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Home My WebLink About2020-04-15 Utilities Advisory Commission Agenda PacketAMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. NOTICE IS POSTED IN ACCORDANCE WITH GOVERNMENT CODE SECTION 54954.2(a) OR 54956 ****BY VIRTUAL TELECONFERENCE ONLY*** Pursuant to the provisions of California Governor’s Executive Order N-29-20, issued on March 17, 2020, to prevent the spread of COVID-19, this meeting will be held by virtual teleconference only, with no physical location. The meeting will be broadcast on Cable TV Channel 26, live on YouTube at https://www.youtube.com/c/cityofpaloalto, and Midpen Media Center at https://midpenmedia.org. Members of the public who wish to participate by computer or phone can find the instructions at the end of this agenda. 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 March 5, 2020 IV.AGENDA REVIEW AND REVISIONS V.REPORTS FROM COMMISSIONER MEETINGS/EVENTS VI.GENERAL MANAGER OF UTILITIES REPORT VII.COMMISSIONER COMMENTS VIII.UNFINISHED BUSINESS - None IX.NEW BUSINESS 1.Staff Recommendation That the Utilities Advisory Commission Action Recommend That the City Council Adopt a Resolution Approving the Fiscal Year 2021 Electric Financial Plan and Reserve Transfers, Amending the Electric Utility Reserve Management Practices, and Increasing Electric Rates by Amending the E-1, E-2, E-2-G, E-4, E-4-G, E-4 TOU, E-7, E-7-G, E-7 TOU, E-14, E-EEC and E-NSE Rate Schedules 2.Staff Recommendation That the Utilities Advisory Commission Action Recommend the City Council Adopt a Resolution Approving the Fiscal Year 2021 Gas Utility Financial Plan, Including Proposed Transfers and an Amendment to the Gas Utility Reserve Management Practices, and Increasing Gas Rates by Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) UTILITIES ADVISORY COMMISSION – SPECIAL MEETING WEDNESDAY, April 15, 2020 – 9:00 A.M. ZOOM/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 At-Places Memo AMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. 3.Staff Recommendation That the Utilities Advisory Commission Action Recommend the City Council Make no Changes to Wastewater Collection Utility Rates for July 1, 2020 4.Selection of Potential Topic(s) for Discussion at Future UAC Meeting Action NEXT SCHEDULED MEETING: May 6, 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 •Utilities Quarterly Report for Q1 & Q2 FY2020 AMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1.Written public comments may be submitted by email to UACPublicMeetings@CityofPaloAlto.org. 2.Spoken public comments using a computer will be accepted through the teleconference meeting. To address the Commission, click on the link below for the appropriate meeting to access a Zoom- based meeting. Please read the following instructions carefully. A.You may download the Zoom client or connect to the meeting in-browser. If using your browser, make sure you are using a current, up-to-date browser: Chrome 30+, Firefox 27+, Microsoft Edge 12+, Safari 7+. Certain functionality may be disabled in older browsers including Internet Explorer. B.You will be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. C.When you wish to speak on an agenda item, click on “raise hand.” The Attendant will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. D.When called, please limit your remarks to the time limit allotted. E.A timer will be shown on the computer to help keep track of your comments. 3.Spoken public comments using a smart phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. https://zoom.us/join Meeting ID: 983 179 564 Utilities Advisory Commission Minutes Approved on: 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 DRAFT Utilities Advisory Commission Minutes Approved on: 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: 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: 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: 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: 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: 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: 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: 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: 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: 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 Utilities Advisory Commission Minutes Approved on: May 20, 2020 Page 1 of 7 UTILITIES ADVISORY COMMISSION MEETING MINUTES OF APRIL 15, 2020 SPECIAL MEETING CALL TO ORDER Chair Danaher called the virtual meeting of the Utilities Advisory Commission (UAC) to order at 9:00 a.m. Present: Chair Danaher, Vice Chair Forssell (joined at 9:07 a.m.), Commissioners Jackson, Johnston, Scharff, Segal, and Smith Absent: None ORAL COMMUNICATIONS None. APPROVAL OF THE MINUTES Chair Danaher requested page 5 of the minutes reflect Commissioner Jackson's revision of "Commissioner Jackson wanted to review the RFP but not necessarily prior to its release." Commissioner Segal moved to approve the minutes of the March 5, 2020 meeting as amended. Commissioner Smith seconded the motion. The motion carried 6-0 with Chair Danaher and Commissioners Jackson, Scharff, Segal, and Smith voting yes, Commissioner Johnston abstaining, and Vice Chair Forssell absent. AGENDA REVIEW AND REVISIONS None. REPORTS FROM COMMISSIONER MEETINGS/EVENTS None. GENERAL MANAGER OF UTILITIES REPORT Dean Batchelor, Utilities Director, reported Information Technology (IT) staff has done a fantastic job ensuring videoconferencing and remote work proceeds smoothly. Library staff is supporting the community support call center and communications concerning preparation for recovery. Planning and Development Services staff continues to handle permit applications submitted online and is supporting the Emergency Operations Center (EOC). Public Works staff continues work on essential projects with staff alternating weeks of working from home and onsite. Administrative Services staff continues to process payments and refunds, prepare audits, research Federal Emergency Management Agency (FEMA) requirements and record keeping, and prepare the City budget. Community Services staff is preparing online programming and recovery programs. Fire Department inspectors are reinforcing vegetation management for wildland fires. Communications staff is writing and publishing information daily and developing scripts for the community support call center. Customer Service staff is responding to billing inquiries, including requests for assistance. About a half of Customer Service staff are working remotely. Approximately 25,000 meters are being estimated so that meter readers do not have to contact customers. Letters have been sent to the affected Utilities Advisory Commission Minutes Approved on: May 20, 2020 Page 2 of 7 customers. Resource Management Division (RMD) and Utility Program Services (UPS) staff is working on assistance programs for small and medium business customers, monitoring water, gas and electric loads, and running models of recession scenarios. Engineering staff is maintaining invoice payments and reviewing cybersecurity for Supervisory Control and Data Acquisition (SCADA) systems. If an economic recession occurs, staff is preparing project designs to take advantage of lower costs. Operations staff continues to respond to emergencies and outages, clean sewer mains, and maintain streetlights and traffic signals. Essential workers are working alternate weeks, wearing masks, and when possible working individually. Crews are practicing social distancing. Morale is high. About 50% of City employees are working remotely, 45% are working onsite, and about 5% have taken leave. The Council has authorized paid administrative leave through June 30, 2020 for City employees whose work is less than 100% essential. The Utilities Department has a total of 215 employees, and about 60% are working from home, 35% report weekly, and 5% have taken leave. Managers are reviewing tasks with employees daily. Nelly Baumb, City Clerk's Office, advised that the public has not been able to join the meeting, provided the correct password for the public, and requested Chair Danaher reopen Oral Communications. Chair Danaher indicated he would do so following the Director's Report. Jonathan Abendschein, Assistant Director of Resource Management, indicated economic impacts from the COVID pandemic are modest and manageable at the current time, but the impacts in a few months are unknown. Staff is tracking loads, decreases in sales, and utility bill defaults. Electric load has decreased, but water and gas loads have not. The majority of the Electric Utility's sales are to the business community; therefore, temporary business closures and increased telecommuting have a large impact on the Electric Utility. In the Gas and Water Utilities, about 50% of usage is residential. The decrease in water sales to commercial customers has been offset by the increase in sales to residential customers. In response to Chair Danaher's inquiry regarding the impact of the differences in commercial and residential rates, Abendschein related that rates are fairly similar and did not expect major impacts. Abendschein continued the presentation, stating for every $1 of sales revenue lost, staff can reduce costs by 40₵-60₵ because the purchases of water, gas, and electricity are reduced. If 8-10% load losses continue for the next three months in the Electric Utility, there will be a $1.5 million net loss of revenue, which can be absorbed in existing reserves. The impact of bill defaults is unclear because staff has no data at the current time and data obtained from the billing system is limited. Staff is working to obtain more data about delinquent bills. During the Great Recession, defaults never reached 0.25% of revenue or approximately $100,00-$200,000 for the Gas and Water Utilities and $400,000-$600,000 for the Electric Utility. Staff has estimated the impact of all retail and restaurant customers defaulting at $3 million in the Electric Utility, $550,000 in the Gas Utility, and $300,000 in the Water Utility. Staff anticipates the impacts could be several hundred thousand dollars in the Gas and Water Utilities and $1-$1.5 million in the Electric Utility. These losses can be absorbed in existing Reserves. In reply to Commissioner Smith's question regarding absorbing a maximum loss of $3.8 million in reserves, Abendschein advised that Electric Utility Reserves could absorb $3 million in defaults and $1.5 million in lost sales revenue. Using Reserves may not be prudent given the uncertainty of future impacts. In answer to Chair Danaher's query regarding defaults, Abendschein explained that estimates for restaurants and retailers assume normal usage and a 100% default rate. Chair Danaher remarked that the two assumptions are double counting because the electric load would decrease as well. Abendschein concurred and indicated the estimates are very conservative. In answer to Councilmember Cormack's inquiry regarding a utility's knowledge of a closed business, Abendschein explained that without smart meters, staff cannot determine through bill or usage information which restaurants and retailers are closed. As the billing cycle continues, reduced usage in accounts may indicate closed businesses, and staff may be able to provide information at a later time. Utilities Advisory Commission Minutes Approved on: May 20, 2020 Page 3 of 7 In response to Commissioner Smith's query regarding a model for a percentage of businesses closing for the remainder of the year, Abendschein related that staff is modeling scenarios like this. A continued 10% load decrease through fiscal year (FY) 2021 would be significant. More information could be available for the May UAC meeting. Abendschein further reported the best reference point for future impacts is the Great Recession; however, separating the impacts of long-term trends, the drought, and the Great Recession is difficult. The long-term impacts of the Great Recession on load appear to be minimal, a 1-3% decrease, for all utilities. During the Great Recession, write-offs did not exceed 0.25% of revenue