATION OPTIONS
New construction projects account for less than 1% of the building stock within the City each
year; thus the electrification of gas end uses in existing buildings is a necessary pathway to meet
the City’s GHG reduction goal. However, most retrofit applications of building electrification
technologies are not currently cost effective. Figure A1 shows the relative GHG abatement
potential within the residential sector, and the estimated GHG abatement cost for the four
primary gas end uses in single family homes. The GHG abatement cost for the replacement of
residential gas water heater with heat pump water heater is around $170/MT CO2e, while th e
GHG abatement cost for the replacement of gas space heating with heat pump heat heating is
slightly higher, at around $180/MT CO2e. For stovetop cooking and clothes dryer, the
corresponding GHG abatement costs for the electrification of these end uses are even
higher. Staff expects electrification costs to decline as adoption of heat pump water heater and
air source heat pump systems increases, as is the case with other emerging technologies.
Figure A1: GHG Emissions Abatement Potential & Costs of Residential Electrification Options
ATTACHMENT E: ENERGY SUSTAINABILITY IMPLEMENTATION PLAN 2018-2020
GOALS
Drive building efficiency and electrification through voluntary and mandatory programs
Mitigate the impacts of natural gas use through carbon offsets (in the short term) and
electrification (in the mid-to long-term)
STRATEGIC MOVES
Identify utility projects needed to support S/CAP decarbonization goals through utility planning
processes such as the Utilities Strategic Plan, Smart Grid Implementation Plan, Distributed Energy
Resources Plan, distribution planning processes and Electric Integrated Resources Plan.
Develop a ZNE Roadmap and benchmarking energy study to identify opportunities to increase
efficiency of new and existing building stock from construction through operation.
KEY ACTIONS
EGY1 - Continue to purchase carbon offsets to match natural gas emissions as a transitional measure.
Evaluate potential local offset purchases. (UTL, PW, S)
EGY2 - Achieve cumulative energy efficiency savings of 2-5% by 2020 through voluntary and
mandatory energy efficiency measures in buildings. (UTL, DS)
EGY3 - Encourage voluntary electrification (and mandates as appropriate) of natural gas appliances
through actions such as pilot programs, process streamlining, evaluating barriers (rates/fees,
financing), and contractor/supplier engagement. (UTL, DS)
EGY4 - Complete construction of a replacement facility for sludge incinerators, the City facility with
the largest energy use (PW)
EGY5 - Develop programs that will result in even greater efficiency savings and decarbonization from
2020 to 2030. Potential evaluations include higher efficiency standards for new and existing
buildings. (DS, UTL)
EGY6 - Develop building benchmarking requirements, and commissioning / retro-commissioning
programs to ensure efficient post-occupancy building operation (DS, UTL)
KPIs: Building Energy Efficiency. Electrification percentage.
Emissions from natural gas use represent ~25% of Palo Alto’s remaining carbon footprint. The decreasing
emissions of California and Palo Alto’s energy supply due to renewable energy opens the opportunity to
reduce natural gas use through electrification in addition to continued efficiency measures. Palo Alto will
first seek to reduce natural gas usage through energy efficiency and conservation, followed by
electrification of water heating, space heating, clothes drying and cooking where practical and cost
effective.
ENERGY
Efficiency, renewables and electrification are key to Palo Alto’s —and California’s—low carbon energy
strategy, but pace of implementation will depend on technology evolution and cost -effectiveness as well
as market acceptance. Electrification—and encouraging existing buildings to upgrade to modern energy
efficiency levels —may pose significant strategic and operating challenges for the City of Palo Alto
Utilities (CPAU). (Lead departments: Utilities, Development Services)
City of Palo Alto (ID # 11110)
Utilities Advisory Commission Staff Report
Report Type: Meeting Date: 3/5/2020
City of Palo Alto Page 1
Summary Title: 2020 Sustainability and Climate Action Plan Update
Title: 2020 Sustainability and Climate Action Plan (S/CAP) Update
From: City Manager
Lead Department: Utilities
Executive Summary
Staff is developing a 2020 Sustainability and Climate Action Plan (S/CAP) Update to help the City
meet its goal of reducing Greenhouse Gas (GHGs) emissions 80 percent below 1990
levels by 2030 and other important Sustainability Goals. The purpose of this Informational
Report is to give a status report on the development of the S/CAP Update and outline
the tasks and schedule for completing it. A critical component of the schedule is the
engagement of Council, the Utilities Advisory commission, and the Community, and therefore
this Informational Report will focus on the engagement steps needed to obtain input for the
S/CAP Update.
