Loading...
HomeMy WebLinkAbout2023-03-01 Utilities Advisory Commission Agenda PacketMATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE COMMISSION AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE UTILITIES DEPARTMENT AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. 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. UTILITIES ADVISORY COMMISSION – SPECIAL MEETING MARCH 1, 2023 – 4:30 PM City Council Chambers / ZOOM Webinar NOTICE IS POSTED IN ACCORDANCE WITH GOVERNMENT CODE SECTION 54954.2(a) OR 54956 Supporting materials are available online at https://www.cityofpaloalto.org/gov/boards/uac/default.asp on Thursday, 5 days preceding the meeting. Join Zoom Webinar Here Meeting ID: 966 9129 7246 Phone: 1 (669) 900-6833 Pursuant to AB 361 Utilities Advisory Commission meetings will be held as “hybrid” meetings with the option to attend by teleconference or in person. To maximize public safety while still maintaining transparency and public access, members of the public can choose to participate from home or attend in person. Members of the public who wish to participate by computer or phone can find the instructions at the end of this agenda. Masks are strongly encouraged if attending in person. The meeting will be broadcast on Cable TV Channel 26, live on Midpen Media Center at https://midpenmedia.org, and live on YouTube at https://www.youtube.com/c/cityofpaloalto. 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 4:30 – 4:35 pm II.AGENDA REVIEW AND REVISIONS 4:35 – 4:40 pm III.ORAL COMMUNICATIONS 4:40 – 4:55 pm 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. IV. APPROVAL OF THE MINUTES 4:55 – 5:00 pm Approval of the Minutes of the Utilities Advisory Commission Meeting Held on February 1, 2023. IV.UNFINISHED BUSINESS None VI. UTILITIES DIRECTOR REPORT 5:00 – 5:15 pm Chairman: Lauren Segal  Vice Chair: A.C. Johnston  Commissioners: John Bowie, Lisa Forssell, Phil Metz, Greg Scharff, and Loren Smith  Council Liaison: Ed Lauing • CITY OF PALO ALTO MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE COMMISSION AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE UTILITIES DEPARTMENT AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. 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. VII. NEW BUSINESS 1. Staff Recommend the Utilities Advisory Commission Recommend the Finance Committee Recommend that the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Reserve Transfers and Increasing Wastewater Rates by Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) (ACTION 5:15 – 6:15 PM) Staff: Lisa Bilir 2. Staff Recommend the Utilities Advisory Commission Recommend the Finance Committee Recommend that City Council Adopt a Resolution Approving the Fiscal Year 2024 Water Utility Financial Plan, Including Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service From Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) (ACTION 6:15 – 7:15 PM) Staff: Lisa Bilir 20-minute break 7:15 – 7:35 PM 3. Staff Recommends That the Utilities Advisory Commission Recommend that the Finance Committee recommend that the City Council Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including the Proposed Reserve and General Fund Transfers, and 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) (ACTION 7:35 – 8:35 PM) Staff: Jonathan Abendschein 4. Staff Recommends the Utilities Advisory Commission Recommend that the Finance Committee Recommend that the City Council Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E-HRA (Hydro Rate Adjuster), 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-NSE (Net Metering Net Surplus Electricity Compensation), and E-EEC (Export Electricity Compensation) (ACTION 8:35 – 9:35 PM) Staff: Micah Babbitt MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE COMMISSION AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE UTILITIES DEPARTMENT AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. 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. VIII. COMMISSIONER COMMENTS and REPORTS from MEETINGS/EVENTS INFORMATIONAL REPORTS IX. FUTURE TOPICS FOR UPCOMING MEETING: April 5, 2023 SUPPLEMENTAL INFORMATION - The materials below are provided for informational purposes, not for action or discussion during UAC Meetings (Govt. Code Section 54954.2(a)(3)). 12-Month Rolling Calendar Public Letter(s) to the UAC MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE COMMISSION AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE UTILITIES DEPARTMENT AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. 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. • 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. • 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. • 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. • When called, please limit your remarks to the time limit allotted. • 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. Join Zoom Webinar Here Meeting ID: 966-9129-7246 Item No. {{item.number}}. Page 1 of 1 Utilities Advisory Commission Staff Report From: Dean Batchelor, Director Utilities Lead Department: Utilities Meeting Date: March 1, 2023 Report #: 2302-1014 TITLE Approval of the Minutes of the Utilities Advisory Commission Meeting Held on February 01, 2023 RECOMMENDATION Staff recommends that the UAC consider the following motion: Commissioner ______ moved to approve the draft minutes of the February 1, 2023 meeting as submitted/Amended. Commissioner ______ seconded the motion. ATTACHMENTS Attachment A - UAC February 01, 2023 Minutes AUTHOR/TITLE: Tabatha Boatwright, Administrative Assistant - U CITY OF PALO ALTO Utilities Advisory Commission Minutes Approved on: Page 1 of 15 UTILITIES ADVISORY COMMISSION MEETING MINUTES OF FEBRUARY 1, 2023 REGULAR MEETING CALL TO ORDER Chair Segal called the meeting of the Utilities Advisory Commission (UAC) to order at 6:00 p.m. Present: Chair Segal, Vice Chair Johnston, Commissioners Bowie, Metz, Scharff and Smith. Commissioner Forssell arrived at 6:09 p.m. Absent: AGENDA REVIEW AND REVISIONS None ORAL COMMUNICATIONS None APPROVAL OF THE MINUTES Chair Segal invited comments on the December 7, 2022 UAC draft meeting minutes. Commissioner Scharff moved to approve the draft minutes of the December 7, 2022 meeting as presented. Commissioner Metz seconded the motion. The motion carried 6-0 with Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Metz, Scharff and Smith voting yes. Commissioner Forssell absent. UNFINISHED BUSINESS None UTILITIES DIRECTOR REPORT Dean Batchelor, Utilities Director, delivered the Director's Report. 0 CITY A 0 ALTO Utilities Advisory Commission Minutes Approved on: Page 2 of 15 Extreme Energy Prices and High Utility Bills This Winter: CPAU and other utilities in the region have experienced extremely high natural gas prices this winter due to national weather, gas production, storage levels, as well as national and international trade and demand. Since learning of these higher prices in late November and early December, CPAU has been informing customers to save energy to avoid high utility bills in January and February. The City is offering resources to help customers, including payment arrangements, energy efficiency tips and warming centers. Our Utilities Customer Service Call Center can be contacted at (650) 329-2161 for financial assistance. The February gas commodity price has dropped from $4/therm to about $1.26. 2022 SunShares Program Results: The 2022 Bay Area SunShares solar and battery storage discount program administered by Building Council for Climate Change ended on December 31, 2022. Palo Alto ranked in first place for the number of SunShares program registrations (151 registrations) and number of solar and storage contracts signed (32 contracts). Of the 32 contracts signed, 23 contracts were for solar only, 8 for solar and storage, and 1 for storage only. CPAU maximizes participation by engaging customers in our programs such as Home Efficiency Genie’s Home Assessments and Heat Pump Water Heater Program. EV Financial Incentives Clinic: On January 25, 2023, CPAU held a virtual, multilingual EV Financial Incentives Clinic in English, Spanish and Vietnamese. This workshop was geared toward lower income customers who may feel they cannot afford an EV. There were over 190 registrants and 85 attendees. The workshop covered topics such as greenhouse gas emissions, fuel and car maintenance savings, rebates, incentives, different levels of EV chargers, and new and used EV models. CPAU will host more EV and E-bike workshops this year. Details and registration for upcoming events are on cityofpaloalto.org/workshops. Ribbon Cutting for Stanford Health Care EV Chargers: Stanford Health Care recently installed 15 new EV charging stations at the Hoover Pavilion garage. Stanford participated in the City’s Electric Vehicle Technical Assistance Program, which helped with technical evaluation, design, permitting, contractor selection and equipment installation. Stanford is in the permitting phase for installing EV chargers at two other garages. Stanford has invited City representatives, including the City Council, to participate in a ribbon-cutting ceremony on February 9. Water Supply Update: The recent storms have had a measurable, positive impact on regional water system storage. Later this month, the San Francisco Public Utilities Commission will provide updates on water supply conditions and rate projections. Final numbers will be released in April. Hydroelectric Update: As of January 30, precipitation totals are about 40% and 70% above average in Northern California and the Central Valley, respectively. The snowpack levels are about 70% and 110% of average in Northern and Central California, respectively. Although this precipitation is not enough to end the drought, reservoir levels are at average levels for this time of year. Utilities Advisory Commission Minutes Approved on: Page 3 of 15 Recent Storms and Power Outages: A slide presentation was shown on the Bay Area Storms Report for January 2023. The rainfall from New Year’s Eve storm caused a peak water flow of about 6300 cubic feet per second, which is more than 10 times the precipitation of 600 cubic feet peak we typically see. There was some flooding. It crested the bank on December 31, 2022. Libraries and the Community Services Center served as daytime warming centers. The City activated the Emergency Operations Center (EOC) and mobilized teams for response to flooding, traffic control needs, emergency rescues, power outages and other storm-related impacts. Operators were at the Utilities Control Center answering customers’ phone calls after hours. Now, we can only take incoming calls, not outgoing calls. For planned outages, we hang flyers on customers’ homes. A new Outage Management System (OMS) has been ordered and should be ready by approximately June 2023. The new OMS has the ability to contact customers by text, email and/or phone call. Regarding the City entering into new labor contracts with the union, Vice Chair Johnston wondered if it was anticipated to help with our Electric recruiting problems. Mr. Batchelor hoped it will help keep our younger apprentices but did not think the wage increase would attract new linemen. Commissioner Metz wanted to know if the flooding on West Bayshore impacted our Colorado Ave substation and Adobe Creek as well as if the City would do something differently for substations going forward. Mr. Batchelor replied we were fortunate the freeway did not flood. The lower section on the west side of Bayshore was flooded. Colorado is higher than MSC. The UAC previously approved security lights and fencing for substations, including replacing Colorado’s wood fencing with pre-made solid walls this year. That should stop some of the flow into that area but there was no flooding or water problems in those two substations. Large sump pumps were spread out across the yard edges. There is a small creek on the south side, so hoses were ready to pump into the creek bed if needed. Commissioner Forssell queried if the 50 fallen trees were City-owned or privately owned and if the City could prevent trees falling during the next big storm. Mr. Batchelor responded the majority of the fallen trees were privately owned. Our tree-trimming program needs to be more proactive. Public Works does not have enough tree trimmers. Having at least 50 to 60 more tree trimmers would lessen the timeline of outages. Utilities pays contractors but it is managed out of the Public Works Department, so there are ongoing conversations with Public Works regarding this. Chair Segal questioned if the rainfall was enough to end the drought. Mr. Batchelor explained that the storms helped but the reservoirs were still low. In April, the San Francisco Public Utilities Commission will release final numbers on reservoir levels, which will be presented to the UAC during the April or May meeting. Utilities Advisory Commission Minutes Approved on: Page 4 of 15 Chair Segal inquired what lessons were learned regarding opening the community centers during the storms and whether we can use them for other storms or emergencies. Mr. Batchelor answered that we need to be more proactive when we know there are upcoming storms. The directors from Library and CSD stayed after hours to keep libraries and community centers open during early mornings and late nights but we could ask staff to help. We could have informed the public sooner about where to go. Mitchell Park was open but we did not have enough staffing to keep all of them open. We will work with Library and the Community Center to open again if we have another bad cold front. NEW BUSINESS ITEM 1: ACTION: Staff Recommend the Utilities Advisory Commission Recommend the City Council Approve and Authorize the City Manager or Their Designee to Execute a Third Phase Agreement With Northern California Power Agency for the Purchase of up to 87,600 Megawatt Hours per Year of Geothermal Energy From Calpine Corporation's Geysers Power Company, LLC Over a Term of up to 12 Years for a Total Not to Exceed Amount of $76.2 Million Micah Babbitt, Resource Planner, delivered a slide presentation regarding an opportunity to enter a 12-year power purchase agreement (PPA) for geothermal energy through Northern California Power Agency (NCPA). Mr. Babbitt addressed Commissioner Forssell’s question about the definition of on-peak and off-peak hours. On-peak is 6 a.m. to 10 p.m. Monday through Saturday and off-peak is all other times. One of our requirements to run a resource adequacy (RA) program is to demonstrate we have local RA, system RA and flex. Our local requirements are set on an annual basis and we have to procure RA to meet the requirements. On average, our requirements have been between 80 to 90 megawatts (MW). The resources in our portfolio contribute about 30 MW. The geothermal project would qualify as a local requirement. We claim system RA from our hydro. We are generally long on system RA, so we sell system RA into the market to other entities that are short. Local resources also qualify as system resources. This purchase agreement would further increase our long position on system RA and allow us to sell more system RA. Commissioner Forssell asked for a definition of our local RA requirement and if it was determined by the location proximity to Palo Alto. Mr. Babbitt explained that a resource qualifies as local if it is located within one of Cal ISO’s market regions. The geothermal project is located in the Northern Bay Area region of the California Independent System, so it qualifies as local. Some of our solar resources in Southern California do not qualify as local RA but they qualify as system RA. We have deficits in all of the evening hours because of the amount of solar we have in our portfolio. We are barely meeting our load during the daytime hours. During Q4 and Q1, there is significantly less solar power generated. In Q2 and Q3, we generally sell energy in the summer because we have more than we need during most hours but we are short in the evening hours. This geothermal project would provide 24/7 power, so it reduces our deficit and thus reduces our exposure to the market in those hours. Utilities Advisory Commission Minutes Approved on: Page 5 of 15 Commissioner Scharff commented that geothermal is a base resource we can use anytime. He assumed everyone is long in solar. He remembered there was a negative price for putting energy into the market, meaning it would cost us money. He believed it was better to have a base resource rather than solar that continually comes when we do not need it. Mr. Babbitt remarked that the main concern or hesitancy regarding electric supply management is to avoid over-procuring energy. In 2025, we are projected to be long. Our load is 850 gigawatt hours and our resources are almost 1 million megawatt hours (MWh), so we have more energy than we need, assuming an average hydro production year. The hydro total for Western and Calaveras are around 470 gigawatt hours. The last couple years, we had significantly less generation, so estimating whether we will be long or short on an annual energy basis is challenging, especially factoring in load growth uncertainty. We have one wind PPA expiring in 2028. We have a series of landfill gas PPAs that start expiring in 2028 and ultimately go into the 2030s. We are able to renew our Western contract starting in 2025. Therefore, there is uncertainty as to what our portfolio will look like starting in 2025. Commissioner Smith queried if the 87,000 MW was overlaid on the average hourly load resource chart for Q2 and Q3 if the bell curve would flatten. Mr. Babbitt responded that the geothermal contribution is seen above the gray bar. The analysis assumption was 10 MW from geothermal every hour of the day, every day of the week. Mr. Babbitt said the major takeaway from the slide “Projection of CA Energy Market Dynamics through 2045” is that the trajectory of the market is retiring baseload power and replacing it with intermittent renewables. Power prices are going up during off-peak hours and down during the day when solar is blasting. The market dynamics make a resource such as geothermal more valuable. Commissioner Metz requested further information regarding the “Projection of CA Energy Market Dynamics through 2045” chart, if he could see the analysis behind this chart, especially the projected gigantic penetration of wind and solar. Storage deployments are outpaced by the addition of intermittent resources, so this makes the mismatch much worse. Mr. Babbitt stated that the slide depicted how the market will place a premium on hours of the day when wind and solar are not generating. Mr. Babbitt agreed to share the analysis behind the chart with Commissioner Metz. Mr. Babbitt showed a slide on the Calpine geothermal deal characteristics and economics. The PPA is between Calpine and NCPA for 100 MW of geothermal. The project starts at 50 MW in 2025 and increases to 100 MW in 2027. Palo Alto’s share would be 5 MW in 2025 and 10 MW in 2027, which translates to 43,000 MWh/year and 87,000 MWh/year, respectively. The term is a 12-year contract from January 2025 to December 2036. The PPA price is set at $79/MWh, which is an annual cost to Palo Alto of just under $7 million. This agreement was evaluated by determining the benefits this resource would generate for us in revenue and if those revenues would be greater than the cost of $79/MWh, including the energy price, renewable energy Utilities Advisory Commission Minutes Approved on: Page 6 of 15 credit and local RA value, although there is uncertainty around what each of those prices will be. This resource is an around-the-clock or baseload resource and we have forward market prices for this type of product from 2025 through 2031 ranging between $62/MWh and $85/MWh. There has been volatility in energy prices. The last couple months, it was well over $100/MWh. We recently transacted Bucket 1 REC prices over $20/MWh. We sold local RA over $11/MWh. In the low end of our estimates, it is still a net value. Commissioner Scharff was curious as to what other options we have for base resources and what those prices were as well as how buying in the spot market compares economically to those options. Mr. Babbitt responded that we could buy base resources within our portfolio limitations. We have renewable portfolio standard requirements and a carbon neutral requirement. Other primary baseload resources in California are natural gas and some types of hydro. Wind and solar are not typically thought of as base resources because of their intermittency. Nuclear and coal are not easily procured in the market. If we buy a five-year contract today for baseload and we want renewable energy credits and local RA, we could pay as much as $116/MWh. Mr. Babbitt confirmed Commissioner Scharff’s assumptions that we buy on the spot market when we have energy shortfalls, which is usually natural gas. Commissioner Scharff commented this PPA was better because it is a true renewable instead of buying carbon offsets. Commissioner Scharff asked how much money we would spend on average in the spot market versus this PPA. Mr. Babbitt replied they have analyzed that question by looking at forward price curves based on what brokers would charge us to buy a strip of energy over an entire year. If today I buy 10 MW for CY25, it is probably $65/MWh plus $14 to buy the renewable energy credit, totaling $79/MWh. Mr. Babbitt agreed with Commissioner Scharff’s understanding that this is competitive from a cost perspective, it is a base resource and we need the energy during those periods. Dr. Stack noted we had not seen many other proposals for renewable baseload resources. In the past several years, most of the responses to our RFPs for renewables were solar. Consultants have said this proposal is very competitive compared to other geothermal projects being developed. We have not seen many wind proposals. During the IRP process, we will look further into the potential for out-of-state wind, which would have a generation profile complementary to our loads that would produce more in the evening hours. In response to Commissioner Scharff’s query as to why are we not buying more in this PPA, Mr. Babbitt answered we asked for more and are in the process of seeing if that is feasible. Commissioner Smith agreed with accepting more if it is available. Commissioner Smith requested an explanation on how to calculate net value. Mr. Babbitt replied that the net value difference is what it could cost if we were to buy this product on the market versus the PPA price. It could cost between $5/MWh to $37/MWh more than the PPA price of $79/MWh. Commissioner Smith asked if the calculation included selling our excess Utilities Advisory Commission Minutes Approved on: Page 7 of 15 during spring and summer. Mr. Babbitt stated these values were based on an average over the entire year on what we would expect the resource to generate in revenue versus what we would be paying for the cost of it. Commissioner Smith asked if the bullets on the slide for the Bucket 1 REC prices, the Local RA Value and the Total Benefits are additional contributions to net value. Mr. Babbitt said the net value is the total benefits minus the total cost, which is $79/MWh. The total benefits include the energy price, renewable energy credit and RA Value. During the winter and off-peak hours, it decreases our exposure to buying local RA on the market and makes us further long in renewable energy credits. Now, we sell renewable energy credits, Bucket 1 and buy Bucket 3, so it further enhances that position. Dr. Stack commented this calculation does not depend on what we do with our portfolio, how we manage it, what we sell or buy or what we are using. The calculation looks at the total market value of all the products being produced by this resource compared to how much the project costs. Mr. Babbitt addressed Vice Chair Johnston’s queries if landfill gas was a baseload renewable resource and if we were phasing it out. Landfill gas is a baseload resource and qualifies as a renewable. A decision has not been made on phasing it out but our 20-year contracts are set to expire. There may be an opportunity to renew those contracts. They had always been some of the more expensive resources in our portfolio but now they are competitive with the market. In reply to Vice Chair Johnston’s question regarding how the price for landfill gas compared to $79/MWh, Mr. Babbitt responded he did not know if we had a recent data point. Vice Chair Johnston asked if RA was a state requirement. Mr. Babbitt replied that every load- serving entity is required to have an RA program. All CPUC regulated entities have an RA program by CPUC. We buy and sell to balance our requirements and certain resources qualify for certain attributes. Commissioner Scharff remembered there were environmental concerns about landfill gas from the National Resources Defense Council and Sierra Club because of water poured into landfill gas to create more from methane. Mr. Babbitt stated the preliminary findings are that geothermal was a good fit for the hours we are in deficit. Data centers have a baseload-type demand profile, so having a new baseload resource in our portfolio would go well with growth of data center load. As the forward market prices continue rising, $79 looks attractive. The City of Santa Clara has Council approval and is the 100% off-taker. NCPA signed the contract with Calpine. Santa Clara will assign a share of the project to individual members that have Council approval. Mr. Babbitt will speak with the Finance Committee in March and the Council in April. With approval from UAC, Finance and Council, the contract starts in January 2025. Sherry Listgarten commented that geothermal is expensive. She understands other things are more expensive but it would be cheaper if we had something more complementary that Utilities Advisory Commission Minutes Approved on: Page 8 of 15 matches our curve better as opposed to more midday that we do not need. She was concerned that the temporary REC exchange was factored into our analysis. She thought it would be helpful to save the excess from midday and use it in the early morning hours. She asked if the City had looked into storage costs. Commissioner Forssell was curious as to why Calpine was selling it for $79/MWh if the value was so high. Mr. Babbitt responded he had not asked Calpine that question but this was a large project and took a long time to negotiate the details of the agreement, which started well before prices ran up. Not long ago, market prices were half of what they are today, so a resource like this looked very expensive. Commissioner Forssell asked if there was a reason why the PPA was only 12 years instead of 20, 25 or 30. Mr. Babbitt did not know but he speculated maybe there was concern about the duration they can guarantee reliable power production at that level. Geothermal is operated from a steam field and the level of output could decline over time. Commissioner Forssell noted the report said Palo Alto asked for 20 MW but was awarded 10 MW and Santa Clara had 70 MW. Dr. Stack explained that when this proposal came in, Santa Clara responded first and indicated their interest in taking the whole thing; therefore, it was a generous act to let other members get into it rather than take it all themselves. Dr. Stack addressed Commissioner Forssell’s question regarding the likelihood of renewing wind contracts and what was the future prospect for wind remaining part of the portfolio. The project is about 20 years old. The supplier will probably come to us with an offer in the next few years to extend the contract, although we will reach out if we do not hear from them. Maintaining wind in the portfolio depends on how competitive the price is. Commissioner Metz inquired what we were doing to look for and capture these opportunities earlier since solar prices and value were going down in the long term; therefore, the price and value of something like this would go up. Dr. Stack replied that we are talking to NCPA about handling RFPs for us in the future because they have a streamlined process and an open solicitation. Developers can submit proposals on the NCPA website. Commissioner Bowie asked if the slide showing 24-hour load balance included the projected load growth through 2045 during off-peak hours, data centers coming online and EV charging. Mr. Babbitt responded it did not. The 24-hour graphs were based on our actual hourly load in 2021 with our projected supply resources in 2025 with the contribution of geothermal. Utilities Advisory Commission Minutes Approved on: Page 9 of 15 Commissioner Bowie queried if it was a closed-loop or open-loop system and if it was drawing from a river or how it generated power from heat. Dr. Stack answered it is not drawing from a river. It is drawing from a steam reservoir underground. He believed it was considered an open-loop system because once steam is released it is not recycled. Chair Segal noted there was a comment in the report about unique operational risks to running geothermal but there was confidence that NCPA could avert them and she was interested in knowing what those risks were. Mr. Babbitt did not recall any specific operational risks, although any power generation asset had operational risks. This opportunity was unique in that there was no development risk with this project because it had already been built. ACTION: Commissioner Forssell moved Staff recommendation that the Utilities Advisory Commission (UAC): 1. Authorize the City Manager, or their designee, to execute a Third Phase Agreement (Attachment A) with the Northern California Power Agency (NCPA) to purchase up to 87,600 MWh of renewable energy/year from a portfolio of geothermal projects owned by Calpine Corporation’s Geysers Power Company, LLC, over a period of 12 years, at a total cost not to exceed $76.2 million; 2. Authorize the City Manager, or their designee, to execute on behalf of the City all related documents or agreements necessary to administer the Third Phase Agreement that are consistent with the Palo Alto Municipal Code and City Council approved policies, including, but not limited to, collateral assignment agreements; and take any and all actions as are necessary or advisable to implement and administer the Third Phase Agreement; 3. Authorize the City Manager, or their designee, to approve and execute amendments to the Third Phase Agreement, as may be required from time to time, so long as the contract price and length of the agreement remain unchanged; and 4. Waive the application of the anti-speculation requirement of Section D.1 of the City’s Energy Risk Management Policy as it may apply to surplus electricity purchases resulting from the City’s participation in the Calpine contract, due to the variability of the City’s hydroelectric resources and uncertainty around the City’s long-term load forecast. Seconded by Vice Chair Johnston. Motion carries 7-0 with Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Forssell, Metz, Scharff, and Smith voting yes. UAC took a break at 7:39 p.m. and resumed at 7:50 p.m. ITEM 2: DISCUSSION: Discussion and Status Update on the One Water Plan Utilities Advisory Commission Minutes Approved on: Page 10 of 15 Lisa Bilir, Senior Resources Planner, delivered a slide presentation. She wanted UAC feedback on the recommended strategic direction for the One Water Plan as well as portfolio themes of water supply and conservation options. The top-ranked water supply portfolio will go to City Council for approval. The One Water Plan is a key action in the Sustainability and Climate Action Plan. It is a 20-year water supply plan for the City of Palo Alto. The goal is to manage future uncertainties such as multiyear droughts and climate change. There have been two rounds of stakeholder engagement with the community and City departments as well as one meeting with regional partners but there will be more stakeholder engagement. The work is being completed by Carollo Engineers, who is a National Thought Leader in the area of One Water and have done One Water Plans for other cities across the nation. This work builds on the existing plans by Public Works and Utilities, including the Northwest County Recycled Water Strategic Plan, the Green Stormwater Infrastructure Plan and Integrated Resource Plan. Commissioner Forssell asked what the purpose of the plan was. Ms. Bilir explained that one portfolio is to continue to purchase all our potable water from San Francisco, which will be compared to portfolios with alternative water supply and conservation options and then determine which we want to implement. Ms. Dailey stated that if big capital projects were recommended, it is unlikely those would be developed far enough to ask for Council approval at the same time we are asking for approval of the plan because a robust engineering design is needed before asking for Council approval. Ms. Bilir pointed out there was a list of about 25 water supply and conservation options in the UAC’s packet. Palo Alto has a high water demand relative to neighboring communities and relative to the average in the region. We have not reduced our water demand as much as the surrounding areas over the last decade. We need to see what additional water conservation actions we can take to reduce our demand without compromising tree canopy health. Once we reduce our demand, we need sustainable and resilient water supply options to meet the remaining demand. The average residential water usage in the BAWSCA Region is 71 GPCD (gallons per capita per day). The City is moving forward with implementing AMI (advanced metering infrastructure). Chair Segal asked if the public could find the Evaluation Criteria Survey online. Ms. Bilir responded they are working on putting it on our website. We have a One Water webpage that explains the project, definition of the terms and provides links. Our contact information is online, so the public can contact us for more information. Ms. Bilir presented the following portfolio themes: Baseline Portfolio, Minimize Cost, Maximize Local Supplies, Maximize Drought Resilience and Sustainable Water Supplies. The initial results will be presented to the UAC and Stormwater Oversight Committee joint meeting in Q2 of 2023. An information-only report will be presented to City Council in Q2 of 2023. The remaining stakeholder outreach will be online, asking for feedback on a draft of the One Water Plan. The final One Water Plan will be presented to the UAC and then to City Council in Fall 2023. Utilities Advisory Commission Minutes Approved on: Page 11 of 15 Ms. Bilir addressed Commissioner Bowie’s request for an explanation of how people were engaged in the stakeholder outreach. The three groups of stakeholders were our City Departments, the community and our regional partners. We collaborated with about six City Departments and held two meetings to get feedback from staff. For the community meetings, a freestanding website was set up on this topic and outreach was done through our Sustainability newsletter, Uplift Local, our email distribution list and our business associations. We held one meeting with our regional partners, which included other cities, BAWSCA and the San Francisco Public Utilities Commission. Vice Chair Johnston inquired why Palo Alto uses more water per capita that most of our neighbors. Ms. Bilir replied it had not been fully analyzed but she could speculate on some reasons being growth and the proportion of single family versus multifamily in Palo Alto compared with surrounding communities. Some communities may already have AMI or more extensive recycled water pipelines. Vice Chair Johnston wondered whether some of it was related to protecting the tree canopy. Commissioner Scharff commented that using a per capital model does not make sense. It is expected that someone in an apartment uses less water than someone in a single-family house. He assumed most of the difference was landscaping. He thought multifamily and single-family should be separated to compare water use to see if our multifamily usage is significantly different than other cities or if our single-family usage adjusted for lot sizes is significantly different. Palo Alto may have a much larger tree canopy than most cities. Regarding the proposed portfolio themes on Page 13, Commissioner Metz suggested High Energy. Many supply options use a lot of energy, most notably desalination, so the feasibility depends on energy costs and availability. Commissioner Forssell liked Commissioner Metz’s addition of High Energy as a theme but suggested looking at the carbon footprint of water because it could be high energy but if it was tied to solar, maybe we would be okay with the energy footprint if it was not high-carbon energy. In reply to Chair Segal’s query if we had a definition for equitable, Ms. Bilir responded that Carollo is helping with our definitions. In our stakeholder engagements, equitable was used to describe the affordability of water as well as access to blue space and green space by people in the community. Ms. Dailey stated another example of an equity problem is if certain groups of customers were being served differently, for example if a neighborhood with a high density of multifamily houses had groundwater but everyone else had Hetch Hetchy. Chair Segal commented it would be great to have something on a website to give the community an opportunity to provide feedback before the March 2023 meeting. Ms. Bilir replied that we are continuing outreach and something will be on our website for people to weigh in on the survey. Utilities Advisory Commission Minutes Approved on: Page 12 of 15 Commissioner Forssell believed the highest priority was to reduce demand. Building codes were an enticing way to reduce demand but having stricter codes might be at odds with our affordable housing targets. She was interested in assigning a price to that and the City subsidizing if we were to do, for example, a zero net water code for development. Vice Chair Johnston agreed with the comments on Slide 7 and thought they were sensible strategic directions. In response to Vice Chair Johnston’s question regarding what was the definition of local on Slide 13 for the portfolio of Maximize Local Supplies, Ms. Bilir answered local is within Palo Alto and within Palo Alto’s control. It could be a reservoir, a storage facility or a multisource storage somewhere in Palo Alto. We would still use all our evaluation criteria for the portfolios but putting extra weight on local supplies. Vice Chair Johnston suggested prioritizing Maximizing Drought Resilience and Sustainable Water Supplies and to the extent that can be done locally was preferable. Commissioner Bowie did not know whether there was a barrier on gray water capture and reuse in the building codes and permitting. Ms. Dailey replied that gray water is one of the resources being considered as well as ways to get more out of gray water use. The City has a gray water program but there have only been about three projects a year. Council Liaison Ed Lauing commented that our residents are concerned about being able to have water come out of their faucets, not their grass going brown or their trees dying. Residents are not watering their trees enough because they want to keep their water usage down. Every source of new supply should be investigated in case we need it. Another concern of residents is if there was going to be enough water when housing grows 25% in the next eight years. Ms. Bilir stated that the demand forecast took into account the growth forecast. ACTION: None ITEM 3: ACTION: Staff Recommends the UAC Accept a Verbal Presentation on State Public Policy Actions and Recommend the City Council Approve the 2023 Utilities Legislative Guidelines Heather Dauler, Acting Compliance Manager, provided to the UAC a broad summary of legislation from the prior year, assumptions about what will happen this year, and information about the state budget. As noted in the staff report, there was a variety of Utilities-related legislation, including clean energy targets, foil balloons, indoor water use, and more. Related to the state budget: we have a deficit. Governor Newsome intends to prioritize money to address homelessness and education while cutting climate spending. Last year’s budget included about $7.9B for energy; the proposed budget preserved $7B. The governor is proposing less money to finance transmission projects, water recycling projects, carbon Utilities Advisory Commission Minutes Approved on: Page 13 of 15 removal projects and zero-emission vehicle credits and programs. The budget proposes to preserve some CEC programs, including flood risk reduction and implementation of clean energy policies. The budget process includes the Governor’s initial proposal in January each year, followed by legislative budget hearings, and a revised budget proposal in May. At that time, we will know more about the financial situation and budget proposal. The budget will be finalized in mid-June. The Legislature has until February 17 to introduce new bills. As noted on Page 3 of the staff report, grid reliability and wildfire mitigation may be topics. There will probably be a focus on how to pay for energy and how to achieve our clean energy goals. Regionalization will also be a legislative effort. Bills already introduced include testing for lead in schools, quickening the pace of water supply projects, changing the State’s greenhouse gas (GHG) reduction goals, and building performance standards for improvements in energy efficiency and GHG reduction in large buildings. We collaborate very closely with our trade association, CMUA, other POUs and NCPA, our joint power agency. The Federal Environmental Protection Agency is going to update their lead and copper rule later in the year, which will have impacts on the State Water Board. We are drafting our State Wildfire Mitigation Plan for the Wildfire Advisory Board, which is due every year. Regulatorily, we are not a CPUC jurisdictional entity but sometimes what they do may have impacts on POUs. There is a proceeding regarding pole databases and the administrative law Judge is asking if POUs should be involved as well. Through CMUA, we are commenting and observing that process. In reply to Commissioner Bowie’s query if the federal funds through IRA that are comparable to the State budget reductions in energy and water programs was a reallocation of federal funds, Ms. Dauler responded no. The IRA funds are in buckets. We are focusing on funds that would assist with rebates for fuel switching. The IRA does not fund the same buckets as the State, so there is no apples to apples comparison, although its anticipated that money from the IRA will fund some State programs. Regarding internal legislative guidelines, the City has its own set of guidelines as well as an advocacy process manual. The Utilities Department is the most heavily regulated department in the City, so we have our own set of guidelines. The suggested guidelines were presented for UAC approval. Examples of changes were in the staff report on Page 4. Discussion ensued. Commissioner Metz suggested changing “We” to “City of Palo Alto Utilities” in each of the nine guidelines because eight reference CPAU but #6 should be written from the perspective of Palo Alto Utilities instead of municipal government. Ms. Dauler suggested to Chair Segal that the motion could be that the UAC recommends City Council continue the 2022 guidelines into 2023. Chair Segal suggested the motion be to continue with the 2022 Legislative Guidelines. Commissioner Forssell voted yes but to add Utilities Advisory Commission Minutes Approved on: Page 14 of 15 some things to the 2022 guidelines next time there is an opportunity. Commissioner Metz echoed Commissioner Forssell. ACTION: Vice Chair Johnston moved to continue to use the approved 2022 Legislative Guidelines for the 2023 calendar year. Seconded by Commissioner Smith. The motion carried 7-0 with Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Forssell, Metz, Scharff, and Smith voting yes. COMMISSIONER COMMENTS and REPORTS from MEETINGS/EVENTS Vice Chair Johnston had comments and questions regarding the quarterly report. In the chart in Paragraph 1.4, Packet Page 136, the units for the outages were not specified for the system average interruption duration index of 81.69 and it is not known if that is good or bad. It would be helpful if there were comparable figures to 2023 Q1, such as 2022 Q4 or 2022 Q1. Chair Segal concurred with Vice Chair Johnston that the font of the quarterly report was very hard to read. The draft report was in a font that was easy to read. Dean Batchelor, Utilities Director, stated that staff would look at the font for reports going forward. Other utilities do not want to broadcast their figures on their websites, so it is difficult to do comparisons. We can compare ourselves to national numbers. Vice Chair Johnston commented it would be useful to compare against ourselves, if we have increased or decreased outages and if the outages are longer or shorter. Mr. Batchelor replied he was open to suggestions on quarterly or yearly comparisons, whatever makes it easier for the Commission to compare ourselves. Next quarterly report, the graph can include 2022 to compare Q2 of 2023 to Q2 of 2022. Chair Segal announced that the UAC is currently recruiting. If you are interested in being a commissioner, you may apply on the City Clerk website. FUTURE TOPICS FOR UPCOMING MEETINGS Commissioner Metz stated there were concerning statistics about vacancies in staffing on Page 124, so he would like a discussion as soon as possible regarding the plan for addressing staffing. He would also like firm dates on the calendar for a resiliency update, strategic plan update and a detailed discussion about the plan and actions for grid modernization. Mr. Batchelor offered to discuss grid modernization in 6 months. Underground process and progress are listed under future topics. Commissioner Forssell suggested simplifying the topic to discuss what the process should be or how much undergrounding has happened in the last five years so the UAC can understand where we currently are. Mr. Batchelor replied they could do that. Utilities Advisory Commission Minutes Approved on: Page 15 of 15 Commissioner Bowie will be resigning after next meeting because he is moving to New York City. He said he was honored to share the dais with his fellow UAC commissioners and thanked the City of Palo Alto and Utilities. Chair Segal thanked Commissioner Bowie for his service. Mr. Batchelor thanked Commissioner Bowie for his time and stated he brought value to the UAC and will be missed. NEXT SCHEDULED MEETING: March 1, 2023 Commissioner Metz moved to adjourn. Commissioner Forssell seconded the motion. The motion carried 7-0 with Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Forssell, Metz, Scharff and Smith voting yes. Meeting adjourned at 9:27 p.m. Respectfully Submitted Jenelle Kamian City of Palo Alto Utilities UAC MEETING [!] March 01, 2023 1 @ Received Before Meeting Staff: Lisa Bilir and Eric Wong Utilities Advisory Commission Staff Report CITY OF From : Dean Batchelor, Director Utilities Lead Department: Utilities PALO ALTO Meeting Date: March 1, 2023 TITLE Staff Recommend the Utilities Advisory Commission Recommend the Finance Committee Recommend that the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Reserve Transfers and Increasing Wastewater Rates by Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial_ Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal -Industria l Discharger) RECOMMENDATION Staff request that the Utilities Advisory Commission (UAC) recommend that the City Council: 1. Adopt a resolution (Attachment A): a . Approving the Fisca l Year (FY} 2024 Wastewater Collection Financial Plan (Linked Document ); and b. Approving a transfer of up to $3.178 mill ion from the Capital Improvement Program Reserve to the Operations Reserve in FY 2023; and c . Approving a transfer of up to $342,000 from the Rate Stabilization Reserve to the Operations Reserve in FY 2023; and d. Increasing Wastewater Collection Utility Rates Via the Amendment of Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal -Industrial Discharger} (Attachment B). EXECUTIVE SUMMARY The FY 2024 Wastewater Collection Utility Financial Plan (Linked Document) includes projections of the utility's costs and revenues through FY 2028. The Fi nancial Plan projects costs to rise over the forecast horizon due to increasing treatment costs related to capital improvements and operational costs at the Regional Water Qua lity Control Plant (RWQCP), as well as increasing collection system operational and Capital Improvement Program (CIP} costs. Staff recommends accelerating the rate of main replacements, from 1 mile to 2.5 miles per year beginning in FY 2026. This acceleration will allow the Wastewater Collection Utility to replace the last main no more than approximately 8 years beyond its anticipated 100-year life expectancy. The Financial Item No. {{item.number}}. Page 1 of 15 Plan also includes three alternative scenarios based upon feedback from the UAC1 and the Finance Committee.2 The alternative scenarios transiti on to 2.5 m i les per year (?f main replacement over longer time periods in order to lessen the impact on sewer rates . The more that wastewater assets are operated past their useful life the greater the likelihood of substanti al pipe failures resulting in additional repair and ma i ntenance costs, sanitary sewer overflows, · sinkho les, or other catastrophic impacts. Staff's recommendation attempts to minimize rate impacts while also prudently managing the City's infrastructure and maintaining an acceptable level of risk. Staff proposes a 9% overall revenue i ncrease in FY 2024, 9%-annua l rate increases in FY 2025 and FY 2026, 8% in FY 2027 and 5% in FY 2028, to cover current and projected costs. BACKGROUND Every year staff presents the UAC' with Financial Plans for the Electric, Gas, Water, and Wastewater Collection Utilities. The Financial Plans recommend rate adjustments if necessary to maintain the financial health of these enterprises. These Financial Plans i nclude a comprehensive overview of the operations of each enterprise, both retrospect ive and prospecti ve, and are intended to be a reference for UAC, Finance Committee, and Council members as they revi ew the budget and staff's rate recommendations . Each Financial Plan also conta i ns a set of Reserves Management Practices describing the reserves for each uti l ity and the management practices for. those reserves. The City's sewer system collects wastewater from Palo Alto residents and delivers it to the RWQCP for treatment. The City of Pafo Alto runs the RWQCP, which also treats wastewater for five other partner agencies (Stanford, East Palo Alto Sanitary District, Los Altos Hills, Los Altos, and Mountain Vi ew). Some of the wastewater for certain partner agencies is also transported across the City's wastewater collection system . The Wastewater Collection Utility has two main costs: the costs of operating the collection system and Palo Alto's share of the cost of running the RWQCP.3 Both cost components have been increasing and are expected to continue to· increase. The RWQCP has been in operation since 1934. Ag i ng equipment, new regulatory requirements, and the movement to full sustainability will require rehabilitation, replacement and new processes. Palo Alto has seen increases in operationa l costs in recent years, and debt service for the plant is expected to increase substantially in coming years as a major rehabilitation and replacement plan adopted in 2012 (Lon Ran e Facilities Plan ) is implemented. Rehabilitation and replacement of plant equipment that has been in use for over 40 years is necessary to ensure the city can provide wastewater treatment safely and in compliance with regulatory requirements for the discharge of treated wastewater 24 hours a day. Collection system costs are also increasing. This is primarily driven by increases in collection system capital costs . Over the last few years, main replacement costs have been increasing for utilities due to economic activity in the Bay Area causing construct ion cost inflation. Staff assumes future CIP spending to increase by about 5.4% annually, 1 UAC Staff Re port #14610, October 12, 2022 and UAC Staff Re port #1 ?8791 Apri l 6, 2022 . 