except in the Water Utility, where write-offs were 0.77% of revenue. Because this recession will probably be different from the Great Recession and recovery may be lengthy, staff is preparing alternate forecasts. Staff is working with the Administrative Services Department to ensure City of Palo Alto Utilities (CPAU) assumptions align with City assumptions. In reply to Commissioner Jackson's question about more rainfall in the past month, Abendschein advised that rainfall affects hydroelectric output. Rainfall in March helped the current dry year, but dry hydroelectric conditions will probably have a $3-$5 million impact on the utility. This impact and the COVID impacts are manageable. In answer to Chair Danaher's query regarding cost savings in addition to reduced purchases, Abendschein indicated supply cost savings are likely the largest. Other cost savings probably total a fraction of supply cost savings. Chair Danaher returned to Oral Communications. COMMISSIONER COMMENTS None. UNFINISHED BUSINESS None. NEW BUSINESS ITEM 1: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend the City Council Adopt a Resolution Approving the Fiscal Year 2021 Electric Financial Plan and Reserve Transfers, Amending the Electric Utility Reserve Management Practices and Increasing Electric Rates by Amending the E-1, E-2, E- 2-G, E-4, E-4-G, E-4 TOU, E-7, E-7-G, E-7 TOU, E-14, E-EEC and E-NSE Rate Schedules. Eric Keniston, Senior Resource Planner, reported staff proposes a 2% electric rate increase to match inflation and to mitigate potential future costs and/or losses. Operations Reserves are projected to fall within guideline levels. Staff plans to begin repaying the $10 million loan from the Special Projects Reserve and add funding to the Capital Improvement Program (CIP) Reserve. Staff plans not to allocate an additional $4 million to the Hydroelectric Stabilization Reserve given the dry hydroelectric year. Electric Utility costs are divided 39% to distribution and 61% to supply. The main supply cost driver is increasing transmission costs. Distribution cost drivers are medical/retirement benefit costs, capital investment, underground construction costs, and contract expenses for line crews. Staff projects 2-3% rate increases after FY 2021. The 2% rate increase is composed of 0.4% net electric supply cost increases, 0.8% CIP cost and investment increases, 0.4% operations cost increases, and 0.3% load loss. While projections are conservative, they may be more accurate due to the impacts of COVID. In response to Chair Danaher's question, Keniston advised that the projections include the proposed rate increase. In reply to Commissioner Smith's inquiry regarding conservative projections, Keniston explained that early in FY 2020 his expectations for sales were low, but sales have exceeded his projections until the last three to Utilities Advisory Commission Minutes Approved on: May 20, 2020 Page 4 of 7 four months. Sales are now closer to his original expectations. For FY 2021, he originally projected a slight sales decline. His models do not anticipate the costs of a continuing COVID response. Keniston further reported the Distribution Operating Reserve balance exceeds the minimum guideline level and the risk assessment guideline. CPAU's rates are approximately 34% less than PG&E's rates but higher than Santa Clara's rates. Under a 0% rate increase scenario for FY 2021, future years would need 4% rate increases. In answer to Commissioner Smith's inquiries regarding delaying action for one month and procurement strategies for projects, Dean Batchelor, Utilities Director, requested the UAC make a recommendation during the current meeting as the Finance Committee will review the rates on April 21. The Engineering group is advancing CIP projects to take advantage of hopefully lower costs in the next few months. In reply to Commissioner Johnston's query regarding inclusion of hourly accounting for carbon emissions and treatment of Renewable Energy Certificates (RECs) in the projections, Keniston indicated the projections do include hourly accounting and the sale of RECs. In response to Commissioner Scharff's question about revenue from a 0% rate increase, Keniston explained that over the long term, revenues would be about the same for a 0% and 2% rate increase. In answer to Chair Danaher's inquiry regarding a dry year, Keniston felt a 2% increase would be prudent given the impact of a dry hydroelectric year. Funds from the Hydroelectric Stabilization Reserve or a hydroelectric add-on fee could offset the increased costs of a dry hydroelectric year. Councilmember Cormack commented that rates have to be set soon so that staff can prepare the City Budget for Council certification in June. If a majority of customers has significant trouble with a minor rate increase, keeping rates flat is worth considering. If a minority of customers has significant trouble, then rates should be increased. In reviewing the proposed Budget, the Council will review all impacts of the emergency. In reply to her questions, Keniston explained that reduced demand from nonresidential customers shifts the burden of fixed costs to the remaining customers. Anecdotally, electric loads across Northern California have deceased 8-10%. Jonathan Abendschein, Assistant Director of Resource Management, indicated market prices for electricity have decreased, and the sale of electric supply will generate less revenue. The demand for renewable energy remains high. Chair Danaher felt the rate increase is modest. The businesses most affected during the shutdown would not use much load. The Council can approve a different or no rate increase. Commissioner Segal believed a 2% rate increase, if comparable to the rate of inflation, is logical and suggested messaging about the rate increase include information about assistance programs. ACTION: Commissioner Jackson moved to recommend the City Council adopt a Resolution approving the Fiscal Year 2021 Electric Financial Plan and Reserve Transfers, Amending the Electric Utility Reserve Management Practices and Increasing Electric Rates by amending the E-1, E-2, E-2-G, E-4, E-4-G, E-4 TOU, E- 7, E-7-G, E-7 TOU, E-14, E-EEC and E-NSE Rate Schedules. Commissioner Smith seconded the motion. The Motion carried 7-0 with Chair Danaher, Vice Chair Forssell, and Commissioners Jackson, Johnston, Scharff, Segal and Smith voting yes. ITEM 2: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend the City Council Adopt a Resolution Approving the Fiscal Year 2021 Gas Utility Financial Plan, Including Proposed Transfers and an Amendment to the Gas Utility Reserve Management Practices and Increasing Gas Rates by Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service). Utilities Advisory Commission Minutes Approved on: May 20, 2020 Page 5 of 7 Eric Keniston, Senior Resource Planner, reported staff proposes a 3% gas rate increase because of distribution system cost increases. Gas Utility costs are divided 60% to distribution and 40% to supply. Capital investment and distribution costs are relatively fixed unless projects are delayed. The cost drivers for gas supply are gas supply, PG&E gas transmission rates, Cap and Trade costs, and the Carbon Neutral Gas Plan. Cost drivers for gas distribution are overhead costs, underground construction costs, temporary funding of crossbore investigations, and overhead transfers. CPAU's rates are 8% lower than PG&E's rates. Projections indicate 6% rate increases will be needed in FY 2022-2024. Staff is investigating the benefits of bond financing main replacement projects. The 3% rate increase is composed of 1.5% operations and maintenance (O&M) expense increases and 1.7% CIP investment increases. With the rate increase, the Operating Reserves balance will remain within guidelines. Staff has not found any shifts in usage related to the COVID situation. Currently, residential bills in winter are lower and in summer are higher than PG&E's bills. Commercial bills are higher than PG&E's bills. With the rate increase, smaller gas users could have lower bills, and more costs will shift to larger gas users. Commercial customers will see a 3-4% increase in their bills with the rate increase. The monthly service charge for all customers will decrease. Alternative 1 is a 5% rate increase in FY 2021 with 4% increases in FY 2022-2024. Alternative 1 will have a larger impact on customers than the staff recommendation. If the UAC recommends a 3% rate increase, the Gas Utility Financial Plan will need to be amended. Alternative 2 is a 0% rate increase in FY 2021 with 10%, 8% and 3% rate increases in FY 2022-2024 respectively. Large rate increases in FY 2022-2024 will be needed to keep Reserves balances within the guideline levels after a major main replacement project and a 0% rate increase in FY 2021. Bond financing could reduce the rate increases. In response to Commissioner Smith's inquiries regarding FY 2021-2025 rate increases under the staff recommendation and Alternative 1, Keniston explained that the ending Operations Reserve balance will be different for each scenario because the cumulative rate increases will be different. Alternative 1 will provide a more stable target Reserve fund balance earlier in the five-year period. The staff recommendation will ease customers into rate increases. PG&E's capital investment costs are reflected in its rates, and CPAU passes PG&E's rates onto customers. That would not affect the Operating Reserve. Commissioner Smith felt Alternative 2 would be risky, and a 10% increase would be difficult for customers. In answer to Commissioner Johnston's queries about lower labor costs and accelerating capital projects, Keniston advised that lower project costs would be an automatic savings for CPAU. If CIP costs decrease, rate increases in subsequent years could be lower. Dean Batchelor, Utilities Director, added that accomplishing more capital projects while spending the same amount of money may be more prudent than reducing future rate increases. Reserves balances will be a factor in any decision. In reply to Vice Chair Forssell's questions regarding the 5% rate increase in Alternate 1 and new projections for supply costs, Keniston indicated 5% reflects the average bill change and assumes a static supply cost. A 3% rate increase is a 5% distribution rate increase overall. Bills for small residential users will decrease under the Staff recommendation and Alternate 1. Several small commercial customers use gas only in winter months, and their bills will decrease under the staff recommendation. Jonathan Abendschein, Assistant Director of Resource Management, related that lower gas prices are forecast for the next few years, and the pandemic has exacerbated lower prices. Vice Chair Forssell remarked that a 3% versus 5% rate increase is not the way to think about the impact on customers given the differences in bill impacts based on customer class and usage rate. Alternative 1 could maintain the financial health of the Gas Utility. Maintaining healthy Reserves would be prudent because the City may take action to reduce load. Chair Danaher indicated his preference for the staff recommendation in light of the current hardship. Commissioner Jackson commented that from an environmental perspective, cheap natural gas is not necessarily a good thing. He was more interested in larger rate increases but, given the impact on local businesses, he could accept a 3% rate increase. Commissioner Scharff preferred a 3% rate increase in light of the economic climate. Utilities Advisory Commission Minutes Approved on: May 20, 2020 Page 6 of 7 Commissioner Segal was comfortable with a 3% rate increase, even though she would prefer a higher rate increase. Commissioner Johnston was more comfortable with a 3% rate increase than a 5% rate increase. Councilmember Cormack suggested messaging for the rate increase include a prominent announcement of the lower monthly service charge. ACTION: Commissioner Johnston moved to recommend the City Council adopt a Resolution approving the Fiscal Year 2021 Gas Utility Financial Plan, including proposed transfers and an