This is a re-transmittal of a report that was provided to the City Council on February 10, 2020
Attachments:
• Attachment A: 2020 Sustainability and Climate Action Plan Update
City of Palo Alto (ID # 10941)
City Council Staff Report
Report Type: Informational Report Meeting Date: 2/10/2020
City of Palo Alto Page 1
Council Priority: Climate/Sustainability and Climate Action Plan,
Tr ansportation and Traffic
Summary Title: 2020 S/CAP Update
Title: 2020 Sustainability and Climate Action Plan Update
From: City Manager
Lead Department: Public Works
Recommendation
This is an Informational Report and requires no Council Action.
Executive Summary
Staff is developing a 2020 Sustainability and Climate Action Plan (S/CAP)Update to help the City
meet its goal of reducing Greenhouse Gas (GHGs) emissions 80 percent below 1990 levels by
2030 and other important Sustainability Goals.The purpose of this Informational Report is to
give a status report on the development of the S/CAP Update and outline the tasks and
schedule for completing it. A critical component of the schedule is the engagement of Council
and the Community, and therefore this Informational Report will focus on the engagement
steps needed to obtain input for the S/CAP Update.
Background
The City of Palo Alto has long been a leader in sustainability, making impressive progress
towards reducing its carbon impacts, greenhouse gas emissions, and resource consumption
since adopting a Sustainability Policy1 in 2001, reflecting the City’s intention to be a sustainable
community -one which meets its current needs without compromising the ability of future
generations to meet their own needs. Since then, the City has undertaken a wide range of
initiatives to improve the sustainability performance of both government operations and the
community at large, including: adopting one of the first municipal Climate Action Plans2 in the
US in 2007; adopting a Sustainability and Climate Action Plan (S/CAP) Framework3 in 2016,
which includes an aspirational goal of reducing Greenhouse Gas (GHGs) emissions 80 percent
1 https://www.cityofpaloalto.org/civicax/filebank/documents/7856
2 https://www.cityofpaloalto.org/civicax/filebank/documents/9946
3 https://www.cityofpaloalto.org/civicax/filebank/documents/60858
City of Palo Alto Page 2
below 1990 levels by 20304; providing 100 percent carbon neutral natural gas since July 2017 —
making the City of Palo Alto Utilities the first utility in the world to provide carbon neutral
electricity and natural gas as a standard to all customers —having provided 100 percent carbon
neutral electricity since 2013;and, in December 2017 accepting the 2018-2020 Sustainability
Implementation Plan (SIP)“Key Actions” as a summary of the City’s work program5.
Sustainability is also embedded in the 2030 Comprehensive Plan6 (adopted in 2017), with 10
goals and over 50 actions outlined in the 2030 Comprehensive Plan Implementation Plan that
are explicitly or implicitly related to sustainability.
While GHG emissions reduction is not the only goal of the S/CAP, it is the major one. To achieve
an 80 percent reduction target by 2030, Palo Alto will need to meet a target “GHG reduction
budget” of about 224,600 MT CO2e7. The analyses in the 2016 S/CAP Framework (conducted in
2014-2015) projected that more than half of the needed additional reductions (117,900 MT
CO2e) could come from transportation related measures, just under half (97,200 MT CO2e)
from efficiency and fuel switching measures (largely in buildings), and about four percent (9,500
MT CO2e) from continuation and extension of Palo Alto’s zero waste initiatives. These
reduction targets are now outdated and do not include recent sustainability initiatives, actions,
and projects. The analyses will be revised to include current information and staff will provide
Council an update when new reduction targets are established.