2 Finance Committee Staff Re ort #1461 November 29, 2022 ~ The costs associated with the RWQCP are shared among Palo Alto and the partner agenci es based primari ly on wastewater flows and the composition of the wastewater each agency sends to the treatment plant. Palo A\to's share varies from year to year but is roughly one third of the total cost. Item No. {{item.number}}. Page 2 of 15 which will significantly increase CIP costs over the forecast period. Staff also recommends an accelerated CIP program to increase the sewer main replacement rate from 1 mile to 2.5 miles per year (or from 2 miles to 5 miles per project constructed every other year) to fulfil the goal of replacing pipes near their life expectancy. There are 138 miles of original sewer mains to be replaced or rehabilitated and most of these are vitrified clay pipe originally installed between 1950 and 1970. Staff's experience suggests that pipe can last around 100 years in Palo Alto's underground condition. This financial plan proposes to begin the accelerated CIP replacement rate in FY 2026, with alternative scenarios starting FY 2028, FY 2030, or FY 2034. Other operational costs have also greatly increased (e.g ., salaries and benefits and administrative overhead). This Financial Plan projects revenue reduc ti ons due to COVID-19 primarily from the Restaurant and Commercial customer classes. Non~residential revenue declined in FY 2022 by 11% relative to FY 2020 levels {prior to the pandemic}, despite the 3% rate increase that was effective September 1, 2021. This is equivalent to a 4% reduction in FY 2022 sales revenue relative to FY 2020 sales revenue. Staff projects a linear recovery through FY 2025. DISCUSSION Staff completes an annual assessment of the financial position of the City's wastewater collection utility to ensure adequate revenue to fund operations, in compliance with the cost of service requirements set forth in the California Constitution (Proposition 218). This includes making long­ term projections of market conditions, the physical condition of the system, and other factors that could affect utility costs, and setting rates adequate to recover these costs. The rates proposed in this Financial Plan were developed based on the 2021 Cost of Service and Rate Study completed by Raftelis Financial Consultants, Inc., the "Ci of Pal o Alto 20 21 Wa stewater CO S Re port."4 4 A cost of service study is a study using industry-standard techn iques to determine how the costs of running the utility should be recovered from i ts customers. Charges to each customer are set in proportion to the cost of serving that customer . Item No . {{item.number}}. Page 3 of 15 Proposed Actions 1. Approve the Fi scal Year 2024 Wastewater Co ll ection Fin_ancial Plan; and 2. Approve a transfer of up to $3.178 milli on from the Capital Improvement Program Reserve to the Operations Reserve in FY 2023; and 3. Approve a transfer of up to $342,000 transfer from the Rate Stabilizati on Reserve to the Operations Reserve in FY 2023; and 4. Increase Water Collection Util ity Rates Via the Amendment of Rate Schedules S-1 (Residentiat Wastewater Collecti on and Disposal), S-2 (Commer cial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collec tion and Disposal) and S-7 (Commercial Wastewater Collection and Disposal -lndustrlat Discharger); and The FY 2024 Wastewater Collection Fi nancial Plan describes these proposed actions in detail. Staff proposes to adjust wastewater rates as shown in Table 1 below, effective July 1, 2023. The proposed adjustments will increase the system average rate by 9%. These proposed rate changes · are i ncluded in the amended rate schedules (Attachment B). Residentia l customers pay a monthly fixed servi ce charge while commercial customers (other than restaurants) are b ill ed monthly based on average winter water usage for the months of January, February and March, app lied in the fo l lowing Ju ly. This cl ose ty approximates non -i rrigation water consumption, which represents sewer use. Restaurant customers are charged based on monthly water usage as they generally lack i rrigation but are charged h igher rates due to higher grease and oil discharges necessitat i ng additional treatment costs . Currently there are no customers on the S-7 (Industri al) rate schedu l e; however, CPAU continues to ma intain the 5-7 rate schedule in case of future need . Table 1: Current and Proposed Wastewater Collection Charges Current Proposed Change (as of 7/1/2022) (effective 7/1/2023) $ % Monthly Service Charges ($/Month) S-1 (Resident ial) Service Charge $ 44.62 $ 48 .64 $4.02 9.0% Water Quantity Rates ($/CCF) S-2 Quant ity Rates 8.33 9.08 0.75 9.0% (Commercial) S-6 (Restaurant) Quanti ty Rates 12.43 13.55 1.12 9.0% FY 2024 Fi nanc i al Pl an's Projected Rate Adjustments for the Next Five Fiscal Years Tab l e 3 shows the projected rate adjustments included in the Wastewater Collection Utility Financial Pl ans and their impact on a res idential wastewater bi ll. Item No. {{item.number}}. Page 4 of 15 Table 3: Projected Rate Adjustments and Residential Bill Impact, FY 2024 to FY 2028 FY 2024 FY2025 FY 2026 FY 2027 FY2028 Wastewater Collection Utility 9% 9% 9% 8% 5% Estimated Bill Impact for $4.02 ' $4.38 $4.78 $4.63 $3 .13 Residential Customers ($/mo) (1) Estimated Monthly Bill $48.64 $53 .02 $57.79 $62.41 $65.53 (1) est i mated impact on residential wastewater monthly bill, which is currently $44.62 As noted above, one of the main drivers for the increase in the Wastewater Collection Utility's costs (and therefore rates) over the next several years is the cost for wastewater treatment, which is projected to increase by an average of 6.2% annually from FY 2022 to FY 2028 as the City makes seve ral upgrades to the RWQCP . Increases to capital expenses begin in FY 2024 with the Joint Intercepti ng Sewer Rehabilitation construction , funded on a pay-as-you-go basis . Additional debt service payments begin in FY 2025 for the Primary Sedimentation Tank, in FY 2028, for the construction of an Outfall Line, Lab/Technical Services building, and Operations building remodel, and in 2029 for Secondary Treatment Upgrades and Headworks. Staff projects Wastewater Collection operations and CIP costs (excluding costs associated with treatment) to increase by approximately 3. 7% annually from FY 2022 to FY 2028; operat i ons costs are projected to grow an average of 1.4% annually over the same time period . The Wastewater Collection Utility undertakes a larger main replacement project every other year. A project is scheduled to begin in the current year {instead of FY 2024) because of coordination with Caltrans to limit or avoid digging into newly paved street on El Camino Real. The next project is scheduled for FY 2026. Undertaking a larger main replacement project every other year allows staff to continue r~placing wastewater mains that are in poor condition, while easing scheduling difficulties for inspection coverage due to shared staffing across water, wastewater, gas, and large deve l opment services projects . Over the last few years, main replacement costs have been increasing for util ities due to economic activity in the Bay Area causing construction cost inflation. It is likely that this trend will continue in the short term . Staff has not observed any dip in construction costs although more information will be known once the Utilit ies Department issues more construction bids .5 Figure 1 and 2 below illustrate the increase in the Wastewater Collection Utility's costs . RWQCP costs for the Wastewater Collection Utility are included in "Treatment," while "Capital" and "Operations" include only collection system costs . 33% of the increase from FY 2018 to FY 2028 is due to treatment cost increases, 29% is due to increases in operations costs, and collection capital costs are responsible for 39% of the increase from FY 2018 to FY 2028. Note that treatment costs increase an additional 28% from FY 2028 to FY 2029 due to debt service coming on line for the Secondary Treatment Upgrades and Headworks. 5 As an additiona l reference, the California Construction Cost index increased from 2.8% in December 2020 to 13 .4% i n December 2021 and then decre ased to 9.3% in Decemb er 2022 . See: https ://www .dgs.ca .gov/RESD/Resources/P age-Content/Rea l-Estate-Services-Division-Resources -list-Folder/DGS­ California-Construction-Cost-lndex-CCCI Item No. {{item .number}}. Page 5 of 15 Item No. {{item.number)}. Page 6 of 15 Figure 1: FY 2018 and FY 2028 Costs ($ Millions) $16 $14 $12 $10 $8 $6 $4 $2 $- Treatment Capital Operations ■ FY 2018 ■ FY 2028 Figure 2: Percentage of Cost Increase from FY 2018 to FY 2028 Attributed to Treatment, and Operations Costs ■ Treatment ■ Capital Operations Item No. {{item.number}}. Page 7 of 15 To promote rate stability and provide continuity in collection system CIP expenditure levels, thi s plan continues the steady annual capital program contribution to the CIP Reserve. The CIP Reserve will then absorb annual spend i ng fluctuations, reducing the i mpact on the Operations Reserve. Figure 3 below shows the projected CIP Reserve balances and Figure 4 below shows year-end reserve balance levels for each reserve from FY 2023 projected through FY 2028. Because the Sanitary Sewer Replacement project budgeted for construction i n FY 2024 is now scheduled to move up to FY 2023 to mini mize street repavement on El Camino Real, this will draw down the CIP Reserve in FY 2023 to zero and slowly replenish the reserve throughout the forecast period so that by FY 2027 the reserve remains within the gui deline range as shown in Figure 3. Item No. {{item.number}}. Page 8 of 15 12,000 10,000 Ill 8,()()Q "'0 C :x :, 0 6,000 ~ ~ 4,000 2,000 Figure 3: Projected Capital Reserve Balances, FY 2023 to FY 2028 2023 2024 2025 2026 2027 2028 Fiscal Year rmll:I CIP Reserve (Year-End) -Reserve Min/Max Figure 4: Wastewater Collection Utility Vear-End Reserve Levels, FY 2022 to FY 2028 $18 ----------­ $16 $14 $12 _$10 .., ~ $8 I SG -$4 $2 $0 Actual Projected fiscal Year Item No. {{item.number}}. Page 9 of 15 m Rate Stabilization ~ Operations eJ CIP ■ CIP Reappropriatlons and Commitments Table 4: Operations, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves, Expenses, Capital Program Contribution To/(From) Reserves, and Operations Reserve Guideline Levels for FY 2023 to FY 2028 ($000) Fiscal Year 2023 2024 2025 2026 2027 2028 Starting Balance I ' I I (1) Ooerations 4,252 3,049 4,315 3,586 3,693 5 805 (2) Rate Stabilization 342 . -. -- 13) CIP 3,178 0 916 3 665 849 5,853 Revenues I I I (~) Total Revenue 21,859 23,896 26,164 28,435 30,648 32,177 Transfers (~) Operations (1,0751 -(700) -- (6) Rate Stabilization (342' . . --- (Z) CIP 1,417 -. 700 . . Caoital Program Contribution 1 I I I (8) Ooerations (3,75011 (2,33311 (7,10011 (7,3131 (7,725) (7,957' 12) CIP 3,750 2,333 7,100 7,313 7,72S 7,957 Expenses I I I I I (1Q). Total Exoenses (w/o CIP and Debt) 118,108) 120,168) (19,794' (20,31S1 (20,812' 122,541' (11) Debt Service (129} 1129) . - -. (12) Planned CIP (8,3451 11,418) (4,351) (10,828) {2,722 (11,917 Endlntt Balance I I I I I (1)+(4)+(5 )+(81+(10)+(11) Operations 3,049 4,31S 3,586 3,693 5,805 7,484 (21_!;(§) Rate Stabi lization . . . . . - (3)~?)+(9)+(12) CIP 0 916 3,66S 849 5,853 1,893 Operations Reserve Guideline Levels I I ' I I I (13) Minimum Guideline Level 2,998 3,336 3,254 3,339 3,421 3,705 (_~) Maximum Guideline Level 7,49S 8 341 8,134 8,349 8553 9,264 I I * Planned CIP (item 12) is reflected as an expense in the CIP Reserve and does not include CIP funded through Reappropriations or Commitments reserves. This Financial Plan utilizes $8.345 million for Planned CIP from the CIP Reserve in FY 2023; this total includes $3.75 million (item 9) and $1.417 million (item 7) as we ll as $3.178 million from the CIP Reserve. Staff requests Council approval to transfer $3.178 million from the CIP Reserve to the Operations Reserve in FY 2023. Capital Projects and Reserves The CIP Reserve aims to stabilize uneven annual funding associated with ongoing CIP projects including sanitary sewer main rep lacements that are scheduled to occur every other year, and is a source for one-time or immediately needed projects. In June 2021 Council approved cons·stent annual funding from the Operations to the CIP Reserve. The attached Financial Plan projects that rate funding is needed to cover $8.345 million of planned CIP in FY 2023. This fgure is the portion of planned CIP in FY 2023 that wi ll not be paid for through funds collected in prior years {the FY 2023 capital budget, less funds available in the Reappropriations and Commitments Reserves) shown in line 12 of Table 4. The $8.345 mill i on will be funded by the capital program contribut i on of $3.75 million plus $1.417 million in one -time funds from the Operations Reserve (lines 9 and 7 from Table 4), together with $3.178 million from the CIP Reserve. Withdrawals from the CIP Item No. {{,item.number}}. Page 10 of 15 Reserve for use on capital projects require Council action.6 The attached Financial Plan therefore requests Council approval to transfer up to $3 .178 million from the CIP Reserve to the Operations Reserve. Wastewater Bill Comparison with Surrounding Cities The monthly equivalent sewer bill for a Palo Alto resident is $44.62 under current rates, 28% lower than the average neighboring community. Table 5 shows the monthly sewer bills at current rates for residential customers compared to what they would be in surrounding communities . These communities are the same six cities that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas, and Electric utilities. Table S: Residential Monthly Equivalent Sewer Bill Comparison($) at Current Rates Neighboring Communities Menlo Redwood Santa Mountain Palo Alto Park City Clara View Los Altos Hayward 44.62 106.67 89.28 46.82 50.10 42.05 38.58 If Council adopts the proposed wastewater rate change, and assuming other agencies do not change their sewer rates, Palo Alto's residential rates would remain 26% lower than the current average neighboring community. Furthermore, under the attached Financial Plan, Palo Alto's residential monthly bills would rise to $65.56 per month in FY 2028 which is only 5% above the current neighboring community average of $62.25 per month. Staff has no information at this time as to whether or when the surrounding communities are planning wastewater rate changes. However, as most agencies are also requiring renovations to their respective treatment plants, increases at other agencies are likely. Note that as partners in the RWQCP, Mountain View and Los Altos will be affected by similar treatment cost increases as Palo Alto. Table 6 shows the monthly sewer bills for Commercial and Restaurant customers. Palo Alto is less competitive with surrounding cities with regards to commercial sewer rates, but is not the most expensive jurisdiction . Palo Alto's commercial bills are 7% higher than the neighboring community average while Palo Alto's restaurant bills are 12% below the neighboring community average. Table 6 assumes 14 units of water for general commercial and 56 units of water for restaurants. 6 See Appendix C, Wastewater Collection Uti lity Reserves Management Practices Section S(b). Item No. {{item.number}}. Page 11 of 15 Table 6: Non-Residential Monthly Equivalent Sewer Bill Comparison ($) Neighboring Communities Menlo Redwood Santa Mountain Palo Alto Park City Clara View Los Altos Hayward General Commercial 116.62 144.34 117.74 75.74 156.66 72.23 87.92 Restaurant 696.08 1,216.88 1,128.40 718.48 718.48 288.90 660.80 Changes from Prior Financial Forecasts Table 7 compares the projected overa_ll rate changes in the current Financial Plan with the projected rate changes in the FY 2022 and FY 2023 Financial Plans. "t:he current plan recommends accelerating the rate of main replacement which increases rates necessary to cover rising costs and maintain adequate reserves for both the Operations and CIP reserves. Table 7: Proposed/Projected Wastewater Rate Changes for FY 2024 to FY 2028 Projection FY FY FY FY FY 2024 2025 2026 2027 2028 Current Plan (FY 2024) 9% 9% 9% 8% 5% FY 2023 Financial Plan 5% 5% 5% 5% N/A FY 2022 Financia l Plan 5% 5% 5% N/A N/A Alternat ive Scenarios The attached Financial Plan includes staff's recommendation along with three alternative rate trajectories (A, Band C) summarized i n Table 8 and 9 below. These alternatives show the impact of a longer transition from 1 m Ue to 2.5 mi les per year of ma i n replacement (or 5-m i les per Sanitary Sewer Replacement or SSR). As indicated above, the anticipated useful life of wastewater mains is est imated at approximate ly 100 years and the proposed rate increase wouM set the City on track to replace the last ma i n approx i mately 8 years after the end of its expected useful life. To rep lace mains with i n the 100-year lifespan, rate increases were projected to be more than desired by the UAC (e.g ., more than 15% in FY 2024). Alternatives A, Band C i n the tab le below provide lower rate i ncreases but would further increase the duration these assets are operated past their estimated useful life. Staff's recommendation attempts to minimize rate impacts while also prudently managi ng the City's infrastructure and maintain i ng an acceptable level of risk. The more that wastewater assets are operated past their useful l i fe the greater the risk of substantial p i pe failures resulting i n additional repair and maintenance costs, sanitary sewer overflows, si nkholes, or other catastrophic impacts. Item No. {{item.number}}. Page 12 of 15 Table 8: Recommendation and Alternate Scenarios for Wastewater Rate Changes 1 Rate Scenarios ~ I Fiscal Year of FY FY FY FY FY Age of Last I First 5-mile 2024 2025 2026 2027 2028 Remaining I I SSR Sewer Main I Construction Replaced Recommendation FY 2026 9% 9% 9% 8% 5% 108 years ·-Alternative A FY2028 9% 8% 6% 6% 6% ll0years Alternative B FY2034 7% 7% 5% 5% 5% 114 years Alternative C Later than FY 5% 5% 5% 5% 5% > 114 years 2034 - Table 9: Projected Residential Bill Impact and Estimated Monthly Bill, FY 2024 to FY 2028 FY2024 FY 2025 FY 2026 FY 2027 FY 2028 Estimated Bill Recommendation $4.02 $4 .38 $4.77 $4.62 $3.12 Impact for Al ternative A 4 .02 3.89 3.15 3.34 3.54 Residential Alternative B 3.12 3.34 2.55 2.68 2.82 Customers ($/mo) (1) Alternative C 2.23 2.34 2.46 2.58 2.71 Estimated Monthly Recommendation 48.64 53.02 57.79 62.41 65.53 Bill ($) Alternat ive A 48.64 52.53 55.68 59 .02 62 .56 Alternative B 47.74 51.08 53.63 56.31 59.13 Alternative C 46.85 49.19 51 .65 54.23 56.94 (1) estimated impact on residential wastewater monthly bill, which is currently $44.62 NEXT STEPS The City Council will consider the proposed Financial Plans and amended rate schedules with the FY 2024 budget, expected in June, at which time the public hearing required by Article XIIID of the State Constitution will be held. If Counci l approves the proposed rate in~reases, they will become effective July 1, 2023. Assuming the UAC and the Finance Committee support the proposed rate adjustments, staff will send notification of the potential rate increases to customers as required by Article XIIID of the State Constitution (added by Proposition 218) expected in April 2023. If the UAC recommends one of the alternative scenarios for wastewater rate changes, staff will describe the UAC's recommendation to the Finance Committee in March. If the Finance Committee recommends one of the alternat ive scenarios for wastewater rate changes, or any other recommendation in March, staff will bring the Finance Committee recommendation to the City Council in June or return to the Finance Committee in April with revised rate scenarios, as directed by the Finance Committee. Staff plans to include the Finance Committee's recommended rate scenario for wastewater rate changes in the notification of potential rate increases to customers as required by Arti d e XIIID of the State Constitution expected in April 2023. Item No. {{item.number}}. Page 13 of 15 RESOURCE IMPACT Staff projects normal year revenues for the Wastewater Collection Utility to increase by approximately 9% ($1.8 million) in FY 2024 as a result of the proposed rate changes. See the FY 2024 Wastewater Collection Uti li ty Financial Pl an for a more comprehensive overview of projected cost and revenue changes for the next five years. The FY 2024 Budget is bei ng developed concurrent with these rates and depending on final rates, adjustments to the budget may be necessary at a later time. POLICY IMPLICATIONS The proposed wastewater rate adjustments are consistent w ith Council•adopted Reserve Management Practices that are part of the Fi nancial Plans. Staff developed the wastewater rate adjustments using a cost of service study and methodology that was comp leted in compl iance with the cost of service requirements of Proposit i on 218 i n 2021 by Rafte lis Financial Consultants, Inc. City o f Palo Alto 2021 Wastewater COS Report. STAKEHOLDER ENGAGEMENT At the Utilities Advisory Commission (UAC) April 2022 meeting, staff presented the need to increase the rate of sewer main replacement from 1 mi le per year to 2.5 mi les per year in order to replace the remaining 138 miles of sewer mains schedu led for replacement before they exceed their expected life {Staff Re port #13879 ). UAC Commissioners expressed support for increasi ng the rate of sewer main replacement to 2.5 miles per year {See UAC Meeti ng Minutes of April 6, 2022 Special Meeting). At the UAC's October 12, 2022 meeting, staff presented three alternative approaches to accelerate the sanitary sewer main replacement (Staff Rep ort #146 10 and UAC meeting minutes). One Commissioner stated that immediately moving to 2.5 miles/year in FY 2024 funded through pay-as -you -go financing or SRF loan is reasonable wh ile two Commissioners opposed the immedi ate move to 2.5 miles per year in FY 2024 alternatives. Three Commissioners supported transitioning to 2.5 mil es per year over four years (beginn ing in FY 2026). One Commissioner questioned whether transitioning to 2.5 mi les per year slowly by 2034 to keep rates low may also be acceptable. Additionally, staff brought this item to the Finance Committee for discussion on November 29, 2022 (Staff Re port #14611 and Finance Committee summary meet ing m i nutes). Staff presented a series of alternative rate trajectories that included the recommendation from this Financia l Plan, a more accelerated time frame for reaching the 2.5 mi les per year of main replacement by FY 2024 through higher rate increases or debt fi nancing and a 5% annual rate increase. Finance Committee members expressed a preference to see the rate trajectory in the mai n recommendation in the attached Financi al Pl an with additional scenarios that showed the transition to 2.5 miles per year of main replacement over 6 years (by 2028) instead of 4 years (by 2026) and with fewer years of 9% i ncreases . The attached Financial Plan includes three alternative scenarios in response to the Finance Committee's feedback. ENVIRONMENTAL REVIEW The Util ities Advisory Commi ssion's review and reco mmendation to Counci l on the proposed FY 2024 Wastewater Collection Financial Plan and rate adjustments do not meet the defin iti on of a Item No. {{item .number}}. Page 14 of 15 project, pursuant to Section 21065 of the California Environmental Quality Act, thus no environmental review is required. ATTACHMENTS Attachment A -Wastewater FY24 Resolution Attachment B -Wastewater FY24 Rate Schedules Attachment C -Wastewater FY24 Presentation AUTHOR/TITLE: Lisa Bilir, Sr, Resource Planner Report#: {{item.Custom_Tracking_Number}} Item No. {{item.number}}. Page 15 of 15 . * NOT YET APPROVED * Resolution No. Resolution of the Council of the City of Palo Alto Approving the Attachment A FY 2024 Wastewater Collection Utility Financial Plan, Including Reserve Transfers, and Adjusting Wastewater Rates by Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal -Industrial Discharger) RECITALS A Each year the City of Palo Alto ("City") assesses the financial position of its uti lities with the goal of ensuring adequate revenue to fund operations. This includes making long-term projections of market conditions, the physical condition of the system, and other factors that could affect utility costs, and setting rates adequate to recover these costs. The City does this with the goal of providing safe, reliable, and sustainable utility services at competitive rates. The City adopts Financial Plans to summarize these projections. R 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 a part of the Financial Plans. C Pursuant to Chapter 12.20.010 of the Palo Alto Mun icipal Code, the Council of the City of Palo Alto may by resolution adopt rules and regulations governing utility services, fees and charges. D. On __ _, 2023, the City Council held a full and fair public hearing regarding the proposed rate increase and considered all protests against the proposals. E. As required by Article XIII D, Section 6 of the California Constitution and applicable law, notice of the ____ 2023 public hearing was mailed to all City of Palo Alto Utilities wastewater customers by __ ~ 2023. F. The City Clerk has tabulated the total number of written protests presented by the close of the public hearing, and determined that it was less than fifty percent (50%) of the total number of customers and property owners subject to the proposed wastewater rate amendments, therefore a majority protest does not exist against the proposal. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. The Council hereby adopts the FY 2024 Wastewater Collection Utility Financial Plan. Attachment A * NOT YET APPROVED * SECTION 2. The Council hereby approves the following transfers as descri bed in the FY 2024 Wastewater Collection Utility Financial Plan: a. Up to $3,178,000 in FY 2023 from the Capital Improvement Projects Reserve to the Operations Reserve. b. Up to $342,000 in FY 2023 from the Rate Stabilization Reserve to the Operati ons Reserve. SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-1 (Residential Wastewater Co ll ection and Disposal ) is hereby amended to read as attached and incorporated. Utility Rate Schedul e S-1, as amended, shall become effective July 1, 2023. SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-2 (Commercial Wastewater Coll ection and Disposal) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-2, as amended, shall become effective July 1, 2023. SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Munici pal Code, Utility Rate Schedule S-6 (Restaurant Wastewater Collection and Disposal) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-6, as amended, shall become effective July 1, 2023. SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-7 (Commercial Wastewater Collection and Disposal -Industrial Discharger) is hereby amended to read as attached and in corporated . Utility Rate Schedule S-7, as amended, shall become effective July 1, 2023. SECTION 7 . The Counci l finds that the revenue derived from the wastewater rates approved by this reso lution do not exceed the funds required to provide wastewater service, and the revenue derived from the adoption of this resolution shall be used only for the purposes set forth in Arti cle VII, Section 2, of the Charter of the City of Palo Alto. SECTION 8. 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. II II II II 112?ol 142l Attachment A * NOT YET APPROVED * II SECTION 9. The Council finds that the adoption of this resolution approving the FY 2024 Wastewater Financial Plan and Reserve transfers does not meet the California Environmental Quality Act's definition of a project under Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(S), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment, and therefore, no environmental review is required . The Council finds that the adoption of this resolution changing Wastewater collection 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 CEQAexemption. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS ATTEST: City Clerk APPROVED AS TO FORM: Assistant City Attorney 02?!12UU Mayor APPROVED: City Manager Director of Utilities Director of Administrative Services A . .1, A. APPLICABILITY: Attachment B RESIDENTIAL WASTEWATER COLLECTION AND DISPOSAL UTILITY RA TE SCHEDULE S-1 This schedule applies to each Occupied Domestic Dwelling unit. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Service. C. RATES: Per Month Each Occupied Domestic Dwelling unit ............................................................................... . $44.e;MS .64 D. SPECIAL NOTES: I. Any dwelling unit being individually served by a Water, Gas, or Electric Meter will be considered continuously occupied. 2. For two or more Occupied Domestic Dwelling units served by one Water Meter, the monthly Wastewater charge will be calculated by multiplying the current Wastewater rate by the number of dwelling units. 3. Each developed separate lot shall have a separate service lateral to a sanitary main or manhole. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No S-1-1 dated Z9-1-202g4 ~\1/~ '-~ - -■ ~ CITYOFPALOALTO \'\ UT I L I T I E S {End} Effective 7-1-2021~ Sheet No S-1-1 A. APPLICABILITY: COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL UTILITY RA TE SCHEDULE S-2 This schedule applies to all commercial establishments other than those served under Utility Rate Schedule S-1 (Residential Wastewater Collection and Di sposal), Rate Schedule S-6 (Restaurant Wastewater Collection and Disposal) or Rate Schedule S-7 (Commercial Establishments Wastewater Disposal -Industrial Discharger). B. TERRITORY: This schedule applies everywhere the City of Palo Alto provide s Wastewater Service. C. RATES: Quantity Rate, per I 00 cubic feet (See Section D. l) ......................................................... . $9 .08 3:JJ D. SPECIAL NOTES: I. The monthly charge for the quantity rate set forth in Section C of thi s rate schedule will be based upon the average Water usage for the month s of January, February and March, and applied in the following July. If a Water Meter i identified as exclusively serving irrigation landscaping, such Meter will be exempted from Wastewater charge calculations. Customers without an applicable usage history will be rebuttably pre sumed to have usage of 4.8 ccf per month until s uch time as such usage may reasonably be established by the City of Palo Alto Utilities Department. 2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a s pecial agreement between the City and the Customer. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-2-1 dated 19-1-2022.4 ~,,,~ ~ ~ ■ ~ CITYOFPALOALTO ,~ U T I L I T I E S {End} Effective 7-1-202 ~ Sheet No S-2-1 RESTAURANT WASTE WATER COLLECTION AND DISPOSAL UTILITY RA TE SCHEDULE S-6 A. APPLICABILITY: This schedule applies to all restaurants. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Service. C. RATES: Quantity Rates, per 100 cubic feet of monthly metered Water usage ................................... $ llli~ D. SPECIAL NOTES: 1. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City and the Customer. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No S-6-1 dated Z9-1-2022.4 ~\I/~ ~ ;.., --■ ~ CITYOFPALOALTO \~ U T I L I T I E S {End} Effective 7-1-202,}_~ Sheet No S-6-1 COMMERCIAL WASTEWATER-COLLECTION AND DISPOSAL -INDUSTRIAL DISCHARGER UTILITY RA TE SCHEDULE S-7 A. APPLICABILITY: This schedule applies to any establishment requiring sampling of industrial discharges in excess of 25,000 gallons per day, or special discharge monitoring, as defined in Rule 23, Section C. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Service. C. RATES: 1. Collection System Operation, Maintenance, and Infiltration Inflow: $ +.t-44.51 per 100 cubic feet of metered water use. 2. Advanced Waste Treatment Operations and Maintenance Charge: $ ~ 1.80 per I 00 cubic feet of metered water use 3. $220 .43 i!~.23 per l000 pounds (lbs) of COD (Chemical Oxygen Demand) 4. $ 531.46 48+.§.8 per 1000 lb s of SS (Suspended Solids) 5. $ 3,672.26 3·;36 9.9S per 1000 lbs ofNHJ (Ammonia) 6. $ 16,111.56 14,78 1.25 per l000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc) D. SPECIAL NOTES: I. Water usage will be determined as defined in Rule 23, Section C. If a Water Meter is identified as exclusively serving irrigation landscaping, such Meter will be exempted from Wastewater charge calculations. 2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City of Palo Alto and the Customer. 3. Charges for large discharges will be determined on the basis of sampling as outlined in Utilities Rule 23, Section C. However, for purposes of arriving at an accurate flow estimate, discharge Meters, if installed, can be utilized to measure outflow for billing purposes. Annual charges will be determined and allocated monthly for billing purposes. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-7-1 dated lfJ-1-2022.4 ~,,,~ -....;: ~ - -■ ~ CITYOFPALOALTO '" U T I L I T I E S {End} Effective 7-1-202,:},~ Sheet No S-7-1 FY 2024 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2024 TO FY 2028 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2024 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2024 TO FY 2028 TABLE OF CONTENTS Section 1: Definitions and Abbreviations ...................................................................... · .......... 4 Section 2: Executive Summary and Recommendations ........................................................... 4 Section 2A: Overview of Financial Position .................................................................................. 4 Section 28: Summary of Proposed Actions .................................................................................. 7 Section 3: Detail of Rate and Reserves Proposals ................................................................... 7 Section 3A: Rate Design ............................................................................. ,. ................................. 7 Section 38: Current and Proposed Rates ..................................................................................... 8 Section 3C: Bill Impact of Proposed Changes .............................................................................. 9 Section 3D: Proposed Reserve Transfers ..................................................................................... 9 Section 4: Utility Overview .................................................................................................... 9 Section 4A: Wastewater Utility History ....................................................................................... 9 Section 48: Customer base ........................................................................................................ 11 Section 4C: Collection System ........................................................... : ........................................ 11 Section 4D: Cost Structure and Revenue Sources ...................................................................... 12 Section 4E: Reserves Structure ................................................................................................... 12 Section 4F: Competitiveness ...................................................................................................... 13 Section 5: Utility Financial Projections ................................................................................. 13 Section SA: FY 2018 to FY 2022 Cost and Revenue Trends ........................................................ 13 Section 58: FY 2022 Results ....................................................................................................... 14 Section SC: FY 2023 Projections ................................................................................................. 15 Section SD: FY 2024 to FY 2028 Projections .............................................................................. 15 Section SE: Risk Assessment and Reserves Adequacy ............................................................... 16 March 2 O 2 3 21 Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN Section SF: Alternate Scenarios ................................................................................................. 18 Section SG: long-Term Outlook ................................................................................................. 21 Section 6: Details and Assumptions ..................................................................................... 21 Section 6A: Wastewater Treatment Costs ................................................................................. 21 Section 68: Operations .............................................................................................................. 22 Section 6C: Capital Improvement Program (CIP) ....................................................................... 22 Section 6D: Debt Service ............................................................................................................ 26 Section 6E: Other Revenues ....................................................................................................... 2 7 Section 7: Communications Plan .......................................................................................... 28 Appendices ......................................................................................................................... 29 Appendix A: Wastewater Collection Financial Forecast Detail .................................................. 30 Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP} Detail .......... 31 Appendix C: Wastewater Collection Utility Reserves Management Practices .......................... 32 Appendix D: Map (CPA Wastewater Collection System -Sewer Mains Replaced or Rehabilitated since 1990) .......................................................................................................... 35 Appendix E: Sample of Wastewater Collection Outreach Materials ......................................... 