amendment in the Gas Utility Reserve Management Practices and increasing gas rates by amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service). Commissioner Segal seconded the motion. The motion carried 7-0 with Chair Danaher, Vice Chair Forssell, and Commissioners Jackson, Johnston, Scharff, Segal, and Smith voting yes. ITEM 3: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend the City Council Make No Changes to Wastewater Collection Utility Rates for July 1, 2020. Lisa Bilir, Resource Planner, reported staff proposes a 0% rate increase for FY 2021 and 5% rate increases for FY 2022-2025. Wastewater Utility costs are composed of 43% collections costs and 57% treatment costs. Treatment cost drivers include rehabilitation of the Regional Water Quality Control Plant (RWQCP). Operations/capital cost drivers include salary and benefits costs, underground construction costs, and capital project costs. No large main replacement projects are scheduled for FY 2021. CPAU's average residential bill is approximately 26% lower than residential bills in neighboring communities. The average commercial bill is about 14% higher than commercial bills in neighboring communities. Staff plans to utilize the CIP Reserve for capital expenses over the next few years. Based on projections, the Wastewater Operations Reserve balance will reach the guideline minimum in FY 2024 and increase in FY 2025. Jonathan Abendschein, Assistant Director of Resource Management, advised that, at his request, staff recommends no rate increase rather than a nominal rate increase because a cost of service study is underway. Staff's ability to work on the study has been heavily impacted by the shelter-in-place order. Staff may propose a rate change at mid-year. In response to Commissioner Segal's query about including the impacts of restaurant closures in the cost of service study, Bilir indicated staff is beginning to explore the impacts of restaurant closures for the Financial Plan. Staff does not know if the impacts will be long term or short term and will seek the consultant's advice for including the impacts in the cost of service study. In reply to Vice Chair Forssell's inquiry about rehabilitation of the RWQCP, Bilir explained that the list of projects in Slide 4 are upcoming and will drive future rate increases. Councilmember Cormack expressed interest in having information about the Capital Reserve in a future presentation. Work at the RWQCP continues as essential construction work. ACTION: Vice Chair Forssell moved to recommend the City Council make no changes to Wastewater Collection Utility Rates for July 1, 2020. Commissioner Scharff seconded the motion. The motion carried 7-0 with Chair Danaher, Vice Chair Forssell, and Commissioners Jackson, Johnston, Scharff, Segal, and Smith voting yes. ITEM 4: ACTION: Selection of Potential Topic(s) for Discussion at Future UAC Meeting. In reply to Chair Danaher's inquiry regarding a discussion of the Sustainability and Climate Action Plan (S/CAP), Dean Batchelor, Utilities Director, suggested staff could present information in July. Councilmember Utilities Advisory Commission Minutes Approved on: May 20, 2020 Page 7 of 7 Cormack reported the Council will receive an interim report about the S/CAP in June. Commissioner Jackson proposed the item be scheduled for the June UAC meeting. Commissioner Johnston requested an item regarding the emerging technologies program. Batchelor agreed to present information at a future meeting. Chair Danaher noted Commissioner interest in the sale of RECs and suggested staff present information later in the year. He requested an update of COVID impacts on utility projections at each meeting. Commissioner Segal requested an educational presentation regarding Cap and Trade monies and impacts. Commissioner Jackson proposed a future item regarding the performance of internet infrastructure during the crisis as an indicator of improvements needed for future crises. Chair Danaher requested an update of progress with the fiber plans in the next few months. Vice Chair Forssell requested a discussion of gas emissions and distribution and transmission system leaks in the summer timeframe. Batchelor advised that staff proposes rescheduling the May 6 meeting to May 20 and canceling the June meeting because of staff's focus on the COVID emergency. Agenda items could include the S/CAP, water supply and the water system, automated metering infrastructure (AMI), and the electric vehicle (EV) program. Items for the budget and water supply should be relatively short. After a discussion of meetings and agenda topics, Chair Danaher noted Commissioners' interest in a May 13 or 20 meeting with agenda items for the S/CAP and perhaps a couple of other items. Jonathan Abendschein, Assistant Director of Resource Management, indicated reports for meetings scheduled in the first week of May have to be submitted in the next few days. Staff could not prepare a report for the S/CAP in a few days; therefore, he advocated for rescheduling the May 6 UAC meeting to late May or early June. Chair Danaher announced the UAC's agreement for rescheduling the May 6 meeting to May 20. Batchelor reminded the UAC's budget ad hoc committee of its meeting on April 22 at 4:00 p.m. ACTION: None NEXT SCHEDULED MEETING: May 6, 2020 Meeting adjourned at 11:28 a.m. Respectfully Submitted Tabatha Boatwright City of Palo Alto Utilities City of Palo Alto (ID # 11162) Utilities Advisory Commission Staff Report Report Type: Agenda Items Meeting Date: 4/15/2020 City of Palo Alto Page 1 Council Priority: Fiscal Sustainability Summary Title: FY 2021 Electric Rates and Financial Plan Title: Staff Recommendation That the Utilities Advisory Commission Recommend That the City Council Adopt a Resolution Approving the Fiscal Year 2021 Electric F inancial Plan and Reserve Transfers, Amending the Electric Utility Reserve Management Practices, and Increasing Electric Rates by Amending the E-1, E-2, E-2-G, E-4, E-4-G, E-4 TOU, E-7, E-7-G, E-7 TOU, E- 14, E-EEC and E-NSE Rate Schedules From: City Manage r Lead Department: Utilities Recommendation Staff requests that the Utilities Advisory Commission (UAC) recommend that the Council adopt a resolution (Attachment A): 1.Approving the Fiscal Year (FY) 2020 Electric Financial Plan (Attachment B) and the following reserve transfers: a)Up to $4 million from the Supply Operations Reserve to the Hydroelectric Stabilization Reserve; and b)Up to $5 million from the Supply Operations Reserve to the Electric Special Projects (ESP) Reserve; c)Up to $7 million from the Distribution Operations Reserve to the Capital Improvement Project Reserve; d)$3.74 million from the Operations Reserve to the Low Carbon Fuel Standard (LCFS) Reserve 2.Amending the Electric Utility Reserve Management Practices relating to the CIP , Low Carbon Fuel Standard, and Rate Stabilization Reserves (as set forth in the Financial Plan) (Attachment C); and 3.Amending Rate Schedules E-1 (Residential Electric Service), E-2 (Small Non-Residential Electric Service), E-2-G (Small Non-Residential Green Power Electric Service), E-4 (Medium Non-Residential Electric Service), E-4-G (Medium Non-Residential Green Power Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), Staff: Eric Keniston City of Palo Alto Page 2 E-7 (Large Non-Residential Electric Service), E-7-G (Large Non-Residential Green Power Electric Service), E-7 TOU (Large Non-Residential Time of Use Electric Service), E-14 (Street Lights), E-NSE (Net Metering Net Surplus Electricity Compensation), and E-EEC (Export Electricity Compensation) (Attachment D). Executive Summary The FY 2021 Electric Utility Financial Plan includes projections of the utility’s costs and revenues through FY 2025. Costs are projected to rise substantially for the next several years for multiple reasons. Costs for electric supply purchases are increasing as a result of increases in transmission costs, and potentially dry hydro conditions may necessitate utilizing funds from the Hydro Rate Stabilization Reserve starting in FY 2021. Substantial additional capital investment in the electric distribution system is planned for FY 2021 through FY 2024. Operational costs in FY 2019 were lower than budgeted due to vacancies and difficulty hiring contractors, but are projected to increase in FY 2020 and beyond as vacancies are filled and new contracts for maintenance work are put in place. Electric loads have been decreasing, mainly in the commercial sector, putting upward pressure on rates. However, due to good hydro conditions in FY 2019 and corresponding surplus sales, revenues were above expenses in FY 2019 and are expected to remain that way in FY 2020. The good hydro conditions are a short-term phenomenon, though, and are not anticipated to continue. Figure 1 below shows the primary rate increase drivers. Figure 1: Allocation of Rate increase The short-term revenue increase has replenished Operations reserves, which had been lower than target levels. This provides flexibility to offset future one-time expense increases associated with future dry years. But because of the increases in annual expenses described above, along with decreased sales, an increase in sales revenues is still required to maintain long term financial health. A 2% rate increase is proposed for July 1, 2020, with 3 to 4% 0.8% supply cost increase net of 0.4% decrease from new supply revenues City of Palo Alto Page 3 increases in the following years. While 2% is the overall increase in average rates, different customer classes will see slightly different increases as shown in Tables 3 and 4. These variations are due to slight shifts in usage by customer class as well as relative demand by customer class. Staff calculated the rate increases using the 2016 cost of service analysis (COSA) model created for the City by EES Consulting, which was implemented on July 1, 2016 , and updated based on the most recent historical data for FY 2019 and projected sales and demand for FY 2021. Background Every year staff presents the UAC with Financial Plans for its Electric, Gas, Water, and Wastewater Collection Utilities and recommends any rate adjustments required to maintain their financial health. These Financial Plans include a comprehensive overview of the utility’s operations, 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. The UAC reviewed preliminary financial forecasts at its December 4, 2019 meeting. Discussion Staff’s annual assessment of the financial position of the City’s electric utility is completed in compliance with cost of service requirements set forth in the California Constitution and applicable statutory law. The assessment includes making long-term projections of market conditions, of costs associated with the physical condition of infrastructure, and of other factors that could affect utility costs. Rates are then proposed that will be adequate to recover projected costs. Proposed Actions for FY 2020 and FY 2021: The FY 2021 Electric Utility Financial Plan includes the following proposed actions: 4. Amend electric rate schedules (see Attachment D) to increase overall electric rates by approximately 2% effective July 1, 2020; 5. Amend the Electric Utility Reserve Management Practices relating to the CIP, Low Carbon Fuel Standard, and Rate Stabilization Reserves (as set forth in the Financial Plan) (Attachment C); 6. Transfer up to $4 million from the Supply Operations Reserve to the Hydroelectric Stabilization Reserve. 