As a result of various City-led initiatives, programs, and activities focused on climate change and
sustainability, by the end of 2018 Palo Alto had reduced GHG emissions an estimated 56.5
percent from the 1990 baseline,despite a population increase of 20.4 percent from the 1990
baseline. Overall, the performance of City Municipal Operations showed a 65.8 percent
reduction in Scope 1 and Scope 2 emissions8 from the 2005 baseline year.
Discussion
For the City to continue progress towards its climate and sustainability goals and targets, a 2020
S/CAP Update is necessary to further study the highest impact actions to take. The 2016 S/CAP
Framework provided direction and overall goals through 2020. The intent was for staff to
update the S/CAP every five years and develop more granular five-year work plans and short-
term programs, rather than attempt to build a detailed 14-year work plan.
The 2016 S/CAP Framework was supplemented by a 2018 –2020 SIP, which provided an
implementation plan for the City’s sustainability work.While the 2018 –2020 SIP focused on
two key concerns—CO2 emissions and Water—and four key areas of activity: Energy, Mobility,
4 https://www.cityofpaloalto.org/news/displaynews.asp?NewsID=3534&TargetID=268
5 https://www.cityofpaloalto.org/civicax/filebank/documents/63141
6 https://www.cityofpaloalto.org/civicax/filebank/documents/62915
7 MT CO2e = metric tons of CO2 equivalent
8 Scope 1 and Scope 2 emissions are non-biogenic emissions that are caused by human activity. Biogenic emissions
are assumed to be net carbon neutral and not reported under GHG emission reporting protocols. Scope 2
emissions from electricity were eliminated starting in 2013 by the purchase of Renewable Energy Credits (RECs)
under the Carbon Neutral Plan.
City of Palo Alto Page 3
Electric Vehicles, and Water, staff proposes that the 2020 S/CAP Update include the following
areas: Energy, Mobility, Electric Vehicles, Water, Climate Adaptation and Sea Level Rise, Natural
Environment, and Zero Waste. For each area, staff –with input from the community –will
include S.M.A.R.T (Specific, Measurable, Attainable, Realistic, Timely) goals and Key Actions.
These goals and Key Actions will be the foundation for the 2020 S/CAP Update. A summary of
the proposed areas and priorities can be found in Attachment A.
Once the Goals and Key Actions have been finalized, a consultant will perform an impact
analysis, which will detail the costs, expected GHG remissions reductions, and sustainability
benefits. In addition, in March 2019 Council approved a Sea Level Rise Adaptation Policy to
provide a roadmap for creating a comprehensive Sea Level Rise Adaptation Plan, which will be
incorporated into the 2020 S/CAP Update. After the 2020 S/CAP Update has been drafted, a
consultant will prepare appropriate CEQA environmental documents, so that there is a
companion CEQA review of the S/CAP Update.
Resource Impact
This Informational Report has no Financial Impact.Actions having a financial impact will be
brought to Council separately.
Policy Implications
The 2020 S/CAP Update aligns with the 2019 Climate/Sustainability and Climate Action Plan
Council Priority and the 2019 Transportation Council Priority.
Stakeholder Engagement
Staff has developed an Engagement Plan which identifies relevant stakeholders, proposed
materials, and desired meeting milestones and outcomes. Staff will involve the community in
the development of the 2020 S/CAP goals and Key Actions through a community workshop this
spring and a 2020 S/CAP Summit in the fall. Some of the areas will require more in-depth
discussion, and staff will hold area-specific meetings to do a deeper dive on specific topics, such
as Sea Level Rise.
Staff will also provide opportunities for on-line engagement to gain a better understanding of
the community’s concerns and vision around the 2020 S/CAP Process, as well as provide an
opportunity for community members who can’t attend the meetings to weigh in. An overview
of the proposed community engagement plan can be found in Attachment B.Attachment C
provides an overview of the proposed 2020 S/CAP Update process.