36 March 2 0 2 3 3 1 Page I WASTEWATER COLLECTION UTILITY FINANCIAL PLAN -- SECTION 1: DEFINITIONS AND ABBREVIATIONS CCF CIP CPAU FOG O&M RWQCP UAC -- The standard unit of measurement for water del ivered to water customers, equal to one hundred cubic feet, or rough ly 748 ga ll ons. When water usage is used to assess wastewater charges for commercia l customers, i t is measured i n CCF. Capital Improvement Program City of Palo Alto Utilities Department Fats, oils, and grease. When fl ushed into the sewer system, these materials accumulate in parts of the sewer system and create blockages. Operations and Maintenance Reg ional Water Qua li ty Contro l Plant, the wastewater treatment plant owned and operated by the Ci ty of Palo Alto that serves Pa lo Alto and several surrounding communities. Utilities Advisory Comm i ssi on - SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financia l Plan for the City of Pa l o Alto's Wastewater Collection Utility for the next five years. The Finan ci al Plan describes how revenues will cover the costs of operating the utility safely over that time whi le adequately investing for the future . It also addresses the financial risks facing the utility over the short and long term and includes measures to mitigate and manage those risks . SECTION 2A: OVERVIEW OF FINANCIAL POSITION Overview · The Wastewater Collection Uti lity's costs include the collection system costs to co ll ect sewage within Palo Alto, maintain and replace sewer infrastructure, and provide customer service, bi lli ng and adm i nistration as we ll as Palo Alto's share of the costs to treat sewage at Pa lo Alto's Reg ional Water Quality Control Plant. Th i s Financial Plan projects total Wastewater Co ll ection Uti l ity costs (including Palo Alto's share of wastewater treatment costs) to increase by an average of 6.8% annually from fiscal year {FY) 2023 to FY 2028. The collection system's operations and cap ital costs, not including Palo Alto's share of wastewater treatment costs, are expected to grow at an average of 8.6% annually from FY 2023 to FY 2028, however, cost i ncreases vary from year to year. Section 6B: Operat ions provides more deta il about operati ons costs, and Section GC : Cap ital Improvement Program {CIP) provides more detail about capital costs). A 9% overall rate i ncrease is needed in FY 2024 to pay for increa s' ng total co l lection system costs, pl an for accelerating cost increases beyond the 5-year planning horizon and to maintain adequate reserves (discussed further in Section SE: Risk Assessment and Reserves Adequacy). Staff recommends accelerating the rate of main replacement from 1 m i le to 2.5 miles per year beginning in FY 2026. This acceleration will allow the Wastewater Co ll ection Util ity to replace the last main no more than approximately 8 years beyond its anticipated 100-year l ife expectancy. The more that wastewater assets are operated past their usefu l life, the greater the li kelihood of substant ial pipe fa i lures resulting in additiona l repa i r and maintenance costs, sanitary sewer March 2 O 2 3 4 I Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN overflows, sinkholes, or other catastrophic impacts. Staff's recommendation attempts to minimize rate impacts while also prudently managing the City's infrastructure (see Section 6C: Capital Improvement Program (CIP)}. To accomplish this, the 5-year capital budget (FY 2023 -FY 2027) is projected to increase from $20.3 million to $29.2 million, an increase of 44%. This Financial Plan presents three alternatives that delay the 2.5 mile per year of main replacement to later years in order to mitigate the impact on sewer rate increases (Table 11 summarizes the three alternatives and Section SF: Alternate Scenarios provides more details). The Regional Water Quality Control Plant (RWQCP) provides wastewater treatment to Palo Alto and several surrounding communities. The RWQCP projects that wastewater treatment costs, a share of which are allocated to Palo Alto and passed on to wastewater collection customers, will increase by an average of 4 .7% annually during the same time period followed by a large debt service increase in FY 2029 after the 5-year planning horizon for Secondary Treatment Upgrades (See Section 6A: Wastewater Treatment Costs for more details). Rehabilitation and replacement of plant equipment at the RWQCP that has been in use for over 40 years is necessary for the City to continue to provide wastewater treatment safely and in compliance with regulatory requirements for the discharge of treated wastewater 24 hours a day. Table 1 shows actual expenses for FY 2022 and projected expenses for FY 2023 through FY 2028 . In Table 1, "Treatment" reflects Palo Alto's share of Regional Water Quality Control Plant O&M and CIP costs. "Operations" includes O&M costs for the collection system . "CIP" shown for FY 2022 includes capital costs of the collection system, along with the increase in CIP commitments and reappropriations reserves for FY 2022. This differs from planned CIP shown in line 12 of Table 3, which is the actual CIP budget. CIP expenses in FY 2023 through FY 2028 reflect capital program contributions from the Operations Reserve to the CIP Reserve. This table does not include the additional one-time transfers from the Operations Reserve to the CIP Reserve, shown in Table 3. Table 1: Wastewater Collection Expenses for FY 2022 to FY 2028 ($000) FY 2022 FY2023 FY2024 FY 2025 FY 2026 FY 2027 FY2028 Expense Actual Projected Treatment 9,479 10,814 12,292 11,590 11,870 12,123 13,612 Operations 8,230 7,423 8,005 8,204 8,445 8,689 8,929 CIP 5,225 3,750 2,333 7,100 7,313 7,725 7,957 TOTAL 22,934 21,987 22,630 26,894 27,628 28,537 30,498 The Operations Reserve was within the guideline levels at the end of FY 2022 and is expected to remain within guideline levels throughout the forecast period (as shown in more detail in Figure 5). The Wastewater Collection utility also maintains a CIP Reserve to manage cash flow for capital projects and _serve as a reserve for capital contingencies . The CIP Reserve aims to smooth out uneven annual funding for ongoing CIP projects, such as the replacement of sanitary sewer mains on a biennial schedule and is a source of funding for one-time or immediately needed projects. Capital Improvement Program The CIP budget for the upcoming Sanitary Sewer Replacement project (SSR 31) has increased and is scheduled to begin in FY 2023 instead of FY 2024 because of coordination with Caltrans to limit --- March 2 0 2 3 5 I P a g e WASTEWATER COLLECTION UTILITY FINANCIAL PLAN or avoid digging into newly-paved street on El Cami no Real. This Financial Plan increases this project budget and reflects the construction budget in FY 2023 instead of FY 2024. Staff plans·to bring this Sewer Replacement project to Counci l for approval in April 2023 to begi n construction in late June or early July of 2023. Rate Proposal Table 2 compares the projected overall rate changes i n the current Financial Plan with the projected rate changes in the FY 2022 and FY 2023 Financia1 Plans. The current plan recommends accelerating the rate of main replacement which increases rates necessary to cover rising costs and maintain adequate reserves for the Operations reserve. This projection utili zes all the funding in the CIP Reserve in FY 2023 for Sanitary Sewer Replacement project 31. Th is bri ngs the CIP Reserve to zero and slowly replenishes the reserve throughout the forecast period so that by FY 2027 it remains within the gu i de l ine range (see Figure 10). The Wastewater Collection Util ity Reserves Management Practices state that if, at the end of any fiscal year, the mi n i mum guideline is not met in the CIP Reserve, staff shall present a plan to the City Council to rep l enish the reserve. This Financial Plan includes a plan to replenish the reserve each year by FY 2027 . Table 2: Proposed/Projected Wastewater Collection Rate Trajectory for FY 2024 to FY 2028 Projection FY FY FY FY FY 2024 2025 2026 2027 2028 Current Plan (FY 2024) 9% 9% 9% 8% 5% FY 2023 Financial Plan 5% 5% 5% 5% N/A FY 2022 Financial Plan 5 % 5% 5% N/A N/A Reserve Changes This Financial Plan projects that rate f unding is needed to cover $8.345 million of planned CIP in FY 2023. This figure is the portion of planned CIP in FY 2023 that will not be paid for through funds collected ,in prior years (the FY 2023 capital budget, less funds available in the Reappropriations and Commitments Reserves) shown i n li ne 12 of Table 3. The $8.345 million will be funded by the capita l program contri but ion of $3.75 millton plus $1.417 million in one­ time funds from the Operations Reserve (lines 9 and 7 from Table 3), together with $3.178 million from the CIP Reserve. Wit hdrawals from the CIP Reserve for use on cap ita1 projects require Council action.1 Th is Financial Plan therefore requests Council approval to transfer up to $3.178 miH ion from the CIP Reserve to the Operations Reserve. Figure 10 shows the projected CIP Reserve year~end balances. Table 3 shows the starting and ending balance in the Operations, CIP and Rate Stabilization Reserves and the projected reserve transfers and capital program contr i butions for FY 2023 through FY 2028. 1 See Appe'!_~ix C, Wastewater Collection Utility Reserves Management Practices Section S(~ March 2 O 2 3 6 I P a g e WASTEWATER COLLECTION UTILITY FINANCIAL PL AN Table 3: Operations, Rate Stabilization and CIP Reserves Changes, Revenue and Guideline Levels for FY 2023 to FY 2028 ($000) I Fiscal Year 2023 2024 2025 2026 2027 2028 Starting Balance I I ' I I (1) O perations 4,252 3,049 4,31S 3,S86 3,693 S,805 (2) Rate Stabilization 342 . . . . . (3) CIP 3,178 0 916 3,665 849 5,853 Revenues I (4) Total Revenue 21,859 23,896 26,164 28,43S 30,648 32,177 Transfers (S) O perations {1,075) . . (700) . . (6) Rate Stabilization (342) . . . . . (7) CIP 1,417 . . 700 . . :capital Program Contribution I I I (8) Operations (3,7S0) (2,333) (7,100)1 {7,313) (7,72S) (7,9S7) (9) CIP 3,750 2,333 7,100 7,313 7,72S 7,9S7 Expenses I I I ' I (10) Total Expenses (w/o CIP and Debtl (18,108) (20,168) (19,794) (20,315) (20,812) (22,541) (11) Debt Service (129) (129) . . . . (12) Planned CIP (8,345) (1,418} (4,3Sl) (10,828) (2,722) (11,917) Ending Balance I ' (1)+(4}+(5)+(8)+(10)+(11) Operations 3,049 4,31S 3,S86 3,693 S,805 7,484 (2)+(_6) Rate Stabilization . . . . . . (3)+(7)+{9)+( 12) CIP 0 916 3,665 849 S,853 1,893 Operations Reserve Guideline Levels I I I l (13J Minimum Guideline level 2,998 3,336 3,254 3,339 3,421 3,705 (14) Maximum Gu ideline level 7,495 8,341 8,134 8,349 8,553 9,264 * Planned CIP (item 12) is reflected as an expense in the CIP Reserve and does not include CIP funded through Reappropriations or Comm itments reserves . Th is Fi nancial Plan utilizes $8.345 million for Planned CIP from the CIP Reserve in FY 2023; this total includes $3.75 m illi on (item 9) and $1 .417 m ill ion (item 7) as well as $3 .178 million from the CIP Reserve . Staff requests Counci l approva l to transfer $3.178 million from the CIP Reserve to the Operations Reserve in FY 2023 . SECTION 28: SUMMARY OF PROPOSED ACTIONS Staff proposes the following actions for the Wastewater Collection Utility in FY 2023 and 2024: I I 1. Increase rates by 9% in FY 2024 for all customer classes to bring revenue collection closer to expenses. See Section 3B: Current and Proposed Rates for more details. 2. Approve up to a $3.178 million transfer from the CIP Reserve to the Operations Reserve in FY 2023 . See Section 30: Proposed Reserve Transfers for more details. 3. Approve up to a $342,000 transfer from the Rate Stabilization Reserve to the Operations Reserve in FY 2023. See Section 30: Proposed Reserve Transfers for more details. SECTION 3: DETAIL OF RATE AND RESERVES PROPOSALS SECTION 3A: RATE DESIGN The Wastewater Collection Utility's rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in Article XIII D of the California March 2 0 2 3 7 I P a g e WASTEWATER COLLECTION UTILITY FINANCIAL PLAN Constitution (Proposition 218). Current rates are structured based on staff's annual assessment of the Wastewater Collection Utility's financial position (Staff Report 12378) and relied on the methodology from the Cit y of Palo Alto 2021 Wastewater COS Report, prepared by Raftelis Financial Consultants, Inc. SECTION 3B: CURRENT AND PROPOSED RATES The current rates were effective July 1, 2022, when the City increased sewer rates by 3%. CPAU has three sewer rate schedules app li cable to current customers: one for residential customers {S-1), one for non-residential customers {other than restaurants) (S-2), and one for restaurants (S-6). Restaurants have a special rate schedule because they discharge higher concentrations of grease, oil and organic components in their sewage and, therefore, discharge sewage that is relatively expensive to treat. Residential customers are billed a monthly service charge, while commercial customers other than restaurants are billed each month based on their winter month water usage (previous January through March). This closely approximates non­ irrigation water consumption, which represents actual sewer use. This proxy for actual sewer use is needed because sewer customers do not generally have meters installed on their sewer connection whereas water connections are usually metered. CPAU also maintains a rate schedule for industrial dischargers {S-7), but there are currently no customers on this rate schedule. To align revenues with costs, CPAU proposes to increase overall rates by 9% in FY 2024, by an additional 9% per year in FY 2025 and FY 2026, by 8% in FY 2027 and by 5% in FY 2028. Table 4 below summarizes the current and proposed rates for all customer classes. These rate increases wi ll cover the increasing treatment costs resulting from improvements and upgrades to the RWQCP, as well as updated sewer mains replacement cycle for collection systems capital projects, and general operations costs. Raftel is Financial Consultants, Inc. completed a cost of service (COS) study for the Wastewater Collection Utility in 2021. Staff calculated the revenue increases needed for the Wastewater Collection Utility based on projected revenue and expenses and applied the same increase percentage to the rates across customer classes. Table 4 shows the rate increases for each customer group. Table 4: Current and Proposed Sewer Rates Current Proposed Change (as of 7/1/2022) (effective 7/1/2023) $ % Monthly Service Charges ($/Month} S-1 (Residential) Service Charge $ 44.62 $ 48.64 $4.02 9 .0% Water Quantity Rates ($/CCF) S-2 (Commercial) Quantity Rates 8.33 9.08 0.75 9.0% S-6 (Restaurant) Quantity Rates 12.43 13.55 1.12 9.0% The proposed rates for the S-7 (Industrial Discharger) rate schedule are: March 2 O 2 3 SI Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN 1) Collection System Operation, Maintenance, and .Infiltration Inflow: $4.51 per 100 cub ic feet of metered water use . 2) Advanced Waste Treatment Operations and Maintenance Charge: $1.80 per 100 cubic feet of metered water use 3) $220.43 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4) $531.46 per 1000 lbs of SS (Suspended Solids) 5) $3 ,672.26 per 1000 lbs of NH3 (Ammonia) 6) $16,111.56 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc) SECTION 3C: BILL IMPACT OF PROPOSED CHANGES Table 5 below shows the bill impact of the proposed FY 2024 rate changes (effective 7/1/2023) for typical customers : Table 5: Bill Impact of Proposed Sewer Rate Changes Current Proposed Change (as of 7/1/2022) (effective 7/1/2023) $/mo. % S-1 (Residential) $ 44.62 $ 48.64 $4.02 9.0% S-2 (Commercial) -14 CCF 116.62 127.12 10.50 9.0% S-6 {Restaurant) -56 CCF 696 .08 758 .80 62.72 9.0% In FY 2024, all customers will experience a 9% increase in bills . Commercial and Restaurant customers bill impacts will vary due to each customer's utilization of the system. SECTION 3C : PROPOSED RESERVE TRANSFERS Staff plans to transfer the remaining $342,000 from the Rate Stabilizat ion Reserve to the Operations Reserve in FY 2023. Additionally, staff proposes a transfer up to $3 .178 million from the CIP Reserve to the Operations Reserve in FY 2023. Section 2A : Overview of Financial Position contains a detailed discussion of proposed reserve transfers and Table 3 lists the proposed reserve transfers. The need for each transfer will be re-evaluated once the year end reserve balances for FY 2023 are known. SECTION 4: UTILITY OVERVIEW This section provides an overview of the utility and its operations. It is i ntended as general background information and to help readers better understand the forecasts in later sections. SECTION 4A: WASTEWATER UTILITY HISTORY The Wastewater Utility commenced operation in 1899 to serve Palo Alto and Stanford. In its first three decades the system grew to 60 miles of sewers. Raw sewage was discharged into Mayfield Slough at the edge of the Bay. In the 1930s, at the behest of the State Department of Health, Palo Alto built the South Bay's first wastewater treatment plant. At that time the sewer system served March 2 0 2 3 9I Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN 20,500 Stanford and Palo Alto residents and a cannery. The plant was upgraded twice in the 1940s and 1950s to increase capacity.2 At the same t i me, the postwar population and industrial boom in the 1950s required rapid expansion of the sewer system . In the first half of the 1960s Palo Alto's area doubled, as did wastewater Hows, overwhelming the capacity of several of the utility's "trunk lines," which are the largest d i ameter main sewer lines carrying wastewater to the treatment plant. This prompted the City, in 1965, to perform the first of its sewer master plans to identify needed capacity improvements. At that point the Wastewater Utility's system comprised more than 150 miles of sewer mains.3 In 1968 the City signed agreements w ith the Cities of Mountain View and Los Altos to build a new regional treatment plant, the RWQCP, which is still in operation today. Since 1940 the City had been providing treatment servi ces to the East Palo Alto Sanitary District through an existing agreement and was also serving Stanford University by transporting wastewater across the City's sewer system to the treatment plant. Both of these organizations became partners in the RWQCP as well. At the same time the Town of Los Altos Hills became the sixth partner as it signed an agreement with the City to connect the Town's sewer system to the City's sewer system to carry wastewater to the new RWQCP. The current agreements for the RWQCP extend through 2035.4 In the 1980s the City performed a series of studies of groundwater inflow and infiltration into the system. The studies found high rates of infiltration, est i mating that as much as 40% of the water going to the RWQCP from Palo Alto's system was groundwater and stormwater rather than wastewater. 5 In some parts of Palo Alto the land surface had subs i ded due to groundwater pumping by the water utility, and though that practice had ceased many years earlier as the water utility sw itched to the Hetch Hetchy Regional Water System, parts of the city had already subsided two to five feet. This subsidence had damaged several parts of the sewer collection system, leading to reduced sl opes for sewer mains that caused reductions in capacity. In response to these studies the City commenced an accelerated sewer system rehabilitation program.6 At that point the sewer system comprised over 190 miles of mains. 7 A Master Plan study in 1988 recommended a vari ety of capacity expansions, and in the 1990s the City completed about half of them. However, a 2004 Master Plan update found that the acce lerated sewer rehabilitation pl_an started in the early 1990s had substantially reduced infiltration, easing the capacity problems that had led the to the recommended capacity increases i n the 1988 study. Several of the outstanding projects were canceled and replaced with · a different set of projects. 8 At the same time the City updated its hydraulic model and developed greater capacity to do system pl anning in-house. l Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pp 2-1 t hrough 2-2 1 Wastewater Collection and Storm Drainage, 1965, Brown and Cal dwell Consu l ting Engineers, pp 4, 6-7, 143 4 Long Range Facilities Pion for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pg 2-2 $ Wastewater Collection System Master Plan -Capacity Assessment, January 2004, MWH Ameri cas, Inc., pg ES-2 ~ CMR 183 :90, Infrastructure Review and Update, March 1, 1990 1 Moster Plan of the Wastewater Collection System, December 1988, Camp Dresser & McKee, Inc., pg 1-2 8 Wastewater Collection System Master Plan -Capacity Assessment, J~nuary 2004, MWH Americas, Inc., pg ES-3 March 2 O 2 3 10 I P a g e WASTEWATER CO LLECTION UTILITY FINANCIAL PLAN SECTION 48 : CUSTOMER BASE The City of Palo Alto's Wt;1stewater Collection Utility provides sewer service to the residents and businesses of Palo Alto. It is distinct from the Wastewater Treatment Utility, which provides treatment services for surrounding communities in addition to Palo Alto. In effect, the Wastewater Collection Utility serves as a wholesale customer of the Wastewater Treatment Utility, and the rates charged by the Wastewater Collection Utility to its retail customers recover not only collection costs but also Palo Alto's share of Wastewater Treatment Utility Costs. Nearly 27,580 customers are connected to the sewer collection system, approximately 26,050 (94%) of which are residential and 1,530 {6%) of which are non-residential. Residential customers pay a flat fee per dwelling unit for service. Commercial customers are billed for sewer service based on their metered winter water usage while Restaurant customers are billed for sewer service based on their metered monthly water usage. SECTION 4C : COLLECTION SYSTEM The Wastewater Collection Utility delivers all the wastewater it collects to the Regional Water Quality Control Plant (RWQCP) operated by the City of Palo Alto under a partnership agreement with several surrounding communities. Palo Alto is responsible for 32% to 35% of the wastewater sent to the RWQCP. This Financial Plan does not describe the cost of running the RWQCP in detail as this cost is contained in the Wastewater Treatment Utility; however since these costs are a major driver of CPAU's sewer rates, Section 6A: Wastewater Treatment Costs provides some discussion of future trends in treatment costs. Treatment costs make up more than a third of the Wastewater Collection Utility's expenses as shown in Table 1 above. To collect wastewater from its customers and deliver it to the RWQCP, CPAU owns roughly 18,000 sewer laterals (which collect wastewater from customers' plumbing systems) and 217 miles of sewer mains (which transport the waste to the treatment plant). These laterals and mains, along with the associated manholes and cleanouts, represent the vast majority of infrastructure used to collect wastewater in Palo Alto. CPAU conducts a sewer rehabilitation and replacement program to replace mains over time as they deteriorate or to increase capacity. For more discussion of this program, see Section 6C: Capital Improvement Program {CIP). CIP expense accounts for less than a quarter of the utility's expenditures. In addition to CIP, CPAU performs various maintenance activities on the sewer system . These include inspecting and repairing sewer laterals, responding to sewer overflows, regularly cleaning sections of the system heavily impacted by fats, oils, and grease (FOG), and building and replacing sewer laterals for new or redeveloped buildings. The utility also shares the costs of other operational activities (such as customer service, billing, equipment maintenance, and street restoration) with the City's other utilities. These maintenance and operations expenses, as well as associated administration, debt service, rent, and other costs, make up approximately another quarter of the utility's expenses. March 2 0 2 3 11 1 Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN SECTION 40: COST STRUCTURE AND REVENUE SOURCES I n FY 2022, approximately 41% of the Wastewater Co lt ection Utility costs were for treatment (capital and operations), while about 36% were for the co ll ect ion system's operations. The remaining 23% were for collect ion system capital improvements. Figure 1 illustrates these expenditures. The utility's ma in source of revenue in FY 2022, shown in Figure 2, was sewer charges (96%), with the rest from capac ity and connect ion fees and other sources (4%). Figure 1: Cost Structure (FY 2022) Figure 2: Revenue Structure (FY 2022) ■Treatment ■ Operations ■ Capital ■ Sa l es Revenue ■ Other Revenue SECTION 4E: RESERVES STRUCTURE CPAU maintains six reserves for its Wastewater Collection Utility to manage various types of contingencies. Below is a summary of these reserves and Appendix C: Wastewater Collection Utility Reserves Management Practices provides more detailed definitions and gu idelines for reserve management: • Reserve for Commitments: A reserve equal to the ut ility's outstanding contract liabi l ities for the current fiscal year. Most City funds, including the General Fund, have a Commitments Reserve. • Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated by the City Council, nea rl y all of which are capital projects. Most City funds, including the General Fund, have a Reappropriations Reserve. • Capital Improvement Program (CIP} Reserve : The CIP reserve is used to accumulate funds for future expenditure on CIP projects and a reserve leve l is anticipated to be maintained in order to smooth major CIP expenditures every other year. It also acts as a contingency reserve for unexpected capital costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well. • Rate Stabilization Reserve: This reserve is i ntended to be empty unless one or more large rate increases are ant icipated in the forecast peri od. In that case, funds can be accumulated to spread the impact of those future rate increases across mult i ple years. This type of reserve is used i n other utility funds (Electric, Gas, and Water) as well. March 2 O 2 3 12 I P a g e WASTEWATER COLLECTION UTILITY FINANCIAL PLAN • Operations Reserve: This is the primary contingency reserve for the Wastewater Collection Utility and is used to manage yearly variances from budget for operational costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well. • Unassigned Reserve: This reserve is for any funds not assigned to the other reserves. SECTION 4F: COMPETITIVENESS Table 6 shows the monthly sewer bills for residential customers compared to what they would be in surrounding communities. The average monthly sewer bill for a Palo Alto single family residential customer is $44.62 at current rates, which is lower than four of the six neighboring communities. These communities are the same six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas, and Electric industries. In the following tables, "Menlo Park" refers to the West Bay Sanitary District. Table 6: Residential Monthly Equivalent Sewer Bill Comparison (FY 2023 Rates)($) Neighboring Communities Menlo Redwood Santa Mountain Palo Alto Park City Clara View Los Altos Hayward $ 44.62 106.67 89.28 46.82 50.10 42.05 38.58 Table 7 compares the sewer bills for two classes of non-residential customers to what they would be under surrounding communities' rate schedules. Note that other communities often have specific rates for industrial customers that discharge high intensity wastewater, such as food processors or chemical or electronics manufacturers, but Palo Alto does not currently have any customers that require these special rates. The estimate of Palo Alto commercial and restaurant monthly sewer bills are around the neighboring community average, assuming neighboring communities do not increase sewer rates. The monthly bill comparison assumes 14 CCF of water for general commercial customers and 56 CCF of water for restaurants. Table 7: Commercial Monthly Sewer Bill Comparison (FY 2023 Rates) ($) Neighboring Communities Customer Menlo Redwood Santa Mountain Types Palo Alto Park City Clara View Los Altos Hayward General 116.62 144.34 117.74 75.74 156.66 72.23 87.92 Commercial Restaurant 696.08 1,216.88 1,128.40 718.48 718.48 288.90 660.80 SECTION 5: UTILITY FINANCIAL PROJECTIONS SECTION SA : FY 2018 TO FY 2022 COST AND REVENUE TRENDS Figure 3 shows the Wastewater Collection Utility's actual expenses and revenues for the past five years and projections through FY 2033. Treatment plant expenses (including CIP and O&M) assigned to Palo Alto's Wastewater Collection Utility decreased, on average, by 0.2% annually from FY 2018 to FY 2022. However, the decreased expenses were due to lower wastewater flows -- March 2 0 2 3 13 I P a g e WASTEWATER COLL ECTION UTILITY FINANCIAL PLAN throughout Palo Alto i n FY 2022. CIP costs for the wastewater co t lection system fluctuate from year to year as sanitary sewer replacements occur every other year rather than annually. Since wastewater revenue is relatively stable, revenue changes closely follow rate changes. However, during the pandemic, non-residential wastewater revenue declined by about 11% in FY 2022 and this Financial Pl an projects revenue reductions from the commercial and restaurant sectors w·11 recover by FY 2026. Connection and capacity fees grew dramatically between FY 2010 and FY 2015 and then plateaued and then declined significantly in FY 2022. This is likely due to more tenant improvements permits rather than new service connection permits where the improvements are inside the buildings and the utility infrastructure remains the same. These revenue reductions contribute to the need to increase rates. Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes Actual Costs through FY 2022 and Projections through FY 2033 $45 $40 S% $3 5 ·1------------8-%-5%- -$3 0 9%_9% ..:..._ j $25 0% U% 7% 0% 3% 3.E " !$20 ~$1 5 $10 $5 $0 Collection Capital & Debt* □Collecti on Operatlons •Treatment Capital & Debt •Treatment Operations -Revenue *CIP in the projected years include changes due to commitments/reappropriations and funds transferred to the CIP Reserve SECTION SB: FY 2022 RES UL TS Actual sales revenues for FY 2022 were approximately $0.24 million lower than forecasted in the_ FY 2022 Finan ci al Plan ($19.8 million actua1 vs. $20 million forecasted). This was primarily because of COVID pandem i c-related reductions in restaurant (S-6) water usage as well as winter water usage reductions for other non-residential customers (S-2); water usage reductions affect wastewater sales revenue because restaurant water sales used monthly water usage for wastewater billing, while winter commercial water usage is the basis for the following year of wastewater rates. Other revenue was approximately $0_.6 million lower than forecasted due to lower than expected connection and capacity fee revenue as well as reductions in interest income. Total revenues were $0.84 million l ower than expected. Treatment expenses were approximately $1.7 million lower than forecasted in the FY 2022 Financial Plan ($9.5 million actua l vs. $11 .2 mi llion forecasted). Collection · system capital and March 2 0 2 3 14 I Page WASTEWATER COLLECTIO N UTILITY FINANCIAL PLAN operating costs were approximately $2.9 million higher than expected ($13.5 mi llion actual vs. $10.6 million forecasted). Table 8 below summarizes key reasons for the variances fr om forecast. Table 8: FY 2022 Actuals vs. FY 2022 Financial Plan Forecast ($000) Net Cost/ Type of (Benefit) Change Lower sales revenues $ 238 Revenue decrease Lower interest income, connection and capacity fees $ 607 Revenue decrease Treatment cost reduct ions $ (1,675) Cost decrease Higher allocated charges and CIP costs $2,875 Cost in crease Net Cost / (Benefit) of Variances $2,045 SECTION SC: FY 2023 PROJECTIONS Staff currently projects about the same sales revenue ($20. 7 million) compared to the FY 2023 Financial Plan. Staff projects other revenue from connection and capacity fees and interest to be slightly higher than expected by approximately $45K. Treatment cost projections decreased by $0.9 million. Collection system costs are estimated to be si milar to the FY 2023 Financial Plan forecast. Table 9 summarizes key variances from the prior forecast . Table 9: FY 2023 Projections vs. FY 2023 Financial Plan Forecast ($000 ) Net Cost/ Type of (Benefit ) Change Sales revenues similar to forecast $3 Revenue decrease Interest, connection, capacity fees and other revenues $ {45) Revenue increase Treatment cost reductions $ (882) Cost decrease Collection system operati ons and capita l $ 29 Cost increase Net Cost/ (Benefit ) of Variances $ (896 ) Although collection system capital contributions remain the same in FY 2023 from the prior forecast, the planned capital from the CIP Reserve increased significantly from $3.2 million to $8.3 million . This is because of the costs increases in Sanitary Sewer Replacement 31 and the budget for that project in FY 2023 instead of FY 2024. This w ill draw down both the Operations Reserve and the CIP Reserve. Additionally, the 5-year budget for CIP in the FY 2023 Financial Plan (FY 2023 -FY 2027) was $20.3 mi llion and this has grown by 51% to $30.6 million due to the accelerated main replacement schedule and cost inflation. SECTION SD: FY 2024 TO FY 2028 PROJECTIONS As shown in Figure 3 above (and, in more detail, in Appendix A: Wastewater Collection Financial Forecast Detail), the Wastewater Collection Utility's total costs are projected to increase by approximately 7.6% per year on average for FY 2024 through FY 2028. This plan proposes to increase the rate of sewer main replacement from 1 mile per year to 2.5 miles per year beginning FY 2026, in order to replace the remain ing 138 miles of sewer mains before they exceed their March 2 0 2 3 1s I P age WASTEWATER COLLECTION UTILITY FINANCIAL PLAN expected life, which is a key driver of the cost increase . Capital costs for treatment are also i ncreas i ng because the treatment plant is facing the need for major upgrades in coming years, due to aging equipment and chang i ng environmental regulations. Rehabilitation and rep lacement of plant equipment that has been in use for over 40 years is necessary to ensure the city can provide wastewater treatment operation safely and in compliance with regulatory requirements for the discharge of treated wastewater 24 hours a day. The costs of the plant are shared among member agenc ies, w ith members expected to see average cost increases of around 4.5% per year over the forecast hori zon. The b iggest increase in Treatment costs is the addit i on of debt service for the Secondary Treatment Upgrades in FY 2029, which is a 28% increase that the Wastewater Ut ility i ncludes in its cost projections (see Section GA: Wastewater Treatment Costs). Figure 4 shows the actuals for FY 2022 and projected reserve levels through FY 2028 . Figure 5 shows the relative drop in Operations Reserve from FY 2023 through FY 2026 and the effects of rate increases to keep the reserve within the guide li ne levels. Figure 4: Wastewater Collection Utility Year-End Reserves Levels, FY 2022 to FY 2028 $20 $18 $16 $14 $12 j$10 ~ $8 ! $6 $4 $2 $0 Actual Projected Fiscal Yeilr SECTION SE: RISK ASSESSMENT AND RESERVES ADEQUACY ml Rate Stabilization Cl Operations IZI CIP ■ CIP Reappropriations and Commitments The Operations Reserve, which is the Wastewater Collection Utili ty's primary contingency reserve, is expected to stay within the reserve guideline levels over the forecast period, as shown in Figure 5 below . However, the Operations Reserve is forecasted to approach the min imum gu i deline through FY 2026, even w ith the proposed annual rate increases of 8-9% from FY 2024 through FY 2027 . This is because the cost of infrastructure replacement, both at the RWQCP and in the collection system, is rising rapidly wh il e revenue declined in FY 2022. In order to ensure that the Operations Reserve remains above the m i nimum gu ideline in FY 2023, funds wi ll need to be transferred from the CIP reserve to the Operations Reserve. The proposed annual rate March 2 O 2 3 16 I P age WASTEWATER CO LLECTION UTILITY FINANCIAL PLAN increases in this Financial Plan are intended to maintain a steady rate trajectory and keep the Operations Reserve within the guideline range in the long term. Figure 5: Operations Reserve Adequacy $10 $9 $8 $7 -$6 Ill -Reserve {Year-End) C: § $5 ---~~--Reserve Min/Max :E $4 -- -Reserve Target $3 $2 ---··--··---·----··--··-··-·· -Risk Assessment $1 $0 2022 2023 2024 2025 2026 2027 2028 Actual Projected Fiscal Year Staff performs an annual assessment of risks for the Wastewater Collection Utility. Table 10 summarizes the risk assessment calculation for the Wastewater Collection Utility through FY 2028. The risk assessment includes the revenue shortfall that could accrue due to: 1. the maximum observed budget-to-actual variance in one year during the past five years; and 2. an increase of 10% in treatment costs. The Operations Reserve is projected to be adequate to manage these levels of risk over the entire forecast period. Table 10: Wastewater Collection Risk Assessment for FY 2024 to FY 2028 FY 2024 FY 2025 FY 2026 FY 2027 FV2028 TotaIRevenue($000) 22,770 25,005 27,255 29,446 30,952 Max. Historical Budget-to-Actual variance 4% 4% 4% 4% 4% Budget-to -Actual Risk ($000) . 911 1,000 1,090 1,178 1,238 Treatment Budget ($000) 12,292 11,590 11,870 12,123 13,612 Treatment Cost Contingency @10% {$000) 1,229 1,159 1,187 1,212 1,361 Total Risk Assessment Value ($000) 2,140 2,159 2,277 2,390 2,599 Projected Operations Reserve Level ($000) 4,315 3,586 3,693 5,805 7,484 March 2 0 2. 3 17 1 Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN SECTION SF: ALTERNATE SCENARIOS Th is Financial Plan includes several alternate rate trajectory scenarios as shown in Table 11 below. Staff brought this item to the Finance Committee for discussion on November 29, 2022 (Staff Re port #14611 ). Staff presented a series of alternative rate trajectories that included the proposal from th i s Financial Plan, wh ich i s a more accelerated time frame for reaching the 2.5 miles per year of main replacement by FY 2024 through higher rate increases or debt financing and a 5% annual rate increase . Finance Committee members expressed a preference to see ~he rate trajectory in the main proposal in this Fi nancial Plan with additional scenarios that showed the trans ition to 2.5 miles per year of main replacement over 6 years (by 2028) instead of 4 years (by 2026) and with fewer years of 9% increases. Staff developed Alternative A and Bin response to this feedback from Finance Committee members . For more detai ls regarding the accelerated replacement, see Section 6C: Capital Improvement Program (CIP). Table 11 below shows the rates projections of the current proposal with starting year of the S­ mile SSR contract ion in FY 2026, along w ith rates projections of alternative scenarios with later start year. Table 12 to 14 below shows the monthly bill impacts of the proposal and alternative scenarios for residential, commerci al and restaurant customers in FY 2024 to FY 2028. Table 11: Alternate Scenarios for Proposed Wastewater Rate Changes Rate Fiscal Year of FY FY FY FY FY Age of last Scenarios First 5-mile SSR 2024 2025 2026 2027 2028 Remaining Sewer Construction Main Replaced Proposal FY 2026 9% 9% 9% 8% 5% 108 years Alternative A FY 2028 9% 8 % 6% 6% 6% 110 years Alternative B FY 2034 7% 7% 5% 5% 5% 114 years Alternative C Later than FY 5% 5% 5% 5% 5% > 114 years 2034 Table 12: Alternate Scenarios for Residential Monthly Bill Impact, S-1 (calcu l ated from FY 2022 residential monthly bill of $44.62/mo) Rate Scenarios FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Proposal $4.02 $4 .38 $4.77 $4.62 $3 .12 Alternative A 4 .02 3.89 3.15 3.34 3.54 Alternative B 3.12 3.34 2.55 2.68 2.82 Alternative C 2.23 2.34 2.46 2.58 2.71 - Table 13: Alternate Scenarios for Commercial Monthly Bill Impact, S-2, 14 CCF Rate Scenarios FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Proposal $10.50 $11.48 $12 .46 $12 .04 $8 .12 Alternative A 10.50 10.22 8.26 8.68 9 .24 Alternative B 8.12 8.68 6.72 7.00 7.42 March 2 0 2 3 18 I P age WASTEWATER COLLECTION UTILITY FINA NCIAL PLAN I Alternative C 5.88 I 6 .16 l 6.44 ..... ! __ 6._12___.1 __ 1._14__.I Table 14: Alternate Scenarios for Restaurant Monthly Bill Impact, S-6, 56 CCF Rate Scenarios FY 2024 FY 202S FY 2026 FY 2027 FY 2028 Proposal $62 .72 $68.32 $74.48 $72.24 $48 .72 Alternative A 62.72 60.48 49.28 52.08 55 .44 Alternative B 48 .72 52.08 39 .76 42.00 43.68 Alternative C 34.72 36.40 38.64 40.32 42.56 Figures 6, 7, and 8 below show the expenses, revenues and rate changes charts for Alternative A, B, and C. Figure 6: Wastewater Collection Utility Expenses, Revenues and Rate Changes, Alternative A $35 --r----------------- $30 1 $25 +----7%,--::::-::-:--------:--c:c--~ 11% 0% !s20 ~ .. ::, 1 $15 ~ $10 $5 2018 2019 2022 2023 2024 Actual Fiscal Year Projected 6% 6% □Coll ection Capital & Debt• □Collection Operations •rreatment Capital & Debt Treatment Operations --Revenue *CIP in the projected years include changes due to commitments/reappropriations and funds transferred to the CIP Reserve March 2 0 2 3 19 I P age WASTEWATER COLLECTION UTILITY FINANCIAL PLAN Figure 7: Wastewater Collection Utility Expenses, Revenues and Rate Changes, Alternative B $35 ~---- $30 -+-------------­ E $25 -+----­~ ! $20 +----'-'------:::.,"1=--~'.:'......::r~~~--~ <I'> ti "' t s15 a: ! $10 - $5 - Actual Fiscal Year Projected 5% 5% □Collection Capital & Debt* □Collection Operations -Treatment Capital & Debt •Treatment Operations -Revenue *CIP in the projected years include changes due to commitments/reappropriations and funds transferred to the CIP Reserve Figure 8: Wastewater Collection Utility Expenses, Revenues and Rate Changes, Alternative C $30 --,------------ $25 --+-----=1%'"""'"0-- ~ 11% 0% 3% ~ s20 -0%-~---_T ,-""':--::-1-~,,,, ! <I'> ~ $15 C !s10 8 $0 l 2020 l 2021 12022 5% 5% c::JCollection Capital & Debt• □Collection Operations -Treatment Capital & Debt Treatment Operations ....... Revenue Actual Projected Fiscal Year *CIP in the projected years include changes due to commitments/reappropriations and funds transferred to the CIP Reserve ------------------March 2 O 2 3 20 I P age WASTEWATER COLLECTION UTILITY FINANCIAL PLAN SECTION SG: LONG-TERM OUTLOOK In the longer term (5 to 35 years), there are several factors that could potentially increase costs for the Wastewater Collection Utility. Section 2A: Overview of Financial Position discusses the acceleration of main replacement, with alternative main replacement schedules shown in Section SF : Alternate Scenarios. Anothe r factor is major upgrades at the RWQCP, which the wastewater utility will pay its share of as part of treatment costs. More details are in Section 6A : Wastewater Treatment Costs. SECTION 6: DETAILS AND ASSUMPTIONS SECTION 6A: WASTEWATER TREATMENT COSTS Treatment expenses represent the Wastewater Collection Utility's share of the costs of operating the RWQCP. According to the agreements between Palo Alto and its partner agencies, these charges are calculated using a formula that considers the amount of wastewater, the organic material and ammonia levels, and the total suspended solids it contains. The Wastewater Collection Utility's assessed share of the RWQCP's revenue requirement is projected to be 30% for FY 2024. Mountain View is the other large agency served by the RWQCP (44% of the revenue requirement estimated for FY 2024) with the smaller agencies (Stanford, Los Altos, East Palo Alto, and Los Altos Hills) making up the remaining share of the total treatment costs. Based on detailed project cost projections provided by RWQCP staff, overall treatment costs are estimated to increase by an average of 4.5% per year from FY 2024 through FY 2033. Wastewater Treatment Fund costs are increasing due to major plant rehabilitation and rising salary and benefit costs as well as increased staffing needed to support capital programs. Additional expenses include higher permitting fees from regulatory agencies and treatment chemical costs. Commodity and utility rates to operate the facility are also anticipated to increase in FY 2024 for electric and natural gas rates. Treatment Operations and Maintenance is projected to increase by an average of 2.3% per year from FY 2024 through FY 2033 to keep up with ongoing replacement of aging equipment. Capital projects and debt are increas i ng at an average of 9.5% per year from FY 2024 through FY 2033. Increases to capital expenses begin in FY 2024 with the Joint Intercepting Sewer Rehabilitation construction, funded on a pay-as-you-go basis. The Wastewater Utility begins to pay for debt service for major projects beginning with the Primary sedimentation Tank in FY 2025, Outfall line Construction, Lab and Tech Services building in FY 2028 and the Secondary Treatment Upgrades and Headworks in FY 2029. Figure 9 below shows the estimated costs of treatment expenses for Palo Alto. March 2 0 2 3 21 1 Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN Figure 9: Palo Alto's Share of Wastewater Treatment Expenses (Projection & Planned CIP) Palo Alto Estimat ed Expenses FY 2024-2033 Projection + Planned CIP $20,000,000 $1S,000,000 $10,000,000 $S,000,000 -Treatment Operations -Reaming/Minor CIP One l"une CIPfor Joint Intercepting sewer -Ex15ti-. Debt ser.nce -Planned Debt SeNite ...,_ Treatment OperatiOll$ & Planned CIPs SECTION GB: OPERATIONS Operations costs include the Customer Service, Distribution Operations, Engineering, and Allocated Charges categories in Appendix A: Wastewater Collection Financial Forecast Detail. Debt service, rent, and transfers are also included in this category. Customer Service costs are primari ly related to the call center and collections on delinquent accounts. The Distribution Operations category includes preventative and corrective maintenance on sewer mains and laterals, investigation of sewer overflows, regular cleaning of heavily impacted sections of the sewer system, and services shared with other utilities (such as street restoration and equipment maintenance). Allocated Charges include the costs of accounting, purchasing, legal, and other administrative functions provided by the City's General Fund staff, as well as shared communications services and Utili ties Department administrative overhead and billing system maintenance costs . Th is Plan expects operations costs to increase by approximately s~6% annually from FY 2023 to FY 2025, based on the latest Consumer Price Index. Staff also projects a 3% increase per year from FY 2026 onwards, based on preliminary assumptions for non-salary and benefit cost categories from Palo Alto's Office of Management and Budget. In terms of salary and benefit assumptions, this plan uses the most recent budgeted annual percentage increases of 11.1% and 7.5% for FY 2023 and FY 2024, respectively, and about 3% annually for FY 2026 and beyond . SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP) The Wastewater Collection Utility's CIP consists of the following programs: • The Sanitary Sewer Replacement/Rehabilitation (SSR) Program, under which the Wastewater Collection