7. Transfer up to $5 million from the Supply Operations Reserve to the Electric Special Projects (ESP) Reserve; 8. Transfer up to $7 million from the Distribution Operations Reserve to the Capital Reserve; and, City of Palo Alto Page 4 9. Transfer $3.74 million from the Operations Reserve to the Low Carbon Fuel Standard (LCFS) Reserve. The transfer to the Electric Special Projects reserve will repay half of a $10 million temporary loan taken from the ESP reserve in FY 2018, during the last drought. The transfer to the Capital Reserve will fund future year CIP increases and balance year to year changes in capital investment. The transfer to the hydroelectric reserve will bring the reserve closer to its target level. Both of these transfers will provide flexibility in preventing or mitigating rate spikes associated with future dry years. The creation of the LCFS Reserve and associated transfer is to better track and manage funds related to the City’s participation in the state’s LCFS program, which are currently contained in the Supply Operations Reserve balance. Staff proposes modifications to the CIP Reserve, within the Electric Utility Reserves Management Practices. Because of the irregular dollar amounts and timing of CIP projects budgeted to occur during the forecast period, as well as the potential for new ongoing projects to be included in the CIP plan in later years, staff recommends that four years of budgeted CIP be used to calculate the reserve maximum levels, rather than the current four months (120 days) of budgeted expenses. The new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level, rather than two months (60 days) of expenses. Staff also proposes that the Electric 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. Although this Financial Plan includes a forecast period of five years, o r 60 months, an even number of years (48 months or 4 years) is used for the CIP Reserve maximum calculation, because of the irregular size and funding of CIP projects. This maximum in FY 2021 is $19 million and the minimum in FY 2021 is $3.8 million, and the reserve is projected to remain within the min/max guidelines for the duration of the forecast. The CIP reserve will be above the old guideline levels in FY 2020, but within the guideline range in FY 2021. Table 1 below shows the effects of the proposed transfers on reserve funds, as well as changes to the CIP min/max guidelines. The attached Electric Financial Plan (Attachment B) discusses these reserve changes in greater detail. City of Palo Alto Page 5 Table 1: Reserves Starting and Ending Balances, Revenues, Expenses, Transfers To/(From) Reserves, Operations and Capital Reserve Guideline Levels for FY 2020 to FY 2025 ($000) FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Starting Reserve Balances 1 Supply Operations 28,709 30,673 23,773 24,870 24,666 25,275 2 Distribution Operations 16,536 10,758 10,712 11,865 11,714 11,968 3 CIP 880 7,880 11,880 11,880 11,880 11,880 4 Electric Special Projects 41,665 46,665 49,665 49,665 49,665 39,665 5 Hydro Stabilization 11,400 15,400 19,000 19,000 19,000 19,000 6 Low Carbon Fuel Standard (LCFS)- 3,740 3,340 2,140 1,140 1,140 Revenues 7 Supply 117,499 117,603 114,725 113,373 113,429 112,227 8 Distribution 59,204 60,948 62,919 64,807 67,314 69,933 Transfers 9 Supply Operations (12,740) (16,600) (4,000) (3,000) (2,000) - 10 Distribution Operations (7,000) 4,000 4,000 3,000 2,000 - 11 CIP 7,000 4,000 - - - - 12 Electric Special Projects 5,000 5,000 - - - - 13 Hydro Stabilization 4,000 3,600 - - - - 14 Low Carbon Fuel Standard 3,740 - - - - - Capital Program Contribution 15 Distribution Operations Reserve - - - - - - 16 CIP Reserve Expenses 17 Supply Expenses (102,794) (107,903) (109,628) (110,578) (110,820) (110,601) 18 Distribution Non-CIP Expenses (42,665) (43,661) (47,680) (48,532) (39,640) (50,394) 19 Planned CIP (15,316) (21,333) (18,086) (19,426) (29,420) (19,298) 20 ESP funded - (2,000) - - (10,000) - 21 Hydro funded - - - - - - 22 LCFS funded - (400) (1,200) (1,000) - - Ending Reserve Balance 1 + 7 + 9 + 17 Supply Operations 30,673 23,773 24,870 24,666 25,275 26,901 2 + 8 + 10 + 15 + 18 + 19 Distribution Operations 10,758 10,712 11,865 11,714 11,968 12,208 3 + 11 + 16 + 19 CIP 7,880 11,880 11,880 11,880 11,880 11,880 4 + 12 + 20 Electric Special Projects 46,665 49,665 49,665 49,665 39,665 39,665 5 + 13 + 21 Hydro Stabilization 15,400 19,000 19,000 19,000 19,000 19,000 6 + 14 + 22 Low Carbon Fuel Standard 3,740 3,340 2,140 1,140 1,140 1,140 Operations Reserve Guidelines (Supply) 23 Minimum 16,898 17,803 18,218 18,342 18,217 18,181 24 Maximum 33,795 35,607 36,437 36,683 36,434 36,362 Operations Reserve Guidelines (Distribution) 25 Minimum 8,194 8,682 9,098 9,324 9,542 9,771 26 Maximum 12,890 13,822 14,494 14,860 15,217 15,586 CIP Reserve Guidelines 27 Minimum 2,518 3,813 3,811 3,900 3,950 4,031 28 Maximum 5,036 19,066 19,057 19,500 19,752 20,153 Proposed and Projected Sales Revenue Requirement, FY 2021 through FY 2025 The July 1, 2019 rate increase was the fourth and last increase in a series of substantial rate increases starting in FY 2017. Prior to the first increase on July 1, 2016, rates had not been increased since July 1, 2009. In FY 2021 to FY 2025, staff forecasts a series of increases of 2 % to City of Palo Alto Page 6 4%. Table 2 shows the sales revenue increases needed to recover costs of operation over the forecast period in the FY 2021 Electric Financial Plan. Table 2: Electric Rate Adjustments, FY 2017 to FY 2024 FY 2017 Approved FY 2018 Approved FY 2019 Approved FY 2020 Approved FY 2021 Proposed FY 2022 Projected FY 2023 Projected FY 2024 Projected FY 2025 Projected 11% 14% 6% 8% 2% 3% 4% 4% 4% These retail rate increases are for the electric utility as a whole, but the rate changes will differ slightly for individual customer classes. Proposed rate increases for each customer class are discussed below. Changes from Prior Financial Forecasts This projection has changed slightly since the FY 2020 Electric Utility Financial Plan presented last year. Table 3 compares current rate projections to those projected in the last two year’s Financial Plans. Nearer term forecasts have come down from prior years due to short-term surplus revenues resulting from better than forecast hydro in FY 2019 and the start of FY 2020. Increased infrastructure budgets are slightly increasing in the outer year projections. Table 3: Projected Electric Rate Trajectory for FY 2020 to FY 2025 Projection FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Current (FY 2021 Financial Plan) 2% 3% 4% 4% 4% Last year (FY 2020 Financial Plan) 4% 4% 4% 3% 3% Two years ago (FY 2019 Financial Plan) 2% 0% 1% 1% 2% 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 electric bill (453 kwh per month in winter, 365 kwh per month in summer). Table 4: Projected Rate Adjustments, FY 2021 to FY 2025 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Electric Utility 2% 3% 4% 4% 4% Estimated Bill Impact ($/mo)* $1.28 1.86 2.55 2.66 2.76 * Estimated impact on median residential electric bill, which is currently $60.70 for CY 2019 City of Palo Alto Page 7 The rate increases are related to several factors: increasing transmission, substantial additional capital investment in the electric distribution system, and operations costs are increasing due to larger contracting needs. Revenues have also declined as customer usage has decreased, requiring larger rate increases to cover fixed expenses and offset the shortfalls. Historically, total electric utility costs (excluding short-term drought impacts) were roughly $120 million per year, allowing the electric utility to go without a rate increase from July 1, 2009 to July 1, 2016. Over the period from FY 2016 to FY 2018, though, annual costs (net of energy supply related revenue, like surplus energy sales) increased to roughly $140 million per year (costs were unusually low in FY 2019 due to some one-time savings from surplus energy sales). Costs are currently projected to increase to roughly $160 million by FY 2025 but will likely be higher as the impacts of some new capital improvement and replacement projects are accounted for in 2020. Figure 1 shows the overall utility’s costs (net of surplus sales revenues) in FY 2015, FY 2020, and FY 2025. Costs for the electric supply portfolio have decreased slightly b etween FY 2015 and FY 2020, but much of this is due to one-time surplus hydro revenues in FY 2020 as well as the fact that customer sales have declined by 1.5% to 2% annually during this time. Assuming normal hydro conditions going forward, as well as a continuing trend of load loss, costs are projected to increase by about 1% in the future. Costs for managing the distribution system (e.g. maintenance, capital investment, customer service, billing, etc.) have increased as well, growing by 2.6% per year on average in the past, but projected to grow by nearly 4% per year going forward. Overall, costs are projected to increase by 1.2% per year over the forecast horizon, but declining loads will necessitate rate increases greater than this to maintain financial health. Figure 1: Electric Utility Costs, FY 2015 Actual vs. FY 2020 and FY 2025 Projections Figure 2 shows electric distribution costs specifically. Capital costs have increased by about 4% per year on average over the last five years and are projected to be more than 5% per year City of Palo Alto Page 8 going forward. Increased costs are related to greater capital investment in the distribution system (e.g. underground district rebuilds, as well as substation and upgrades). In the last few years, the City has experienced a higher number of outages in underground districts due to aging equipment and infrastructure. Distribution system operational spending is projected to increase by about 3 to 4% annually. Some of this is due to projected increases in costs of labor and materials, but also due to higher than anticipated staff vacancies requiring external contracts. Figure 2: Electric Distribution Costs, FY 2015 vs. FY 2020 and FY 2025 While net electric supply portfolio cost decreases from FY 2015 to FY 2020, this was mainly due to surplus energy revenues and decreasing loads driving down generation cost . Transmission cost increases and, to a lesser extent, operational overhead costs have increased by 8% to 9% annually in the same timeframe, as shown in Figure 3. In the fu ture, staff forecasts that increased costs will continue largely come from transmission costs. These increases are the due to rehabilitation and replacement of the existing statewide electric transmission system as well as expansion of that system to accommodate new generation, mostly renewable. Staff works to contain transmission costs through partner agencies, including the Transmission Agency of Northern California (TANC) and Northern California Power Agency (NCPA), and through direct partnerships with other local utilities (the Bay Area Municipal Transmission group, BAMx). These groups intervene in transmission proceedings at the Federal Energy Regulatory Commission (FERC) and the California Independent System Operator (CAISO), and have achieved some reductions in long-term transmission costs. Staff is beginning to look at strategies to achieve cost savings in electric supply and will discuss these strategies in greater detail through the ongoing Integrated Resource Planning (IRP) process. City of Palo Alto Page 9 Figure 3: Electric Supply Costs, FY 2015 Actual vs. FY 2020 and FY 2025 Projections With a 2% rate increase, this Financial Plan will seek to maintain stable reserves and counter erosion to revenue from load. Staff also recognizes the importance of managing operating costs and maximizing efficiency in order to minimize rate increases. As discussed above, staff is working on cost containment measures related to transmission and renewable energy costs. Utility consumers also see some long-term cost savings from City-wide efforts to manage personnel costs. As reflected in the Utilities Strategic Plan, staff is exploring additional ways to effectively use available resources, particularly across Divisions. Rate Changes by Customer Class Table 5 shows the rates that will be used to recover sale revenues for each customer class. The Street Lighting (E-14) class and the E-4 Time of Use (TOU) and E-7 TOU rates are not shown in the table but can be seen in the attached rate schedules (Attachment D). City of Palo Alto Page 10 Table 5: Electric Rates (Current and Proposed) Current Rates Proposed Rates (7/1/20) Change $ % E-1 (Residential) Tier 1 Energy ($/kWh) 0.13757 0.14087 0.00330 2.4% Tier 2 Energy ($/kWh) 0.19367 0.19609 0.00242 1.2% Minimum Bill ($/day) 0.3283 0.3344 0.0061 1.9% E-2 & E-2-G (Small Non-Residential) Summer Energy ($/kWh) 