Environmental Review
Discussion of the 2020 S/CAP Update from Council does not meet the definition of a “project”
under the California Environmental Quality Act and therefore no environmental review is
required.
Attachments:
·Attachment A -2020 SCAP Update Proposed Areas and Priorities
City of Palo Alto Page 4
·Attachment B -2020 SCAP Update Community Engagement Plan
·Attachment C -2020 SCAP Update Proposed Process
2020 SUSTAINABILITY AND CLIMATE ACTION PLAN
PROPOSED AREAS AND PRIORITIES
Ü Building efficiency and electrification are key to achieving Palo Alto’s greenhouse gas
reduction goals. Overcoming building electrification barriers at both the local and
regional level will be necessary to increase market adoption in existing buildings.
Ü Priority: Reduce greenhouse gas emissions from Palo Alto’s building sector
Ü Road transportation represents the largest percentage of Palo Alto’s existing carbon
footprint –and a congestion headache.Reducing Vehicle Miles Traveled (VMT),is one
solution to reduce transportation related GHG emissions.
Ü Priorities: Increase active transportation (human-powered methods of travel, such as
walking or bicycling); Increase availability of transit and shared mobility services
Ü Powering transportation through Electric Vehicles (EVs) as opposed to fossil fuel
powered vehicles can significantly reduce GHG emissions and climate pollution.
Ü Priorities: Increase the number of EVs registered in Palo Alto; Ensure adequate EV
charging infrastructure
Ü Water is a limited resource, and its availability will be further impacted by climate
change. Strategies include reducing water consumption while exploring ways to capture
and store water and increasing the availability and use of recycled water.
Ü Priorities: Reduce per capita water use; Increase the percentage of recycled water used;
Reduce total dissolved solids (inorganic salts and some small amounts of organic matter
that are dissolved in water);Manage stormwater
Ü Sea level rise (SLR) in San Francisco Bay is anticipated to range between 3 –10 feet by
2100. In Palo Alto, many City services and infrastructure that are essential to the City’s
public health, safety,and economy are located within areas that are predicted to be
inundated by Bay water if adaptation measures are not implemented.
Ü Priorities: Conduct a SLR vulnerability assessment; Develop and implement a SLR
Adaptation Plan using protect, adapt, retreat strategies; Potentially modify City
planning, zoning, building codes, and floodplain management; Protect and enhance the
Baylands ecosystem
Ü Sustainability is not only about mitigation, adaptation, and resilience, but also
regeneration –identifying opportunities for renewal, restoration, and growth of our
natural environment. Palo Alto will continue to build and restore the natural
environment and its ecosystem services and the bio-capacity that supports it.
Ü Priorities: Renew, restore, and enhance resilience of our natural environment;Maximize
biodiversity;Reduce environmental impacts of our actions;Increase tree canopy;
Expand the designation of pesticide-free parks and city facilities
Ü Reducing waste is an important strategy for both GHG reductions and overall
sustainability. Zero Waste is a holistic approach to managing materials in a closed loop
system (circular economy), where all discarded materials are designed to become
resources for others to use.
Ü Priorities: Divert waste from landfills;Implement 2018 Zero Waste Plan Initiatives
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2020 Sustainability & Climate Action Plan (S/CAP) Community Engagement
2020
S/CAP
Update
2020 S/CAP Community Input:
Community Engagement Workshop
City Council Study Session
S/CAP Update Summit
Outreach:
Adopted 2020 S/CAP
Area-Specific Community Input
Seven Proposed Areas of the 2020 S/CAP Update
1 1
2020 S/CAP Update Proposed Process
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On-going On-Line Community Engagement
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2020 S/CAP Update Area-Specific Community Engagement
Draft Goals and Key Actions
with Community input
Impact Analysis
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Key Actions
2019
Greenhouse
Gas Inventory
Finalize
2020 S/CAP
Final CEQA
Report
Council
Adopts
2020 S/CAP