Utility replaces aging sewer mains. March 2 0 2 3 22 I Page WASTEWATER COLL ECTION UTILITY FINANCIAL PLAN • Customer Connections, which covers the cost when the Wastewater Collection Utility installs new laterals or upgrades existing laterals at a customer's request in response to development or redevelopment. CPAU charges a fee to these customers to cover the cost of these projects . • Ongoing Projects, which covers the cost of replacing deteriorated manholes and sewer laterals, addressing unplanned replacement needs, performing hydraulic analysis, replacing antiquated software, as well as the cost of capitalized tools and equipment. The Sanitary Sewer Replacement and Rehabilitation Program funds the replacement of deteriorating sewer mains to increase capacity or improve pipe condition in various parts of the sewer system. The sewer system consists of 216 miles of mains, and CPAU uses a variety of tools to establish which sections need to be replaced. The 2004 Master Plan study identified wastewater mains with capacity deficiency, and they have been corrected in past CIP projects. A new master plan study is recommended to update the existing wastewater model, given the many development projects which have introduced additional flow in the collection system since 2004. This project will be submitted to Council for approval around June 2023, if negotiation with the consultant is successful to fit the required scope within the budget. The new study will include flow-monitoring data to reflect current condition and re-assessment of the system capacity. For condition assessment, maintenance statistics (such as records of the location and number of sewer overflows on the system) and video recording of sewer mains during routine cleaning and inspection can reveal areas with deteriorating pipe. CPAU uses a structural rating system to grade the pipe defects. The video-inspection data and maintenance records are used to plan and prioritize sewer main replacement and rehabilitation. Utilities also coordinates with the Public Works street maintenance program to avoid cutting into newly repaved streets. A major goal of the replacement program is to minimize sewer overflow and reduce groundwater and rainwater infiltration. As clay pipe deteriorates, roots start intruding into the cracks or pipe joints to create blockages, permitting groundwater or rainwater to infiltrate the system, and potentially cause structural damage such as broken or collapsed pipe. Some level of infiltration is expected on any sewer system, but if there is too much, the combined flow of wastewater and groundwater/rainwater can overwhelm the capacity of various parts of the sewer system . Reducing infiltration can reduce the need to expand the system to accommodate increased flow, as well as reducing unnecessary amounts of water to be treated at the treatment plant . To achieve this goal, deteriorating mains are either replaced with new HOPE pipe or rehabilitated with a plastic lining when replacement is not feasible. Staff has been replacing/rehabilitating the mains as needed according to their condition. In addition, Wastewater Operations' routine maintenance continues to stay on schedule to minimize sewer overflows. Utilities Engineering has been consistently replacing aging sewer mains since the early 90's. The proactive replacement program keeps the collection system in good condition. Between 1990 and 2022, 80 miles or 37% of the collection system has been replaced or rehabilitated (the darker green-colored lines shown in the attached map in Appendix D: Map {CPA Wastewater Collection System ~ Sewer Mains Replaced or Rehabilitated since 1990). March 2 0 2 3 23 I P age WASTEWATER COLLECTION UTILITY FINANCIAL PLAN A routine replacement program is recommended to keep the system reliable. Each SSR project in recent years has had approximately a $4 to $5 million budget to cover design and construction. This project scope and frequency allows staff to continue replacing 1 mile per year of wastewater mains that are in poor condition that potentially would collapse to create sewer overflow or street sink hole and to reduce groundwater and rainwater infiltration through cracks or leaking joints. The upcoming SSR 31 budget estimate increased because of coordination with Caltrans' street improvement project on El Camino Real, therefore, the CIP budget from FY 2024 is now planned for FY 2023. Staff updated the budget for this SSR to be available in FY 2023 (instead of FY 2024) so that staff can submit the project for Council approval in April to start construction in late June or early July of 2023. Starting SSR 31 on time will avoid digging into newly-paved street on El Cam ino Real. Staff continues to re-eva luate and re-prioritize the scope of future projects based on the structural rating system, Wastewater Operations' feedback, and available budget. Our experience suggests that clay pipe can last around 100 years in Palo Alto's underground cond i tion. Since most of the remain ing original clay pi pes were installed between 1950 and 1970, staff recommends an accelerated CIP program to increase the replacement rate from 1 mile to 2.5 m iles per year (or from 2 miles to 5 miles per project constructed every other year) to fulfil the goal of replacing pi pes near their life expectancy. The anticipated useful life of wastewater mains is estimated at approximately 100 years and this financial plan proposa l would set the City on track to replace the last main approximately 8 years after the end of its expected usefu l life. Staff's proposal attempts to minimize rate impacts while also prudently managing the City's infrastructure and maintaining an acceptable level of risk. This f inan cial plan proposes to begin the accelerated CIP replacement rate in FY 2026, with alternative scenarios starting in FY 2028, FY 2034, or later than FY 2034. These alternatives further increase the duration these assets are operated past their estimated useful life. The more that wastewater assets are operated past their useful life the greater the risk of substantial pipe failu r es resulting in additional repair and maintenance costs, sanitary sewer overflows, sinkholes, or other catastrophic impacts. In Apri l 2022, staff provided a report on Wastewater Utility Asset Management and a presentation to the UAC on Wastewater Infrastructure (Staff Report #13879). The presentation provides details on two categories of pipe condition defects (p lease see the video of the p resentation ). Over the last few years, main replacement costs have been increasi ng for utilities due to economic activity in the Bay Area causing construction cost inflation. Utilities has bi d one sewer project since the pandemic began. There are no indications of a dip in construction costs in the near f uture. Therefore, future CIP spending assumes an inflation rate of about 5.4% annually, wh ich wi ll signifi cantly increase CIP costs over the forecast period. The costs for Customer Connections and on-going projects are projected to remain steady through the end of the forecast period. Actual expenses for these projects fluctuate annually depending on how many defective laterals and manholes are discovered during routine maintenance, as well as how much development and redevelopment is going on that prompts the replacement or upgrade of sewer laterals. Property owners pay a fee for sewer lateral March 2 O 2 3 24 I P a g e WASTEWATER COLLEC TION UTILITY FINANCIA L PLAN replacement or expansion during redevelopment, so when the number of projects increases, so does fee revenue . Table 15 displays projected CIP spending for the 5-year financial forecast peri od, assuming the accelerated replacement rate of CIP projects will start in FY 2026 . Table 15: Projected CIP Spending, FY 2023 to FY 2028 ($,000) FY 2023 Project Category Budget* FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Sewer Rehab/Augmentation 12,040 -3,234 10,406 1,372 11,560 Ongoing Projects 1,600 1,100 1,126 1,150 1,177 1,205 Customer Connecti ons 600 450 450 450 450 450 TOTAL 14,240 1,550 4,810 12,006 2,999 13,215 *Includes unspent funds from previous years carried forward or reappropriated Aside from Customer Connections, the CIP plan fo r FY 2024 to FY 2028 is funded by sewer rates and capacity fees. Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail shows the details of the plan . Figure 10 below shows the projected CIP Reserve balances from FY 2023 through FY 2028 . Figure 11 below shows the projected CIP expenditures fluctuating from year to year with the staggered main replacement schedule relative to the steady projected capital program contributions. Appendix A: Wastewater Collection Financial Forecast Detail shows the amount of the rate • funded CIP Reserve contributions under "Expenses" for FY 2023 through FY 2028 . March 2 0 2 3 25~Page Ill "D C :JI :::, 0 .r:. I- 11\- WASTEWATER COLLECTION UTILITY FINANCIAL PLAN Figure 10: Projected CIP Reserve Balances, FY 2023 to FY 2028 ($,000) 12,000 . ~----•-•-••n•• .. •••••••• ••••••••••••••••••••• •• •• ••• •••• 10,000 8,000 6,000 4,000 2,000 2023 2024 2025 2026 2027 2028 Fiscal Year ~CIP Reserve (Year-End) -Reserve Min/Max Figure 11: Projected CIP Expenditure, and Projected Capital Program Contribution, FY 2023 to FY 2028 ($000) 14,000 12,000 "' 10,000 "O C 8,000 IV "' :J 0 6,000 .r:. I- 11\- 4,000 2,000 2023 2024 2025 2026 2027 2028 Fiscal Year Projected CIP Expenditure • Projected CIP Contribution SECTION 60: DEBT SERVICE The Wastewater Collection Utility currently pays its share of one bond issuance, the 1999 Utility Revenue Bonds, Series A, wh i ch is due to be retired in FY 2024. This $17.7 million issuance refinanced various earl ier Storm Drain, Wastewater Treatment, and Wastewater Collection Util ity bond issuances . The Wastewater Collection Util ity's share of the issuance was roughly $1.9 milli on. This amount represented the second refinancing of the remaining principal of a 1990 March 2 0 2 3 26 I Page WASTEWATER CO LLECTION UTILITY FINANCIAL PLAN bond issuance, which itself was a refinancing of a 1985 issuance that financed a variety of improvements to the sewer system. The cost of debt service for the Wastewater Collection Utility's share of this bond issuance for the financial forecast period is roughly $129,000 per year. The 1999 Utility Revenue Bonds include two covenants stating that 1) the Wastewater Collection Utility will maintain a debt coverage ratio of 125% of debt service, and 2) that the City will maintain "Available Reserves"9 equal to five t i mes the annual debt service . The current Financial Plan maintains compliance with both covenants throughout the forecast peri od. Table 16, below, shows compliance with the first covenant. Due to the small size of the annual debt service payment for these bonds, the Wastewater Collection Utility's Operations Reserve alone more than satisfies the second covenant at more than 20 times annual debt service throughout the forecast period. Table 16: Debt Service Coverage Ratio ($000) FY 2024 Revenues 22,748 Expenses (excl . CIP 17,369 and Debt Service) Net Revenues 5,496 Debt Service 129 Coverage Ratio . 4161% The Wastewater Collection Utility's reserves (but not its net revenues) are also considered security for the Storm Drain and Wastewater Treatment Utilities' shares of the debt service on the 1999 bonds . Throughout the term of the bonds there remains a small risk that the Wastewater Collection Utility's reserves could be called upon to make a debt service payment on behalf of one of those utilities if it cannot meet its debt service obligations. Staff does not foresee this occurring based on the current financial condition of those utilities. If the Wastewater Collection Utility's reserves were used this way, any amounts advanced would have to be repaid by the borrowing utility. SECTION GE : OTHER REVENUES Other revenues are from capacity and connection fees and income from interest and transfers i n. These revenues fluctuate from year to year. This plan forecasts other revenues using budget estimates through FY 2028, then increasing by inflation annually through the forecast period . 9 Avai lable Reserves as defined in the 1999 Util ity Revenue Bonds included reserves for the Water, Wastewater Treatment, Wastewater Collection, Refuse, Storm Drain, Electric, and Gas Utilities March 2 0 2 3 27 I P a g e WASTEWATER COLLECTION UTILITY FINANCIAL PLAN i SECTION 7: COMMUNICATIONS PLAN - - - - In FY 2024, the communications strategy for the wastewater collection utility will address the following primary areas: infrastructure upgrades, i ncreasing wastewater treatment costs, maintenance and operations related to safety, and how these necessary activities impact the rates this year. Communication about waste~ater rate adjustments will highlight the important i nfrastructure upgrades that are occurring at the Regional Water Quality Control Plant (RWQCP) as well as increased capital improvement projects (CIP) to improve our wastewater collection utility services. These infrastructure upgrades are necessary to replace aging wastewater collection mains and sanitary sewer treatment equipment at the RWQCP. This is important for functional as well as safety reasons . One of the main reasons for current wastewater utility rate increases is the cost to treat sewage at Palo Alto's Regional Water Qual ity Contro l Plant. The other main driver is the cost to collect sewage within Palo Alto, includ i ng: mainta i ning and replacing sewer infrastructure, customer service, billing, and administration. Staff update the utilities website w ith i nformat ion on the progress of wastewater projects to keep customers apprised of the status and accomp li shments of CIP projects. Customers can find project schedules, maps, overview of the work being done, and project manager contact information at ci tyofpaloa lto .org/ut ili t yp ro jects Promot ional activities about wastewater infrastructure upgrades and environmental service improvements, operations, safety, CPAU and customer responsibilities for wastewater system ma i ntenance, include the use of bill inserts, ads in local print publications, ema i l newsletters and social media . An important communications topic for the wastewater utility is avoiding sewer back-ups due to FOG (fats, oil and grease), trash and other hazardous materia ls being dumped down drains and to i lets . These items can clog sewer lines, cause sewer overflows, and can pollute San Francisco Bay. Safety topics are emphasized yeaMound. Staff cont i nue with the outreach goal of educating customers about the utility's gas-sewer l i ne cross-bore inspection program, including the importance of calling 811 before digging and contact i ng CPAU prior to clearing sewer lines in the event of a sewer back-up. While pri nt materials and webs ite pages feature prom i nently, CPAU is increasing the outreach emphasis on more direct communicat ion with customers, including through use of social media, ema it newsletters, digital ads and videos. As the COVID-19 pandemic emergency has abated, staff will begin attending community outreach events, safety and emergency preparedness fairs, and neighborhood meetings once again. CPAU continually seeks out new opportunities to engage with the public to spread awareness about important safety topics and inform the community about project improvements such as at the RWQCP. March 2 0 2 3 28 I P age WASTEWATER COLLECTION UTILITY FINANCIAL PLAN I I APPENDICES ------------------ Appendix A: Wastewater Collection Financial Forecast Detail Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP} Detail Appendix C: Wastewater Collection Utility Reserves Management Practices Appendix E: Map (CPA Wastewater Collection System -Sewer Mains Replaced or Rehabilitated since 1990) Appendix E: Sample of Wastewater Collection Outreach Materials March 2 o 2 3 29 I P age WASTEWATER COLL ECTION UTILITY FINANCIAL PLAN APPENDIX A: WASTEWATER COLLECTION FINANCIAL FORECAST DETAIL O CITV OF Wastewater Collection Financial Detail PALO ALTO ($'0001 Actual Projected 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 1 2 "CHANGE IN RETAIL RATE 0.0% 11.0% 7.0% 0.0% 3.°" 3.0% 9.0% 9.0% 9.0% 8.0% s.o,i. ,--3 PROJECTED CHANGE IN RETAIL SAlES REVENUE -1,916 1,359 . 499 S9S 1,871 2,056 2,258 2.188 1,4n 4 5 RETAIL SALES REVENUE 17,420 19,342 20,335 19,817 19,778 20,744 22,748 24,982 27,231 29,421 30,927 6 CONNECTION AND CAPACITY FEES 549 S94 686 S02 203 4S0 450 450 450 450 4S0 7 OTHER/ TRANSFERS IN 328 545 394 404 486 S15 541 568 585 602 620 8 INTEREST 19 446 406 43 141 150 1S7 16S 170 175 180 9 REVENUES 18,316 20,928 21,820 20,765 20,608 21,859 23,896 26,164 28,435 30,648 32,ln 10 11 PURCHASES/CHARGES OF UTILITIES (TREATMENT) 9,559 9,843 10,234 10,542 9,479 10,814 12,292 11,S90 11,870 12,123 13,612 12 AU.OCATED CHARGES (CIP&OPERATING) 634 2,459 2,536 1,865 3,251 2,064 2,169 2,277 2,345 2,415 2,488 13 CUSTOMER SERVICE 283 306 366 430 407 446 S22 S44 560 sn 595 14 DISTRIBUTION OPERATIONS 2,720 2,855 3,461 3,413 3,697 3,909 4,281 4,457 4,59S 4,731 4,861 lS ENGINEERING (OPERATING) 345 329 339 351 261 381 403 418 430 443 456 16 DEBT SERVICE 128 128 128 128 129 129 129 . . -- 17 RENT 310 320 332 252 257 264 271 278 286 294 302 18 OTHER/ TRANSFERS OUT 3S9 364 467 342 229 229 229 229 229 229 229 19 CAPITAL PROGRAMCONTRIBUTIONA 2,955 1,886 3,686 2,526 5,225 3,750 2,333 7,100 7,313 7,T15 7,9S7 20 EXPENSES 17,294 18,489 21,550 19,848 22,934 21,987 22,630 26,894 27,628 28,537 30,498 21 22 INTO/ (OUT OF) RESERVES 1,022 2,439 271 917 (2,326) (128) 1,266 (729) 807 2,1U 1,679 23 24 ENDING COMMITMENTS & REAPPROPRIATIONS 1,268 5,732 4,ns 830 4,612 4,612 4,612 4,612 4,612 4,612 4,612 25 ENDING PLANT REPLACEMENT RESERVE . . . . . . . . . . 26 ENDING CIP RESERVE 978 978 978 3,178 3,178 0 916 3,665 849 5,853 1,893 27 ENDING RATE STABILIZATION RESERVE 342 342 342 342 342 . . . . 2B ENDING OPERATIONS RESERVE 7,415 5,390 5,661 6,578 4,252 3,049 4,315 3,586 3,693 S,805 7,484 129 UNASSIGNED RESERVES . . . - - - -. . . . 130 31 SHORT TERM RISI< ASSESSMENT VALUE 1,652 1,7S8 1,837 1,853 1,740 1,912 2,140 2,1S9 2,2n 2,390 2,599 32 33 OPERA TIO NS RESERVE GUI OE LINES 34 MIN (60 DAYS TREATMENT/O&M EXP) 2,357 2,729 2,937 3,189 2,911 2,998 3,336 3,254 3,339 3,421 3,705 35 TARGET(lOS DAYS TREATMENT/O&M EXP) 4,125 4,nG S,139 S,582 S,094 5,246 5,839 5,694 5,844 5,987 6,484 36 MAX (1SO DAYS TREATMENT/O&M EXP) 5,893 6,823 7,341 7,974 7,278 7,495 8,341 8,134 8,349 8,S53 9,264 37 38 h Capital Program Contribution rep resents level amount of CIP funding from the Operations Reserve to the CIP Reserve beginning in FY 2021 March 2 O 2 3 30 I P age WASTEWATER COLLECTION UTILITY FINANCIAL PLAN ----------------------- APPENDIX 8: WASTEWATER COLLECTION UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL I I I Project# Project Name Reappropriated / Carried Forward/ Accruals from Previous Years/ Current Year Current Year Accruals (Al Estimate (Bl Funding (B-A) FY 2024 SEWER SYSTEM REHABILITATION AND AUGMENTATION SSR/A PROGRAM WC-17001 SSR/A-Project 30 3,854,802 3,854,802 0 WC-19001 SSR/A -Project 31 8,185,000 8,185,000 WC-20000 SSR/A -Project 32 WC-20001 SSR/A-Project 33 WC-22001 SSR/A -Project 34 ntation 3854802 12039802 8185 000 ONGOING PROJECTS WC-13002 Fus ion & Gen. Equip./Tools 120,976 170,976 50,000 50,000 WC-15002 WW System Improvements 104,501 604,501 500,000 200,000 Sewer/ Manhole Rehab. 885,000 .825,000 60000) 850,000 477 1,600,477 490,000 1,100,000 CUSTOMER CONNECTIONS FEE FUNDED WC-80020 Sewer S tem Extensions Subtotal Customer Connections GRAND TOTAL 4,993,351 14,240,279 9,246,928 Funding Sources Connection/Capac ity Fees 450,000 450,000 450,000 Funded b Rates and Other Revenue 13,790,279 8,796,928 1100000 6/30/2022 CIP-RELATED RESERVES DETAIL Actual Rea ro riations & Commitments 4,993,351 March 2 0 2 3 FY 2025 FY 2026 FY 2027 1,234,134 10,406,221 1,372,200 2000000 3,234,134 10,406,221 1,372,200 50,000 50,000 50,000 200,000 200,000 200,000 875,500 900,000 927,000 1,125,500 1,150,000 1,177,000 2 999,200 450,000 450,000 450,000 4,359,634 11,556,221 2,549,200 FY 2028 11,560,437 11,560,437 50,000 200,000 954,810 1,204,810 13 215 247 450,000 12,765,247 31 I Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN APPENDIX C: WASTEWATER COLLECTION UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Wastewater Co ll ection Utility Financial Plan: Section 1. Defin i t i ons a) "Financial Planning Peri od" -The Financial Planning Period is the range of future fiscal years covered by the Fi nanc ial Plan. For example, if the Financial Plan delivered in conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015 to FY 2019 would be the Financial Planning Period. b) "Fund Balance" -As used in these Reserves Management Practices, Fund Balance refers to the Uti lity's Unrestricted Net Assets. c) "Net Assets" -The Government Accounting Standards Board defines a Utility's Net Assets as the di fference between its assets and liabilities. d) "Unrestricted Net Assets" -The portion of the Utility's Net Assets not invested in capital assets (net of related debt) or r_estricted for debt service or other restricted purposes. Section 2. Reserves The Wastewater Collection Utility's Fund Balance is reserved for the following purposes: a) For exist i ng contracts, as described in Section 3 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 4 (Reserve for Re -appropriations) c) For cash flow management and contingencies related to the Wastewater Collection Utility's Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve) d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve) e) For operating contingencies, as described in Section 7 (Operations Reserve) f) Any funds not included in the other reserves will be considered Unassigned Reserves and shall be returned to ratepayer s or assigned a specific purpose as described in Section 8 (Unassigned Reserves). Section 3. Reserve for Commitments At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to the total remaining spending authority for all contracts in force for the Wastewater Collection Utility at that time. Section 4. Reserve for Re-appropriations At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re­ appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. March · O 2 3 32 I Page WASTEWATER CO LLECTION UTILITY FINANCIAL PLAN Section 5. CIP Reserve The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capital contingencies . Staff will manage the CIP Reserve according to the following practices: a) The following guideline levels are set forth for the CIP Reserve . These guideline levels are calculated for each fiscal year of the Financial Planning Period and approved by Council Resolution . Minimum Level 20% of the maximum CIP Reserve guideline level Maximum Level Average annual (12 month)1° CIP budget, for 48 months of budgeted CIP expenses 11 b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added or removed from to that reserve as a result of a change in contractual commitments related to CIP projects. Any other additions to or withdrawals from the CIP reserve require Council action . c) Minimum Level : i) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered by the end of the following fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is below its minimum level at the end of FY 2017, staff must present a plan by June 30, 2018 to return the reserve to its minimum level by June 30, 2019 . In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve, or that does so in a shorter period of time . d) Maximum Level: If there are funds in this reserve in excess of the maximum level staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period . Staff may also seek City Council to approve holding funds in this reserve in ex cess of the maximum level if they are held for a specific future purpose related to the CIP. Section 6 . Rate Stabilization Reserve Funds may be added to the Rate Stabilization Reserve by action of the City Council and held to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate Stabilization Reserve requires Council action . If there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Wastewater Collection Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. 10 Each month is calculated based upon 1/12 of the annual budget. 11 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period to use to derive the annual av «:!a_g~ would be FY 2023 through FY 2026 etc. March 2 0 2 3 33 I P a g e WASTEWATER COLLECTION UTILITY FINANCIAL PLAN Section 7. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the .Wastewater Collection Utility's Fund Balance not included in the reserves described in Section 3-Section 6 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage the Operations Reserve according to the following practices: a) The following guideline levels are set forth for the Operations Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of Operat i ons and Maintenance (O&M) and commodity expense forecasted for that year in the Financial Plan. Minimum Level 60 days of O&M and commodity expense Target Level 105 days of O&M and commodity expense Maximum Level 150 days of O&M and commodity expense b) Minimum level : If, at the end of any fi scal year, the funds remaining in the Operations Reserve are lower than the minimum level set forth above, staff shall present a plan to the City Council to replenish the -reserve. The plan shall be delivered within six months of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the following fiscal year. For example, if the Operations Reserve is below its minimum level at the end of FY 2014, staff must present a plan by December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to rep l enish the reserve. c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower than the target level, any Financial Plan created for the Wastewater Collection Utility shall be designed to return the Operations Reserve to its target level within four years . d) Maximum Level: If, at any time, the Operat ions Reserve reaches its maximum level, no funds may be added to this reserve. Any further i ncrease in the Wastewater Collection Ut ility's Fund Balance shall be automatically included in the Unass igned Reserve described in Section 8, below . Sect ion 8. Unassigned Reserve If the Operations Reserve reaches its max i mum leve l, any further additions to the Wastewater Collection Utility's Fund Balance will be held in the Unassigned Reserve . If there are any funds in the Unass igned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Counc i l must in cl ude a plan to assign them to a specific purpose or return them to the Wastewater Collection Uti lity ratepayers by the end of the first fiscal year o f the next Financial Planning Period . For example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next Financial Pl anning Period is FY 2016 through FY 2020, the Financial Plan sha t! include a plan to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds or returns them over a longer period of t i me . March 2. O 2 3 34 I Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN APPENDIX D: MAP (CPA WASTEWATER COLLECTION SYSTEM -SEWER MAINS REPLACED OR REHABILITATED SINCE 1990) .,._ ........, .......................... 1 .. ,,,,.._. __ ,..,,. ,,,_,.._nwna.-«--llnca1a> , •• 4 11 , ., Palo Alto March 2 O 2 3 CPAW......_,~ Aaplaced s Rahllbatallld llrlCl 1990 ad1"2022 35 I P age WASTEWATER COLLECTION UTILITY FINANCIAL PLAN APPENDIX E: SAMPLE OF WASTEWATER COLLECTION OUTREACH MATERIALS March 2. 0 2 3 36 I Page UAC MEETING r;l March 01, 2023 L.!J 0 Received Before Meetmg Staff: Lisa Bilir and Eric Wong • CITY OF PALO ALTO Projected Change in Residential Median Bill Gas Utility 3t Monthly Bill Change s1 0% $1.28 2% $0.00 0% $0.()() 0% $1.60 3% $2.00 3% $0.00 $0.30 3% 3% -$3.90 1% 37% $2.60 4% $1.30 3% $8.00 9% $0.00 0% $0.60 4% 8% $4.00 9% $6.90 7% $0.00 0% $0.80 5% ------- -3% $4.90 9% $3.20 3% $1.50 3% $0.70 4% $35.20 $17.10 $12.20 11% 5% 3% 5% $3.70 5% $4.80 9% $3.30 5% $3.90 5% $4.60 8% $3.40 3% $1.60 3% $0.70 4% $18.40 4% 5% $4.10 5% $3.10 5% $5.80 5% $1.60 $19.90 5% 1) 37% increase includes 4/1/22 hydro rate adjuster {HRA) activation {10%), 7/1/22 5% rate increase, and 1/1/23 HRA increase {19%} 2) 0% change includes a 14% increase to base electric rates and 50% reduction to the HRA 3) Gas utility rates shown exclude gas market price changes. FY 24 bill forecast w/ market p rice chan g es is (-13%). Actual rates will vary. 4) Storm Drain fees increase by CPI index annually per approved 2017 ballot measure 2 5) Based on an FY 2023 monthly bill of $369 ,ACITY OF ¥PALO ALTO ONGOING COST CONTAINMENT/ REVENUE ENHANCEMENT • Consistent with the Utilities Strategic Plan, cost containment is being instituted as an ongoing priority and annual cycle • Fall completion of preliminary out-year rate forecasts • Review by all Divisions for alignment of multiyear strategies • Ongoing management review of personnel actions • Review/revision of position classifications to match evolving needs • Addition/Deletion of positions to reflect organizational priorities • Review/approval to fill individual position vacancies in conjunction with ASD Budget Office and Human Resources • Regular review of performance metrics and expenditures ,AC I TY OF · VPALO ALTO RECENTLY IMPLEMENTED COST CONTAINMENT & REVENUE ENHANCEMENT • Maintained renewable energy exchange program ($1.lM for FY 2022 and ~$3M for FY 2023, ~$1.SM/year for subsequent years) • Advocated for improvements that resulted in additional Western resource value ($2M/year) • Participated in litigation to ensure more equitable allocation of Central Valley Project Improvement Act (CVPIA) costs, yielding approximately $2M savings in FY21, $3M savings in FY22, and $4M in FY23. • Implemented outsourcing of hedging and risk management to NCPA, first transactions to occur this spring • Captured value of excess Redwood pipeline capacity (~$300k/year) and continued participation in MuniGas program (~$800k/year} • Applied for $9M grant from Pipeline and Hazardous Materials Safety Administration (2022) • Utilized cross-functional field crews to install water, gas, and sewer services simultaneously at new construction sites, reducing hours spent in the field. Staff time freed up to be reallocated to sewer replacements. ---~ ' 4 Ac 1Tv OF VPALO ALTO RECENTLY IMPLEMENTED COST CONTAINMENT & REVENUE ENHANCEMENT • Negotiated agreement with Valley Water -$250K to $1M/year + up to $16 million in funding for reverse osmosis facility • Implemented mobile workforce applications, reducing administrative data entry time, freeing up staff for other work • Expanded use of bank draft to reduce credit card fees, particularly for large accounts • Schedule larger CIP projects every other year to achieve efficiencies in project management and more competitive bids • Cluster main replacements to reduce mobilization costs for construction contractors • Procure materials for pipeline replacement in-house rather than having contractors buy them to reduce construction markups • Modify scope when bid results exceed estimates to reduce overall project costs tft\cnv OF VPALO ALTO FUTURE POTENTIAL COST CONTAINMENT • Switch to new customer information system with reduced support costs • Explore adding batteries to solar resources to improve value • Increase water and energy end use technical training for Customer Service reps, reducing transferred phone calls • BAWSCA water bond refunding to achieve lower debt service payments for wholesale customers, including Palo Alto beginning in 2023 • Apply for $9M grant from Pipeline and Hazardous Materi~ls Safety Administration (2023) • Apply for approximately $11M from Valley Water -specific use to be determined 0 - CITY OF PALO ALTO WASTEWATER PROJECTIONS FY 2024 recommendation: 9% overall rate increase • Accelerate main replacement from 1 mile per year to 2.5 miles per year in FY 2026 to replace the last main no more than~ 8 years beyond "'100 year life expectancy • Alternatives A, Band Clower sewer rate increases & slower transition to 2.5 miles per year; increasing likelihood of increased repair and maintenance costs, sanitary sewer overflows, sinkholes or other catastrophic impacts Summary of Recommended Rate Increases and Alternate Scenarios I Fiscal Year 2025 2026 Start 2.5 Mile Per Year I I Main Replacement I I I I Recommendation 9% 9% 9% 8% 5% I 2026 Alternative A 9% 8% 6% 6% 6% 2028 -IL I Alternative B 7% 7% 5% 5% 5% 2034 --J( Later th ~ 2034 -7 Alternative C 5% 5% 5% 5% 11 5% WASTEWATER UTILITY BASICS v..., • . CITY OF PALO ALTO ' ......... ~ ......... -·-Cdl-oo 9 ,.,... - • 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 8 SEWER MAINS WITH STRUCTURAL DEFECTS • Structural defects such as broken pipe or missing section require replacement • Mechanical devices used for routine maintenance could disturb the broken section to make it worse • Potential damage if broken sections collapse: ■ Sewer main blockage/backup ■ Sewage overflows into street and storm drain system • Street sink hole Acnv OF WPALO ALTO WASTEWATER COST AND .REVENUE PROJECTIONS • . CITY OF PALO ALTO $35 $30 ~ $25 ~ ·- ~$20 v,. QJ :::, ~ $15 QJ Cl: -~ $10 $5 $0 11% 2018 2019 2020 2021 Actual Projected Fiscal Year 5% □Collection Capital & Debt* □Collection Operations •Treatment Capital & Debt Treatment Operations -Revenue "' CIP in the projected years include changes due to commitments/reappropriations and funds transferred to the CIP Reserve ------- 10 WASTEWATER OPERATIONS RESERVE PROJECTIONS • 'C IT Y OF PALO ALTO -__, C .2 -i - $10 $9 $8 $7 $6 $5 $4 $3 $2 $1 $0 -Reserve (Year-End) -Reserve Min/Max - -Reserve Target -··-··----1----~ ·-·-........ --• ... • ... -.. ·-·-------.. -Risk Assessment 2022 2023 2024 2025 2026 2027 2028 Actual Projected Fiscal Year - -- 11 WASTEWATER CIP RESERVE PROJECTIONS • CITY OF PALO ALTO VI "'O C "' (I) ~ 0 ~ I- .v,. 12,000 10,000 8,000 6,000 4,000 2,000 2023 2024 2025 2026 2027 2028 Fiscal Year ~CIP Reserve (Year-End) -Reserve Min/Max ------- ---- 1 12 RESIDENTIAL AND NON-RESIDENTIAL RATE IMPACTS Month Service Charps $/Month) S-1 Residenti . $ 44.62 48.64 $ 4.02 9.0% e Water Qua . S-2 S-6 • CI T Y OF Commercial 8.33 9.08 0.75 9.0% Restaurant 12.43 13.55 1.12 9.0% (1) Monthly charges for S-1 (Residential) are fixed monthly charges. (2) For S-2 (Commercial) customers, the quantity charges are based upon the average water usage for the months of January, February and March and applied in the following July. For Restaurant customers, the quantity charges are based on monthly metered water usage. (3) Currently there are no customers on the S-7 (Industrial) rate schedule; however, CPAU continues to maintain the S-7 rate schedule in case there is a need for the rate schedule in the future. PALO ALTO I 13 I RESIDENTIAL AND NON-RESIDENTIAL BILL IMPACTS Currant PmpDNd Cha,we (as of 7/1/2CYJ.2) (effective 7/'J/2023) $/mo. " .. S-1 (Residential ) $ 44.62 $ 48.64 $4.02 9.0% S-2 (Commercial) -14 CCF 116.62 127.12 10.50 9.0% S-6 (Restaurant) -56 CCF 696.08 758.80 62.72 9.0% Note: Non-residential bill impacts will var y due to each customer's utilization of the system. CITY OF PALO ALTO WASTEWATER UTILITY COST STRUCTURE (FY 2022) Cost to collect sewage within Palo Alto, including maintaining and replacing sewe·r infrastructure, customer service, billing, administration, etc . • . ■ Treatment ■ Operations ■ capital C I TY OF Palo Alto's share of the cost to treat sewage at Palo Alto's Regional Water Quality Control Plant PALO ALTO I I 15 ,Acnv OF ~PALO ALTO TREATMENT COST DRIVERS • Regional Water Quality Control Plant needs rehabilitation • Long Range Facilities Plan completed in 2012 • Near Term Major Projects: • Primary Sedimentation Tank -$19.4M • New Outfall Pipeline -$17.4M • · Lab/Ops Building -$41.4M • Secondary Treatment Upgrades -$193M • Headworks Facility-$48.6M • Advanced Water Purification System -$56M ------- I 16 1 A.c1rv OF VPALOALTO OPERATIONS/CAPITAL COST DRIVERS Operational Costs • Salary and Benefit costs • 5-6% near-term annual inflation for other Operating costs • One-time revenue loss during pandemic of 11% reduction in non-residential revenue; recovery projected by FY 2026 Cap ital Costs • Construction cost increases • Sanitary Sewer Replacement budget increase to accelerate replacement rate from 1 to 2.5 miles per year on average 17 WASTEWATER MONTHLY RESIDENTIAL BILL($) • CITY OF PALO ALTO Palo Alto 44.62 Menlo Park 106.67 Palo Alto is 28% below compariso _n city average Neighboring Communities Redwood Santa Mountain City Clara View Los Altos Hayward 89.28 46.82 50.10 42.05 38.58 WASTEWATER MONTHLY NON-RESIDENTIAL BILL{$) General Commercial Restaurant • CITY O F PALO ALTO Menlo Palo Alto Park 116.62 144.34 696.08 1,216.88 , Commercial: Palo Alto is 7% higher than comparison city ave rage Restaurant: Palo Alto is 12% below comparison city average Neighboring Communities Redwood Santa Mountain City Clara View Los Altos Hayward 117.74 75.74 156.66 72.23 87.92 1,128.40 718.48 718.48 288.90 660.80 Ac1rv OF 'VPALO ALTO RECOMMENDATION Staff requests that the UAC recommend that the Finance Committee Recommend that the City Council Adopt a resolution approving; • The Fiscal Year 2024 Wastewater Collection Financial Plan, including 9% overall rate increase • Transfer up to $3.178 million from the Capital Improvements Projects Reserve to the Operations Reserve in FY 2023 • Transfer up to $342 thousand from the Rate Stabilization Reserve to the Operations Reserve in FY 2023 • Increase Wastewater Collection Utility Rates Via the Amendment of Wastewater Collection and Disposal Rate Schedules 5-1 (Residential), 5-2 (Commercial), 5-6 (Restaurant) and 5-7 (Industrial Discharger) UAC MEETING rn March 01, 2023 2 0 Received Before Meeting Utilities Advisory Commission Staff Report CIT Y OF From: Dean Batchelor, Director Utilities Lead Department: Utilities PA LO ALTO Meeting Date: March 1, 2023 TITLE Staff Recommend the Utilities Advisory Commission Recommend the Finance Committee Recommend that City Council Adopt a Resolution Approving the Fiscal Year 2024 Water Utility Financial Plan, Including Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W-1 (General Residential Water Service), W -2 (Water Service From Fire Hydrants), W-3 (Fire Service Connections), W -4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water 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) 2024 Water Utility Financial Plan (Linked Document ); and b. Approving a transfer of up to $3.746 million from the Capital Improvement Program (CIP} Reserve to the Operations Reserve in FY 2023; and c. Approving a transfer of up to $3.0 million from the Rate Stabilization Reserve to the Operations Reserve in FY 2023; and d. Increasing Water Utility Rates Via the Amendment of Rate Schedules W-1 (General Residential Water service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connecti ons), W-4 (Residential Master-Metered and General Non­ Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) EXECUTIVE SUMMARY The Ci ty's water rate schedules currently consist of a volumetric charge for each CCF {100 Cubic Feet or 748 gallons) of water consumed during the billing period and a monthly service charge for each customer, based on water meter size. The volumetric charge has two parts: a wholesale commodity rate (or San Francisco Public Uti lities Commission or SFPUC wholesale rate), and a customer volumetric rate. Water rates are designed to recover the City's costs of buying and distributing water while maintaining adequate financial reserves. The customer volumetric rate and the monthly service charge together are considered the distribution rates; revenue from Item No. {{item.number}}. Page 1 of 16 those rates pay for the upkeep of Palo Alto's distribution system. Revenue from the wholesale commodity rate pays for the City's cost of buying water from the SFPUC. The FY 2024 Water Utility Financial Plan includes projections of the utility's costs and revenues for FY 2023 through FY 2028. The Financial Plan projects costs to rise by about 2-3% per year over the next several years. The drought is ongoing1 and customer response to state, regional and local ca Hs for water conservation has reduced water sales revenue. In FY 2022, water sales revenue declined by 7% compared with FY 2021; the FY 2023 Financial Plan anticipated this level of reduction and there was adequate funding in the Operations Reserve as well as offsetting cost reductions due to lower water purchase costs. However, staff expects the drought to continue at least through FY 2023, further reducing water sales relative to prior forecasts. Recovery is projected to be slow, and as in prtor droughts, some conservation is projected to be permanent. Other revenues also declined below prior forecast levels primarily due to reductions in water service connection and capacity fee revenue. These drought impacts put upward pressure on water rates. While these rate increases can be perceived as decreasing the benefit of conservation, bitls for customers who conserve will be lower in the future than they would have been without conservation. The Water Fund's healthy reserve levels allowed the Water Utility to hold rates flat for two years (FY 2021 and FY 2022), and provide adequate funding for the first year of drought-related sales revenue reductions in FY 2022. Additionally, staff propose for the Water Utility to use remaining reserves to mitigate distribution rate increases (rates that cover the cost to deliver water within the City) to 3% in FY 2024 and to 6% annually from FY 2025 through FY 2028 while still funding essential capital investments. Customers have a separate commodity rate for purchased water from the San Francisco Public Utilities Commission (SFPUC) relative to the rest of the distri bution-related portion of the volumetric rates. This commodity charge passes through SFPUC rate increases to customers (Resolution 9844). The pass-through commodity rate is currently $4.75 per hundred cubic feet (CCF) and will increase to $5.30 per CCF on July 1, 2023, according to SFPUC's February 2023 forecast. The SFPUC will not determine its final wholesale customer rate for FY 2024 until May or June 2023. If SFPUC's final rate for FY 2024 does increase, Palo Alto will notify customers 30 days in advance of the pass-through rate increase via their billing statements or by any other mailing by CPAU to the customer's regular billing address. BACKGROUND Every year staff presents the UAC with Financial Plans for the Electric, Gas, Water, and Wastewater Collection Utilities. The Financial Pl ans recommend rate adjustments required to ma intain the financial health of these enterprises. These Fi nancial Plans include a comprehensive 1 On November 23, 2021, the SFPUC declared a l ocal water shortage emergency by Resoluti on No. 21-0177 calling for voluntary system-wide 10% water use reductions. On May 24, 2022 SFPUC increased the system-wide voluntary water use reduction to 11%. SFPUC serves retai l customers in San Francisco as well as Palo Alto and 25 other Wholesale Customers in the Bay Area. Wholesale Customers' collective voluntary water purchase cutback level is 16~ from FY 2020 level s while Palo Alto's voluntary water purchase cutback level is 8% from FY 2020 levels. Item No. {{item.number}}. Page 2 of 16 overview of the operations of each enterprise, both retrospective and prospective, and are intended to be a reference for UAC and Council members as they review the budget and staff's rate recommendations. Each Financial Plan also contains a set of Reserve Management Practices describing the reserves for each utility and the management practices for those reserves. All of the City's potable water comes from the SFPUC's Hetch Hetchy Regional Water System. This same system serves San Francisco and other Bay Area cities. San Francisco operates the system, but as much as two thirds of the water is used outside of San Francisco by 26 cities, water districts, and private utilities. These agencies, including the City, are frequently referred to as the "wholesale customers" (as compared to the SFPUC's "retail customers" in San Francisco). The Bay Area Water Supply and Conservation Agency (BAWSCA) represents the wholesale customers and negotiates with the SF_PUC on their behalf. BAWSCA also ensures contract compliance through regular review of the SFPUC's accounting and capital expenditures .2 The Water Utility has two main costs: water supply costs (primarily the cost of water delivered to Palo Alto from the Hetch Hetchy Regional Water System) and the costs of operating the distribution system (the system of pipes, pumps, reservoirs, and other infrastructure that carries water to Palo Alto customers). Both cost components have been increasing and are expected to continue to increase . For many years, the largest cost increases have been on the water supply side. This is due primarily to major capital investments the SFPUC has made since 2010, which were undertaken partly due to pressure from wholesale customers. The Water System Improvement Program (WSIP) is a $4.8 billion capital improvement program, one of the largest in the country, to rehabilitate and seismically strengthen the lower portions of the Hetch Hetchy Regional Water System. One of the goals is to achieve the capability to return to service within 24 hours after a major earthquake. Although much of the work is complete (the program was 98. 