0.20853 0.21430 0.00577 2.8% Winter Energy ($/kWh) 0.14624 0.14792 0.00168 1.1% Minimum Bill ($/day) 0.8359 0.8536 0.0177 2.1% E-4 & E-4-G (Medium Non-Residential) Summer Energy ($/kWh) 0.12848 0.13792 0.00944 7.3% Winter Energy ($/kWh) 0.09946 0.10687 0.00740 7.4% Summer Demand ($/kW) 28.91 28.14 (0.77) -2.7% Winter Demand ($/kW) 18.97 14.64 (4.33) -22.8% Minimum Bill ($/day) 17.2742 17.4346 0.1604 0.9% E-7 & E-7-G (Large Non-Residential) Summer Energy ($/kWh) 0.11432 0.11689 0.00257 2.2% Winter Energy ($/kWh) 0.07738 0.08259 0.00521 6.7% Summer Demand ($/kW) 30.69 28.34 (2.35) -7.7% Winter Demand ($/kW) 17.05 17.18 0.13 0.8% Minimum Bill ($/day) 42.3648 42.7994 0.4346 1.0% Table 6 shows the impact of the proposed July 1, 2020 rate changes on the residential and non - residential bills for various consumption levels. The rate changes for each customer class are similar and the overall rate change for the residential class is roughly 1.9%. Their usage as a class has been consistent from last year, leading to a rate increase that’s the same as the overall increase. Small commercial (E-2) loads have decreased over time, but their use of the distribution system has become a little less efficient (e.g. higher peak usage relative to average usage), leading to a slightly higher overall increase (2.1%) Medium commercial usage has also decreased, but their peak demand has also dropped compared to their consumption, meaning a more efficient use of the overall system and thus a lower overall increase for the class of 1.2%. Large commercial customers have also improved the efficiency of the way they use the system, limiting the overall increase needed for this customer class to 1.1%. City of Palo Alto Page 11 Table 6: Impact of Proposed Electric Rate Changes on Customer Bills Rate Schedule Usage (kwh/mo) Bill under Current Rates ($/mo) Bill Under Rates Proposed 7/1/20 ($/mo) Change $/mo % E-1 (Residential) 300 $ 41.27 $42.26 $0.99 2.4% (Summer Median) 365 52.18 53.35 1.17 2.2% (Winter Median) 453 69.22 70.61 1.39 2.0% 650 107.37 109.24 1.86 1.7% 1200 213.89 217.09 3.19 1.5% E-2 (Small Non- Residential) 1,000 178 182 4 2.1% E-4 (Medium Non-Residential) 160,000 27,541 27,977 436 1.6% E-7 (Large Non- Residential 500,000 71,534 72,344 810 1.1% 2,000,000 286,135 289,374 3,239 1.1% Cost of Service Analysis and Rate Study The rates discussed in the previous section are based on the cost of service methodology established in the “City of Palo Alto Electric Cost of Service and Rate Study”1 drafted by EES Consulting, Inc. in 2016. Staff updated the model sales and budget projections, including projected transmission and distribution costs, power supply costs and billing data, in order to update individual cost of service model components and determine the proposed rates. Electric Bill Comparison with Surrounding Cities Table 7 compares electric bills under current rates as of February 1, 2020 for residential customers to those in surrounding communities. Under current rates, CPAU’s median residential bills are 39% lower than PG&E’s but about 19% higher than Santa Clara’s. Palo Alto’s non-residential rates are lower than PG&E’s as well, but Santa Clara’s commercial rates are lower than Palo Alto’s rates. 1 Staff Report 6857 http://www.cityofpaloalto.org/civicax/filebank/documents/52274 City of Palo Alto Page 12 Table 7: Average Electric Bill Comparison ($/month) As of February 1, 2020 Customers Usage (KWh/mo) Palo Alto (Current) Palo Alto (Proposed) PG&E Santa Clara Residential Customers 300 $ 41.27 $42.26 $ 70.74 $ 36.96 365 (Summer Median) 52.18 53.35 92.04 45.27 453 (Winter Median) 69.22 70.61 106.82 56.50 650 107.37 109.24 164.73 81.66 1200 213.89 217.09 327.95 151.91 Non- Residential Customers 1,000 178 182 263 190 160,000 27,541 27,977 32,240 21,905 500,000 71,534 72,344 93,260 64,480 2,000,000 286,135 289,374 394,490 269,230 Timeline The Finance Committee is scheduled to review the FY 2021 Electric Financial Plan in May 2020. The City Council will consider adopting the Financial Plan and rate amendments as part of the FY 2021 budget review and adoption process. If Council approves the prop osed rate changes, they will become effective July 1, 2020. Resource Impact Net of load losses, the proposed July 1, 2020 rate changes are projected to maintain sales revenues at roughly FY 2020 levels. See the attached FY 2021 Electric Financial Plan for a more comprehensive overview of projected cost and revenue changes for the next five years. Policy Implications The proposed electric rate adjustments were developed using the 2016 cost of service study and methodology and are consistent with the Council adopted Reserve Management Practices that are part of the Financial Plan. Stakeholder Engagement The UAC reviewed preliminary financial forecasts at its December 4, 2019 meeting, and the Finance Committee reviewed the preliminary forecasts at its March 3, 2020 meeting. Staff and the UAC’s recommendation on the FY 2021 Electric rate increases will go to the Finance Committee in May and be presented to City Council in June during the budget adoption process. City of Palo Alto Page 13 Environmental Review The UAC’s review and recommendation to Council on the FY 2021 Electric Financial Plans and rate adjustments does not meet the California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section 21065, thus no environmental review is required. Attachments: •Attachment A: Resolution Electric Rates Financial Plan Reserve Management Attachments B-D have been linked to conserve printing •Attachment B: Electric Financial Plan •Attachment C: Reserve Management Practices •Attachment D: FY2021 Proposed Electric Rates Attachment A * NOT YET APPROVED * 6055344 Resolution No. _________ Resolution of the Council of the City of Palo Alto Approving the Fiscal Year 2021 Electric Utility Financial Plan, Including Proposed Reserve Transfers, Amending the Electric Utility Reserve Management Practices, and Increasing Electric Rates by Amending Rate Schedules E-1 (Residential Electric Service), E-2 (Residential Master-Metered and Small Non-Residential Electric Service), E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service), E-4 (Medium Non-Residential Electric Service), E-4-G (Medium Non-Residential Green Power Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E 7 (Large Non-Residential Electric Service), E-7-G (Large Non- Residential Green Power Electric Service), E-7 TOU (Large Non-Residential Time of Use Electric Service), E-14 (Street Lights), E-NSE (Net Metering Net Surplus Electricity Compensation), and E-EEC (Export Electricity Compensation) 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. It 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. C. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of the City of Palo Alto may by resolution adopt rules and regulations governing utility services, fees and charges. D. On ____, 2020, the City Council heard and approved the proposed rate increase at a noticed public hearing. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The Council hereby approves the FY 2021 Electric Utility Financial Plan. SECTION 2. The Council hereby approves the following transfers as described in the FY 2021 Electric Utility Financial Plan: Attachment A * NOT YET APPROVED * 6055344 a. Up to $4 million from the Supply Operations Reserve to the Hydro Stabilization Reserve; b. Up to $5 million from the Supply Operations Reserve to the Electric Special Projects Reserve; c. Up to $7 million from the Distribution Operations Reserve to the CIP Reserve. d. $3.74 million from the Supply Operations Reserve to the Low Carbon Fuel Standard Reserve. SECTION 3. The Council hereby approves amendments to the Electric Utility Reserves Management Practices, as shown in Appendix B to the Electric Utility Financial Plan. SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-1 (Residential Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-1, as amended, shall become effective July 1, 2020. SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-2 (Residential Master-Metered and Small Non-Residential Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-2, as amended, shall become effective July 1, 2020. SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-2-G, as amended, shall become effective July 1, 2020. SECTION 7. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-4 (Medium Non-Residential Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-4, as amended, shall become effective July 1, 2020. SECTION 8. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-4-G (Medium Non-Residential Green Power Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-4-G, as amended, shall become effective July 1, 2020. SECTION 9. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-4 TOU (Medium Non-Residential Time of Use Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-4 TOU, as amended, shall become effective July 1, 2020. SECTION 10. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-7 (Large Non-Residential Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-7, as amended, shall become effective July 1, 2020. Attachment A * NOT YET APPROVED * 6055344 SECTION 11. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-7-G (Large Non-Residential Green Power Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-7-G, as amended, shall become effective July 1, 2020. SECTION 12. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-7 TOU (Large Non-Residential Time of Use Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-7 TOU, as amended, shall become effective July 1, 2020. SECTION 13. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-14 (Street Lights) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-14, as amended, shall become effective July 1, 2020. SECTION 14. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-NSE (Net Metering Net Surplus Electricity Compensation) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-NSE, as amended, shall become effective July 1, 2020. SECTION 15. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-EEC (Export Electricity Compensation) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-EEC, as amended, shall become effective July 1, 2020. SECTION 16. The Council makes the following findings: a. The revenue derived from the adoption of this resolution shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. b. The fees and charges adopted by this resolution are charges imposed for a specific government service or product provided directly to the payor that are not provided to those not charged, and do not exceed the reasonable costs to the City of providing the service or product. // // // SECTION 17. The Council finds that approving the Financial Plan and amending the Electric Utility Reserves Management Practices 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 assessment is required. The Council finds that changing electric rates to meet Attachment A * NOT YET APPROVED * 6055344 operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital improvements necessary to maintain service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the staff report and all attachments presented to Council, the Council incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption. 