7% complete as of September 2022), some of the projects are still under construction and bond financing of WSIP projects over the next several years will continue to drive wholesale rates up. The program has greatly improved the resiliency of the Hetch Hetchy Regional Water System but has also led water supply costs to approximately double. CPAU's operational costs for the water utility have increased by approximately 4.8% per year over the last five years; allocated charges (charges allocated to the water utility for administrative services provided by the General Fund) and operations and maintenance costs (including engineering) costs were the primary reasons for the increase. Capital costs have fluctuated from year to year. This Financial Plan projects increases in capital and operational costs that align as much as possible with the City's Budget and long-Range Financial Forecast and average approximately 3% per year over the next five years. DISCUSSION Staff completes an annual assessment of the financial position of the City's water utility to plan for adequate revenue to fund operations, in compliance with the cost of service requirements set forth in the California Constitution (Proposition 218). This includes making long-term projections of market conditions, the physical condition of the system, and other factors that 2 For a video summary of BAWSCA's activities, see https://vimeo.com/283596665/5619ce2c11 Item No. {{item.number}}. Page 3 of 16 could affect utility costs, and setting rates adequate to recover these costs . The current rate proposals are also based on the cost of service (COS) methodology described in the 2012 Palo Alto Water Cost of Service & Rate Study, which was updated in 2015, and the 2015 Drought Rate memorandum completed by Raftelis Financial Consultants, and the 2019 update titled "Proposed FY 2020 Water Rates," (see Attachment Q to staff report 10295.3 ) Proposed Actions 1. Increase rates for Rate Schedules W-1 (General Residential Water service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master­ Metered and General Non-Residential Water Service), and W -7 (Non-Residential Irrigation Water Service); and 2. Transfer up to $3.746 million from the CIP Reserve to the Operations Reserve in FY 2023. 3. Transfer up to $3.0 million from the Rate Stabilization Reserve to the Operations Reserve in FY 2023. The FY 2024 Water Utility Financial Plan describes these proposed actions in detail. Tables 1 through 4 below ill ustrate the current and proposed water di stributi on rates under the attached Fi nancial Pl an . The rates shown below are in add ition to the pass-through commod ity rate charged to customers based on SFPUC supply charges. The pass-through commodity rate is currend y $4.75 per CCF . SFPUC's proposed rate increase in FY 2024 is 11.6%; the current rate would increase on or around Jul y 1, 2023 to $5.30 per CCF, w i th no additional i ncrease projected in the SFPUC meter charge. , A cost of service study (COS) is a s tudy using industry-standard techniques to determ ine how the costs of running the utility should be recovered from its customers; charges to ea ch customer are set tn proportion to the cost of serving that customer. Item No. {{item .number}}. Page 4 of 16 • Table 1: Current and Proposed Water Consumption Charges I Current Proposed Change Change(%) I (7/1/2022) (7/1/2023) ($/CCF) W-1 (Residential) Volumetric Rates {$/CCF) Tier 1 Rates 2.67 2.75 0.08 3% Tier 2 Rates 6.21 6.39 , 0.18 3% W-2 (Construction) Volumetric Rates {$/CCF) Uniform Rate 3.76 3.87 0.11 3% W-4 (Commercial) Volumetric Rates ($/CCF) Uniform Rate 3.76 3.87 0.11 3% W-7 (Irrigation} Volumetric Rates ($/CCF) Uniform Rate 5.72 5.89 0.17 3% Table 2 and Table 3 show the currently monthly service charges for rate schedules W-1, W -4 and W-7. Table 2: Current and Proposed Monthly Service Charges for Residential W-1 Monthly Service Charge ($/month Change Meter based on meter size) Size Current Proposed $ " {7/1/2022) (7/1/2023) 5/8" 21.06 21.69 0.63 3% 3/4" · 21.06 21.69 0.63 3% 1" 21.06 21.69 0.63 3% 1 ½" 68.02 70.06 2.04 3% 2" 105.22 108.37 3.15 3% 3" 223.02 229.71 6.69 3% 4" 396.63 408.52 11.89 3% 6" 812.03 836.39 24.36 3% 8" 1,494.04 1,538.86 44.82 3% 10" 2,362.05 2,432.91 70.86 3% . 12" 3,106.07 3,199.25 93.18 3% Item No. {{item.number}}. Page 5 of 16 Table 3: Current and Proposed Monthly Service Charges for W-4 and W•7 Monthly Service Charge ($/month Change Meter based on meter size) Size Current Proposed $ " (7/1/2022) (7/1/2023) 5/8" 18.42 18.97 0 .55 3% 3/4" 24.62 25.35 0 .73 3% 1" 37.02 38.13 1 .11 3% 1½" 68.02 70.06 2 .04 3% 2" 105.22 108.37 3 .15 3% 3" 223.02 229.71 6 .69 3% 4" 396.63 408.52 11.89 3% 6" 812.03 836.39 24.36 3% 8" 1,494.04 1,538.86 44.82 3% 10" 2,362.05 2,432.91 70.86 3% 12" 3,106.07 3,199.25 93.18 3% Table 4 shows the current and proposed monthly service charges for rate schedule W-3. Table 4: Current and Proposed Monthly Service Charges for Fire Services (W-3) Monthly Service Charge ($/month Change Meter based on meter size} Size Current Proposed $ " (7/1/2022) (7/1/2023) - 2" $4.34 $4.47 0.13 3% 4" 26.85 27.66 0.81 3% 6" 77.96 80.30 2.34 3% 8" 166.13 171.11 4.98 3% 10" 298.77 307.73 8.96 3% 12" 482.59 497.07 14.48 3% Bill Impact of Proposal Table 5 and Table 6 show the i mpact of the proposed July 1, 2023 rate changes on the median residential, commercial and irrigation bills including the Sf PUC commodity pass-through rate increase of 11.6% or $5.30 per CCF. The bill increases shown in Table 5 and 6 vary by usage because the Sf PUC increase per CCF is more than the distribution rate increases. Item No. {{i tem.number}}. Page 6 of 16 ♦ Table 5: Impact of Proposed Water Rate Changes on Residential Bills Bill under Current Bill under Proposed Change Usage (CCF/mo.) Rates (7/1/2022) Rates (7/1/2023) $/mo. % 4 $50.74 $53.89 $3.15 6% (Winter median) 7 $76.54 $81.68 $5.14 7% (Annual median) 9 $98.46 $105.06 $6.60 7% (Summer median) $153.26 $163.51 $10.25 7% 14 25 $273.82 $292.10 $18.28 7% Table 6: Impact of Proposed Water Rate Changes on Commercial Bills Usage (CCF/mo.) Bill under Current Bill under Proposed Change Rates (7/1/2022) Rates (7/1/2023) $/mo. % 1, Commercial (W-4) (5/8" meters) (Annual median) 12 $120.54 $129.01 $8.47 7% (Annual average) 64 $563.06 $605.85 $42.79 8% Irrigation (W-7) (1 ½" meters) (Winter median) 9 $162.25 $170.77 $8.52 5% (Summer median) 37 $455.41 $484.09 $28.68 6% (Winter average) 56 $654.34 $696.70 $42.36 6% (Summer average) $2,151.55 $2,296.87 $145.32 7% 199 Staff expects median quantities of water use to decrease from pre-drought levels, however, as calls for water conservation continue. Customers who conserve will experience less of a bill increase than those customers who are not reducing water consumption. FY 2024 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 residenti al water bill for 5/8" customers. These projected rate adjustments include the impact of the projected changes to the pass-through commodity rate . Item No. {{item.number}}. Page 7 of 16 Table 7: Projected Rate Adjustments, FY 2024 to FY 2028 (5/8" meter) Fiscal Year FY2024 FY 2025 FY2026 FY2027 FY 2028 Water Utility 7% 3% 3% 3% 5% Estimated Monthly Bill $6.60 $3.45 $3.66 $3.89 $6.27 Estimated Bill Impact ($/mo)1 $105.06 $108.51 $112.17 $116.06 $122.33 1) estimated impact on median monthly residential water bill for customers with S/811 meter, which is currently $98.46. Figures 1 and 2 below illustrate the projected increases in the Water Utility's costs between FY 2023 and FY 2028. .,. C $35 $30 .2 $25 ~$20 $15 $10 $5 $0 Figure 1: Projected FY 2023 and FY 2028 costs Average Annual % Change 2% 3% ■ 2023 0% Water Supply Operations Capital Item No. {{item.number}}. Page 8 of 16 Figure 2: Percentage of Total Cost Increase From FY 2023 to FY 2028 Attributed to Supply, Capital, and Operations Costs Contribution to FY 2023 to FY 2028 Cost Increases by Source 0 Water Supply ■ Operations The "Capital" bars on Figure 1 reflect the capital program contributions to the CIP Reserve. Additionally, this Financial Plan includes a one -time transfer to the CtP Reserve to fund seismic reservoir rep l acement work. CIP funds available for projects that were budgeted in FY 2022 and prior years that are carried forward or reappropriated to FY 2023 will be used to offset the new CIP budget. Water Supply Costs The cost of water is a major driver for the increase in the water utility's costs (and therefore rates} in FY 2024. Wholesale water costs are adopted by the SF PUC, and generally have changed on an annual basis. The SFPUC is currently engaged in a $4.8 billion Water System Improvement Program (WSIP) for regional projects. As of September 30, 2022, 48 of the 52 regional projects were complete or in close •out while three of the regiona l projects were under construction.4 This has resu lted and w ill continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed, wholesale customers must start paying the debt service costs within 3 to 4 years. For most of those costs, 4 First Quarter FY 2022 -2023 WSIP Regional Quarterly Report, https://www.sfpuc.org/sites/defau1t/files/documents/Q1FY23 WSIP Regional Qtrly Report 4 Web.pdf The additional regional pr ojects do no t include construction : Long-Term M itigation Endowment and Watershed and Environmental Improvement Program. Item No. {{item.number}}. Page 9 of 16 funded with bond financing, the costs will be paid off over approximately 30 years. The currently estimated WSIP completion date is February 7, 2027, as adopted by the SFPUC in April of 2022. As the SFPUC completes WSIP projects, the SFPUC is pursuing a suite of other capital improvement work; dam safety improvements and Mountain Tunnel repairs are rate increase drivers during the next 10-year timeframe. Future and in-progress construction work will require bond funding, and the SFPUC's financial plans show debt service cost for the water enterprise growing by 32% between FY 2021 and FY 2026, and by 40% by FY 2028.5 Changes in usage due to drought, or recovery from drought, can make the magnitude of future increases difficult to predict. The SFPUC's costs to operate the Regional Water System are primarily ftxed costs, so the water rate charged to wholesale customers like the City of Palo Alto is highly dependent on water usage by all users of the Regional Water System . The SFPUC has been accumulating funds in its Wholesale Customer Balancing Account due to a variety of factors, in cl uding: SFPUC sold more wholesale water than the sales projection it used for rate setting, there were cost savings in the wholesale revenue requirement due to the SFPUC's debt refinancing, and BAWSCA's annual review of the wholesale revenue requirement resulted in credits applied to the balancing account. The SFPUC has been returning these funds to wholesale customers by using the balancing account funds to offset the required revenues from wholesale customers. Using this method, SFPUC held rates constant from FY 2017 through June 30, 2022. Because of the water use reductions expected during the ongoing drought conditions and calls for vo luntary conservation (11% system-wide and 16% for the wholesale customers collectively), all of the available funding in the balancing account (approximately $86 million at year end FY 2021) is expected to be returned to wholesale customers i n FY 2022 and FY 2023. W ithout the use of the balancing account, SFPUC's rate forecast would be higher. BAWSCA Revenue Bond Refundi ng On January 5, 2023, BAWSCA completed the settlement of BAWSCA's revenue bond series 2023A to refund bonds issued in 2013 at a lower rate. BAWSCA locked-in the bond rates in October 2021 at an all -in true interest rate of 2.06%. What this means for Palo Alto i s that i ts share of the debt service • approximately $1. 74 m illion per year (or $0.36 per CCF) w ill decrease to an estimated $1.17 million per year (or $0.26 per CCF), a savi ngs of $0.57 million annuall y through 2034 when the bonds will be paid off. Staff projects the total water rate i ncrease of 7% in FY 2024 for Palo Alto customers with the pass-through of the commodity rate increase and the Palo Alto distribution rate increase . This is equivalent to a monthly water b ill i ncrease of $6.60 for res idential customers with annua I median water usage. Capital Projects & Reserv:es The Water Utility deferred some capita l project spending in FY 2022 leading to lower capital costs than budgeted. Staff anticipates completing many of these capital projects in FY 2023. Despite these deferrals, the 5-year capital budget of $55. 7 m illion (not includi ng budgets carried forward from prior years) rema i ned the same within 1% in the current Financi al Plan at $56.4M . Customer 1 FY 2018-19 & FY 2019-20 Adopted SFPUC Budget, http s://sfwater.org/modules/sh gwdocument.asp x?d ocumentid "'13147 Item No. {{item.number}}. Page 10 of 16 rates still need to recover the full amount of revenue to pay for these costs over the 5-year timeframe. The capital budget includes one-time seismic water system upgrades and/or replacements for the Park and Dahl reservoirs to improve earthquake resistance. This work will improve protection from water loss at these reservoirs in a seismic event. The attached Financial Plan also updates the transfer proposals due to project cost increases and available reserve balances. For CIP, the Plan projects that rate funding needs to cover $12 .846 million of planned CIP in FY 2023. This figure is the portion of planned CIP in FY 2023 that will not be paid for through funds collected in prior years (essentially the FY 2023 Capital budget, less funds available in the Reappropriations and Commitments Reserves), shown in line 12 of Table 8 for FY 2023. This capital budget is projected to be funded by the capital program contribution of $9.1 million together with $3.746 million from the CIP Reserve. Because withdrawals from the CIP Reserve for use on capital projects require Council action, 6 staff requests Council approval to transfer up to $3.746 million from the CIP Reserve to the Operations Reserve. The need for each of the transfers will be re-evaluated once the year end reserve balances for FY 2023 are known. Figure 3 shows the CIP Reserve year end balances. 6 See Sectio n S(b) of the W at er Utility Re serve s Management Practices; Appendix C t o the attached Water Financ ial Plan . Item No. {{item.number}}. Page 11 of 16 -0 -IA C 0 ·-= ·-:E Figure 3: Actual FY 2022 and Projected Capital Reserve Balances FY 2023 to FY 2028 14 12 10 8 6 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 ~Capital Reserve Ending Balance -Min/Max Guideline Figure 4 illustrates the year end reserve balances for FY 2022 (actual) and projected through FY 2028. Water Utility reserve levels remain healthy at year end FY 2022: the CIP Reserve is at the maximum guideline level of $10.7 million and the Operati ons Reserve is al so at the maximum guideline level of approxima_tely $14 mitli on with an addi tional $0.3 million above the maximum that is considered unassigned. In accordance with the reserve gu idel i nes, any funds above the maximum guideline level must be assigned a specific purpose or be returned to ratepayers. The funds will be assigned and used to cover water utili ty operational and capita l costs in FY 2023 . There is also $9 million available in the Rate Stabi l ization Reserve at year end FY 2022. This Financial Plan uses reserve funding (from the Operations Reserve, Rate Stabili zation Reserve and CIP Reserve) together with rate increases to manage the decreased sa l es revenue and increasing costs from FY 2023 through FY 2028. Item No. {{item.number}}. Page 12 of 16 Figure 4: Actual Reserve Levels for FY 2022 and Projections through FY 2028 $60 -.---------------------- $40 Ill $30 C ! :E $20 $10 $0 Actual Rate Stabilization Reserve Projections ■ Unassigned ml Rate Stabilization Reserve m Operations Reserve '1!.I capital Reserve ■ Commitments (Non-CIP) ■CIP Reappropriations & Commitments Staff plans to use the Rate Stabilization Reserve balances to buffer rate increases. Staff expects to transfer $3 million from the Rate Stabilization Reserve to the Operations Reserve in FY 2023 and $2 million from the Rate Stabilization Reserve to the Operati ons Reserve in FY 2024, FY 2025 and FY 2026. The use of the Rate Stabilization Reserve balances in this way, together with the cost and revenue projections in this Financial Pl an, is expected to hold CPAU water distribution rate increases to 3% in FY 2024 and 6% annually from FY 2025 through FY 2028, while continuing to fund essential capital work. This Financial Plan projects that the Rate Stabilization Reserve will be exhausted by the end of FY 2026 (see line 7 in Table 8). Item No. {{item.number}}. Page 13 of 16 Table 8: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution To/(From) Reserves Projected for FY 2023 to FY 2028 ($000) FY2023 FY2024 FY2025 FY2026 FY2027 FY2028 Startin1 Balance (ll 0 0eratlons/Unassl 11ned 14,420 13,028 12,582 10,527 9,385 9,480 ,,1 Rate Stabili zation 9,069 6069 3 000 3 000 - - (l l CIP 10,707 6,961 3,088 8,533 1,861 6,847 Revenues (4 To tal Revenue 48,343 52,911 55,766 57,105 58,523 61,046 (5 Transfers In 332 342 353 363 374 385 Transfers (61 00erations/Unassi1ned 3,000 3,069 500 (7 Rate Stabili zat.on (3,000' (3,069 (3,000 (8 CIP -2,500 <:apl.tal Program Contribution 191 Ooe raH0n1/Unas$iRned (9,100 (9,100 (9,100 (9,100 (9,100 (9,1001 1101 CIP 9,100 9,100 9,100 9,100 9,100 9 ,100 EJlpenses (11 Tota l Expenses o ther than CIP (43,825 (47,523 (48,923 (49,245 (48,932 (50,372 Il l Planned CIP 112,8461 112,9731 13,6551 118,2721 14,1141 (12,456 1131 Transfers Out /1421 /146 11511 (765I ln0I 17751 Endln1 Balance I U+/4l+CS)+l6l+/9l+(lll+l13 Qpe rati0ns/U nassi11ned 13,028 12,582 10,527 9,385 9,480 10,664 (2)+(7 Rate Stabilization 6,069 3,000 3,000 -- 131+181+/101+1121 CIP 6,961 3,088 8,533 1,861 6,847 3,491 Operations Reserve Gulde line Levels (14 Mini mum Gu i deli ne level 7,227 7,836 8,067 8,221 8,170 8,408 11$) M aximum Gu l d ~li n t level 14,455 15,672 16,134 16,442 16,340 16,815 * Planned CIP (item 12) is reflected as an expense in the CIP Reserve and does not include CIP funded through Reappropriations or Commitments reserves. Water Bill Com p arison .with Surrounding Cities Table 9 compares water bills for residential customers to those in surrounding communities as of October 2022 (under current the City's current water rates). Palo Alto customers have some of the highest monthly bills of the group, although bills for smaller water users are lower than in some surrounding communities. The bill difference between Palo Alto and neighboring communities has decreased over the past several years as other agencies invest more in capital improvement. It is unclear at this time what water rate changes may be implemented in surrounding communities for FY 2023. The average community rate calculated in the following table is the mean of the six surrounding communities listed. These communities are the same six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas and Electric industries. Item No. {{item.number}}. Page 14 of 16 Table 9: Residential Monthly Water Bill Comparison Residential monthly bill comparison ($/month)* As of October 2022 Palo Menlo Mountain Redwood Santa Average of Usage Hayward Los Altos Surrounding Alto Park View City Clara (CCF/month) Communities 4 $50.74 $62.83 $43.47 $41.03 $54.04 $29.32 $53.29 $47.33 (Winter 76.54 87.32 67.29 63.23 76.09 51.31 $72.46 $69.62 median) 7 (Annual 98.46 103.65 83.17 78.03 90.79 65.97 $85.24 $84.47 median) 9 (Summer 153.26 148.02 122.87 123..48 138.94 102.62 $120.01 $125.99 median) 14 25 273.82 257.41 257.81 223.47 267.39 183.25 $212.91 $233.71 *Based on the FY 2013 BAWSCA survey, the percentage of SFPUC as the source of potable water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for Santa Clara and 100% for Hayward. Los Altos does not receive water supply from SFPUC. Changes from Last Year's Financial Plan Table 10 shows rate projections from the last two Financial Plans for FY 2022 and FY 2023 as well as the impact of SFPUC's wholesale rate increase projections when combined with Palo Alto's distribution rate increase. Table 10: Proposed and Projected Water Revenue Changes for FY 2024 to FY 2028 Projection FY FY FY FY FY 2024 2025 2026 2027 2028 FY 2024 Plan (Current} 7% 3% 3% 3% 5% FY 2023 Plan 9% 3% 2% 0% - FY 2022 Plan 5% 5% 5% -- Table 11 shows the proposed water rate increases broken out into the needed increases to commodity revenues, to cover the costs of purchasing water from SFPUC and separately the distribution revenue increases to pay for the upkeep of Palo Alto's water distribution system. Table 11: Proposed Commodity and Distribution Water Rate Changes FY 2024 to FY 2028 Projection FY FY FY FY FY 2024 2025 2026 2027 2028 Commodity Rate (SFPUC Wholesale Rate) 11.6% 0% 0% 0% 4.5% Distribution Rate 3% 6% 6% 6% 6% Total Rate 7% 3% 3% 3% 5% Item No. {{item.number}}. Page 15 of 16 This plan uses the Rate Stabilization Reserve and CIP Reserve to stabilize rates while antici pating a large wholesale water rate increase in FY 2024 and funding needed for cri tical water CIP budgets. NEXT STEPS The Finance Committee plans to consider the recommended water rate changes in March. Assuming the Finance Committee supports the proposed rate adjustments, staff will send notification of the potential rate increases to customers as required by Article XIIID of the State Constitution (added by Proposition 218) expected in April 2023. The City Council w m consider the proposed Financial Plans and amended rate schedules with the FY 2024 budget, expected in June, at which time the public hearing required by Article XIIID of the State Constitution will be hel d. RESOURCE IMPACT Staff projects estimated revenue for the Water Utility in FY 2024 to increase approxi mately 7% ($3.2 million) as a result of the proposed rate increases. The FY 2024 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 FY 2024 Water Utility Financial Plan for a more comprehensive overview of the projected cost and revenue changes for the next five years. POLICY IMPLICATIONS The proposed water rate adjustments are consistent with Council-adopted Reserve Management Practices that are part of the Financial Plans. Staff developed the water rate adjustments using a cost-of-service study and methodology consistent with the cost of service requirements of Proposition 218. ENVIRONMENTAL REVIEW The UAC's review and recommendation to Council on the FY 2024 Water Fi nancial Plan and rate adjustments does not meet the definition of a project requiring California Environmental Quality Act (CEQA) review under Public Resources Code Section 21065 thus no env!ronmental review is required. ATTACHMENTS Attachment A: Water FY 24 Resolution Attachment B: Water FY 24 Rate Schedules Attachment C: Water FY 24 Presentation Linked Attachment: Water Financial Pl an FY24 (UAC) AUTHOR/TITLE: Lisa Bilir Report#: {{item.Custom_ Tracking_Number}} Item No. {{item.number}}. Page 16 of 16 * NOT YET APPROVED "' Resolution No .. ___ _ Resolution of the Council of the City of Palo Alto Approving the FY 2024 Water Utility Financial Plan and Reserve Transfer, and Increasing Water Rates by Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) RECITALS Attachment A A. Each year the City of Palo Alto ("City") regularly assesses the financial position of its utilities with the goal of ensuring adequate revenue to fund operations. This includes making long-term projections of market conditions, the physical condition of the system, and other factors that could affect utility costs, and setting rates adequate to recover these costs. The City does this with the goal of providing safe, reliable, and sustainable utility services at competitive rates. The City adopts Financial Plans to summarize these projections. B. The City uses reserves to protect against contingencies and to manage other aspects of its operations, and regularly assesses the adequacy of these reserves and the management practices governing their operation. The status of utility reserves and their management practices are included in Reserves Management Practices attached to and made part of the Financial Plans. 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 __ __, 2023, the City Council held a full and fair public hearing regarding the proposed rate increase and considered all protests against the proposals. E. As required by Article XIII D, Section 6 of the California Constitution and applicable law, notice of the ________ 2023 public hearing was mailed to all City of Palo Afto Utilities water customers by___, 2023. F. The City Clerk has tabul ated the total number of written protests presented by the close of the public hearing, and determined that it was less than fifty percent (50%) of the total number of customers and property owners subject to the proposed water rate amendments, therefore a majority protest does not exi st against the proposal. The Council of the City of Palo Al to does hereby RESOLVE, as follows: 6056604 Attachment A SECTION 1. The Council hereby adopts the FY 2024 Water Utility Financial Plan. SECTION 2. The Council hereby approves a transfer from the Capital Improvement Program Reserve to the Operations Reserve of up to $4,688,000 in FY 2023 as described in the FY 2024 Water Utility Financial Plan. SECTION 3. The Council hereby approves a transfer from the Rate Stabilization Reserve to the Operations Reserve of up to $3,000,000 in FY 2023 as described in the FY 2024 Water Utility Financial Plan. SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-1 (General Residential Water Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule W-1, as amended, shall become effective July 1, 2023. SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-2 (Water Service from Fire Hydrants) is hereby amended to read as attached and incorporated . Utility Rate Schedule W-2, as amended, shall become effective July 1, 2023. SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule W-3 (Fire Service Connections) i s hereby amended to read as attached and i ncorporated. Utitity Rate Schedule W -3, as amended, shall become effective July 1, 2023. SECTION 7. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedu l e W-4 (Residential Master-Metered and General Non -Residential Water Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule W -4, as amended, shall become effective Jul y 1, 2023. SECTION 8. Pursuant to Section 12.20.010 o f the Pal o Alto Munici pal Code, Utility Rate Schedule W-7 (Non-Resi dential Irrigation Water Service) is hereby amended to read as attached and i ncorporated. Utili ty Rate Schedule W-7, as amended, shall become effective July 1, 2023 . SECTION 9. The City Council finds as follows: a. Revenues deri ved from the water rates approved by this resolution do not exceed the funds requ i red to provide waterservi ce. b. Revenues deri ved from the water rates approved by this resolution shall not be used for any purpose other than provid ing water service, and the purposes set forth in Article VII, Secti on 2, of the Charter of the Ci ty of Palo Alto. c. The amount of the water rates imposed upon any parcel or person as an incident of property ownershi p shall not exceed the proportional cost of the wate r service 60S6604 Attachment A attributable to the par(el. 6056604 Attachment A SECTION 10. 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. II II II II II II II II II II II II II II II II II II II II 6056604 Attachment A II SECTION 11. The Council finds that the adoption of this resolution approving the Financial Plan and Reserve transfers does not meet the California Environmental Quality Act's (CEQA) definition of a project under Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment, and therefore, no environmental review is required. The Council finds that the adoption of this resolution changing water 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 6056604 Attachment B GENERAL RESIDENTIAL WATER SERVICE UTILITY RA TE SCHEDULE W-1 A. APPLICABILITY: This schedule applies to separately metered s ingle -family residential dwellings receiving Water Service from the City of Palo Alto Utilities. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Water Serv ice. C. RATES: Monthly Service Charge: Per Meter Per Month For meters 5/8-inch to I inch .................................................................................... $ 22. l 2~ For l 1/2 inch meter .................................................................................................. 7 I .436&W For 2-inch meter ·················~·········• ... +••· .. •••• .......................................... ► ............................. ◄ •••• 110.4 9 10 5.22 For 3-inch meter ........................................................................................................ 23 4 . l 822J .Q1 For 4-inch meter ........................................................................................................ 416.473 Q6 .63 For 6-inch meter ........................................................................................................ 852.648 12 .0J · For 8-inch meter ........................................................................................................ 1,568.75 l,494.04 For 12-inch meter ....................................................................................................... 3261.383,IOe.O+ Volumetric Rates: (To be added to Service Charge, applicable to all pressure zones .) Commodity Rate: Water DeliYery Cha rge from SF PUC (thro1:1glt htly 31. 2822) ................................. . Water Delivery Charge from SFPUC (effeeEi'le A ug tts t I . 2 022) ............................. . Distribution Rate: Per Hundred Cubic Feet Per Month !4.10 Tier I usage ........................................................................................................................ $2.81~ T ier 2 usage (AU, usage over I 00% of T i er I ) ♦U♦HHUU~O+♦HH••u t o• .. •••• .. •• ................ ~h •uu ........ ,,.,.6.5~ CITY OF PALO ALTO UTILITIES Issued by the City Coun cil Superse des She et No W-1-1 dated 7-1-202249 ~\I/~ ~ ~ ■ ~ CITY OF PALO ALTO \~ UT I L IT I E S E ffectiv e 7-l-202J;~ Sheet No W-1-1 GENERAL RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-1 Drought Surcharges (deactivated): A drought surcharge will be added to the Customer's applicable commodity rate for Tier 1 and Tier 2 Water usage when the City Council has determined that a Water reduction level is in effect for the City as described in Section D.4. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Level I (10/15%) Reduction level Tier I 0.20 Tier 2 0.58 Tem porary Service -Developers Temporary unmetered service to residential subdivision developers, per connection D. SPECIAL NOTES: 1. Calculation of Cost Components Level 2 (20%) Level 3 (25%) 0.43 0.64 1.21 1.85 $6.00 The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable dis counts, surcharges and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Commodity Rate The Commodity Charge is based on the water delivery rate per the San Francisco Public Utility Commis sion (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Tenn Contract. The Commodity Charge will be passed through automatically via periodic rate adjustments to account for increases in wholesale water charges, as well as inflation. The pass-through period will be effective for fi scal years 2020 through 2024, inclusive . Customers will be provided notice of any adjustments via their billing statements or by any other mailing by CPA U to the customer's regular billing address. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No W-1-2 dated 7-1-2022.:W ~\I/~ ...._ _.... - -■ ~ CITYOFPALOALTO '" UT I L IT I E S Effective 7-1-2021i Sheet No W-1-2 3. Calculation of Usage Tiers GENERAL RESIDENTIAL WATER SERVICE UTILITY RA TE SCHEDULE W-1 Tier 1 Water usage shall be calculated and billed based upon a level of0 .2 ccf per day rounded to the nearest whole ccf, based on Meter reading days of Service. As an example, for a 30-day bill, the Tier 1 level would be 0 through 6 ccf. For further discussion of bil I calculation and proration, refer to Rule and Regulation 11 . 4. Drought Surcharge During period of Water shortage or restrictions on local Water use, the City Council may, by resolution, declare the need for citywide Water conservation at the 10/15 %, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply . The purpose of the drought surcharge is to recover revenues lost as a result of reduced consumption. CITY OF PALO AL TO UTILITIES Issued by the C ity Council Supersedes Sheet No W-1-3 dated 7-1-2022-W ~\I/~ ...._ _.... -·-■ ~ CITY OF PALO ALTO \~ UT I L IT I ES {End} Effective 7-l -202J ;; Sheet No W -1-3 WATER SERVICE FROM FIRE HYDRANTS U TILITY RATE SCHEDULE W-2 A. APPLICABILITY: This schedule applies to all Water taken from fire hydrants for construction, maintenance, and other uses in conformance with provisions of a Hydrant Meter Permit. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Water Service. C. RATES: I. Monthly Service Charge. METER SIZE 5/8 inch .......................................................................................................................... . 50.00 125.00 3 inch .......................................................................................................................... . 2. Volumetric Rate: (per hundred cubic feet) Commodity Rate: Wuler Del iv@~ Chai:ge ne1'ft Sfl>UC (tkFewgh Jttl~ JI . 2021) ;~ ...... ;................ $4.1 (} Water Delivery Charge from SFPU C (effeeti¥e Attgust 1, 1922)..................... $5.25~ Distribution Rate: ................................................................................................................. $3.95~ 4. Drought Surcharges (deactivated): A drought surcharge will be added to the Customer's applicable Commodity rate when the City Council has determined that a Water reduction level is in effect for the City as described in Section 0.6. The drought surcharges in the table below are measured in dollars per hundred cubic feet ( ccf). Water Usage Level l (10/15%) Level 2 (20%) Reduction level Surcharg e 0 .26 0.53 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-2-1 dated 7-1-2022.W ~\I/~ ""' ~ --■ ~ CITYOFPALOALTO '" UT I L IT I E S Level 3 (25%) 0.77 Effective 7-1-2021i Sheet No W-2-1 D. SPECIAL NOTES: WATER SERVICE FROM FIRE HYDRANTS UTILITY RA TE SCHEDULE W-2 I. Monthly charges shall include the applicable m onthly Service Charge in addition to usage billed at the commodity rate. 2. T he Commodity Charge is based on the water delivery rate per the San Francisco Public Utility Commission (Sf PUC) Water Rate Schedule W-25: Wholesale Use with Long-Term Contract. The Commodity Charge will be passed through automatically via periodic rate adjustments to account for increases in wholesale water charges, as well as inflation. The pass-through period will be effective for fiscal years 2020 through 2024 , inclusive. Customers will be provided notice ofany adjustments via their bi 11 ing statements or by any other mailing by CPA U to the customer's regular billing address. 3. Any person or company using a hydrant without first o btaining a valid Hydrant Meter Permit shall pay a fee of $50.00 for each day of such use in addition to all other costs and fees provided in this schedule. A hydrant permit may be denied or revoked for failure to pay such fee. 4. A Meter deposit of $750.00 may be charged any applicant for a Hydrant Meter Permit as a prerequisite to the issuance of a permit and Meter(s). A charge of$50.00 per day will be added for delinquent return of hydrant Meters. A fee will be charged for any Meter returned with missing or damaged parts. 5. Any person or company using a fire hydrant improperly or without a permit, or who draws Water from a hydrant without a Meter installed and properly recording usage shall, in addition to all other applicable charges be subject to criminal prosecution pursuant to the ~alo Alto Municipal Code. 6. During period of Water shortage or restrictions on local Water use, the City Council may, by resolution, declare the need for citywide Water conservation at the I 0/1 5 %, 20% or 25 % level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the drought surcharge is to recover revenues lost as a result of reduced c onsumption. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-2-2 dated 7-1-202249 ~\I/~ ......_ _.... --■ ~ CITYOFPALOALTO \~ UT I L IT I E S {End} Effective 7-l-202J.~ Sheet No W -2-2 FIRE SERVICE CONNECTIONS UTILITY RATE SCHEDULE W-3 A. APPLICABILITY: This schedule applies to all public fire hydrants and private fire Service connections. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Water Service. C. RATES: I. 2. Monthly Service Charges Public Fire Hydrant.................................................................................................... $5.00 Private Fire Service: 2-inch connection ....................................................................................................... $4.5{>4:-;4 4-inch connection ....................................................................................................... 28.20~ 6-inch connection....................................................................................................... 81 . 86~ 8-inch connection ....................................................................................................... I 7 4 .44 166 .13 I 0-inch connection ..................................................................................................... 313.7 I i:!9 8 .77 12-inch connection ..................................................................................................... 506. 72 48~.59 Commodity (To be added to Service Charge unless Water is used for fire extinguishing or testing purposes.) Per Hundred Cubic Feet All water usage .......................................................................................................... $10.00 D. SPECIAL NOTES: I. Service under this schedule may be di s continued if Water is used for any purpose other than fire extinguishing or testing and repairing the fire extinguishing facilities. Using hydrants and fire Services for other purposes is illegal and will be subject to the commodity charge as noted above, fines , and criminal prosecution pursuant to the Palo Alto Municipal Code. 2. For a combination Water and fire Service, the Water Service schedule shall appl y . CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-3-1 dated 7-1-2022-W ~\I/~ ~ ~ - -■ ~ CITY OF PALO ALTO \~ UT I L IT I E S Effective 7-1-2023~ Sheet No W-3-1 FIRE SERVICE CONNECTIONS UTILITY RA TE SCHEDULE W-3 3 . Utilities Rule and Regulation No. 21 provides additional information on Automatic Fire Services. 4. Repairs and testing of fire extinguishing facilities are not considered unauthorized use of Water if records and documentation are supplied by the Customer. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-3-2 dated 7-1-2022.W ~\I/~ ...... :..--- -■ ~ CITYOFPALOALTO ,~ UT I L IT I E S {End} Effective 7-1-2023~ Sheet No W-3-2 RESIDENTIAL MASTER-METERED AND GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RATE SCHEDULE W-4 A. APPLICABILITY: This schedule applies to Water Services to non-residential buildings, and multi-family residential dwellings served through a Master-Meter. B. TERRITORY: C. This schedule applies everywhere the City of Palo Alto provides Water Service. RATES: Monthly Service Charge Per Meter Per Month For 5/8-inch meter For 3/4-inch meter For I-inch meter For I ½-inch meter For 2-inch meter For 3-inch meter For 4-inch meter For 6-inch meter For 8-inch meter For I 0-inch meter For 12-inch meter .................................................................................... $19.35~ .................................................................................... 2_5._8~ .................................................................................... 38.88~ .................................................................................... 71.43~ .................................................................................... 110.491 QS.22 .................................................................................... 234.18 223 .0 2 ........................................................... ......................... 416.4 7391/i,,(i,J .................................................................................... 852.64812.03 .................................................................................... 1,568.751,494.04 .................................................................................... 2.480.162Ja2.os .................................................................................... 3,261.383, I 06.00 Volumetric Rates : (to be added to Service Charge, applicable to all pressure zones) Commodity Rate: Per Hundred Cubic Feet Per Month Wtlte,-Qeli\'ery Charge frem Si;'Pl:lf (Oue~•gh Jtdy 31 ; 2022) ............. .. Water Del ivery Charge from SFP UC t effeetive,'\wgtisl I , 2022) .......... . Distribution Rate: .......................................................................................... . $ 4.1.Q 5.25~ 3.95~ CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-4-1 dated 7-1-2022~ ~\I/~ -....: __... - -■ ~ CITY OF PALO ALTO \~ U T I L I T I E S Effective 7-l -2021i Sheet No W-4-1 RESIDENTIAL MASTER-METERED AND GENERAL NON-RESIDENTIAL WATER SERVICE UTILITY RA TE SCHEDULE W-4 Drought Surcharges (deactivated): A drought surcharge will be added to the Customer's applicable commodity rate when the City Council has detennined that a Water reduction level is in effect for the City as described in Section D.3. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Level l (10/15%) Level 2 (20%) Level 3 (25%) Reduction level Surcharge 0.26 0.53 0.77 D. SPECIAL NOTES: l. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Commodity Rate The Commodity Charg e is based on the water delivery rate per the San Francisco Public Utility Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Tenn Contract. The Commodity Charge will be passed through automatically via periodic rate adjustments to account for increases in wholesale water charges, as well as inflation. The pass-through period will be effective for fiscal years 2020 through 2024, inclusive. Customers will be provided notice of any adjustments via their billing statements or by any other mailing by CPAU to the customer's regular billing address. 3. Drought Surcharge During period of Water shortage or restrictions on local Water use, the City Council may, by resolution, declare the need for citywide Water conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the drought surcharge is to recover revenues lost as a result of reduced consumption. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-4-2 dated 7-1-2022.:f-9 ~\I/~ --...; _.... ■-~ CITYOFPALOALTO ,~ UTILITIES {End} Effective 7-l-202J J Sheet No W-4-2 NON-RESIDENTIAL IRRIGATION WATER SERVICE UTILITY RA TE SCHEDULE W-7 A. APPLICABILITY: This schedule applies to non-residential Water Service supplying dedicated irrigation Meters. B. TERRITORY: C. This schedule applies everywhere the City of Palo Alto provides Water Services. RATES: Monthly Service Charge For 5/8-inch meter For 3/4-inch meter For 1-inch meter For 1 1/2 inch meter For 2-inch meter For 3-inch meter For 4-inch meter For 6-inch meter For 8-inch meter For 10-inch meter For 12-inch meter Per Meter Per Month .................................................................................... $19.35~ .................................................................................... 25 ~ .................................................................................... 38.88~ .................................................................................... 71.43~ .................................................................................... 110.49105.22 .................................................................................... 234. I 8223.Q2 .................................................................................... 416.47396.(;J ···················································································· 852.64812.QJ .................................................................................... 1,568.751,494.04 .................................................................................... 2,480.162,362.QS .................................................................................... 3,261.383, I Qa.00 Volumetric Rates: (to be added to Service Charge, applicable to all pressure zones) Commodity Rate: Per Hundred Cubic Feet Per Month WoteF Qoefo•ery Cnai:ge f:raM SFPUC (tftrewgl• Jtd~· JI. 2922) .................. ... Water Delivery Charge from SFP UC (effective Julx I August I , 202J.~) .... : Distribution Rate: ................................................................................................... .. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-7-1 dated 7-1-202249 ~\I/~ ...._ _.... --■ ~ CITYOFPALOALTO \'\ UT I L IT I E S Effective 7-1-2021~ Sheet No W-7-1 NON-RESIDENTIAL IRRIGATION WATER SERVICE UTILITY RATESCHEDULE W-7 Drought Surcharges (deactivated): A drought surcharge will be added to the Customer's applicable commodity rate when the City Council has determined that a Water reduction level is in effect for the City as described in Section D.3. The drought surcharges in the table below are measured in dollars per hundred cubic feet (ccf). Water Usage Level 1 (10/15%) Level 2 (20%) Level 3 (25%) Reduction level Surchar~e 0.53 1.25 2.02 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Commodity Rate The Commodity Charge is based on the water delivery rate per the San Francisco Public Utility Commission (SFPUC) Water Rate Schedule W-25: Wholesale Use with Long-Term Contract. The Commodity Charge will be passed through automatically via periodic rate adjustments to account for increases in wholesale water charges, as well as inflation. The pass-through period will be effective for fiscal years 2020 through 2024, inclusive. Customers will be provided notice of any adjustments via their billing statements or by any other mailing by CPAU to the customer's regular billing address. 3. Drought Surcharge During period of Water shortage or restrictions on local Water use, the City Council may, by resolution, declare the need for citywide Water conservation at the 10/15%, 20% or 25% level. While such a resolution is in effect, a drought surcharge will apply. The purpose of the drought surcharge is to recover revenues lost as a result of reduced consumption. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No W-7-2 dated 7-1-2022-W ~\l/~ ...._ ..... ■-~ CITYOFPALOALTO \~ UT I L IT I E S {End} Effective 7-1-2021~ Sheet No W-7-2 WATER UTILITY FINANCIAL PLAN FY 2024 WATER UTILITY FINANCIAL PLAN FY 2024 TO FY 2028 March 2023 ll Page WATER UTILITY FINANCIAL PLAN FY 202 4 WATER UTILITY FINAN CIAL PLAN FY 2024 TO FY 2028 TABLE OF CONTENTS Section 1: Definitions and Abbreviations ................................................................................ 4 Section 2: Executive Summary and Recommendations ........................................................... 4 Section 2A: Overview of Financial Position .................................................................................. 4 Section 28: Summary of Proposed Actions ................................................................................ 10 Section 3: Detail of FY 2024 Rate and Reserves Proposals ..................................................... 10 Section 3A: Rate Design ............................................................................................................. 10 Section 38: Current and Proposed Rates ................................................................................... 11 Section 3C: Bill Impact of Proposed Rate Changes .................................................................... 14 Section 3D: Proposed Reserve Transfers ................................................................................... 15 Section 4: Utility Overview .................................................................................................. 15 Section 4A: Water Utility History ............................................................................................... 16 Section 48: Customer Base ........................................................................................................ 17 Section 4C: Distribution System ................................................................................................. 17 Section 4D: Cost Structure and Revenue Sources ...................................................................... 17 Section 4E: Reserves Structure ................................................................................................... 18 Section 4F: Competitiveness ...................................................................................................... 18 Section 5: Utility financial Projections ................................................................................. 19 Section SA: Load Forecast .......................................................................................................... 19 Section 58: FY 2018 to FY 2022 Cost and Revenue Trends ........................................................ 21 Section SC: FY 2022 Results ....................................................................................................... 22 Section 5D: FY 2023 Projections ................................................................................................ 23 Section 5£: FY 2024 -FY 2028 Projections ................................................................................ 24 Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 25 Section SG: Alternate scenario .................................................................................................. 26 March 2023 21 Page WATER UTILITY FINANCIAL PLAN Section SH: long-Term Outlook ................................................................................................. 26 Section 6: Details and Assumptions ..................................................................................... 27 Section 6A: Water Purchase Costs ............................................................................................. 27 Section 68: Operations .............................................................................................................. 29 Section 6C: Capital Improvement Program (CJP) ....................................................................... 31 Section 6D: Debt Service ............................................................................................................ 36 Section 6E: Other Revenues ....................................................................................................... 36 Section 6F: Sales Revenues ........................................................................................................ 37 Section 7: Communications Plan .......................................................................................... 37 Appendices .......................................................................................................................... 38 Appendix A: Water Utility Financial Forecast Detail ................................................................. 39 Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 41 Appendix C: Water Utility Reserves Management Practices ..................................................... 42 Appendix D: Description of Water Utility Operational Activities ............................................... 45 Appendix E: Sample of Water Utility Outreach Communications ............................................. 46 March 2023 3 I Page WATER UTILITY FINANCIAL PLAN SECTION 1: DEFINITIONS AND ABBREVIATIONS Bay Area Water Supply and Conservation Agency BAWSCA CCF The standard unit of measurement for water delivered to water customers, equal to one hundred cubic feet, or roughly 748 gallons . Capital Improvement Program City of Palo Alto Utilities Department Operations and Maintenance Raftelis Financial Consultants, Inc. San Francisco Public Utilities Commission San Francisco Water Department Utilities Aqvisory Commission CIP CPAU O&M RFC SFPUC SFWD UAC WSIP The SFPUC's Water System Improvement Program to seismically strengthen the transmission lines of the Hetch Hetchy Regional Water System. SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City's Water Utility for FY 2024 through FY 2028. This Financial Plan provides for revenues to cover the costs of operating the utility safely· over that period while adequately investing for the future. It also addresses the financial risks facing the utility over the short term and long term and includes measures to mitigate and manage those risks. SECTION 2A: OVERVIEW OF FINANCIAL POSITION The City's water rate schedules currently consist of a volumetric charge for each CCF (1oo ·cubic Feet or 748 gallons) of water consumed during the billing period and a monthly service charge for each customer, based on water meter size. The volumetric charge has two parts: a wholesale commodity rate (or San Francisco Public Utilities Commission or SFPUC wholesale rate), and a customer volumetric rate. Water rates are designed to recover the City's costs of buying and distributing water while maintaining adequate financial reserves. The customer volumetric rate and the monthly service charge together are considered the distribution rates; revenue from those rates pay for the upkeep of Palo Alto's distribution system. Revenue from the wholesale commodity rate pays for the City's cost of buying water from the SFPUC. The FY 2024 Water Utility Financial Plan includes projections of the utility's costs and revenues for FY 2023 through FY 2028. Due to the ongoing drought and water conservation efforts, the water utility's sales revenue declined in Fiscal Year (FY) 2022 by $3.375 million or 7% compared with sales revenue in FY 2021. The FY 2023 Financial Plan anticipated these declines and there was adequate funding in the Operations Reserve. Water purchase cost reductions due to lower water sales offset approximately $1 million of the revenue decline in FY 2022. Staff expects water sales revenue to continue to decline in FY 2023 with the ongoing drought conditions. Recovery is projected to be slow and as in prior droughts, some conservation is projected to be permanent. Overall costs in the Water Utility are projected to rise on average by about 2.3% per year from Fiscal Year (FY) 2023 to 2028. Operations cost projections rise on average by about 3.2% annually from FY 2023 to 2028. On February 16, 2023, SFPUC provided Palo Alto an estimate of the FY 2024 wholesale water rate increase of $5.30 per CCF. Relative to the current rate of $4.75 per March 2023 41 Page WATER UTILITY FINANCIAL PLAN CCF, this represents a rate increase of 11.6%. Palo Alto passes through the SFPUC wholesale rate increase to customers (see Section 3A: Rate Design for more detail). Overall, this Financial Plan uses reserve funding (from the Operations Reserve, Rate Stabilization Reserve and CIP Reserve) together with rate increases to manage the decreased sales revenue and increasing costs from FY 2023 through FY 2028. While these rate increases can be perceived as decreasing the benefit of conservation, bills for customers who conserve will be lower in the future than they would have been without conservation . Table 1 shows the costs for the Water Utility from FY 2022 through FY 2028. The "CIP" row in Table 1 includes capital expenditure and increased capital funding for reappropriations and commitments in FY 2022 and planned contributions from the Operations Reserve to the CIP Reserve for FY 2023 through FY 2028. This does not include the additional one-time transfers from the Operations Reserve to the CIP Reserve, shown in Table 4. This also differs from planned CIP which is shown in line 12 of Table 4, and is reflected as an expense in the CIP Reserve. Table 1: Expenses for FY 2022 to FY 2028 (Thousand $'s) Expenses FY2022 FY 2023 FY 2024 FY 2025 FY2026 FY 2027 FY 2028 ($000) (act.) (est.) Water Purchases 21,249 22,683 25,349 25,983 25,713 25,446 26,256 Operations 20,282 21,284 22,320 23,091 24,298 2~,256 24,890 CIP 10,551 9,100 9,100 9,100 9,100 9,100 9,100 TOTAL 52,082 53,067 56,769 58,174 59,110 58,802 60,247 Drought Water Use Restrictions and Sf PUC Supply Impacts On November 23, 2021, the SFPUC declared a local water shortage emergency calling for voluntary system-wide 10% water use reductions.1 In alignment with State requirements, on May 24, 2022, SFPUC adopted a system-wide voluntary water use reduction of 11% compared to baseline water use during FY 2020, effective July 1, 2022. 2 SFPUC serves retail customers in San Francisco as well as in Palo Alto and 25 other wholesale customers in the Bay Area. The collective voluntary water purchase cutback level for the wholesale customers is 16% from FY 2020 levels, while Palo Alto's voluntary water purchase cutback level is 8% from FY 2020 levels. 3 The Palo Alto City Council implemented the water use restrictions in Stage I of the Water Shortage Contingency Plan on March 7, 2022 and added the water use restrictions in Stage ti on June 20, 2022. 1 SFPUC Resolution No. 21-0177 2 SFPUC Resolution No. 22-0098 3 During water shortages up to 20% system -wide, the ''Tier 1" formula allocates water between retail and wholesale customers; the ''Tier 2" formula then allocates water among wholesale customers in accordance with an agreement among the wholesale customers. The Tier 2 formula considers each agency's Individual Supply Guarantee (or equivalent), seasonality of water usage and applies minimum and maximum cutbacks. March 2023 5 I Page WATER UTILITY FINANCIAL PLAN Additionally, on June 20, 2022, the City Council restricted potable irrigation of ornamental landscape and lawn to two days per week other than to ensure the health of trees. 4 The cost of SFPUC water supply is also increasing over the forecast period due to increasing debt service for a series of major capital projects on the Hetch Hetchy Regional Water System. SFPUC's water supply rates remained flat from FY 2017 through FY 2022 as SFPUC returned accumulated reserves to customers. On July 1, 2022, SFPUC increased the supply rate by 15.9% from $4.10 per CCF to $4.75 per CCF of water delivered to Palo Alto. SFPUC's May 2022 projection included a wholesale water rate increase of 10.5%, from $4. 75 per CCF to $5.25 per CCF on July 1, 2023. This projection assumes that SFPUC will return the remaining accumulated reserves to customers in FY 2023. On February 16, 2023 SFPUC released a rate increase projection expected to take effect on July 1, 2023 of 11.6%, bringing the current rate of $4. 75 per CCF up to $5.30 per CCF. For more information, see Section 6A: Water Purchase Costs. Staff expects SFPUC to provide a final rate notice around May 2023. Capital Improvement Program Palo Alto's capital costs were lower than budgeted in FY 2022. Staff anticipates that many of the budgeted capital projects deferred from previous years will be completed in FY 2023; reserve funds are available to fund a portion of those costs with the remainder funded by revenues in FY 2023. Staff plans for a main replacement construction project every other year. Actual capital costs vary from year to year; however, this Financial Plan continues with a stable annual capital contribution from the Operations Reserve to the Capital Improvement Program Reserve (CIP Reserve). Section 6C: Capital Improvement Program (CIP) provides more detail. Rate Proposal This financial plan projects that the Water Utility will need to implement the rate increases shown in Table 2 in order to generate sufficient revenues to cover costs and maintain reserves within guideline levels. This financial plan also projects that water supply costs will increase in FY 2024 and then remain stable through FY 2028. Staff expect water sales to dec rease in line with voluntary cutback requests from SFPUC, and there is little or no expected increase in non-sales revenue, such as i nterest, connection fees and capac ity fees. Table 2 shows rate projections from the previous two financial plans for FY 2022 and FY 2023, as well as the expected impact of SFPUC's projected wholesale rate increase when combined with Palo Alto's distribution rate increase. 4 For more information see https://www.cityofp aloalto.org/Dep artments/Utilities/Sustainability/Water-Conservation-and­ Drou ght•Updates March 2023 6 I Page WATER UTILITY FINANCIAL PLAN Table 2: Proposed and Projected Water Revenue Changes for FY 2024 to FY 2028 Projection FY FY FY FY FY 2024 2025 2026 2027 2028 FY 2024 Plan {Current) 7% 3% 3% 3% 5% FY 2023 Plan 9% 3% 2% 0% - FY 2022 Plan 5% 5% 5% - - Table 3 shows the proposed water rate increases broken out into the needed increases to commodity revenues, to cover the costs of purchasing water from SFPUC, and separately the distribution revenue increases to pay for the upkeep of Palo Alto's water distribution system. Given the uncertainty regarding drought conditions, the SFPUC wholesale rate forecast is highly uncertain. Table 3: Proposed Commodity and Distribution Water Rate Changes FY 2024 to FY 2028 Projection FY FY FY FY FY 2024 2025 2026 2027 2028 Commodity Rate (SFPUC Wholesale Rate) 11.6% 0% 0% 0% 4.5% Distribution Rate 3% 6% 6% 6% 6% Total Rate 7% 3% 3% 3% 5% Reserve Changes The Water Utility's Rate Stabilization Reserve provides funding to smooth rate increases over several years. At the end of FY 2022, the balance in the reserve was $9.07 million. The use of the Rate Stabilization Reserve, together with the cost and revenue projections in this Financial Plan allow projected CPAU water distribution rates to increase 3% in FY 2024 and 6% annually from FY 2025 through FY 2028. Without the use of the Rate Stabilization Reserve in FY 2023 and FY 2024, water distribution rate increases of 9-10% would be needed in FY 2024 and FY 2025. This Financial Plan projects that the Rate Stabilization Reserve will be exhausted by the end of FY 2026. Higher bid cost and delays in project schedules resulted in a deferment of main replacement projects in FY 2017 through FY 2022, temporarily lowering CIP expenditures. This resulted in the Operations Reserve being filled to the maximum guideline level. For example, at year end FY 2022, an estimated $0.34 million was above the maximum guideline level in the Operations Reserve. In accordance with the reserve guidelines, any funds above the maximum guideline level must be assigned a specific purpose or be returned to ratepayers. The funds will be used to cover water utility operational and capital costs in FY 2023 offsetting funds that would otherwise need to be recovered from rates. The capital budget includes one-time seismic water system upgrades and/or replacements for the Park and Dahl reservoirs to improve earthquake resistance. This work will improve protection from water loss at these reservoirs in a seismic event. Table 4 shows the starting and ending balances for the Operations & Unassigned Reserves combined, Rate Stabilization Reserve, and CIP Reserve, minimum and maximum Operations Reserve guideline levels and projected reserve transfers over the forecast period. March 2023 71 Page WATER UTILITY FINANCIAL PLAN This Plan updates the transfer proposals due to project cost increases and available reserve balances. Specifically, the proposed transfer from the Operations Reserve to the CIP Reserve is $2.4 million in FY 2026 (see lines 6 and 8 in Table 4). In FY 2023, FY 2024, and FY 2026, transfers from the Rate Stabilization Reserve to the Operations Reserve will manage the trajectory of future year rate increases and provide sufficient funding for the seismic reservoir retrofits/replacements (see line 7 in Table 4). This Financial Plan requests Council approval for the $3 million transfer from the Rate Stabilization Reserve in FY 2023. Staff will request Council approval for the remaining transfers in future Financial Plans, if needed, once the year-end FY 2023 reserve balances are known. Line 12 of Table 4 shows the anticipated CIP Reserve transfers in FY 2023 through FY 2028 from the CIP Reserve to the Operations/Unassigned Reserve. Line 10 of Table 4 shows the anticipated CIP Reserve transfers, or capital program contributions, in FY 2023 through FY 2028 from the Operations/Unassigned Reserve to the CIP Reserve. There is also approximately $12.2 million in CIP budgeted in FY 2022 or prior years that is reappropriated or carried forward from previous years and is currently in the CIP Reappropriations and CIP Commitments Reserves. See Appendix B: Water Utility Capital Improvement Program (CIP) Detail for detailed information. The CIP Reserve aims to stabilize uneven annual funding associated with ongoing CIP projects including water main replacements scheduled to occur every other year and is a source for one­ time or immediately needed projects. In June 2020 Council approved consistent annual funding from the Operations to the CIP Reserves (Resolution 9904). This Financial Plan projects a capital program contribution of $9.5 million annually (see line 9 of Table 4) from the Operations Reserve to the CIP Reserve based upon actual and projected revenue and expenses as well as FY 2022 year-end reserve balances. This Financial Plan projects that rate funding is needed to cover $12.846 million of planned CIP in FY 2023. This figure is the portion of planned CIP in FY 2023 that will not be paid for through funds collected in prior years (the FY 2023 capital budget, less funds available in the Reappropriations and Commitments Reserves), shown in line 12 of Table 4 for FY 2023. This capital budget is projected to be funded by the capital program contribution of $9.1 million together with $3.746 million from the CIP Reserve. Withdrawals from the CIP Reserve for use on capital projects require Council action.5 This Financial Plan therefore requests Council approval to transfer up to $3.746 million from the CtP Reserve to the Operations Reserve. The need for the transfer will be re-evaluated once the year end reserve balances and final CIP spending for FY 2023 are known. Figure 10: Projected CIP Reserve Balances FY 2022 to FY 2028 shows the CIP Reserve year-end balances. 5 See Section S(b) of the Water Utility Reserves Management Practices; Appendix C to the attached Water Financial Plan . March 2023 8I Page WATER UTILITY FINANCIAL PLAN Table 4: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution To/(From) Reserves Projected for FY 2023 to FY 2028 ($000) FY2023 FY2024 FY2025 FY 2026 FY2027 FY2028 Starting Balance (1) Operations/Unassigned 14,420 13,028 12,582 10,527 9,385 9,480 (2) Rate Stabilization 9,069 6,069 3,000 3,000 . - (3) CIP 10,707 6,961 3,088 8,533 1,861 6,847 Revenues (4) Total Revenue 48,343 52,911 55,766 57,105 58,523 61,046 (5) Transfers In 332 342 353 363 374 385 Transfers (6) Op erations/Unassigned 3,000 3,069 . 500 . . (7) Rate Stabilization (3,000) (3,069) . {3,000) . . (8) CIP . . . 2,500 . - Capital Program Contribution (9) Op erations/Unassigned {9,100) (9,100) (9,100) (9,100) (9,100) (9,100) (10) CIP 9,100 9,100 9,100 9,100 9,100 9,100 Expenses (11) Total Expenses other than (43,825) (47,523) (48,923) (49,245) (48,932) (50,372) CIP (12) Planned CIP (12,846) (12,973) (3,655) (18,272) (4,114) (12,456) (13) Transfers Out (142) (146) (151) (765) (770) (775) Ending Balance (1)+(4)+(5)+(6) Operations/Unassigned 13,028 12,582 10,527 9,385 9,480 10,664 +{9)+(11)+(13) (2)+(7) Rate Stabilization 6,069 3,000 3,000 -. . (3)+(8)+(10)+ CIP 6,961 3,088 8,533 1,861 6,847 3,491 {12)* Operations Reserve Guideline Levels (14) Minimum 7,227 7,836 8,067 8,221 8,170 8,408 (15) Maximum 14,455 15,672 16,134 · 16,442 16,340 16,815 * Planned CIP (item 12) is reflected as an expense in the CIP Reserve and does not include CIP funded through Reappropriations or Commitments reserves. Cost Savings for Palo Alto from BAWSCA Bond Refunding In 2013, BAWSCA used bond financing to directly pay a debt the BAWSCA agencies (including Palo Alto) owed to SFPUC. This lowered the cost of repaying the debt. Since 2013, BAWSCA agencies, including Palo Alto have been separately paying the debt service for these bonds and those costs are separate from the wholesale water rate and add about $0.35 to $0.45 per CCF to the wholesale rate. On January 5, 2023, BAWSCAcompleted the settlement of BAWSCA's revenue bond series 2023A to refund the 2013A bonds at an even lower rate. BAWSCA locked•in the bond rates in October 2021 at an all-in true interest rate of 2.06%. What this means for Palo Alto is that the debt service of approximately $1.74 million per year (equivalent to approximately $0.36 per CCF) will decrease to approximately $1 .17 million per March 2023 91 Page WATER UTILITY FINANCIAL PLAN year {or $0.26 per CCF), a savings of $0.57 million annually through 2034 when the bonds will be paid off. SECTION 28: SUMMARY OF PROPOSED ACTIONS Staff proposes the following action for the Water Utility in FY 2023 and FY 2024: 1. Increase distribution rates in FY 2024 for all customer classes to bring revenue collection more in line with expenses. See Section 38: Current and Proposed Rates. 2. Approve up to a $3.746 million transfer from the CIP Reserve to the Operations Reserve in FY 2023. See Section 6C: Capital Improvement Program (CIP) for more details. 3. Approve up to a $3.0 million transfer from the Rate Stabilization Reserve to the Operations Reserve in FY 2023. See Section 3D : Proposed Reserve Transfers for more details. · SECTION 3: DETAIL OF FY 2024 RATE AND RESERVES PROPOSALS SECTION 3A: RATE DESIGN The Water Utility's rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in Article XIII D of the California Constitution (Proposition 218) and applicable statutory law. The City structured current rates based on staff's assessment of the financial position of the Water Utility, and updated current rates using the methodology and rate structures developed by Raftelis Financial Consultants, Inc. (RFC) 6 • Staff plans to update the cost of service study in 1 to 2 years, unless any major changes occur to the utility's operations or customer base that would necessitate an earlier study. Before conducting any new cost of service study, staff will review current water rates and the scope of the study with the Utilities Advisory Commission (UAC) and Council to determine the City's policy priorities. The Water Utility's rates are based on RFC's 2019 update to the 2015 cost of service study, which reviewed the City's most recent cost of service methodologies and rate structures and declared both fundamentally sound. With the onset of the COVID-19 pandemic, usage amongst residential customer classes increased as people worked and stayed at home rather than going to the workplace. Businesses operations were also affected by the COVID-19 pandemic and their collective water usage decreased. Additionally, calls for water conservation due to drought conditions and water use restrictions in Palo Alto are influencing customer water usage patterns -customers in Palo Alto collectively conserved 4.5% from January 1, 2022 -December 31, 2022 relative to the same months in FY 2020 (January -June 2020 and July-December 2019). During the months of July 1, 2022 to December 31, 2022, customers in Palo Alto collectively conserved 6 RFC has developed 3 cost studies for the City: the March 2012 Palo Alto Water Cos t o f Service & Rate Study, a 2015 study reviewing the 2012 methodology and analyzing drought rates entitled, Memorandum: Prop osed Water Rates. and a 2019 Memorandum analyzing the 2015 methodology and rate structure, titled "Pro posed FY 2020 Water Rates". March 2023 10 I Page WATER UTILITY FINANCIAL PLAN 11.2% relative to the same months in FY 2020 (July -December 2019). In order to move toward full cost recovery while minimizing rate impacts in light of pandemic-related economic challenges, staff recommends a distribution rate increase to all customer classes of 3%. Together with SFPUC's commodity rate increase of 11.6%, staff estimates the 3% distribution rate increase will result in a 7% total average rate increase for FY 2024. SECTION 3B: CURRENT AND PROPOSED RATES The current rates and surcharges became effective on July 1, 2022. CPAU has five rate schedules: separately metered residential customers (W-1), commercial and master-metered multi-family residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire hydrant rental meters used for construction (W-2). All customers pay a monthly service charge based on the size of their inlet meter. This charge represents meter reading, billing, and other customer service costs, and also the cost of maintaining the capability to deliver a peak flow for that customer based on their meter size. All customers are also charged for each CCF (one hundred cubic feet) of water used. Separately metered residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF for a 30-day billing period) charged at the first-tier price per CCF, and all additional units charged a higher tier price per CCF. Commercial customers, including most multi-family customers, pay a uniform price for each CCF used. A separate rate per CCF exists for separately metered irrigation service. Water rates are composed of two general types of costs: commodity and distribution. For July 1, 2023, staff proposes to pass through the SFPUC wholesale water rate increase for commodity rates (estimated to be an increase of 11.6%) and increase distribution rates by 3%. Customers have a separate commodity rate for purchased water from SFPUC relative to the rest of the distribution-related portion of the volumetric rates. This charge passes-through future SFPUC rate increases to customers. All customers will pay this separate commodity rate for each unit of water in addition to the volumetric rate that is applicable for their customer class. The rates shown below are in addition to the pass-through commodity rate charged to Palo Alto's customers based on SFPUC supply charges. The pass-through commod ity rate is currently $4.75 per CCF. This automatically adjusting pass-through charge is effective July 1, 2019 through July 1, 2024 pursuant to Resolution 9844. For further information and details about the proposed commodity rate range, see Section 6A: Water Purchase Costs. Distribution rates cover all the costs to deliver water within the City, such as operations, maintenance, metering, billing, and capital. improvements. Through annual Council approvals, the water utility provides steady funding to the CIP Reserve, which reflects actual fluctuations in CIP expenditures (money spent on actual projects in a given year). Previously, CIP expenditures were reflected in the Operations Reserve. Table 4 (row 12) shows planned CIP expenditures and the CIP Reserve balance is calculated by taking the starting balance for the CIP Reserve (row 3), adding the one-time transfers (row 8) and capital program contributions (row 10) and subtracting planned CIP expenditures (row 12). Section SE: FY 2024 -FY 2028 Projections contains a more detailed description of this change. In this way, although CtP expend itures fluctuate from year to March 2023 11 I Page WATER UTILITY FINANCIAL PLAN year, staff projects the capital program contribution to the CIP reserve to remain fairly constant over the next five years. The exception to this is the one•time reservoir replacement costs that will be partly funded through one-time transfers from the Operations Reserve to the CIP Reserve . Once these reservoirs are replaced or rehabilitated, these costs will no longer be included in the ongoing CIP budget needs for the water utility. More detail regarding reserve transfers is in Section 3D: Proposed Reserve Transfers. Operations costs are discussed in Section 68: Operations, below. Table 5 shows the current and proposed consumption charges, which are distribution rates. Table 5: Current and Proposed Water Distribution Charges Current Proposed Change Change(%) (7/1/2022} (7/1/2023} ($/CCF) W-1 (Residential) Volumetric Rates ($/CCF) Tier 1 Rates 2.67 2.75 0 .08 3% Tier 2 Rates 6.21 6.39 0 .18 3% W-2 (Construction) Volumetric Rates ($/CCF) Uniform Rate 3.76 3.87 0.11 3% W-4 (Commercial) Volumetric Rates ($/CC F) Uniform Rate 3.76 3.87 0.11 3% W-7 (Irrigation) Volumetric Rates ($/CCF) Uniform Rate 5.72 5.89 0.17 3% March 2023 12 I Page WATER UTILITY FINANCIAL PLAN Table 6 and Table 7 show the current monthly service charges for rate schedules W-1, W-4 and W-7. These month ly service charges are also considered distribution rates. Table 6: Current and Proposed Monthly Service Charges for Residential W-1 Monthly Service Charge ($/month Change Meter based on meter size) Size Current Proposed $ " (7/1/2022) (7/1/2023) 5/8" 21.06 21.69 0.63 3% 3/4" 21.06 21.69 0.63 3% 1" 21.06 21.69 0.63 3% 1 ½" 68.02 70.06 2.04 3% 2" 105.22 108.37 3.15 3% 3" 223.02 229.71 6.69 3% 4" 396.63 408.52 11.89 3% 6" 812.03 836.39 24.36 3% 8" 1,494.04 1,538.86 44.82 3% 10" 2,362.05 2,432.91 70.86 3% 12" 3,106.07 3,199.25 93.18 3% Table 7: Current and Proposed Mo·nthly Service Charges for W-4 and W-7 Monthly Service Charge ($/month Change Meter based on meter size) Size Current Proposed $ " (7/1/2022) (7/1/2023) 5/8" 18.42 18.97 0 .55 3% 3/4" 24.62 25.35 0.73 3% 1" 37.02 38.13 1.11 3 % 1 ½" 68.02 70.06 2.04 3% 2" 105.22 108.37 3.15 3% 3" 223.02 229.71 6.69 3% 4" 396.63 408.52 11 .89 3% 6" 812.03 836.39 24.36 3% 8" 1,494.04 1,538.86 44 .82 3% 10" 2,362.05 2,432.91 70.86 3% 12" 3,106.07 3,199 .25 93 .18 3 % March 2023 13 I P age WATER UTILITY FINANCIAL PLAN Table 8 shows the current and proposed monthly service charges for rate schedule W -3. Table 8: Current and Proposed Monthly Service Charges for Fire Services (W-3) Monthly Service Charge ($/month Change Meter based on meter size) Size Current Proposed $ " (7/1/2022) (7/1/2023) 2" $4.34 4.47 0.13 3% 4" $26.85 27.66 0.81 3% 6" $77.96 80.30 2.34 3% 8" $166.13 171.11 4.98 3% 10" $298.77 307.73 8.96 3% 12" $482.59 497.07 14.48 3% SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES Table 9 shows the impact of the proposed July 1,_2023 rate changes on the median residential bill . The system average increase is projected to be 8 percent, but some customers will see higher or lower increases due to changes in the composition of the customer's utilization of the system over time, as well as changes in the utility's costs. Table 10 shows the impact of the proposed July 1, 2023 rate changes on the median commercial bill. Table 9: Impact of Proposed Water Rate Changes on Residential Bills Usage (CCF/mo.) Bill under Current Bill under Proposed Change Rates (8/1/2022) Rates (7 /1/2~23) $/mo. " 4 $50.74 $53.89 $3.15 6% (Winter median) 7 $76.54 $81 .68 $5.14 7% (Annual median) 9 $98.46 $105.06 $6.60 7% (Summer median) 14 $153.26 $163.51 $10.25 7% 25 $273.82 $292.10 $18.28 7% March 2023 14 I Page WATER UTILITY FINANCIAL PLAN Table 10: Impact of Proposed Water Rate Changes on Commercial Bills Usage (CCF/mo.) Bill under Current Bill under Proposed Change Rates (8/1/2022) Rates (7/1/2023) $/mo. " Commercial (W-4) (5/8" meters) (Annual median) 12 $120.54 $129.01 $8.47 7% (Annualaverage)64 $563.06 $605.85 $42.79 8% Irrigation (W-7) (1 ½" meters) (Winter median) 9 $162.25 $170.77 $8.52 5% (Summer median) 37 $455.41 $484.09 $28.68 6% (Winter average) 56 $654.34 $696.70 $42.36 6% {Summer average) 199 $2,151.55 $2,296.87 $145.32 7% SECTION 3D: PROPOSED RESERVE TRANSFERS A transfer of approximately $3 million in FY 2023, $3 million in FY 2024 and FY 2026 from the Rate Stabilization Reserve to the Operations Reserve will mitigate the need for distribution rate increases. See Table 4 above, row 7, for a summary of the projected reserve transfers out of the Rate Stabilization Reserve. This meets the requirement in the Water Utility Reserves Management Practices that states if there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the withdrawal of all funds from this reserve by the end of the Financial Planning Period. Section 2A: Overview of Financial Position describes the proposed transfers to and from the CIP Reserve . Table 4 shows the proposed capital program contributions in row 10. This Financial Plan projects a one-time transfer from the Operations Reserve to the CIP Reserve to fund reservoir work for the upcoming Dahl and Park reservoir replacement or rehabilitation costs. This one-time transfers totals $2.4 million in FY 2026 . Appendix B shows projected one­ time spending needs for reservoir replacement/rehabilitation on the line labeled "WS-09000 Seismic Water System". Reservoir replacement/rehabilitation CIP costs total nearly $18 million for FY 2023 -FY 2028; the $2.4 million in one-time transfers from the Operations Reserve to the CIP Reserve together with the funds already in the CIP Reserve will provide adequate funding for the reservoir replacement/rehabilitations. Table 4 shows these one-time transfers from the Operations Reserve to the CIP Reserve on line 8. Additionally, Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail shows details of reserves levels. SECTION 4: UTILITY OVERVIEW This section provides an overview of the utility and its operations. It provides general background information and helps readers better understand the forecasts in Section 5 : Utility Financial Projections and Section 6: Details and Assumptions. March 2023 lS I Page WATER UTILITY FINANCIAL PLAN SECTION 4A: WATER UTILITY HISTORY The Water Utility was established on May 9, 1896, two years after the City was incorporated. Voters of the 750-person community approved a $40,000 bond to buy local, private water companies who operated one or more shallow wells to serve the nearby residents. The city grew and the well system expanded until nine wells were in operation in 1932. Palo Alto began receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these sources. A 1950 engineering report noted, "the capricious alternation of well waters and the San Francisco Water Department water ... has made satisfactory service to the average customer practically i mpossible". By 1950, only eight wells were still in operation. Despite this, groundwater production increased in the 19SO's leading to lower groundwater tables and water quality concerns. In 1962, a survey of water softening costs to CPAU customers determined that CPAU should purchase 100% of its water supply needs from the SFWD. CPAU signed a 20-year contract with SFWD, and CPAU's wells were placed in standby condition . The SFWD later became known as the SFPUC. Since 1962 (except for some very short periods) CPAU's entire supply of potable water has come from the SFPUC. As the city grew, so did the number of mains in the water system, while existing sections of the system continued to age. In the mid-1980s, the number of breaks in cast iron mains installed during the 1940s and earlier started to accelerate. In FY 1994, to combat deterioration of older sections of the system, CPAU performed an analysis of cost-effective system improvements and increased the rate of main replacement from one mile per year to three. CPAU began a plan to replace 75 miles of deficient mains within 25 years. In 1999, a study of system reliability concluded that the distribution system needed major upgrades to provide adequate water supply during a natural disaster. This ultimately resulted in the $40 million Emergency Water Supply and Storage Project, completed in 2013, which involved a new underground reservoir in El Camino Park, the siting and construction of several emergency supply wells, and the upgrade of several existing wells and the Mayfield pump station. Upon completion, the city began to focus reliability efforts on its system of water storage reservoirs and transmission lines in the Foothills. At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy Regional Water System, which crosses two major fault lines between the Sierras and the Bay Area. That evaluation concluded that major upgrades to the system were required. This planning process culminated in the SFPUC's $4.8 billion Water System Improvement Project (WSIP), which is ongoing. This has resulted and will continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. After SFPUC completes each WSIP project, wholesale customers must start paying the debt service costs within 3 to 4 years . Wholesale customers will pay off the majority of those costs, funded with bond financing, over approximately 30 years . The SFPUC continues to evaluate its aging system for other needed infrastructure improvements; future major improvements include dam safety and Mountain Tunnel repairs. March 2023 16 I Page WATER UTILITY FINANCIAL PLAN SECTION 48: CUSTOMER BASE CPAU's Water Utility provides water service to the residents and businesses of Palo Alto, plus a handful of residential customers not in Palo Alto (primarily in Los Altos Hills). There are approximately 20,600 customers connected to the water system. Approximately 16,600 (81%) of these are separately metered residential customers and approximately 4,000 (19%} of these are commercial, master-metered residential, irrigation and fire service customers. Judging from seasonal consumption patterns, Palo Alto's customers collectively use between 35% and 50% of the water for irrigation, and that consumption is heavily weather dependent. It also varies significantly by season. As a result of these two factors, there is significant variability in the amount of water demanded from the system month to month and year to year. SECTION 4C: DISTRIBUTION SYSTEM To deliver water to its customers, CPAU owns and operates roughly 236 miles of mains (which transport the water from the SFPUC meters at the city's borders to the customer's service laterals and meters), eight wells (to be used in emergencies), five water storage reservoirs (also for emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow and demand (due to fire suppression, heavy usage times, etc.). These represent the vast majority of the infrastructure used to distribute water in Palo Alto. SECTION 40 : COST STRUCTURE AND REVENUE SOURCES Figure 1 shows that in FY 2022, 41% of the Water Utility's costs were for water commodity purchases, 39% were for operations and maintenance costs, and the remaining 20% were for capital investment. Staff projects these percentage distributions to remain similar over the forecast period. The Water Utility's revenue comes mainly from the sale of water, with the rest coming from capacity and connection fees, interest on reserves, and other sources. About 16% of the utility's revenues come from fixed service charges, though most of the utility's costs are fixed . Appendix A: Water Utility Financial Forecast Detail provides more detail on the utility's cost and revenue structures. March 2023 Figure 1: Cost Structure (FY 2022) II 39 % 41% ■Supply ■ Operations ■Capital Figure 2: Revenue Structure (FY 2022) ■ Fixed Service Charge Sales Revenue ■ Vol umetrlc Charge Sales Revenue ■ Other Revenue 17 1 Page WATER UTILITY FINANCIAL PLAN SECTION 4E: RESERVES STRUCTURE CPAU maintains six reserves for its Water Utility to manage various types of contingencies. The descriptions below summarize these reserves; see Appendix C: Water Utility Reserves Management Practices for more detailed definitions and guidelines for reserve management: • Reserve for Commitments: A reserve equal to the utility's outstanding contract liabilities for the current fiscal year. Most City funds, including the General Fund, have -a Commitments Reserve. • Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated by the City Council, nearly all of which are capital projects. Most City funds, including the General Fund, have a Reappropriations Reserve. • Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate funds for future expenditure on CIP projects, as well as to manage cash flow for ongoing capital projects. This reserve can also act as a contingency reserve for the CIP. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Rate Stabilization Reserve: This reserve is intended to be empty unless the city anticipates one or more large rate increases in the forecast period . In that case, funds can be accumulated to spread the impact of those future rate increases across multiple years. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Operations Reserve: This is the primary contingency reserve for the Water Utility, and is used to manage yearly variances from the budget for operational water supply costs. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Unassighed Reserve: This reserve is for any funds not assigned to the other reserves and funds in this reserve are assigned or returned to Water Utility ratepayers by the end of the first fiscal year of the next financial planning period. SECTION 4F: COMPETITIVENESS Table 11 compares the current water bills for single-family residential customers in Palo Alto with those of neighboring communities. While Palo Alto is among the highest monthly bills among these communities, the difference between Palo Alto's bills and those of the surrounding cities has decreased in recent years as other agencies have increased their investments in capital improvement. Additionally, bills for smaller water users in Palo Alto are lower than in some neighboring communities. These comparison cities are the ones that Palo Alto compares itself to in the annual budget across all industries . March 2023 18 I Page WATER UTILITY FINANCIAL PLAN Table 11: Slngle-Famlly Residential Monthly Water Bill Comparison Residential monthly bill comparison ($/month)* As of October 2022 Usage Palo Menlo Mountain Redwood Santa Los (CCF/month) Alto Park View Hayward City Clara Altos 4 $S0.74 $62.83 $43.47 $41.03 $S4.04 $29.32 $S3.29 (Winter median) 7 76.S4 87.32 67.29 63.23 76.09 S1.31 $72.46 (Annual median) 9 98.46 103.6S 83.17 78.03 90.79 65.97 $85.24 (Summer median) 14 1S3.26 148.02 122.87 123.48 138 .94 102.62 $120.01 25 273.82 257.41 2S7.81 223.47 267.39 183.25 $212.91 • Based on the FY 2013 BAWSCA survey, the percentage of SFPUC as the source of potable water supply was 100'¼ for Palo Alto, 95'¼ for Menlo Park, 100'¼ for Redwood City, 879' for Mountain View, 1096 for Santa Clara and 1009' for Hayward. Los Altos does not receive water supply from SFPUC. SECTION 5: UTILITY FINANCIAL PROJECTIONS SECTION SA: LOAD FORECAST Figure 3 shows 48 years of water consumption history in Palo Alto. Despite population growth, average water use has trended downward over time. This is due to significant water use reductions particularly during drought periods, such as 1976-77, 1988-92 and 2014-17. During these periods, customers invested in efficient equipment and modified their behavior to achieve water reduction goals. These reductions persisted even after the droughts ended. Additionally, water sales decreased during the 2007-2009 recession and drought and again during the 2014- 2017 drought. Water usage returned to pre-drought levels in 2018 after the drought. However, the Covid-19 pandemic led to an increase in water use in Palo Alto in 2020-21. During the months affected by pandemic impacts, but prior to Governor Newsom's Executive Order N-10-21 calling on Californians to voluntarily reduce water use 15% from 2020 levels, (March 2020-June 2021), overall water sales increased approximately 3-6% from recent years. Because weather was also dry during the same time period, which also tends to increase water sales, pandemic-related sales impacts are not able to be determined with specificity. Staff will continue to monitor water sales and will recommend adjustments in next year's financial plan as needed. March 2023 19 I Page WATER UTILITY FINANCIAL PLAN 10 9 -;;-8 C § 7 ! e 6 5 4 3 2 1 Figure 3: Historical Palo Alto Water Purchases (Rolling 12-Month) 0 --..~~~ .................... ~--~...,..... ........ -,-..-._.,.....,......--,~-.-............... ....,.......~-.--~~-...,....-......-~ ~~~~~iiiii~liiiii i~!ili!f8~g~!~!28S~~~=~~~~~~~~~~ ~~~~~M"N~~~~-~~~M N"~N~MMM2~N~222~2222222222222222 ttt tttttttttttttt tttttttttttttttttttttttttt~ttttt Figure 4 shows the FY 2024 financial plan water purchases forecast, compared to the projected water purchases in the FY 2023 financial plan. Figure 4: Projected Palo Alto Water Purchases 6.0 5.5 -VI C: _Q 5.0 ~ ~4.5 ~ 4.0 3.5 m o:f' .... .... 