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 City of Palo Alto (ID # 11145) Utilities Advisory Commission Staff Report Report Type: Agenda Items Meeting Date: 4/15/2020 City of Palo Alto Page 1 Council Priority: Fiscal Sustainability Summary Title: FY 2021 Gas Rates and Financial Plan Title: Staff Recommendation That the Utilities Advisory Commission Recommend the City Council Adopt a Resolution Approving the Fiscal Year 2021 Gas Utility Financia l Plan, Including Proposed Transfers and an Amendment to the Gas Utility Reserve Management Practices, and Increasing Gas Rates by Amending Rate Schedules G -1 (Residential Gas Service), G -2 (Residential Master-Metered and Commercial Gas Service), G -3 (Large Commercial Gas Service), and G -10 (Compressed Natural Gas Service) From: City Manager Lead Department: Utilities Recommended Motion Staff recommends the Utilities Advisory Commission (UAC) consider the following Motion: Recommend Council adopt a Resolution approving the FY 2021 Gas Financial Plan, including reserve transfers and an amendment to the Gas Utility Reserves Management Practices, and increasing gas rates by amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service). Recommendation Staff requests that the Utilities Advisory Commission (UAC) recommend that the Council: 1.Adopt a Resolution (Attachment A): a.Approving the fiscal year (FY) 2021 Gas Utility Financial Plan (Attachment B); and b.Transferring all remaining funds (currently $2.533 million) from the Rate Stabilization Reserve (RSR) to the Operations Reserve; and c.Transferring up to $4.5 million from the Operations Reserve to the CIP Reserve; and d.Amending the Gas Utility Reserve Management Practices relating to the CIP and Rates Stabilization Reserves (as set forth in the Financial Plan) (Attachment C); and e.Increasing gas rates by amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) (Attachment D). Staff: Eric Keniston City of Palo Alto Page 2 Executive Summary The FY 2021 Gas Utility Financial Plan includes projections of the utility’s costs and revenues for FY 2021 through FY 2025. Gas utility costs are made up of supply-related costs (41 percent of costs in FY 2019) and distribution-related costs (59 percent of costs in FY 2019). Supply-related costs (and customer rates) vary monthly with the gas markets, but customer rates for gas distribution are evaluated annually and set by Council action like other utility rates. Gas rates related to distribution costs were last increased by 8 percent on July 1, 2019. The proposed FY 2021 Gas Utility Financial Plan also includes a 5 percent overall system rate (and bill) increase on July 1, 2020, which will be done through an 8 percent increase in distribution rates (because distribution accounts for only 59 percent of the average customer’s bill). Further 4 percent overall increases (6 percent distribution increases) are projected over the next three years. CIP expenditures for the last several years have been lower than normal while the City was completing the Upgrade Downtown project, and much of this increase is due to the Gas Utility resuming ongoing main replacement projects. In addition, the plan proposes transfers to the Operations Reserve of up to $2.5 million from the Rate Stabilization Reserve, and up to $4.5 million to the CIP Reserve from the Operations Reserve, to ensure that there are appropriate financial reserves for contingencies, such as high construction costs and unplanned CIP replacement, as well as to provide initial funding for the CIP Reserve to operate as a functional reserve for CIP projects. This will allow the CIP reserve to absorb annual variations in capital cost, rather than the Operations reserve. More on this will be discussed below. The Rate Stabilization Reserve is projected to be at zero balance by the end of FY 2020, consistent with the Reserves Management Practices. The 2019 Natural Gas Cost of Service and Rates Study was completed last year. Staff updated the model developed as part of the study with current and proposed operating costs, changes to the utilities infrastructure mix, and developing patterns of usage between Palo Alto’s customers. The results showed a need for some adjustments between customer classes. While rates for all customer classes will increase in order to cover increasing commodity, capital and operational costs, residential and large commercial customers require a slightly lower rate increase to achieve cost of service (COSA) than small commercial customers. Consumption decreased for all customer classes, but more for small commercial customers than others, meaning that a small amount of additional distribution-related costs need to be recovered for this class, leading to a slightly higher rate G-2 rate increase overall, as shown in Table 1, below. Table 1: Rate Increases by Customer Class City of Palo Alto Page 3 Cost of Service Analysis FY 2021 Revenue Increase needed for Distribution Charges Increase for Combined Commodity and Distribution Charges G1 - Residential 7.1%4.9% G2 - Small Commercial 8.1%5.2% G3 - Large Commercial 7.4%4.4% TOTAL 7.6%4.9% The cost shifts between customer classes are the result of changes in fixed costs, primarily Capital Improvement spending, declining customer usage and shifts to how customers use the gas system. Figure 1 below shows the primary drivers for the proposed rate change, which are almost equally split between increasing Capital Improvement (CIP) cost and increases in Operations expenses. The increases are discussed in greater depth in the attached FY 2021 Gas Financial Plan: Figure 1: Allocation of Distribution Rate increase Supply-related costs (the cost of the natural gas itself, gas transmission, and gas environmental charges) are the most volatile component of the Gas Utility’s expenses, but recent market indications have led staff to project supply cost increases of around 2.5 percent annually for the forecast horizon. Market prices, however, are monitored monthly and automatically incorporated into monthly supply rate adjustments. Therefore, it is not possible to exactly predict what supply rates will be during the planning horizon. Where overall rate increases (supply plus distribution) are referenced in this report, the figures do not attempt to predict or include any supply rate increase or decrease that can occur as a result of the monthly supply rate adjustments. Background Every year staff presents the Utilities Advisory Commission with Financial Plans for its Electric, Water, Gas, and Wastewater Collection Utilities and recommends any rate adjustments required to maintain City of Palo Alto Page 4 their financial health. These Financial Plans include a comprehensive overview of the utility’s operations, 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. The City’s gas is purchased from a variety of marketers who source gas from throughout the Western United States. The City then pays Pacific Gas and Electric (PG&E) to transport the gas across its gas transmission system to Palo Alto, which is then delivered to customers through Palo Alto’s gas distribution system. The Gas Utility’s costs can be divided into two main categories: gas supply costs (which includes the cost of the gas itself, the cost of transmitting the gas to Palo Alto, and environmental costs1) and the costs of running the business and operating the distribution system. As noted above, gas supply costs vary with the market, and the costs are passed through to customers through a gas supply rate component that varies monthly. The UAC reviewed preliminary financial forecasts at its December 4, 2019 meeting. At that meeting, staff also projected an 8% distribution rate increase (or a 5% overall gas rate increase). Discussion Staff’s annual assessment of the financial position of the City’s gas utility is completed to ensure adequate revenue to fund operations and to ensure that the City’s rates comply with cost of service requirements set forth in the California Constitution and applicable statutory law. The assessment includes making long-term projections of market conditions, of costs associated with the physical condition of infrastructure, and of other factors that could affect utility costs. Rates are then proposed that will be adequate to recover projected costs. Proposed Actions for FY 2020 and FY 2021: The FY 2021 Gas Utility Financial Plan includes the following proposed actions: 1. Amend gas rate schedules (see Attachment D) to increase distribution rates by approximately 8 percent (a 5 percent increase on overall rates); 2. Transfer all remaining funds (currently $2.533 million) from the Rate Stabilization Reserve (RSR) to the Operations Reserve; and, 3. Transfer up to $4.5 million from the Operations Reserve to the CIP Reserve. 4. Amend the Gas Utility Reserve Management Practices (as shown in redline in Attachment C). The reserve transfers and proposed changes to the Reserve Management Practices will enable staff to both maintain sufficient funds in the Gas Operations Reserve while establishing a CIP fund to balance the year to year cost swings associated with capital spending, as discussed below. These proposed actions are described in more detail in the FY 2021 Gas Financial Plan (Attachment B). Proposed Gas Rates and Cost of Service Update 1 These are the costs of complying with the State’s Cap and Trade system and procuring offsets under the City’s Carbon Neutral Gas program. City of Palo Alto Page 5 The Gas Utility’s rates are evaluated and implemented in compliance with cost of service requirements. The Gas Utility’s proposed rates are based on the methodology from the 2019 Natural Gas Cost of Service and Rates Study, presented to Council in June 20192, and updated with current and proposed operating costs, changes to the utilities infrastructure mix from last year, and developing patterns of usage between Palo Alto’s customers. Table 2 below shows the results of the analysis and the corresponding revenue and rate increases sought by rate class: Table 2: Cost of Service (COSA) results by Customer Class Cost of Service Analysis FY 2021 Test Year Projected FY 2021 Revenues under Current Rates Net Distribution Revenue Requirement Projected Deficiency in FY 2021 Ravenue based on Current Rates Revenue Increase needed for Distribution Charges Increase for Combined Commodity and Distribution Charges G1 - Residential 10,345,561$ 11,080,902$ 735,342$ 7.1%4.9% G2 - Small Commercial 10,535,487$ 11,386,754$ 851,266$ 8.1%5.2% G3 - Large Commercial 3,621,144$ 3,889,324$ 268,180$ 7.4%4.4% TOTAL 24,502,193$ 26,356,980$ 1,854,787$ 7.6%4.9% The COSA estimates a net distribution revenue requirement of $26.4 million for FY 2021, and its further estimates that the existing rates would only generate $24.5 million in distribution revenues for FY 2021. A roughly 8 percent increase in distribution rates is necessary to recover this deficiency. Table 2 above outlines how these revenue requirements and distribution charges are allocated amongst the three gas customer classes. Variations in allocations between customer classes, both in general as well as between monthly service charges and volumetric rates, are a function of annual and projected variations in loads, system utilization characteristics by class, as well as changes in costs over time. Much of the shift in costs between customer classes in the proposed FY 2021 rates ties back to the increased capital spending plan. For several years (2013 to 2019) staff focused on large scale and complex gas main replacement projects (one of which was Upgrade Downtown). This prevented staff from engaging in more routine annual main replacement. With those projects completed staff is planning for routine main replacement over the next five years. This increased capital spending affects different customer classes differently. Staff does not expect future year rate changes to vary as significantly between customer classes, since capital spending is expected to be more stable going forward. Fixed charges include both customer service and meter reading costs as well as a portion of distribution system costs. As the City resumes regular main replacement for its gas utility, it impacts the fixed charges. In addition, G-2 (small commercial) customer usage is higher than that of G-1 and G-3 customers. Because their utilization of the system is higher than the other two classes, they will have a larger impact to their fixed charges from the re-allocation of the distribution system cost and capital improvements. Stabilization of CIP spending and reserve transfers should help to moderate these types of class swings in the future. For the volumetric distribution charges, the increase is about 10% for all groups. However, as CIP-related costs are weighted more towards peak demands (like winter peaks), Tier 2 residential rates for the G-1 residential group, which collects costs associated with distribution capacity to serve peak demand, are seeing a larger increase than for Tier 1. 