0 0 N N >->-u.. LL Lil I.O ,..._ 00 °' 0 .... .... .... .... .... N 0 0 0 0 0 0 N N N N N N >->->-> >-ct u.. u.. u.. u.. LL Actual . . '\ ti I I,. I•-:,. ......... .., ...... ,,,_,;-"" ....... , ..... .... N rt') ,o:t i.n I.O ,..._ 00 N N N N N N N N 0 0 0 0 0 0 0 0 N N N N N N N N ct >-ct ct >-ct >->-LL u.. LL LL Projected -Actual -----FY 24 Projection • • • • • • FY 23 Projection Water conservation efforts in Palo Alto reduced water usage in FY 2022. However, the pandemic also affected water consumption patterns, with higher home water usage. Actual water purchases in FY 2022 were 4,709,184 CCF, about 4.8% higher than projected in the FY 2023 Financial Plan. The FY 2023 Financial Plan also assumed the drought would end by FY 2023 and begin to recover during FY 2023 and FY 2024, but staff currently expects drought conditions to extend through FY 2023, with recovery in FY 2024 -FY 2025. The current forecast for FY 2023 is 4,391,708 CCF and 4,508,088 CCF in FY 2024. The forecast for FY 2023 was based on actual March 2023 20 I P age WATER UTILITY FINANCIAL PLAN purchases from July to October and assumed a 6.7% decrease from FY 2022 levels for the rest of the year. This FY 2024 forecast assumes: 1. Water supply conditions return to normal starting in FY 2024 with a linear recovery by the end of FY 2025; 2. A long-term downward trend in water consumption (an average annual decrease of 1.1% from FY 2002 to FY 2021); 3. A 1% decrease in water purchases in FY 2023 to reflect COVID pandemic recovery. SECTION SB: FY 2018 TO FY 2022 COST AND REVENUE TRENDS Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs have changed during the last five years as well as how staff projects they will change over the next five years. The annual expenses for the water utility rose by 5.3% annually on average between FY 2018 and FY 2022. The increases were related to operations costs. Water purchase costs changed proportional to water volume sold during this time because SFPUC held its wholesale water rate at $4.10 from July 2016 to June 2022. Palo Alto's water purchase volumes increased in FY 2020 and FY 2021 in part because of COVID-19 related impacts and then decreased back to FY 2018 levels in FY 2022 due to drought water use restrictions . Section 6A: Water Purchase Costs contains a more in-depth discussion of water purchase costs. Operations costs other than purchased water and CIP increased by about 4.8% annually from FY 2018 to FY 2022, primarily due to increases in allocated costs and operations and maintenance including engineering costs. CIP costs have generally increased but fluctuated down in certain years. For example, in FY 2022, CIP costs were lower than expected because ongoing work on a water main replacement continued into FY 2023. Section 6B: Operations contains more detail regarding operations costs and Section 6C: Capital Improvement Program (CIP) provides more detail regarding CIP costs. March 2023 21 I Page WATER UTILITY FINANCIAL PLAN Figure 5: Water Utility Expenses, Revenues, and Rate Changes: Actual Expenses through FY 2022 and Projections through FY 2028 $70 3% 5% Rate Changes Ill $60 I: □Capital• 0 i $50 $40 □Operations $30 mwater Supply $20 •Debt Service $10 -Revenue $0 00 (71 0 .-i N I'll ~ IJl '° ,.._ .-i .-i N N N N N N N N 0 0 0 0 0 0 0 0 0 0 N N N N N N N N N N it ► LI.. it it ► LI.. ► LI.. it ► LI.. it it Actuals Projected * Note: in Figure 5, Capital Investment in the projected years reflects one-time transfers from the Operations Reserve to the CIP Reserve, the annual capital program contribution to the CIP Reserve, as well as increases in CIP Reappropriations and Commitments. SECTION SC: FY 2022 RESULTS Actual sales revenues for FY 2022 were 1. 7% lower than projected in the FY 2022 Financial Plan ($44.8 million vs. $44.1 million). Correspondingly, actual FY 2022 water purchase costs were 1.6% lower than forecast and sales volume was 1.1% below forecasted. During FY 2022, Palo Alto implemented voluntary water use restrictions due to ongoing drought conditions as well as a drought declaration by the SFPUC, Palo Alto's water supplier. Other revenues were 26% lower than forecasted in the FY 2022 Financial Plan primarily due to reductions in interest income, service connection and capacity fees. Council approved a transfer of up to $13.964 million from the CIP Reserve to the Operations Reserve in FY 2022 to fund ongoing CIP work. However, no transfer was necessary to keep the Operations Reserve above the minimum guideline level based upon actual reserve levels at the end of FY 2022. Although staff did not complete any transfers, this Financial Plan models the total CIP-related amounts ($10.5 million) as an expense from the CIP Reserve and a corresponding capital program contribution from the Operations Reserve. Other operating expenses were similar to the forecast in the FY 2022 Financial Plan. Table 12 summarizes the variances from forecast. March 2023 22 I Page WATER UTILITY FINANCIAL PLAN Table 12: FY 2022, Actual Results vs. Financial Plan Forecast Net Cost/ Type of (Benefit) ($000) change Lower sales revenues $746 Lower revenues Lower other revenue $1,050 Lower revenues $2,331 Increase in Capital Capital Program Contribution Water purchases lower than exp ected $(343) Cost decrease Operating Exp ense higher than exp ected $(33) Cost decrease Net Cost / (Benefit) of Variances $3,731 SECTION SD: FY 2023 PROJECTIONS Staff estimates sales revenues in FY 2023 to be lower than forecasted in the FY 2023 Financial Plan .by about 4% or $1.8 million, as a result of expected reductions in water use due to drought. Approximately $0.9 million of this is lower distribution revenues. Staff currently estimates water sales volumes to be 5% lower than the FY 2023 Financial Plan forecast, which had assumed some drought recovery during FY 2023. This puts additional upward pressure on water rates. Staff also expects other revenue to be lower than forecasted by $0.6 million in FY 2023 primarily due to reductions in service connection and capacity fee revenue. Staff projects total revenue to be $2.4 million lower than forecasted, of which approximately $1 million is offset with lower water purchase costs also resulting from the lower sales forecast. The operations and maintenance expense forecast decreased -although there were increases primarily from allocated charges as well as rent, these were offset by a decrease related to generator lease expense moving from the operating budget in the FY 2023 Financial Plan to the capital budget in the FY 2024 Financial Plan. Table 13 summarizes the changes. The FY 2023 Financial Plan estimated a 5-year capital budget for FY 2023 through FY 2027 of $55. 7 million (not including carry-forward budgets from prior years). This budget remained the same within 1% in the current Financial Plan at $56.4M. However, the FY 2023 Financial Plan estimated $11.987 million in CIP funding needed to be transferred from the Operations Reserve to the CIP Reserve in FY 2023; the current forecast is lower at $9.1 million. This reflects deferred CIP spending, as large capital projects such as Water Main Replacement 28 span multiple years. However, the total funding needed has not declined over the 5-year forecast and so customer rates still need to recover the same amount of revenue to pay for these costs. Table 13: FY 2023 Change in Projected Results, 2023 Forecast vs 2024 Forecast ($000) Net Cost/ Type of (Benefit) Change Sales Revenue $1,844 Revenue decrease Other Revenue $597 Revenue decrease Water Purchases ($1,001) Cost savings Capital-Related Deferral ($2,887) Cost deferral Operations & Maintenance Costs ($1,107) Cost decrease Net Cost / (Benefit) of Variances ($:Z,553) March 2023 2 3 I Page WATER UTILITY FINANCIAL PLAN SECTION SE: FY 2024 -FY 2028 PROJECTIONS On average the Water Utility's costs projected to increase by 1.5% annually from FY 2024 through FY 2028 (see Figure 5 and Table 14). Table 14: Average Annual Percentage Cost Change for Water Utility Expenses Water Utility Expense Average annual percentage cost change FY 2024 -FY 2028 Cap ital 0% Operations 4% Water Supply 0.9% Debt Service (5.5%) Total 1.5% This plan projects water supply costs to increase nearly 1% annually on average over the forecast period FY 2024 -FY 2028. Staff projects operations costs to increase by 4% annually and capital contributions to the CIP Reserve to remain steady throughout the forecast period. While staff has revised future CIP costs upwards to reflect the higher construction costs seen in recent projects, there is still uncertainty with regard to the utility's future costs for main replacement. See Section 6: Details and Assumptions for more detail on the costs that make up these projections, as well as the various assumptions underlying the projections. Debt service costs are declining during the FY 2024 -FY 2028 time period because the 2011 Utility Revenue Refunding Bond, Series A, is scheduled to be retired in 2026. This Financial Plan assumes that drought conditions will continue in FY 2023 and Palo Alto customers will conserve water in line with the 8% cutbacks requested by SFPUC and that drought conditions will begin to recover in FY 2024 and fully recover by the end of FY 2025. Based upon the updated sales forecast, staff expects distribution sales revenues to be $0.9 million lower in FY 2023 and FY 2024 than expected in the FY 2023 Financial Plan. This puts additional upward pressure on Palo Alto's water distribution rates. Both the FY 2023 and current Financial Plans utilize all of the $9.06 million in the Rate Stabilization Reserve by the end of FY 2026 to stabilize rates and cover operational and capital costs. As shown in Table 3, the Water Utility requires distribution rate increases between 3% and 6% per year through FY 2028 to provide sufficient revenues to fund annual expenses for the distribution system. The overall average system rate increase needed with SFPUC's projected rate increase is between 3% and 7% per year through FY 2028. Figure 6 shows reserves trends based on these cost and revenue projecti ons. The figure shows the use of the unassigned funds by the end of FY 2023 and the transfers from the Rate Stabilization Reserve to the Operations Reserve in FY 2023 through FY 2026. Staff expects the Operations Reserve, the main contingency reserve, to be within the target range by the end of FY 2023 and for the remainder of the forecast period, and that this reserve will be March 2023 24 [Page WATER UTILITY FINANCIAL PLAN adequate to meet all identified risks, as discussed in Section SF: Risk Assessment and Reserves Adequacy. Figure 6: Water Utility Reserves Actual Year End Reserve Levels for FY 2022 and Projections through FY 2028 $60 $50 +-------------------------,--- $40 ■ Unassigned m Rate Stabilization Reserve 111 $30 C mi Operations Reserve ~ i $20 0 Capital Reserve ■ Commitments (Non-CIP) $0 ■CIP FY 20;2f FY 202 i FY 20241 FY 202sl FY 2026r FY 2021 1 FY 2028~ Reappropriations : 1 & Commitments Actual Projections •1 SECTION SF: RISK ASSESSMENT AND RESERVES ADEQUACY The Water Utility's main contingency reserve is the Operations Reserve, and this Financial Plan projects the ·operations reserve to remain within the guideline levels throughout the forecast period, as shown in Figure 7. Staff will consider funds in the Operations Reserve in excess of the maximum to be unassigned. Staff projects the Operations Reserve to exceed both the minimum reserve level and the short-term risk assessment level throughout the forecast period . March 2023 2SI Page WATER UTILITY FINANCIAL PLAN $18 ,,. l $14 $12 1 $10 Ill ~ ~ sa l ~ $6 t $4 $2 so .-- Figure 7: Operations Reserve Adequacy .-... -----------------· FY 2022 FY 2023 FY 2024 FY 2025 FY 202 6 FY 2027 FY 20 28 Actual Projected -Reserve Maximum/Minimum - -Reserve Target -Reserve (Year-End) -Risk Assessment Table 15 summarizes the risk assessment calculation for the Water Utility through FY 2028. The risk assessment includes the revenue shortfall of 14% that could accrue due to lower than forecasted sales revenue. Table 15: Water Risk Assessment ($000) FY2024 FY2025 FY2026 FY 2027 FY2028 Total Non•Commodity $27,757 $29,967 $31,519 $33,149 $34,856 Revenue Max. Revenue Variance, Previous Ten Years 14% 14% 14% 14% 14% Risk of Revenue Loss $2,659 $2,871 $3,019 $3,175 $3,339 Total Risk Assessment Value $2,659 $2,871 $3,019 $3,175 $3,339 SECTION SG: ALTERNATE SCENARIO There is no alternate scenario included in this Financial Plan. SECTION SH: LONG-TERM OUTLOOK CPAU has put its Water Utility on strong footing by investing in its distribution system infrastructure and emergency water facilities over the last 20 years. The Water System Master Plan, completed in FY 2016, evaluated the current state of the distribution system and determined the necessary rate of main replacement in the next 20 years. This study factored in seismically vulnerable mains as well as deteriorating mains. In addition, CPAU's water supplier, the SFPUC, has replaced and seismically strengthened its water transmission infrastructure, which will benefit Palo Alto and all Hetch Hetchy Regional Water System customers over the long term. March 2023 26 I Page WATER UTILITY FINANCIAL PLAN The opportunities for CPAU's Water Utility to obtain additional supplies over the long term may be in alternative water supplies such as recycled water, groundwater, and water from Valley Water. Staff have analyzed these alternatives in the past and analyzed them again most recently in the 2017 Water Integrated Resource Plan. 7 Some of these alternatives may provide cost savings or increased drought protection. For example, in November, 2019, the City of Palo Alto entered into an agreement with Valley Water and the City of Mountain View that will provide (1) funding for a salt removal facility at the Regional Water Quality Control Plant in Palo Alto to improve the quality of non-potable recycled water used in Palo Alto and Mountain View, (2) a transfer of treated wastewater from Palo Alto to Valley Water for use in the county south of Mountain View, and (3) Palo Alto and Mountain View will have a future option to request new potable or non-potable water supply from Valley Water, if needed. Climate change may begin to present challenges for the Water Utility over the next 20 to 40 years. Availability of water from SFPUC's Regional Water System may change with changing seasonal precipitation patterns. Water consumption patterns may change. Consumption could increase due to drier weather or decrease as customers become even more focused on water conservation. Droughts may become more frequent. The risk of wildfire in the foothills could increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level rise could result in greater exposure of utility infrastructure to inundation, possibly resulting in­ higher maintenance and replacement costs. As part of the Sustainability/Climate Action Plan, CPAU is currently working on a Climate Change Adaptation Roadmap that will begin to assess some of these risks. Palo Alto staff is in the process of developing a One Water supply plan to enhance and preserve Palo Alto's potable water supply. The Palo Alto City Council approved a Contract with Carollo Engineers for this work in June 2022 (Staff Re port #13434). The One Water Plan will be used as an adaptable water supply plan for implementing a One Water portfolio over a 20-year planning horizon. This work aims to address how Palo Alto can mitigate the impact of future uncertainties such as severe multi-year drought, changes in climate, water demand and regulations through integrated water resources supply planning. More information is available on the One Water webpage. SFPUC recently conducted a study of long-term vulnerabilities of the Regional Water System in partnership with The Water Research Foundation. The Long-Term Vulnerability Assessment covers the risks associated with potential climate change in the context of effects from other drivers of change. SECTION 6: DETAILS AND ASSUMPTIONS SECTION 6A: WATER PURCHASE COSTS CPAU purchases all of its potable water supplies from the SFPUC, which owns and operates the Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water from 7 2017 Water Integrated Resource Plan: htt ps://www.ci ty ofp aloalto .ora/cMcax/fllebank/documents/56088 March 2023 27 I Page WATER UTILITY FINANCIAL PLAN the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation Agency (BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA member agencies. On May 10, 2022, SFPUC adopted the FY. 2022-23 wholesale water rate of $4.75/CCF, which was a 15.9% incre~se effective July 1, 2022. SFPUC needed this increase primarily due to lower wholesale purchase projections based on drought conditions and the call for a reduction in water consumption, and increased costs of debt service and operations and maintenance. On February 16, 2023, SFPUC projected a rate increase of 11.6% i_n FY 2024, no increase in FY 2025 through FY 2027, and a 4.5% increase in FY 2028. During FY 2017 through FY 2021, the balan~ing account for SFPUC's wholesale customers built up an over-collection of revenue due to wholesale customer revenues exceeding costs. There are several reasons contributing to this: SFPUC sold more wholesale water than its sales projection used for rate setting, there were cost savings in the wholesale revenue requirement due to the SFPUC's debt refinancing, and BAWSCA's annual review of the wholesale revenue requirement resulted in credits applied to the balancing account. SFPUC's rate forecast projects that all of the funding in the wholesale customer balancing account will be used to offset the Wholesale Revenue Requirement in FY 2022 and FY 2023 and be fully returned to wholesale customers by the end of FY 2023. The Hetch Hetchy Regional Water System begins with a system of reservoirs and tunnels in the high Sierra in Tuolumne County and water is transported by a gravity-fed pipeline to the Bay Area. Currently, the SFPUC is in the midst of a $4.8 billion bond-financed capital improvement program (the Water System Improvement Program, or WSIP) to seismically retrofit the facilities that transport water to the Bay Area. As of September 30, 2022, 98.7% of the WSIP regional projects are complete. 8 This has resulted and will continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto . After each WSIP project is completed, wholesale customers must start paying the debt service costs within 3 to 4 years. The currently estimated WSIP completion date is February 7, 2027, as adopted by the Sf PUC in April of 2022. In large part because of these WSIP-related debt service costs, the SFPUC's wholesale water rate has already increased from $1.43 per CCF in FY 2009 to $4.75 per CCF currently, and is forecast to increase to $5.30 per CCF by FY 2024 (these projections are subject to change based on future SFPUC budget estimates). Figure 8 shows the SFPUC's actual wholesale water rate since FY 2009 and projection through FY 2028. Note that the wholesale water rate decreased in FY 2014, but the apparent rate decrease is due to a debt the BAWSCA agencies owed to Sf PUC being directly paid by the BAWSCA agencies via bond financing, which lowered the cost of repaying the debt (described in more detail in Section 2A: Overview of Financial Position). 8 First Quarter FY 2022 -2023 WSIP Regional Quarterly Report, https://www .sfpuc.org/sites/default/files/documents/Q1FY23 WSIP Regional Qtrlv Report 4 Web.pdf March 2023 28 I P age WATER UTILITY FINANCIAL PLAN Figure 8: Historical and Projected Sf PUC Wholesale Water Rate $6.00 ~ ~ $5.00 l! i $4.00 Ill~ -u DI~ $3.00 .!! 0 o-j $2.00 ~ $1.00 ICI. r.a. Cl) $- en 0 0 .... 0 0 N N Actual/Projected Sf PUC Wholesale Rates .... N m ..;t Ll'l \0 r--00 en 0 .... N m ..;t 1,/') ID r--.... .... .... .-t .... .... rl rl .... N N N N N N N N 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 N N N N N N N N N N N N N N N N N Actual Projection Fiscal Year 00 N 0 N Parts of SFPUC's system not included in the WSIP will also need rehabilitation after the WSIP is completed, and some of these projects are already included in the SFPUC's rate projections, such as additional Transmission, Supply, Storage and Treatment system upgrade projects, and dam safety work slated to occur during the next 10 years. The SFPUC is also conducting condition assessments of other "up-country" facilities, located in the Sierras, in the coming years. Estimates from 2021 are that $1.8 billion will be needed between FY 2019 and FY 2028 primarily for these non-WSIP projects, but if these assessments identify other facilities that need replacement, it may result in additional rate increases as new debt is issued to finance the projects. SFPUC coordinates the development of wholesale rate adjustments with its annual budget process and may decide on the final rate increase in May or June of 2023. The rate increase could be effective on July 1, 2023 or another date. SFPUC will provide written notice to Palo Alto 30 days before the Commission meeting to increase wholesale rates, and the rate adjustment will be effective no sooner than 30 days after the Commission adopts the wholesale rate (the 2018 Amended and Restated Water Supply Agreement Section 6.03.A. describes the details of budget coordinated rate adjustments). Palo Alto will pass through the wholesale rate (commodity charge) automatically and will provide notice to customers of any adjustments through billing statements. SECTION 68: OPERATIONS CPAU's Water Utility operations include the following activities: • Administration, a category that includes charges allocated to the Water Utility for administrative services provided by the General Fund and for Utilities Department administration, as well as debt service and other potential transfers. Additional detail on Water Utility debt service is provided in Section 6D: Debt Service • Customer Service • Engineering work for maintenance activities (as opposed to capital activities) • Operations and Maintenance of the distribution system; and March 2023 29 I Page WATER UTILITY FINANCIAL PLAN • Resource Management Appendix D: Description of Water Utility Operational Activities incl udes detailed descriptions of the work associated with each of these activities. From FY 2018 to FY 2022, overall operations costs increased 4.8% per year on average. Allocated charges and operations and maintenance costs (including engineering) costs were the primary reasons for the increase. Transfers have varied from year to year, but staff expect transfers to remain relatively low and stable through the forecast period. Staff project inflationary increases for all operations costs with underlying assumptions for salary and benefit costs, consumer price index, and other cost projections that align as much as possible with the City's Long Range Financial Forecast.9 This plan projects operations costs to increase by 3% per year, on average, over the forecast period. For salary and benefit assumptions, this Financial Plan uses estimated budget and long-term annual percentage increases applied to the actual FY 2022 salaries and benefits of 9% in FY 2023, 6% in FY 2024 and 3% per yea r in FY 2025 through FY 2028. These percentage estimates may change as the budget is refined and finalized this fiscal year. I n FY 2022 there were reductions in overall salaries and benefits (shown in Figure 9 : Historical and Projected Operational Costs) because of vacancies that have been cha ll enging to fill. However, those vacancies are expected to be filled over the coming months. 9 Staff referenced the Finance Committee Staff Report #14629, Finance Committee December 6, 2022, during the development of this Financial Plan. However, after this Financial Plan was written, the City's Long Range Financial Forecast was also reviewed by the City Council on February 6 (Action Item 8) and February 13, 2023 (Action Item AA2) March 2023 30 I Page WATER UTILITY FINANCIAL PLAN Figure 9: Historical and Projected Operational Costs $30 $0 ()() °' 0 ~ N r,, q-"' '° " ~ ~ N N N N N N N N 0 0 0 0 0 0 0 0 0 0 N N N N N N N N N N ct > u.. > u. ► u. ct > u.. > u.. > u.. > u.. > u.. Actuals Projected SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP) The Water Utility's CIP consists of the following types of projects: GJ Debt service and transfers ■Resource Management □ Operations & Maintenance (including Engineering) □ Customer Service ■ Administration (excluding debt service and transfers) • One•time projects, or large, non-recurring replacement of system assets (such as reservoir rehabilitation). • Water main replacement, which represents the ongoing replacement of aging water mains and the services associated with those mains, as well as seismically vulnerable mains located in areas where soil is prone to liquefaction. • Ongoing projects, which represent the cost of replacing aging and under-recording meters and degraded boxes and covers, minor replacements of various types of distribution system equipment, and the cost of capitalized tools and equipment. • Customer connections, which represents the cost when the Water Utility installs new services or upgrades existing services at a customer's request in response to development or redevelopment. CPAU charges a fee to these customers to cover the cost of these projects. Table 16 shows the FY 2022 projected budget and the _five-year CIP spending plan, although these figures are preliminary pending ongoing budget discussions. · March 2023 31 I Page WATER UTILITY FINANCIAL PLAN Table 16: Budgeted Water Utility CIP Spending ($000) Project Category Current Budget* FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 One Time Projects 8,597 891 600 7,000 800 900 Water Main Replacement 11,226 8,925 425 8,925 850 8,925 Ongoing Projects 6,082 2,856 2,311 2,019 2,087 2,204 Customer Connections 1,077 932 961 989 1,019 1,049 TOTAL 26,982 13,604 4,296 18,933 4,756 13,078 •includes unspent funds from previous years carried forward or reappropriated into the current fiscal year This budget does not include allocated overhead, which is estimated to be $0.6 million in FY 2023 and escalating at 2-4% annually thereafter as shown in the table below. Allocated overhead is added to the capital budget. Table 17: Allocated Overhead FY2023 FY2024 FV2025 FY2026 FY2027 FY2028 Allocated Overhead $573,344 $604,931 $631,402 $650,344 $669,855 $689,950 The Water Main Replacement (WMR) program funds the replacement of deteriorating water mains or water mains in liquefaction zones. The water system consists of over 236 miles of mains, approximately 2,000 fire hydrants, and over 20,000 metered service connections spanning 9 pressure zones over a 26 square mile service area. In recent years, CPAU has replaced many miles of the most leak-prone and deteriorated pipes. Since the CIP program started in the early '90s, 61 miles or 26% of water mains have been replaced. CPAU continues to pursue a pipe replacement program of mains that are subject to recurring breaks based on maintenance history, and 11.6 miles of mains that were identified in the 2015 water system study. CPAU also coordinates with the Public Works street maintenance program to avoid cutting into newly repaved streets. The main replacement schedule in this Financial Plan will allow CPAU to replace these mains on schedule. Costs for the water main replacement program are increasing for a variety of reasons : • Fire Code regulations now mandate fire sprinklers for new residential units. To accommodate increased fire flows, new main replacement projects require larger diameter pipe. • CPAU has switched to high-density polyethylene (HOPE) for its mains. Installation costs for this material are slightly higher, though lifecycle costs are lower, and the material performs better. Joints in distribution mains are the most likely place for failure, and sections of HOPE pipe are fused together rather than connected with fittings . In the long run, this will reduce water losses and maintenance costs. • To take full advantage of HDPE's fusibility, CPAU is now replacing the services along with the water mains with new HOPE services. In the past, the existing services were reconnected, regardless of the material. This new practice costs more in the short run, but will provide long term benefits. • Lastly, material and fuel costs have escalated due to inflation, leading to higher bids than were seen in the past. March 2023 32 I Page WATER UTILITY FINANCIAL PLAN These factors have created some uncertainty in future water main replacement costs. As bids for recent projects have consistently come in higher over the last few years, future main replacement project budgets have been increased to reflect expected bid estimates. If the cost of water main replacement continues to rise at its current levels, budgets may need to be revised further. In 1993, the long-term water main replacement program focused on replacing the oldest and most degraded parts of the system. Then in 2015, CPAU initiated a master planning process that was completed in FY 2016 to evaluate the current state of the distribution system and determine the necessary rate of main replacement in the next 20 years. This study factored in seismically vulnerable mains as well as deteriorating mains. Mains with recurring maintenance issues are added to projects as they are identified. Preparing for the future, CPAU is in the process of evaluating the utility's asbestos cement pipe (ACP} water mains. Over half the mains in the system are ACP. The ACP pipe has performed very well, but CPAU wants to verify its life expectancy and plan for its future replacement in 20 to 30 years. This Financial Plan addresses these challenges in a way that will allow CPAU to meet its main replacement needs. This Financial Plan includes approximately $8.S million every other year for main replacement constructior:i. Staff anticipates that larger main replacement construction projects every other year will attract more contractors to bid on the larger projects and alleviate the burden of insufficient inspection coverage. Included in the one-time project budget are seismic water system upgrades and/or replacement for the Park and Dahl reservoirs to improve earthquake resistance. This work will improve protection from water loss at these reservoirs in a seismic event. If an earthquake caused a significant water leak, this could lead to loss of water for firefighting, loss of water storage for drinking, property damage from flooding or mudslides, and environmental damage. Staff contracted with an engineering.specialist to investigate and analyze the structural integrity and condition of the Park Tank Reservoir. The engineering specialist will recommend replacement or rehabilitation of the Park Tank Reservoir, prepare structural load calculations of the existing structure, and identify deficient structural beam members needing replacement. The decision to replace or rehabilitate these two tanks will depend on the degree of corrosion and the benefit­ cost between replacement and rehabilitation. Staff will solicit proposals for an engineering specialist for the Dahl Tank Reservoir, after the tank specialist has performed their initial assessment of the Park Tank Reservoir. If replacement is needed, the estimated cost for design and construction of Dahl and Park reservoirs is approximately $7 million each in FY 2024 and FY 2026. Staff prepared and solicited bids for a capital improvement project for a seismic improvement of the California and Page Mill Turnouts, two water receiving stations from the San Francisco Public Utilities Commission's water distribution system, and the City awarded the contract in FY 2023. Staff is reviewing material submittals and preparing for construction work to mobilize in March 2023. The currently planned work at Page Mill Turnout will involve restraining a valve, and the work at California Turnout will involve replacement of all the water piping and valving in the City of Palo Alto's water utility vault on California Avenue and a replacement of the vault roof. Ongoing Projects and Customer Connections are projected to cost approximately $6 million in FY 2023 because of the purchase of generators and security cameras. However, this CIP category will then reduce to between $3.1 and $3.8 million through the end of the forecast period. Actual March 2023 33 I Page WATER UTILITY FINANCIAL PLAN expenses fluctuate annually depending on how many defective meters are discovered and replaced during routine maintenance, as well as how much development and redevelopment is going on that prompts the replacement or upgrade of water services. Property owners pay a fee for water service replacement or expansion during redevelopment, so when the number of projects go up (meaning higher costs for this activity), so does fee revenue. Aside from customer connections, the CIP plan for FY 2023 to FY 2028 is funded by revenue from utility rates and capacity fees. Appendix 8: Water Utility Capital Improvement Program (CIP) Detail shows the details of the plan. Figure 10 below shows the projected CIP Reserve balances from FY 2022 through FY 2028. Figure 11 below shows the projected CIP expenditure fluctuating from year to year with the staggered main replacement schedule and one -time reservoir replacements/rehabilitations, relative to the steadier capital program contributions to the CIP Reserve. This Financial Plan projects a $9.1 million capital program contribution to the CIP Reserve in FY 2023 and requests Council approval to transfer up to $4.688 million out of the CIP Reserve to the Operations Reserve to pay for estimated CIP in FY 2023. Appendix A: Water Utility Financial Forecast Detail shows the amount of the capital program contributions under "Expenses" for FY 2023 through FY 2028. March 2023 34 1 Page WATER UTILITY FINANCIAL PLAN Figure 10: Projected CIP Reserve Balances FY 2022 to FY 2028 14 l 12 10 l -11). -In C § 8 j ~Capital Reserve Ending Balance 6 :E 4 2 0 l FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 -Min/Max Guideline Figure 11: Projected CIP Expenditure,and Projected Capital Program Contribution, FY 2023 to FY 2028 $20 $18 $16 $14 VI $12 C: .2 $10 ~ $8 $6 $4 I I $2 $ FY 23 FY 24 FY 25 FY 26 FY 27 FY 28 Capital Program Contribution ■ Projected CIP Expenditure M a r c h 2 O 2 3 35 I P a g e WATER UTILITY FINANCIAL PLAN SECTION 6D: DEBT SERVICE The Water Utility's annual debt service is roughly $3.2 million per year, which is offset by a federal subsidy of approximately $300K to $430K annually. The debt service is associated with two bond issuances, one requiring payments through 2026, the other through 2035. CPAU is in compliance with all covenants on both bonds. The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new wells, and rehabilitation of existing wells and tanks) which will be retired by 2035. As part of the 'Build America' bond program, there is an interest payment subsidy from the Federal Government of 33 to 35%. The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A; which is to be retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital improvements for both systems. The Water Utility's share of the issuance was roughly $7.8 million. Table 18 shows the cost of debt service for the Water Utility's share of these bond issuances for the financial forecast period: Table 18: Water Utility Debt Service ($000) FY 2023 FY2024 FY 202s FY2026 FY2027 FY 2028 2009 Water Revenue Bond, Series A 2,138 2,158 2,181 2,201 2,225 2,251 (net of subsidy) 2011 Utility Revenu_e Refunding Bond, 658 656 654 656 0 0 Series A Total 2,797 2,814 2,835 2,857 2,225 2,251 Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available Reserves shall be at least 5 times the maximum annual debt service. Note that "Available Reserves," as defined for both bonds, include the reserves for the Gas and Electric systems, not just the Water system. This Financial Plan maintains compliance with these covenants throughout the forecast period, as shown in Appendix A: Water Utility Financial Forecast Detail. SECTION 6E: OTHER REVENUES The Water Utility receives most of its revenues from sales of water. The next largest source in FY 2022 was service connection fee revenue, which represented 32% of revenue from sources other than water sales; interest income represented 26% of revenue from sources other than water sales, and grants represented 23% of revenue from sources other than water sales. The remainder consisted of a variety of miscellaneous charges and tran~fers. Connection fees are charged to new developments that need new or replacement service connections, while capacity fees are charged to development that put additional demands on the water distribution system . Revenue from these sources fluctuate from year to year. In FY 2022, March 2023 36 I Page WATER UTILITY FINANCIAL PLAN capacity fee revenue was lower than it has been in any of the prior ten years. Service Connection fee revenue was also lower than in any of the prior three years. Staff estimates this decrease is due to more tenant improvements permits rather than new service connection permits where the improvements are inside the buildings and the utility infrastructure remains the same. This financial plan forecasts connection fee and capacity fee revenue using the most recent year recorded amounts increasing at an average of 3% per year in subsequent years. Connection and capacity fee revenue is reflected in the Operations Reserve . Other revenue sources are projected to stay stable through.the forecast period, though interest income fluctuates depending on changes in interest rates. Some uncertainty also exists related to the Federal government's commitment to continuing to pay the interest subsidy on the Build America Bonds. SECTION 6F: SALES REVENUES Staff based the sales revenue projections on the load forecast in Section SA: load Forecast and the projected rate changes shown in Figure 5. Precipitation can vary substantially, and this can affect revenues substantially. In dry, non-drought years customers use more water, increasing revenues, and in wet years they use less. It is difficult to predict customer usage recovery during drought together with impacts from the ongoing pandemic. Staff will continue to monitor these patterns and adjust projections accordingly in subsequent financial plans. SECTION 7: COMMUNICATIONS PLAN The Fiscal Year (FY) 2024 water utility communications strategy covers these primary areas: drought and water supply conditions, cost drivers and cost containment measures, efficiency programs and services, capital improvement, operations and maintenance for infrastructure safety and reliability. The City of Palo Alto Utilities (CPAU) communication methods include use of the utilities website, utility bill inserts, messaging on utility bills and online MyCPAU account management platform, email newsletters, print and digital ads in local publications, social media, community messaging platforms, and a new WaterSmart portal program. One of the main reasons for current water utility rate increases is the cost to deliver water in Palo Alto, including maintaining and replacing water infrastructure, customer service, billing, and administration. The City needs to increase the distribution rate to pay for i nfrastructure upgrades along the local water distribution system including water main replacements and seismi c retrofits or replacement of three reservoirs. The other main driver is the drought and reduced revenues from lower water use as well as rate increases from our water supplier, the San Francisco Public Utilities Commission (SFPUC). SFPUC declared a water shortage emergency calling for voluntary water use reductions throughout the Regional Water System. These water use reductions increase the water rate because the primarily fixed costs of the system are spread among fewer units of water sales. CPAU's communication about water utility rates will focus on these costs passed down from the SFPUC, capital improvement and infrastructure upgrades, and what CPAU is doing to keep costs down. Maintaining water pipes, mains, and se·rvice connections is necessary to prevent leaks, Mar"ch 2023 37 I Page WATER UTILITY FINANCIAL PLAN which cost the utility and rate payers money, and prevents damage to infrastructure which could exacerbate safety and reliability concerns in the long term. Market economics have continued to drive up labor and material costs for construction projects. As a not for profit public utility, CPAU must recover its costs primarily through revenue generated by rates. Any increased supply costs are passed through rates to CPAU customers. Staff maintain a dedicated webpage at cityofpaloalto.org/ratesoverview to provide an overview on all utility rates, costs to the utility, updates to financial forecasts and proposed rate changes. While print materials such as bill inserts and ads feature prominently, CPAU is exploring additional ways to communicate directly through customers utilizing unique prog·rams like a new WaterSmart portal and Home Water Reports. Staff continue to maintain an active presence in social media and are expanding outreach through citywide email newsletters. As the COVID-19 pandemic emergency has abated, staff will begin attending community outreach events and hosting educational workshops once again. CPAU promotes water use efficiency programs and easy water-saving behaviors to aid in our water saving efforts and help customers keep utility costs low. Messagi ng reinforces that although rates may increase, efficient usage can help customers avoid seeing a significant water cost increase on the utility bill. The City is also exploring opportunities to expand use of alternative water supplies and has adopted a One Water Plan for that purpose to further reduce demands on potable water supplies. APPENDICES Appendix A: Water Utility Financial Forecast Detail Appendix B: Water Utility Capital Improvement Program (CIP) Detail Appendix C: Water Utility Reserves Management Practices Appendix D: Description of Water Utility Operational Activities Appendix E: Sample of Water Utility Outreach Communications March 2023 38 I P age APPENDIX A: WATER UTILITY FINANCIAL FORECAST DE TAIL l 2 3 • Purd>ases (CCF) 4,859,576 4,600,987 4,757,199 4,785,384 4,709,184 4,391,708 4,508,088 4,627,552 4,576,649 4,526,306 4,476,517 5 Sales (CCF) 4,609,89] 4,411,473 4,670,827 4,770,922 4,458,594 4,193,782 4,304,917 4,418,997 4,370,388 4,322,JU 4,274,769 6 7 lllll.l. ~ ~J'.I! QWIGB 8 Variable Che,ve (supply) 0'Mo 0'Mo 0'Mo 0'Mo 0"41 16% 12% 0% O'llo O'llo 5% 9 Resk!entlal Vlrl1ble Ch•rve (Distribution) ]'Mo l'Mo 0% 0'M. 4'11, 3'11, 6'11, 6'11, 6'11, 6'11, 6% 10 S'(stem Average Ralte 4'llo •l'll, 0% 0'M. 0"41 9'1!o 7'11, ]'ll, 4'11, 4'11, 6¥. 11 Average Customer Bill (projected) 8% 7'11, ]'ll, ]'ll, ]'M, S'l!o 12 13 [STAlnmG ll&ll!RV!S ]4 Re■pproprtotlons (Non-CIP) 258,000 70,000 41,000 15 Corrmltments (Non-CIP) 177,273 28<1,034 442,000 796,000 444,000 1,766,000 1,766,000 1,766,000 1,766,000 1,766,000 1 ,766,000 16 1 Restricted for Debt Servlc:e 3,260,000 3,260,000 3,260,000 l,260,000 2,906,000 2,906,000 2,906,000 2,906,000 2,906,000 2,906,000 2 ,906,000 17 Eme,vency Plant Replacement 18 ,Re1pproprtot1ons I. Corrmlments 13,266,000 11,326,000 15,090,505 11,036,000 10,147,000 12,168,000 12,168,000 12,168,000 12,168,000 12,168,000 ll,168,000 19 C1p1t11 Reserve 2,726,096 2,726,096 2,726,096 5,726,096 10,707,096 10,707,096 6,961,052 ],087,936 8,533,314 1,861,242 6,846,960 20 "Rate SllbDIUtlon Reserve 4,069,437 4,069,437 4,069,437 9,069,437 9,069,437 9,069,437 6,069,437 3,000,000 3,000,00 0 21 Ope111llons Reserve 12,734,948 13,741,000 12,438,456 13,351,122 13,876,597 13,653,96] 13,028,491 12,581,820 10,526,808 9,384,592 9,479,521 22 Un,sslgned 7,056,052 7,182,707 8,213,544 5,912,761 6,897,289 766,]07 a TOTAi. STAAllNG RESERVES 43,289,806 42,589,274 46,498,038 49,221,417 54,088,419 51,036,80] 42,898,980 35,509,757 38,900,122 2 8,085,835 33,166,481 24 l~ uu 2~ NetS.les 44,078,960 44,134,246 47,136,524 47,434,047 44,058,867 45,905,823 50,434,222 53,248,929 54,545,971 55,921 ,3]8 58,401,634 n Other Revenues 1nd Tr,msrers In •,11&,200 s 121a1,1& J,927,307 J,294,442 219so1s9o 2,769,112 2.!!181952 2,869,954 2,922,100 2,975,459 3 10301015 28 TOTAi. REVENUES 48,195,160 49,353,223 51,063,831 50,728,489 47,009,457 48,674,935 53,253,174 56,118,883 57,468,071 58,896,796 61,431,648 25 10 ECPINSl!S l! W•ter Purcheses 21,957,711 21,210,399 21,773,295 21,935,250 21,248,651 22,682,640 25,349,342 25,982,50] 25,712,717 25,445,898 26,256,379 J2 Operating Expenses j) Administration ;JAi -0,~ -2,809,112 2,626,526 2,79!1,878 3,224,030 3,646,012 3,904,386 4,119,489 4,199,150 4,42/l,70 4,561,605 4,6!lll,45] }~ Rent l,115,114 1,812,5119 l,!104,010 2,1.U,372 2,210,000 2 ,4{16,100 2,526,510 2,652,836 2,132,421 2,8l4,393 2,8!lll,825 ~ OobtSetvb 3,222,66!1 3,220,858 3,220,638 3,222,843 J,2l!l,993 3,222,938 3 ,220,113 3,219,316 3,219,331 2,5153,1583 2,5155,S!lll 11 ».nslln -~ Ad}Usrm...rs l:l:i fiQZ ~11.IZZ fU2£l .Z~Z~i ilZ2QJ i:iZ~ i:ifi .iai i~Hrl ztii.?U zti2 atiZ ZZ~§U lH Subtotlll, Admlnlstrotlon 8,201,161 8,118,304 8,399,539 8,939,890 9,273,908 9,675,564 10,012,473 10,322,592 11,145,705 10,709,549 10,937,540 n Resource M■n■gen.nt 922,558 963,976 1,159,106 1,215,567 1,261,S14 1 ,364,214 1,446,115 1,500,634 1,545,65] 1,592,022 1,639,783 40 Operations ■nd Mtc 5,725,236 5,964,589 7,010,251 7,400,625 7,195,632 7,892,636 8,]65,292 8,682,200 8,942,666 9,210,946 9 ,487,274 4] Engineering (Operating) 354,597 383,877 401 ,902 662,832 492,438 712,557 753,201 784,36:! 807,89] 832,130 857,094 41 customer servtice 1,625,332 1,620,421 1,865,571 2,053,820 2,058,662 2,235,468 2,374,363 2,457,774 2,531,507 2,607,452 2,685,676 43 Alowanc:e: for Unspent Budget !427,929) ,s9&1365) 1631~04) 1656,169) 1675,854) !6961130) 1711,014) 44 Subtotlll, Operating Expenses 16,828,885 16,623,240 18,836,369 20,272,734 20,282,154 21 ,284,074 22,3 19,939 23,091,392 24,297,570 24,255,969 24,890,352 45 C1p1tal Program ContrlbutlonA 8,169,097 11,791,292 3,842,284 4,981,000 10,551,269 9,100,000 9,100,000 9,100,000 11,600,000 9,100,000 9,100,000 46 TOTAL EXPENSES 46,955,693 49,624,930 44,451,948 47,188,984 52,082,074 5],066,714 56,769,282 58,173,896 61,610,287 58,801,867 60,246,731 47 48 lammca....,,.. 