2 Staff Report 10295, 6/17/2019 https://www.cityofpaloalto.org/civicax/filebank/documents/71892 City of Palo Alto Page 6 Staff proposes to adjust gas rates as shown in Table 3 and Table 4 below, effective July 1, 2020. These changes are projected to increase the system average gas rate (total of supply and distribution) by roughly 5 percent for all classes. These rate changes are included in the proposed amended rate schedules in Attachment D. Table 3: Current and Proposed Monthly Service Charges Rate Schedule Monthly Service Charge ($/month) Change Current (as of 7/1/19) Proposed for FY 2021 ($) (%) G-1 (Residential) $13.35 $11.98 ($1.37) (10.3%) G-2 (Small Commercial) 104.95 107.37 2.42 2.3% G-3 (Large Commercial) 690.45 524.44 (166.01) (24.0%) G-10 (CNG) 70.98 72.62 1.64 2.3% Table 4: Current and Proposed Gas Distribution Charges Change Current (as of 7/1/18) Proposed for FY 2020 ($) (%) G-1 (Residential) Tier 1 Rates $0.4835 $0.5279 $0.0444 9.2% Tier 2 Rates 1.0426 1.2756 0.2330 22.3% G-2 (Residential Master-Metered and Small Commercial) Uniform Rate 0.6102 0.6726 0.0624 10.2% G-3 (Large Commercial) Uniform Rate 0.6056 0.6665 0.0609 10.1% G-10 (Compressed Natural Gas) Uniform Rate 0.0100 0.0110 0.0010 10.0% Bill Impact of Proposed Rate Changes Table 5 shows the impact of the proposed July 1, 2020 rate changes on various levels of residential bills. The average increase for the residential class is roughly 5 percent based on last year’s commodity prices, but lower usage G-1 customers may see a bill decrease due to the decrease in the monthly service charge, and higher users will see larger bills as Tier 2 prices increased more than Tier 1 did. Table 5: Impact of Proposed Gas Rate Changes on Residential Bills Usage (Therms/month) Bill under Current Rates Bill under Proposed Rates Change $/mo. % City of Palo Alto Page 7 Winter (Using December 2019 commodity prices) 30 $ 44.47 $ 44.44 ($ 0.04) (0.1%) 54 (median) 69.37 70.40 1.03 1.5% 80 106.41 111.99 5.58 5.2% 150 218.17 240.06 21.89 10.0% Summer (Using July 2019 commodity prices) 10 $ 22.56 $ 21.64 ($ 0.93) (4.1%) 18 (median) 29.93 29.36 (0.57) (1.9%) 30 46.20 47.93 1.72 3.7% 45 68.41 73.62 5.22 7.6% Table 6 shows the impact of the proposed July 1, 2020 rate changes on various representative commercial customer bills. The overall increases for the G-2 and G-3 classes are projected to be 5.2% and 4.4%, respectively. Table 6: Impact of Proposed Gas Rate Changes on Commercial Bills (Using December 2019 commodity prices) Usage (Therms/month) Bill under Current Rates Bill under Proposed Rates Change % 500 687 721 4.9% 5,000 5,926 6,240 5.3% 10,000 11,747 12,373 5.3% 50,000 58,669 61,548 4.9% FY 2021 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years Table 7 shows the projected rate adjustments over the next five years and their impact on the annual median residential gas bill (54 therms per month in winter, 18 therms per month in summer). Note that as the residential increase in FY 2021 falls largely on the second tier and the monthly service charge is decreasing, the median customer bill’s impact is relatively less than it would be otherwise. Table 7: Projected Rate Adjustments, FY 2021 to FY 2025 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Gas Utility 5%4%4%4%2% Estimated Bill Impact ($/mo)*$0.10 $1.77 $1.85 $1.92 $1.00 * estimated impact on median residential gas bill, which is currently $44.36 for CY 2019 One of the main drivers for the increase in the Gas Utility’s short-term costs (and therefore rates) over the next several years are increases in capital improvement costs to maintain a safe and reliable system. In FY 2015 and FY 2017, costs for the gas utility were unusually low as new main replacements were not planned. In FY 2014 and FY 2015, staff was completing a prior major gas main replacement project, the largest in utility history, which included replacement of most ABS gas mains in Palo Alto. FY 2017 included replacements of gas mains on University Avenue, a project that has evolved into the Upgrade Downtown project, involving a coordinated replacement of several different types of infrastructure to City of Palo Alto Page 8 avoid multiple disruptions to the business district. This was a multi-year planning effort, completed in 2019, which did not allow for design of other new projects. Also, as government agencies regionally and nationally spend more on infrastructure improvement, contractor bids for underground construction have risen greatly from where they were in years past. This current financial plan works to address these challenges in a way that will allow City of Palo Alto Utilities (CPAU) to meet its gas main replacement (GMR) needs. The next focus of the GMR program will be the replacement of all Polyvinyl Chloride (PVC) mains with Polyethylene (PE) mains. CPAU installed PVC pipes from the early 1970s to mid-1980s. Some of the City’s PVC pipe is approaching 50 years of service, and according to industry data, PVC pipes have a much higher leakage rate than PE mains after 20 years of service due to potential disbandment of fittings and joints. This financial plan includes approximately $9 to 10 million every other year for main replacement construction instead of $5 to 6 million annually, starting in FY 2021. This shift to larger main replacement construction projects every other year will slightly lengthen the amount of time needed to replace all PVC pipes in the system but will ideally attract more contractors and better bid pricing on the larger projects. Additionally, this main replacement project schedule for gas will be staggered with water and wastewater (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. This arrangement is likely to be a short-term solution (3-5 years) until project capacity can be increased and upward pressure on utility rates has eased. Because of this staggered CIP approach capital spending will vary from year to year. Staff proposes modifications to the Gas Utility Reserves Management Practices to synchronize them with the staggered main replacement schedule and to use the CIP account/Reserve to absorb the year to year variation. 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 expense3. Staff also proposes that the Gas 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. 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.4 The new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level. This maximum in FY 2021 is $8.9 million and the minimum in FY 2021 is $1.8 million. Table 8 below shows the reserve balance changes for each reserve from FY 2019 and projected through FY 2025. Staff is requesting up to a $4.5 million transfer from the Operations Reserve to the CIP reserve in FY 2020. This transfer will allow the CIP Reserve to hold enough funds to manage cost variances in CIP projects or the need for modest amounts of emergency CIP spending. Staff may seek to add more funds to the CIP reserve if FY 2020 ending reserves are healthier than projected. 3 Each month is calculated based upon 1/12 of the annual budget 4 For example, in this Financial Plan for FY 2021, the 48 month period to use to derive the annual av erage 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 9 Table 8: Operations, 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 Reserve 9,966 8,814 8,508 7,664 7,595 9,030 2 CIP Reserve 3,820 8,320 1,320 3,570 70 3,070 3 Rate Stabilization 2,533 - - - - - Revenues 4 Total Revenue 40,121 40,870 43,051 45,447 47,730 49,362 Transfers 5 Operations Reserve (1,967) 7,000 (2,250) 3,500 (3,000) 3,000 6 CIP Reserve 4,500 (7,000) 2,250 (3,500) 3,000 (3,000) 7 Rate Stabilization (2,533) - - - - - Expenses 8 Non CIP Expenses 35,964 35,893 37,621 37,949 39,184 40,436 9 Planned CIP 3,342 12,283 4,024 11,067 4,111 11,319 Ending Balance 1 + 4 + 5 + 8 + 9 Operations Reserve 8,814 8,508 7,664 7,595 9,030 9,638 2 + 6 CIP Reserve 8,320 1,320 3,570 70 3,070 70 3 + 7 Rate Stabilization - - - - - - Operations Reserve Guidelines 10 Minimum 5,912 5,900 6,184 6,238 6,441 6,647 11 Maximum 11,824 11,800 12,369 12,476 12,882 13,294 Table 8 above shows the anticipated CIP Reserve transfers in FY 2020 through FY 2025. There is also approximately $3.8 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 $1.2 million in commitments (CIP Commitments Reserve) and $2.6 for ongoing projects (CIP Reappropriations Reserve). Over the longer term, gas commodity costs are the most variable factor in customer gas bills, being subject to market forces, and are currently projected to grow by about 2.5 percent per year. Increases to Operations costs are projected to increase at 3 to 4 percent annually, although there is a near term large one-time increase in costs to pay for phase two of a cross-bore safety verification program. The cross-bore safety program ensures that gas pipelines have not crossed through sewer laterals, which is rare but possible during trenchless installation. This is referred to as a “cross-bore,” and while they are very rare, if they exist they pose a risk of gas leaks if a plumber uses a cutting tool to clear a sewer line and accidentally cuts the gas line. The project will video inspect, determine and repair any unintended conflicts between gas service pipelines and sewer laterals. Phase two of this program is estimated to require $1 million per year for the next two years, although the project may require additional funding depending on what inspections show. City of Palo Alto Page 10 Figures 2 below illustrates the projected long run changes in the Gas Utility’s costs. Cost increases over the FY 2016 to FY 2025 time period are mainly from commodity costs, followed by operations and capital expenses. Figure 2: FY 2016, FY 2020 and FY 2025 costs * Note that FY 2020 and FY 2024 Capital Investment costs are displayed as an average of two years’ cost, as FY 2025 has a $9 million main replacement project while FY 2020 does not. Gas usage was trending downward over the last several years, most likely due to relatively warm winter heating seasons, as well as lower hot water usage during the drought, but a cooler winter and the end of drought restrictions has brought increased usage in FY 2019. Gas usage has nearly recovered to levels seen back in 2013, but as with water, it is difficult to determine whether or when long run usage will resume the declining trend seen over the last few decades. The long-term forecast includes the impact of the new Reach Code that mandates new all-electric residential construction, but does not include assumptions related to existing building electrification. In 2020 and 2021 the community will update the Sustainability and Climate Action Plan, updating its goals for electrification of existing buildings, and staff will also be analyzing the impacts to the gas utility’s finances and potential mitigations. Staff will incorporate its findings into next year’s gas utility financial forecasts. Gas Bill Comparison with Surrounding Cities Table 9 presents winter and summer residential bills for Palo Alto and PG&E at several usage levels for commodity rates in effect as of July 2019 (to illustrate a summer month bill) and December 2019 (to illustrate a winter month bill). The annual gas bill for the median residential customer for calendar year City of Palo Alto Page 11 2019 was $532.32, about 3% lower than the annual bill for a PG&E customer with the same consumption. PG&E’s distribution rates for gas have increased substantially to collect for needed system improvements for pipeline safety and maintenance. The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which includes the surrounding communities. Table 9: Residential Monthly Natural Gas Bill Comparison ($/month) Season Usage (therms) Palo Alto PG&E Zone X % Difference Winter (December 2019) 30 44.47 43.79 1.6% (Median) 54 69.37 82.27 -15.7% 80 106.41 135.31 -21.4% 150 218.17 278.10 -21.5% Summer (July 2019) 10 22.56 13.74 64.2% (Median) 18 29.93 24.74 21.0% 30 46.20 48.25 -4.2% 45 68.41 77.86 -12.1% Table 10 shows the monthly gas bills for commercial customers for various usage levels for rates in effect as of December 2019. Bills for CPAU customers at the usage levels shown can vary between 11% lower to 25% higher for commercial customers than for PG&E customers. This is a substantial improvement over the calendar year 2013 bill comparison, when commercial gas bills for CPAU customers were 27% to 44% higher than for PG&E customers. This is primarily attributable to PG&E’s higher distribution rates as the commodity rates for CPAU and PG&E are very similar, both being based on spot market gas prices. Table 10: Commercial Monthly Average Gas Bill Comparison (for Rates in Effect December 2019) Usage (therms/mo) Gas Bill ($/month) % Difference Palo Alto PG&E 500 687 618 11% 5,000 5,926 5,882 1% 10,000 11,747 10,356 13% 50,000 58,669 47,104 25% City of Palo Alto Page 12 Timeline The Finance Committee is scheduled to review the FY 2021 Gas Financial Plan in May 2020. The City Council will consider adopting the Financial Plan, including the updated Reserve Management Practices, and rate adjustments as part of the FY 2021 budget review and adoption process. If Council approves the proposed rate changes, they will become effective July 1, 2020. Resource Impact Normal year sales revenues for the Gas Utility are projected to increase by roughly 5 percent ($1.9 million) as a result of the proposed rate increases, not including fluctuations in commodity revenue/cost. The FY 2021 Budget is being developed concurrent with these rates and, depending on the final rates, adjustments to the budget may be necessary at a later time. See the attached FY 2021 Gas Financial Plan for a more comprehensive overview of projected cost and revenue changes for the next five years. Policy Implications The proposed gas rate adjustments are consistent with Council-adopted Reserve Management Practices that are part of the Financial Plan, and were developed using a cost of service study and methodology consistent with industry-accepted cost of service principles. Stakeholder Engagement The UAC reviewed preliminary financial forecasts at its December 4, 2019 meeting, and the Finance Committee reviewed the preliminary forecasts at its March 3, 2020 meeting. Staff and the UAC’s recommendation on the FY 2021 gas rate increases will go to the Finance Committee in May, and be presented to City Council in June during the budget adoption process. Environmental Review The Utility Advisory Commission’s review and recommendation to Council on the FY 2021 Gas Financial Plan and rate adjustments does not meet the California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section 21065, thus no environmental review is required. Attachments: • Attachment A: Resolution Adopting the FY 2021 Gas Financial Plan and Transfers Attachment A * NOT YET APPROVED * 6055342 Resolution No. _________ Resolution of the Council of the City of Palo Alto Approving the Fiscal Year 2021 Gas Utility Financial Plan, Including Proposed Transfers and an Amendment to the Gas Utility Reserve Management Practices, and Increasing Gas Rates by Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G- 10 (Compressed Natural Gas Service) 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. It 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. C. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of the City of Palo Alto may by resolution adopt rules and regulations governing utility services, fees and charges. D. On ____, 2020, the City Council heard and approved the proposed rate increase at a noticed public hearing. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The Council hereby adopts the FY 2021 Gas Utility Financial Plan. SECTION 2. The Council hereby approves the transfer of up to $2.533 Million from the Rate Stabilization Reserve to the Operations Reserve, and up $4.5 Million from the Operations Reserve to the CIP Reserve, as described in the FY 2021 Gas Utility Financial Plan approved via this resolution. SECTION 3. The Council hereby approves the amendments to the Gas Utility Reserves Management Practices. Attachment A * NOT YET APPROVED * 6055342 SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-1 (Residential Gas Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule G-1, as amended, shall become effective July 1, 2020. SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-2 (Residential Master-Metered and Commercial Gas Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule G-2, as amended, shall become effective July 1, 2020. SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-3 (Large Commercial Gas Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule G-3, as amended, shall become effective July 1, 2020. SECTION 7. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-10 (Compressed Natural Gas Service Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule G-10, as amended, shall become effective July 1, 2020. SECTION 8. The City Council finds as follows: a. Revenues derived from the gas rates approved by this resolution do not exceed the funds required to provide gas service. b. Revenues derived from the gas rates approved by this resolution shall not be used for any purpose other than providing gas service, and the purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. SECTION 9. The Council finds that the fees and charges adopted by this resolution are charges imposed for a specific government service or product provided directly to the payor that are not provided to those not charged, and do not exceed the reasonable costs to the City of providing the service or product. // // // // // // // Attachment A * NOT YET APPROVED * 6055342 // SECTION 10. The Council finds that approving the Financial Plan and amending the Gas Utility Reserves Management Practices 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 assessment is required. The Council finds that changing gas rates to meet operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital improvements necessary to maintain service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the staff report and all attachments presented to Council, the Council incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption. 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 1 of 3 TO: UTILITIES ADVISORY COMMISSION FROM: DEAN BATCHELOR, DIRECTOR OF UTILITIES DATE: APRIL 15, 2020 SUBJECT: AGENDA ITEM NUMBER 2 – Staff Recommendation That the Utilities Advisory Commission Recommend the City Council Adopt a Resolution Approving the Fiscal Year 2021 Gas Utility Financial Plan, Including Proposed Transfers and an Amendment to the Gas Utility Reserve Management Practices, and Increasing Gas Rates by Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) In item #2, staff has proposed an overall gas rate change of 5% effective July 1, 2020. In light of the COVID-19 pandemic, staff is bringing forward an alternative rate increase proposal for consideration by the Utilities Advisory Commission. Projection FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 Current Financial Plan 5% 4% 4% 4% 2% Alternate 3% Increase (Recommended) 3% 6% 6% 6% 1% Alternate 0% Increase 0% 10% 8% 3% 1% Understanding that rate increases during this time are more difficult for residents and businesses to absorb, staff is recommending an alternative, lower rate increase amount of 3% overall for gas. The future rate increase trajectory is slightly higher, as shown in Figure 1, but Operations reserves will still remain within guideline levels, as shown in Figure 2. Given lower sales volumes seen since the forecasts were first created (prior to the winter heating season and the shelter-in- place actions), staff is anticipating that future rate increases would likely need to be higher than what was presented earlier. Some of this lower consumption has been factored into the alternate proposals. 2 DocuSign Envelope ID: 40C09FF0-ED34-4781-ACF9-A96BF5076CA7 2 of 3 Staff also ran a scenario with no rate increase for FY 2021, although future rate increases would be larger to keep the Operations Reserve within the guideline ranges, or large costs, such as CIP projects, would be deferred to later years. If the UAC and Finance Committee agree to this alternate scenario, the Rates adoption CMR, FY 2021 Gas Financial Plan and rate schedules to be presented to Council in June will be amended to reflect the alternate scenario. Figure 1: FY 2021 3% Rate Increase scenario DocuSign Envelope ID: 40C09FF0-ED34-4781-ACF9-A96BF5076CA7 3 of 3 Figure 2: FY 2021 3% Rate Increase: Operations Reserve _______________________ _______________________ Jonathan Abendschein Dean Batchelor Assistant Director of Utilities Director of Utilities DocuSign Envelope ID: 40C09FF0-ED34-4781-ACF9-A96BF5076CA7 City of Palo Alto (ID # 11233) Utilities Advisory Commission Staff Report Report Type: Agenda Items Meeting Date: 4/15/2020 City of Palo Alto Page 1 Summary Title: Wastewater Collection Utility Financial Projections Title: Staff Recommendation That the Utilities Advisory Commission Recommend the City Council Make no Changes to Wastewater Collection Utility Rates for July 1, 2020 From: City Manager Lead Department: Utilities Recommendation Staff requests that the Utilities Advisory Commission (UAC) recommend the Council make no changes to Wastewater rates for July 1, 2020. Executive Summary At the April 15, 2020 meeting, staff will present a general overview of the financial projections for the Wastewater Collection Utility. Staff will present the full FY 2021 Wastewater Collection Utility Financial Plan and cost of service study, once final, at a future meeting date. Staff will target a meeting da te that is both after the COVID-19 emergency is over and that allows full and in person customer attendance and participation in the public meetings and hearing to consider proposed rate changes. Attachments: •Attachment A: Presentation on Wastewater Collection Utility Financial Projections Staff: Lisa Bilir APRIL 15, 2020 www.cityofpaloalto.org WASTEWATER COLLECTION UTILITY FINANCIAL PROJECTIONS Staff: Lisa Bilir Attachment A • CITY OF PALO ALTO 1 WASTEWATER PROJECTIONS •FY 2021 proposal: •0% overall rate increase •Future projections (following four years) •5% per year increases 2 WASTEWATER UTILITY COST STRUCTURE Palo Alto’s share of the cost to treat sewage at Palo Alto’s Regional Water Quality Control PlantCost to collect sewage within Palo Alto, including: maintaining and replacing sewer infrastructure, customer service, billing, administration, etc. Treatment $12.2 million 57% Collections $9.1 million 43% 3 WASTEWATER UTILITY BASICS •Five partners: Stanford, East Palo Alto, Los Altos Hills, Los Altos, and Mountain View •Wastewater drains from partner systems through the City of Palo Alto Collection System, and into the City of Palo Alto Regional Water Quality Control Plant (RWQCP) for treatment •City of Palo Alto Utilities Department manages collection system, Public Works manages the RWQCP 4 TREATMENT COST DRIVERS •Regional Water Quality Control Plant needs rehabilitation •Long Range Facilities Plan completed in 2012 •Rehab/replacement of: •Sedimentation tank ($17M) •Outfall pipeline ($9M) •Laboratory/Operations Center ($22M) •Secondary Treatment ($30M) •Advanced Water Purification ($23M) •Headworks Facility ($39M) 5 OPERATIONS/CAPITAL COST DRIVERS •Salary and benefit costs for existing staff •Underground construction cost increases •Capital Spending: •Large Capital Improvement Projects will be conducted every two years 6 WASTEWATER MEDIAN MONTHLY RESIDENTIAL BILL ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward 41.37 98.08 81.76 42.91 42.05 38.44 34.30 Palo Alto is 26% below comparison city average 7 WASTEWATER MONTHLY NON-RESIDENTIAL BILL ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward General Commercial 111.58 135.24 107.80 72.10 131.18 66.03 76.16 Restaurant 690.48 1,118.88 1,033.20 666.40 602.00 264.13 541.52 Commercial: Palo Alto is 14% higher than comparison city average Restaurant: Palo Alto is 2% below comparison city average 8 WASTEWATER PROJECTIONS 9 WASTEWATER OPERATIONS RESERVE PROJECTIONS 12 RECOMMENDATION Staff recommends that the UAC recommend that the Council make no changes to Wastewater rates for July 1, 2020