49 1te1ppropr11tlon1 (Non-CIP) 258,000 70,000 41,000 so Corrmltments (Non-CIP) 284,034 442,000 796,000 444,000 1,766,000 1,766,000 1,766,000 1,76&~ 1,766,000 1,766,000 1,766,000 51 Restr1d:ed for Debt Service 3 ,260,000 3,260,000 3,260,000 2,906,000 2,906,000 2,906,000 2,906,000 2,906,000 2,906,000 2,906,000 2,906,000 52 Emervency Plant Replacement T 53 1teepproprl1tlons I. COIMitments 11,326,000 15,090,505 11,036,000 10,147,000 12,168,000 12,168,000 12,168,000 12,168,000 12,168,000 12,168,000 12,168,000 54 Capital Reserve 2,726,096 2,726,096 5,726,096 ·10,707,096 10,707,096 6,96 1,052 3,087,936 8,533,31 4 1,861,242 6,846,960 3,490,522 55 Rate Stabllullon ReNrve 4 ,069,4]7 4,069,437 9 ,069,437 9,069,437 9,069,437 6,069,437 3,000,000 3,000,000 S6 Operations Reserve 13,741,000 12,438,456 13,351,122 13,876,597 13,653,963 13,028,491 12,581,820 10,52 6,808 9,384,592 9,479,521 10,664,438 S7 unassigned 7,182,707 8,213,544 5,912,161 6,897,289 766,]07 58 TOTAL ENDING RESERVES 42,589,274 46,498,038 49,221,417 54,088,419 51,036,803 42,898,980 35,509,757 38,900,122 28,085,835 33,166,481 30,994,960 A Otpltaf ~ Ci>ntrll>utlon re,n,sMIS aP /IJndlng tnns"'1rf,d !tom th• Opentlons Raerw lO the CIP Res.,... lle!/lnn"'9 In FY 202J Appendix A (continued) l 2 3 4 Net Sales 91 % 89% 92% 94% 94% 94% 95% 95% 95% 95% 95% s Other Revenues and Transfers In 9 % 11% 8 % 6 % 6 % 6% 5% 5% So/o 5% 5% 6 TOTAL REVENUES 100% 100% 100% 100% 100% 100% 100'11, 100% 100% 100% 10 0% 7 8 IDCPl!NSES 9 water Purthases 47% 43% 49% I 50% 41% 43'11, 45'11, 45% 42% 43% 44% 10 Ope rating Expenses II Admnlstratlon . 12 Allocated a,arge5 6% 5% 6% 7% 7% 7% 7% 7% 7% 8% 8% ~ 13 Rent 4% 4% 4% S% 4% 5% . 4% S% 4'11, ~ 5% S% 14 Debt~ 7 % 6)%. 7% 7% 6% 6% 6% 6% 5% 4 % 4 % 15 Transl'els and Other Adjustments a a a a '22k '22k . '22k '22k a a a 16 Subtota l, Administration 17% 16% 19% 2 0% 18% 18% 18% 18'!1 18% 18'1t, 18% 17 Resource Management 2% + 2% 3 % 3 % 2% 3% 3% 3% 3% 3% 3% 18 Operations and Mtc 12% 12% 16% + 17% 14% 15% 15% 15% 15% 16% 16% 19 Engineering (Operating ) 1 % 1% 1% 1 % 1% 1% T 1% 1% 1% 1% 1 'lll -20 Customer Service 3% 3% 4 % 5% 4 % 4% + 4% 4% 4% 4% 4% Allowance far Unspent Budget • +" 21 0% ·1% 0 % 0 % 0% ·1% ·1% ·1% ·1% ·1 'Yo ·1% 22 Subtotal, Operating Expenses 36% 33% 42% I 4 6% 3 9% 40% 39% 40% 39% 41'11. 41% 23 Capital Program Contribution 17% 24% 9 % 5 % 20% 17% 16% 16% 19% 15% 15'11, 24 TOTAL EXPENSES l00'M. 100% 100o/o 100% 100% l00'M. 10 0 % 100% 100% 100 % 100% 25 26 !RISK ASSESSMENT DETAIL t;PROJECTm! 27 Distribution Revenue Variance 2,524,316 2 ,658,835 2,870,538 3,019,206 3 ,17 5,359 3,338,809 28 Total Risk Asssessment Value 2,524,316 2 ,658,835 2,870,538 3,019,206 3,175,359 3 ,338,809 29 Projected Operations Reserve 13,028,491 12,581,820 10,526,808 9,384,592 9,479,521 10,664,438 30 Operations Reserve,% of Risk Value 516% 473% 367% 311 'M, 299'M, 319% 31 32 loPDAnoNs RDIRVE 33 Min (60 days of non-opttal expenses) 6,375,879 6,219,228 6,675,561 6,938,299 6,826,982 7,227,405 7,836,046 8,066,942 8,220,869 8 ,170,170 8,407,682 34 Target (90 days of non-capital expenses) 10,058,439 9,328,842 10,013,342 10,407,448 10,240,472 10,841,108 11,754,069 12,100,413 12,331,304 12,255,255 12,611,523 35 Max (120 days of non-capital expenses) 13,741,000 12,438,456 13,351,122 13,876,597 13,653,963 14,454,810 15,672,093 16,133,883 16,441,738 16 ,340,340 16,815,364 36 RISk Assessment Value 2,524,316 2,658,835 2,870,5 38 3,019,206 3 ,175,359 3,338,809 37 38 IDEBTSERVICI! COVl!RAGI! RATIO 39 Net Revenues (125% of Debt Service) 1104% 1075% 1161'11. 1210% 1190'!'v 1264o/o 1380% 1424% 1453% 1839% 1894% 40 Available Reserves (Sx Debt Service)• 12.1 13.2 14.0 15.7 14.4 11.9 9 .6 10.6 7.3 11.1 10.3 *For the purposes of debt aM11>ants, the unrestrleted reserves of other utlllt./es may be counttKI toward the available reserves for meeting thlS measure. A 41 ratio below Sx means that this utmty IS relying an the reserves of other ut/1/tles to meet Its debt covenants. WATER UTILITY FINANCIAL PLAN APPENDIX B: WAT ER UT ILI T Y CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL WS-14001 WS-15002 WS-16001 IGRAM WMR • Project 28 WMR • Project 29 WMR • Project 30 WMR • Project 31 .\','t,'IR. ONGOING PROJECTS WS-80014 Services/Hydrants WS-B0015 Water Mete!$ ws-02014 W-<;-W utlRty GIS Data WS-13002 Equipment/Tools WS-11003 Dist. S\15. Improvements WS-11004 Supply Sys. Improvements Ma Id ReseMlir eds CUSTOMER OONNECflONS RJNDED Fundlnl Sources Connection/Capacity Fees Other Utility Funds (Asset Mgmt, GIS SystelTl$1 UtUlty Rates i!lP-RELATED llESERVES DETAIL Reall!Pf'Ol)llatlons & Commitments March 2023 I I I 10,426,270 374,600 . 400,020 348,713 30,000 220,629 999 .q,e,g 6/30/2022 Actual 13,509,489 10,426,270 799,600 400,000 962,820 847,213 80,000 506,529 3,285,900 ,on,011 ,077.011 !!z.,1., 42S,000 400,000 S62,800 498,500 S0,000 285,900 3,285,900 5083100 :::1 u,4n. I 904,600 322,400 U 245700 8,S00,000 425,000 400,000 1,253,146 S13,431 50,000 294,456 345,131 93~000 I 932,000 ~[ 1,100,000 322,640 1 18 544 425,000 4U.000 300,000 S28,BOD 50,000 305,000 715.000 96Di!OO I 960,500 ~I 1,128,500 332,320 835480 4 1 I Page 8,500,000 425,000 424,000 321,000 544,000 50,000 314,000 366,000 019 000 9891000 919,000 u.,»1000 1,140,100 342,286 174S0614 437,000 450,100 340,000 400,000 560,000 S82,400 S0,000 50,000 323,000 332.700 3n,ooo 388,300' 1,152,000 1,186,560 352,533 352,533 3 1167 11~668 WATER UTILITY FINANCIAL PLAN APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Water Utility Financial Plan: Section 1. Definitions a) "Financial Planning Period" -The Financial Planning Period is the range of future fiscal years covered by the Financial Plan. For example, for the Water Utility Financial Plan delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is the Financial Planning Period. b) "Fund Balance" -As used in these Reserves Management Practices, Fund Balance refers to the Utility's Unrestricted Net Assets. c) "Net Assets" -The Government Accounting Standards Board defines a Utility's Net Assets as the difference between its assets and liabilities. d) "Unrestricted Net Assets" -The portion of the Utility's Net Assets not invested in capital assets (net of related debt) or restricted for debt service or other restricted purposes. Section 2. Reserves The Water Utility's Fund Balance is reserved for the following purposes: a) For existing contracts, as described in Section 3 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 4 (Reserve for Re-appropriations) c) For cash flow management and contingencies related to the Water Utility's Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve) d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve) e) For operating contingencies, as described in Section 7 (Operations Reserve) f) Any funds not included in the other reserves will be considered Unassigned Reserves and shall be returned to ratepayers or assigned a specific purpose as described in Section 8 (Unassigned Reserves). Section 3. Reserve for Commitments At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to the total remaining spending authority for all contracts in force for the Water Utility at that time. Section 4. Reserve for Re-appropriations At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re­ appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. Section 5. CIP Reserve The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff will manage the CIP Reserve according to the following practices: M a r c h 2 0 2 3 42 I P a g e WATER UTILITY FINANCIAL PLAN a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period and approved by Council resolution. Minimum level 20% of the maximum CIP Reserve guideline level Maximum Level Average annual (12 month)1° CIP budget, for 48 months of budgeted CIP expenses 11 b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added or removed from to that reserve as a result of a change in contractual commitments related to CIP projects. Any other additions to or withdrawals from the CIP reserve require Council action. c) Minimum Level: If, at the end of any fiscal year, the minimum guideline is not met, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered by the end of the following fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is below its minimum level at the end of FY 2017, staff must present a plan by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve, or that does so in a shorter period of time. d) Maximum Level: If there are funds in this reserve in excess of the maximum level staff must propose in the next Financial Plan to transfer these funds to another reserve, return the funds to ratepayers, or designate a specific use of the funds for CIP investments that will be made by the end of the next Financial Planning Period. Staff may also seek City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Section 6. Rate Stabilization Reserve Funds may be added to the Rate Stabilization Reserve by action of the City Council and held to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the next Financial Planning Period. The Council may approve exceptions to this requirement, when proposed by staff to provide greater rate stabilization to customers. 10 Each month is calculated based upon 1/12 of the annual budget. 11 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use to derive the annual average would be FY 2022 through FY 2025 etc. M a r c h 2 O 2 3 43 I P a g e WATER UTILITY FINANCIAL PLAN Section 7. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Water Utility's Fund Balance not included in the reserves described in Section 3-Section 6 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage the Operations Reserve according to the following practices: a) The following guideline levels are set forth for the _Operations Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of Operations and Maintenance (O&M) and commodity expense forecasted for that year in the Financial Plan. Minimum Level 60 days of O&M and commodity expense Target Level 90 days of O&M and commodity expense Maximum Level 120 days of O&M and commodity expense b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations Reserve are lower than the minimum level set forth above, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered within six months of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the following fiscal year. For example, if the Operations Reserve is below its minimum level at the end of FY 2014, staff must present a plan by December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In additibn, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve. c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower than the target level, any Financial Plan created for the Water Utility shall be designed to return the Operations Reserve to its target level within four years. d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no funds may be added to this reserve. Any further increase in the Water Utility's Fund Balance shall be automatically included in the Unassigned Reserve described in Section 8, below. Section 8. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Water Utility's Fund Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to assign them to a specific purpose or return them to the Water Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period. For example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY 2021, the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds or returns them over a longer period of time. March 2023 44 I P age WATER UTILITY FINANCIAL PLAN APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES This appendix describes the activities associated with the various operational activities referred to in Section 68: Operations of this Financial Plan. Administration: Accounting, purchasing, legal, and other administrative functions provided by the City's General Fund staff, as well as shared communications services, CPAU administrative overhead, and billing system maintenance costs. This category also includes Water Utility debt service and rent paid to the General Fund for the land associated with reservoirs and various other facilities. Customer Service: This category includes the Water Utility's share of the call center, meter reading, collections, and billing support functions. Billing support encompasses staff time associated with bill investigations and quality control on certain aspects of the billing process. It does not include maintenance of the billing system itself, which is included in Administration . This category also includes CPAU's key account representatives, who work with large commercial customers who have more complex requirements for their water services. Engineering (Operating): The Water Utility's engineers focus primarily on the CIP, but a small portion of their time is spent assisting with distribution system maintenance. Operations and Maintenance: This category includes the costs of a variety of distribution system maintenance activities, including: • investigating reports of damaged mains or services and performing emergency repairs; • testing and operating valves; • monitoring water quality and reservoir levels; • monitoring the status of the different pressure zones; • flushing water at hydrants and other closed end points of the system; • building and replacing water services for new or redeveloped buildings; and • testing and replacing meters to ensure accurate sales metering. This category also includes a variety of functions the utility shares with other City utilities, including: • the Field Services team (which does field research of various customer service issues); • the Cathodic Protection team (which monitors and maintains the systems that prevent corrosion in metal tanks and reservoirs); and • the General Services team (which manages and maintains equipment, paves and restores streets after gas, water, or sewer main replacements, and provides welding services) Resource Management: This category includes water procurement, contract management, water resource planning, interaction with BAWSCA, the SFPUC, and Valley Water, and tracking of legislation and regulation related to the water industry. March 2023 4 5 I Page APPENDIX E: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS IYmpla and Substantfl,e Waysto&n.Watarandl.owatoYDurBU1 o.--..s-i .-.s,..,. _ _.,..,. ...... _ ---""'···· __,.._ ....... Gia __ • ., SJ a ~• ,,_,. .. _._....,_..,..._,~ ---...-----· -.--- THE S1MPL ~ TASKS_. ,> · --.,.... ....... _____ ... _ ______ .. .,. ______ ____ - --- THE EASY FIXES: , ·~ ........ ~~.-...!!!~,,... ••11n n1-1....,w11111_.,.....,..-. .. -....-~---.--• ----• • u.,. ____ .., __ My - THI! ■IGOER 10£!.AS; · • ··------o.o.a.Q ·---..... ---........ -·------•---Q a-­And...,.•••,.....tipa • ----·----------......,. __ _ ,_,_ ... __.-« .. llli'P rte ,~ ..... -=--. .:=':.!::::===---:=:::~ ...... ~ .......... ._..._-..ia. t r •r,-4_,..~._____,_, _____ _ ...... .. ....................... ................................................................. ----.. -------·, .............. March 2023 ........,CANHIU''l'Olfl .. Boll_ .......... ,.... ......... __ ~~ ........ . ~-,_ ______ .....,,... ... __,... ·----............. ...,_,...._. __ ....._ . ___ ,__.,.... ___ _ on 5TARt110 VJTTH YIAflRSMAAT. """'c•~_,,.___,,_ .. .,_ ,.... •t,CNU--. -__.,,._ ~ ~ ...-_ .. ______ ,_..._, flUl'MVINGIWQDMD ...... ""'"w.tfasMun ........ a. ......... WI: 'lllaOt., .... A&o ... -,-~-a-...-. ~ .... -~--....... -.....,,. .. ~ --.----••t ~ ........... ,... ...... -..... --...,_..,_.,.... ___ _ ......... _ _.,..,.. ___ ...._ ··--.,.......-.nur.-c-t_._ ____ ,,.,...,__ ·-----.-• c:mna ...... ................ __ ,__...., __ . ....,_ .. _____ IU!f_ .... ___ ..___.,)OII.,.... ,..,now...,...,..,.,,.. .._,t.lD ,,__ ... ...,.........,._ ... _ _., .... ____ ,..__., .... _ .. fO LIA_,..,. MO•I 'llt,Cf, • ,1 ~ ■ • • • ~ ... ' •• .-,:- Jlflil 1h UPALO ALTO 461 Page UAC MEETING [!] March 01, 2023 2 0 Received Before Meeting Staff: Lisa Bilir and Eric Wong {J .. • CITY OF PALO ALTO www.cityofpaloalto.org ,A.CITY OF VPALO ALTO ,.· .... , ~ ..... -: ------· ·---· t :·, .. C:, , ·~ ~ , ' " , ~ .) I nwc ,., EE' Tl.t -.''l l . • • V r.., --"'-l'I ...,. -.--• ' '€ •i Cost structure and drivers •· Overview and bill impacts of rate proposal • · -Projections of costs, revenue, and reserves ;"r.-. .,_ ~ • Bill compariso Qs:to neighboring utilities •"~Recommendation !, ) WATER UTILITY COST STRUCTURE (FY 2024) Supply $21.6 million 43% Cost to bring water to Palo Alto Ac1Tv OF VPALOALTO' ................. _, .... .,., ...... -, ...................... , .. ....... ""., ...... ..,.. __ ,:--,;::t:>":>":,":m~l ................................... , ... · -~~~~~~!~[~?~~!~: , ..• , .......... ,.~ ........ ..,. ..... , ...... ,.,."' .......................... ... -~!)~i~!i!i~$~;$!ti~~: ............................... .-'\. .............. .... '.~~~~~$~~$S~~5~~~~~~~~ ~ ,.._.. .............................. ,-"11,,t,,o'\,o ... . . ~..-.... _..,._,.~•b ..... ., ... ...,..~I . .. , .................................... ,~--.~-,- f>~~>~i,$~;;~%~½~~% ~t1~!~~~$~i:2~~%~t~%: ~;.)_.i';::~-:;-l';'l-;.);~:.~;>~.,.::~.,i'~' ~~~~~~~~~<~(:m~~-' ,.,)_. ..... ~~----~-,":.-;r;."};:r~ ..... .. , ........................... -.,.....;,~ ........ . :;~~~=::~~~s}~~m~1~· · ■ Debt Service ■ Capital t;1 Operations ~ Water Supply Distribution $28.4 million 57% Cost to distribute water within Palo Alto, including: maintaining and replacing water infrastructure, customer service, billing, administration, etc. ,ActTY OF VPALOALTO WATER OPERATIONS & CAPITAL COST DRIVERS Operating • Salary & benefit costs continue to increase • Drought water sales reductions Capital • Construction costs have not declined • Large one-time costs for reservoir rehabilitation ,AclTY OF WPA_LO ALTO WATER SUPPLY COST DRIVERS • Water Supply Rate Increase Projection 10.5% in FY 2024 • Primary Driver is Drought Reductions in Water Use • Water System Improvement Program (WSIP) • 2002: advocacy by wholesale customers results in AB 1823 requiring SFPUC to adopt and implement the WSIP • In 2010 construction began -$4.8B, one of the largest water projects in the nation • Level of service goal: return to service in 24 hours after an earthquake ftcnv OF V'PALOALTO WATER SUPPLY COST DRIVERS • WSIP spending 99% complete as of September 2022; bond financing continues to drive wholesale rates up • "Upcountry" system in the Sierras still needs work. • Wholesale customers (via BAWSCA) advocating for improvements in long-term capital planning • Necessary and improves reliability, but supply costs will increase in the future as a result V Palo Alto annual savings estimated at $0.57M from BAWSCA's bond refunding at all-in true interest rate of 2.06% 6 Ac1rv OF VPALO ALTO WATER RATE PROPOSAL FY 2024: 7% Overall Rate Increase • FY 2024 5% distribution rate increase & 11% SFPUC commodity rate increase • FY 2022 year-end Operations Reserve at maximum guideline levels • FY 2023 8% voluntary conservation, FY 2024 slow recovery, some permanent conservation • Future rate projections 3-4% annually FY 2025-2028 • Use of CIP Reserve & Rate Stabilization Reserve to mitigate rate increases WATER COST AND REVENUE PROJECTIONS $70 3% 3% 4% Rate Changes -.~-- 4'I $60 g I ... ,Ql 1% 0% ,-, ~ p:·1 1-I F l □capital• § $50 ' 2 $40 lJ;:~U u u LJLJ L □Operations $30 &Wate r Supply $20 •Debt Service $10 111 fl II WI 1111 II II ll II Iii II -Revenue $0 co Cl'I 0 .-4 N l'l'I ~ 11'1 U) ..... 00 .-4 .-4 N N s N N N N N N 0 0 0 ~ 0 0 0 0 0 0 N N N N N N N N N N ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ Actuals Projected • * Includes changes due to commitments/reappropriat ions and funds transferred to the CIP Reserve CI T Y OF PALO ALTO WATER OPERATIONS RESERVE PROJECTIONS • C llY O F PALO ALTO· $18 ...... ·-·-·····················-····--··-•···-·-·········-·-·-····-·-·-····-····-····--····-·-····-·-·-· $16 ----------------...... ---···------·----------■ -Reserve $14 $12 -• M . rn/M .. --·-·-·-···--·-·-·---=·:.-':":" .. :":"! •• :...~ -.-:-•• ~---······-··-ax1mu 1mmum _~ ... -~ ----,_. -- $10 -+--····-·-·······-·········--·············-·············-······-·-··-·-·-·········-· . "' g $8 i $6 ------------------------------------------- - $4 --t-·······················--·············-··· ••••• -··-··,--•·-··~··-··-··---··_. .. $2 --t-·--·····-········· •.....••. -····-·········· ~--····-·-·--. •·••·-·············-···-··· -. ·- $0 -t----~--~--.......----r----.----.------, FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Actual Projected - -Reserve Target -Reserve (Year-End) -Risk Assessment WATER CIP RESERVE PROJECTIONS • C H Y O F PALO ALTO 14 -------------··-····--------····--·---------·-·-·-·-·-·-·---·-···--·---·-··-······-··· 12 10 -,en. - 8 -+•-"' C 0 = 6 ~ 4 l -- 2 Q l vvo FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 ~Capital Reserve Ending Balance -Min/Max Guideline ESTIMATED RESIDENTIAL BILL CHANGES Usage (CCF/mo.) 4 (Winter median) 7 (Annual median) 9 (Summer median) 14 25 • CITY OF PALO ALTO Bill under Current Bill under Proposed Rates (7/1/2022) Rates (7/1/2023) $50.74 $54.36 $76.54 $82.26 $98.46 $105.82 $153 .26 $164.72 $273.82 $294.30 Change $/mo. " $3.62 7% $5.72 7% $7.36 7% $11.46 7% $20.48 7% 11 ESTIMATED ·COMMERCIAL BILL CHANGES • CITY OF PALO ALTO Usage (CCF/mo.) Bill under Current Rates (7/1/2022) Commercial (W-4) (S/sn meters) (Annual median) 12 $120.54 (Annual average) 64 $563.06 Irrigation (W-7) (1 ¼" meters) (Winter median) 9 $162 .25 (Summer median) 37 $455 .41 (Winter average) 56 $654 .34 (Summer average} 199 $2,151.55 Bill under Proposed Rates (7/1/2023) $129.75 $608.15 $172.77 $488.05 $701.99 $2,312.17 Change $/mo. " $9.21 8% $45.09 8% $10.52 6% $32.64 7% $47.65 7% $160.62 7% MONTHLY WATER BILL COMPARISON Single-Family Residential 250 -200 ~ -ell = 150 cc > -S 100 C: 0 ~ 50 ,Acnv OF ¥PALO ALTO Pal o Alto is 14% a bove comparison city avera ge Palo Alto Redwood City Menlo Park Mountain Havward Santa Clara (Cal Water) View •Low (4 CCF) •Med (8 CCF) •High (18 CCF) -Average at 8 CCF Bold indicates 100% of Water Supply from SFPUC MONTHLY WATER BILL COMPARISON 3500 3000 • . lo.Alto is 5% above Com merc1a I comParison city average -~ 2500 ___ __, iii 2000 > L: 1500 +-' ~ 1000 500 0 Palo Alto Redwood City Menlo Park (Cal Water) Mountain View Hayward Santa Clara •12CCF •64CCF •300CCF -Average at 64 CCF Bold indicates 100% of Water Supply from SFPUC Ac 1rv oF VPALOALTO ft cJTY OF V PALOALTO RECOMMENDATION Staff requests that the Utilities Advisory Commission (UAC) recommend that the Finance Committee Recommend that the City Council: 1. Adopt a resolution approving: a. FY 2024 Water Utility Financial Plan b. Up to a $3.746 million transfer from the Capital Improvement Projects Reserve to the Operations Reserve in FY 2023 c. Up to a $3.0 million transfer from the Rate Stabilization Reserve in FY 2023 c. Increasing Water Utility Rates Via the Amendment of Rate Schedules W-1, W-2, W-3, W-4, and W-7 15 n ~'"' 1 • "' • " \ \ ; ..-" • 1 ~ ;" It • • ~ F { I A . .. ~ " I {. • "' < • ,. • . ... ~ • < • • ., '\, ., • l/ • T ' . t ' " • '"· ' ~ • ,.. ,-. , r ' ' N ' ' , '· • ,, • ., + ) , I\ l • ' ' ' - 1.l J (' a -- ' ' 'l IL .. ' ,J , I. ' ,. t ,, ,. ~"' ► t!" ' .'</.'-~ , 1 ' r ~ ,. (• J -, o, ' > ?) _. • C: ' ' ,, ~ ~ t ~ (,. • .. ' ., ..., :- ' , ~ ., . ' '"'' ,, ~ ... , • T ) ~ ' ~ '(. • r ... • !,. -! CI TY O F PALO A LTO TITLE UAC MEETING rn March 01, 2023 3 0 Received Before Meeting Staff: Jonathan Abendschein Utilities Advisory Commission Staff Report From: Dean Batchelor, Director Utilities Lead Department: Utilities Meeting Date: March 1, 2023 Staff Recommends That the Utilities Advisory Commission Recommend that the Finance Committee recommend that the City Council Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including the Proposed Reserve and General Fund Transfers, and 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) RECOMMENDATION Staff requests that the Utilities Advisory Commission (UAC) recommend that the Finance Committee recommend that Council adopt a resolution (Attachment A): a. Approving the fiscal year (FY) 2024 Gas Utility Financial Plan (Linked Document ); and b. Amending the Gas Utility Reserve Management Practices (Attachment B) c. Transferring up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund in FY 2023; d. Transferring up to _% of gas utility gross revenues received during fiscal year 2022 to the general fund in FY 2024; e. Transferring up to $3.82 million from the CIP Reserve to the Operations Reserve in FY 2023;and f . 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 C). Staff is seeking UAC and Finance Committee feedback on item (d) above before sending a final recommendation to Council, and has provided two general fund transfer alternatives which comply with the voter-approved Measure L. EXECUTIVE SUMMARY The FY 2024 Gas Utility Financial Plan includes projections of the utility's costs and revenues for FY 2023 through FY 2028. Gas utility costs are made up of supply-related costs (60 percent of costs in FY 2023), which are collected through a supply rate that varies monthly, and distribution­ related costs (40 percent of costs in FY 2023), which are collected through a distribution rate that Item No. {{item.number}}. Page 1 of 15 is typically adjusted annually. Distribution rates last increased on July 1, 2022, which resulted in a roughl y 3 percent increase in the total system average gas rate (the supply rates plus the di stribution rates). Gas market prices rose to unprecedented levels in FY 2023, leading to far higher gas costs than are projected for FY 2024 through FY 2028. Staff is proposing to increase the distribution component of the gas rates in FY 2024 to ensure the utility is recovering its costs of operations. Revenues were already below costs after keeping rate increases low through the pandemic, but construction inflation and other factors have driven costs up. The distribution rate increase is projected to i ncrease overall customer bills approximately 8% if supply costs remain the same in FY 2024 as they were in FY 2023, though staff does not expect this. This 8% increase in customer bills results from increasing the distribution component of the rates 21% to fully recover di stribution costs and avoid decreasing reserves further. Even with this distribution rate increase, staff expects average annual customer gas bills to decline 13% in FY 2024 compared to FY 2023 because gas supply costs were extremely high in FY 2023,. particularly in the winter. FY 2024 annua l gas supply ·costs are forecasted to be about 36% lower than FY 2023. Gas market prices are uncertain, however, and these forecasts can change. The distribution rate increase i s driven by two things: 1) the need to replenish reserves, which were depleted by significant losses due to FY 2023 commodity costs that were not be fully passed through to customers under the Ci ty's commodity rate cap of $4 per therm, and 2) continuing increases in capital and operating costs. Distribution rates have not kept up with these increased costs in past years as the City has minimized gas rate increases to minimize impacts to the community during the economic downturn associated with the COVID-19 pandemi c. The gas utility's transfer to the City's General Fund is another component of the Ci ty's gas rates. City voters first authorized the transfer in 1950, and in November 2022 voters approved Measure L, affirming the continuation of this practice by add ing section 2.28.185 to the Municipal Code. Each year the City Counci l may transfer from the gas utili ty to the general fund an amount up to 18% of the gross revenues of the gas uti lity, 1 though Council may choose to transfer a lesser amount. Staff is seeking UAC and Finance Committee feedback on the amount of the FY 2024 transfer before sending a final recommendation to Council. Two alternatives and their associated rate increases are shown in the section below titled "Alternative Gas Increase Plans ." All post-FY 2023 rate and cost discussions in this staff report are based on Alternative 2, which involves transferring up to 18% of gas utility gross revenues i n FY 2023, and projects 15 .5% in FY 2024. BACKGROUND Every year staff presents the UAC with Financial Plans for its Electric, Water, Gas, and Wastewater Collection Utilities and recommends any rate adjustments required to mainta i n thei r fi nancial 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 1 18% of the gross revenues of the gas utility received "duri ng the fisc al y ear two fi sca l years before the fiscal year of the transfer." (Pa lo Alto Municipal Code Section 2 .28.185). Item No. {{item.number}}. Page 2 of 15 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 and Canada. The City 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 are divided into two main categories: gas supply costs and gas distribution costs. Supply costs include the cost of the gas itself, the cost of transmitting the gas to Palo Alto, and environmental costs2 and distribution costs include the costs of operating the distribution system. As noted above, gas supply costs are passed through to customers through four gas supply rate components. The commodity rate is the largest gas supply rate component and it varies monthly, while transportation and environmental pass-through rates change less frequently. DISCUSSION Staff's annual assessment of the financial position of the City's gas utility is completed to ensure adequate revenue to fund operations, including reserves, 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. Prop osed Actions for FY2023 and FY 2024: The FY 2024 Gas Utility Financial Plan includes the following proposed actions: a. Approve the FY 2024 Gas Utility Financial Plan (Linked Document); and b. Amend the Gas Utility Reserve Management Practices (Attachment B); and c. Transferring up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund in FY 2023; d. Transferring up to _% of gas utility gross revenues received during fiscal year 2022 to the general fund in FY 2024; e. Transfer up to $3.82 million from the CIP Reserve to the Operations Reserve in FY 2023; and f. Amend gas rate schedules (Attachment C) to increase distribution rates by 21.4 percent, (for an estimated 8 percent increase to total rates in FY 2024). These proposed actions are descri bed in more detail below and in the FY 2024 Gas Financial Plan (Linked Document). Staff is seeking UAC and Finance Comm ittee feedback on the General Fund transfer in item (d) above before sending a final recommendation to Council and has provided two alternatives for determining the amount of the transfer, both of which comply with the 2 These are the costs of complying with the State's Cap and Trade regulati ons and procuring offsets under the City's Carbon Neutra l Gas program. Item No . {{item.number}}. Page 3 of 15 voter~approved Measure L. Both options are described in the section below titled "Alternative Gas Increase Plans." Overview of Cost and Rate Projections and Drivers The Financial Plan projects overall gas costs to increase from FY 2022 actuals through FY 2028 at about 5.1% per year on average. Although it is not possible to precisely predict commodity rates, staff monitors market prices monthly and automatically incorporates market prices into monthly supply rate adjustments, which are passed directly to customers as a line item on their utility bills. Staff projects commodity prices to decline in FY 2024. Beyond FY 2024 the forecast assumes (consistent with current gas market forecasts from various sources, including forward gas contracts on exchanges, forecasts from suppliers, and the Federal Energy Information Administration) overall supply costs will increase gradually from FY 2025 through FY 2028, remaining higher than historical gas prices. Total gas supply costs (which include gas commodity, transportation, and environmental charges) were $0.4 per therm to $0.6 per therm before FY 2022, but are projected to be between $1 .0 per therm and $1.3 per therm for the rest of the forecast period. This is partially due to projected increases in environmental and transportation charges, but also higher projected western gas prices going forward. However, gas commodity prices are highly variable, and weather or economic factors could shift this forecast rapidly, in which case any savings or additional costs would be passed through to customers via the monthly varying commodity rate adjuster. The gas utility last increased distribution rates on July 1, 2022, which resulted in about a 3% increase in the total system average gas rate (the supply rate plus the distribution rate). This Financial Plan includes an increase in distribution rates effective July 1, 2023 that will result in about an 8% increase to the total system average gas rate if supply costs remain the same in FY 2024 as they were in FY 2023, though staff does not expect this. This 8% increase in customer bills results from increasing the distribution component of the rates 21% to fully recover distribution costs and avoid decreasing reserves further. This Financial Plan includes additional 5-7% increases to the total system average gas rate annually over the subsequent four years. The unprecedented and extremely high gas prices in FY 2023 impacted the gas utility's reserves significantly, and very high double-digit rate increases in the total system average gas rate would be required to return the Operations Reserve to a level within guidelines. Due to the market price dynamics described above and commodity rate cap limits, the utility did not recover the full supply purchase costs from customers. Specifically, the commodity rate limit was $4/therm in January, but about 50% of the City's gas was purchased at $5/therm, leading to significant additional costs being absorbed from the OperaUons Reserve instead of being passed through to customers. The rate increases in the attached Financial Plan partially replenish the gas utility's reserves over the next several years. However, Staff is also proposing to allow the Gas Operations Reserve to be below the risk assessment levels for two fiscal years (FY 2024 and FY 2025) and below the minimum guideline for three fiscal years (FY 2024 through FY 2026) to mitigate required rate increases. The Gas Utility Reserves Management Pract i ces (Attachment B) require returning Item No. {{item .number}}. Page 4 of 15 reserves to within minimum guidelines (60 days of O&M and commodity expense) within one year unless an alternative plan is approved by Council. $30 $25 $20 'iii II: .S! 5 $15 ~ - $10 $5 Figure 1: Operations Reserve Projection '-------~----------- $0 -I---~--~--~-----.--~.----,--------, FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 -Reserve (Vear-~nd) -Reserv~ Maxli:num - -Reserve Target -Reserve Minimum -Risk Assessment In addition to replenishing gas utility reserves, distribution rate increases are needed to pay for increasing operations costs and Capital Improvement Project (CIP) expenditures in the distribution system. Distribution system operations costs are increasing primarily due to salary and benefit increases both in the gas utility and for administrative functions provided by the City's General Fund staff. The priority for the City's gas utility is operating the system safely, which requires the replacement of higher risk PVC and steel mains on a reasonable timeline. The cost of gas main replacement continues to rise. For this reason, failing to increase the gas main replacement program budget steadily would result in a reduction of the rate of main replacement over time. This Financial Plan addresses these challenges in a way that will allow CPAU to meet its main replacement needs by increasing the main replacement budget beginning in FY 2025 and including a 3% annual construction inflationary increase thereafter. Staff is also controlling costs by applying for grant funding for the upcoming main replacement project and is currently awaiting a response regarding a Natural Gas Distribution Infrastructure Safety and Modernization grant opportunity. In addition, with the ongoing discussions and direction from City Council related to electrification of homes and neighborhoods throughout the City and transitioning away from natural gas, the City may be able to retire some PVC and steel mains through aggressive electrification in neighborhoods with these types of mains. Staff is working to develop an efficient phasing plan for electrification and the scaling back of the gas infrastructure. The City's natural gas rates are based on the 2019 Natural Gas Cost of Service and Rates Study, updated with current and proposed operating costs. During the COVID-19 pandemic, usage amongst customer classes dropped to reflect people working and staying at home rather than going to the workplace. Similarly, businesses operated at minimum staffing conditions or fully Item No. {{item.number}}. Page S of 1S remote. Cost projections for CIP and operation of the distributi on system as well as supply costs are increasing. The overall rate changes (gas supply plus distribution) referenced in this report are based on current gas market forecasts that indicate that the commodity portion of the overall rate i s unlikely to continue increasing at the unprecedented level observed in FY 2023. Current gas market forward prices indicate that average annual commodity costs are likely to decline 36% FY 2024 from FY 2023. This is consistent with current gas market forecasts from various sources, including forward gas contracts on exchanges and forecasts from suppliers, but staff cauti ons that these forecasts can change rapidly due to changi ng weather, economic factors, or gas supply constraints. Staff recommends increasing the distributi on component of the rates by 21.4%, which equates to an 8% increase to total rates, if commodity rates remain unchanged from FY 2023 (whi ch, as noted above, staff does not project to be the case). Table 3 below shows both the proposed increase in distribution rates (about 21%) and the net impact on rates including commodity costs (about 8% overall, as distribution is about 40% of total rate revenue in FY 2023). From FY 2023 to FY 2024, the distribution portion of customer gas bills will increase 8%, and the commodity portion of the bill is projected to decline 22%. The result is that customers should see a 13% overall decrease in their bills in FY 2024 over the prior year, if, as forecasted above, commodity rates drop 36% from FY 2023 to FY 2024. Table 3: Revenue and Rate Revenue Changes by Customer Class Cost of Service Analysis Proposed Distribution Assumed Commodity Net Change for FY 2024 Rate Increase Rate Change Combined Commodity and Distribution Rate Gl -Resi dential G2 • Small Commercial 21% -36% -13% G3 -Large Commercial Total* * CPAU al so has a G-10 Compressed Natural Gas Rate Schedule that currently does not have any customers but is retained for potential future use. Figure 2 below shows the primary drivers for the proposed rate change, which are split between increasing operati ng and capital improvement expenses and replenishing reserves to work towards bringing reserves back to within guideline levels for the Operations Reserve set forth in the Reserve Management Practices (Attachment B). The attached FY 2024 Gas Financial Plan provi des more detailed discussion. Item No. {{item.number}}. Page 6 of 15 Proposed Gas Rates Figure 2: Allocation of 21% Distribution Rate increase ■ CIP Investment Increase ■ O&M Expense Increase ■ Replenish Reserves Staff proposes to adjust gas rates as shown in Table 4 and Table 5 below, effect ive July 1, 2023. These changes are projected to increase distribution rates by 21.4% resulting in a total system average gas rate (total of supply and distribution) by roughly 8 percent for all classes. These rate changes are included in the proposed amended rate schedules in (Attachment B). Table 4: Current and Proposed Monthly Service Charges Rate Schedule Current Proposed for Change($) Change(%) (as of 1/1/23) FY2024 G-1 (Residential) $11.54 $14.01 $ 2.47 21 .4% G-2 (Small Commercial) 106.90 129.78 22 .88 21 .4% G-3 (Large Commercial) 489.12 593.79 104.67 21 .4% G-10 (CNG) 72.30 87.77 15.47 21 .4% Table 5: Current and Proposed Gas Distribution Charges Current Proposed Change($) Change(%) (as of 1/1/23) for FY 2024 G-1 (Residential) Tier 1 Rates $ 0.5607 $ 0.6807 $ 0.1200 21.4% Tier 2 Rates 1.4338 1.7406 0.3068 21.4% G-2 (Residential Master-Metered and Small Commercial) Uniform Rate 0.7365 0.8941 0.1576 21.4% G-3 (Large Commercial) Uniform Rate 0.7292 0.8852 0.1560 21.4% G-10 (CNG) Uniform Rate 0.0120 0 .0145 0 .0025 20.8%* *Adjusted downward due to rounding Bill Imp act of Pro posed Rate Changes Item No. {{item.number}}. Page 7 of 15 Table 6 shows the impact of the proposed July 1, 2023 rate changes on the median residential bill for representative average winter and summer bills, with average winter bills forecasted to be significantly lower and summer bills higher. The average annual gas bill for the median residential customer is projected to be 13% lower in FY 2024 than FY 2023. However, since customer gas usage varies and the price of commodities changes monthly, the actual change may vary. Table 6 shows a representative winter period (November thru March) and summer period (April through October) bill comparison. Table 6: Impact of Proposed Gas Rate Changes on Residential Bills Usage (Therms/month) Bill under Current Rates Bill under Proposed Rates Change $/mo. % Winter Commodity Average Actual Average Forecast I Prices based on: Commodity Cost Nov. Commodity Cost Nov. I) 2022 -Jan. 2023 2023 -Jan. 2024 30 $ 98.98 $ 66.53 ${32.45) -33% 54 (median) 168.93 108.54 (60.39) -36% 80 262.18 175.25 (86.92) -33% 150 527.32 371.99 (155.34) -29% Summer (Based on May 2022 Commodity Prices) 10 $ 27.41 $ 31.08 $ 3 .67 13% 18 (median) 40.11 44.74 4.63 12% 30 67.89 75.83 7.94 12% 45 104.80 117.34 12.54 12% Table 7 shows the impact of the proposed July 1, 2023 rate changes on various representative commercial customer bills. The overall increases for the G-2 and G-3 classes are projected to be about -13% on an annual basis, assuming gas commodity prices decline as described above. Table 7: Impact of Proposed Gas Rate Changes on Commercial Bills 3 Usage Bill under Bill under Change (Therms/month) Current Rates Proposed Rates % 500 $ 1,282 $ 1,146 -11% 5,000 11,855 10,295 -13% 10,000 23,604 20,460 -13% 50,000 117,609 101,802 -13% FY 2024 Financial Plan's Projected Rate Adjustments for the Next Five Fiscal Years Table 8 shows the projected rate adjustments over the next five years and thei r impact on the annual median residential gas bill (54 therms per month i n winter, 18 therms per month in summer). 1 Commodity prices for bills under current rates are based on the average actua l commodity prices from July 2022 through February 2023 and projections for March 2023 to June 2023 . Commod ity prices for bills under the proposed rates are based on staffs forecast for July 2023 through June 2024. Item No. {{item.number}}. Page 8 of 15 Table 8: Projected Distribution Rate Adjustments, FY 2024 to FY 2028 FY 2024 FY 2025 FYZ0Z6 FY2027 FY 2028 Gas Utility 8% 7% 5% 5% 5% Estimated Residential Bill Impact ($/mo}* $ 6 .43 $ 4.34 $ 3.10 $ 3.30 $ 3.49 * Estimated impact of distribution rate increases on median residential gas bill, which is currently $64.14 for FY 2023, assuming commodity rates are static. Reserve Transfers Table 9 below shows the reserve transfers from FY 2023 and projected through FY 2028. Table 9: Operations, Rate Stabilization and CIP Reserve Starting and Ending Balances, Revenues, Transfers To/(From) Reserves, Capital Program Contribution To/(From) Reserves, and Reserve Guideline Levels for FY 2023 to FY 2028 ($000) FY 2023 FY2024 FY 202S FY2026 FY2027 FY2028 Starting Reserve Balances 1 Operations Reserve• 11,300 3,666 4,169 3,983 8,536 13,10 1 2 CIP Reserve 3,820 -. . 3 Cao and Trade Reserve 6,732 8,834 11,908 15,395 19,294 23,623 4 Debt Service Reserve 434 434 434 434 . . Revenues s Total Revenues 70,468 63,223 65,479 68,993 72,516 76,622 6 Cap and Trade 2,102 3,074 3,487 3,898 4,329 4,776 Transfers 7 Ooerations Reserve• 1,718 (3,074) 13,487) r-----( 3.1.461) (4,3291 (4,776) 8 CIP Reserve (t.S~C?) ---. 9 Cap and Trade Reserve 2,102 3,074 3,487 3,898 4,329 4,776 10 Debt Service Reserve (434) Expenses 11 Total Non-CIP Expenses (71,704) (55,684) (SS,3181 (57,374) (57,800) (59,122 } 12 Planned Distribution CIP (10,217) (7,036) (10,3471 (7,500) (10,150) (11,818) Ending Reserve Balances 1+5+6+7+11+12 Operations Reserve• 3,666 4,169 3,983 8,536 13,101 18,784 2+8 CIP Reserve ---. . 3+9 Cap and Trade 8,834 11,908 15,395 19,294 23,623 28,398 4+10 Debt Service Reserve 434 434 434 . . . Operations Reserve Guidelines 13 Minimum 13,394 10,044 10,05S 10,450 10,575 11,504 14 Maximum 26,788 20,089 20,111 20,900 21,151 23,008 CIP Reserve Guidelines 15 Minimum 10,217 7,036 10,347 7,500 10,150 11,818 16 Maximum 17,253 17,383 17,847 17,650 21,968 26,261 *Operations Reserve represents the Gas Supply Fund Rate Stabilization Reserve and the Gas Distribution Fund Operations Reserve combined. Item No. {{item.number}}. Page 9 of 15 Cost Trends Figure 3 below illustrates the projected l ong run changes in the Gas Utility's costs. Cost increases over the FY 2019 to FY 2028 time period are mainly from supply costs, followed by operations and cap ital expenses. 80 . .,.,0 'iii C: .60 ,,g 50 I t 40 Yl- 30 29 10 Figure 3: FY 2019, FY 2024 and FY 2028 Cost Trends Ahnuitllzed l!jcnias.e, W19-FY24: 4 Supply,, l'np,~~o,n;" Er1il1roi'm'iefltlif: Eilvi • . .. -· Capital; ~r Operations: SUP,P.ilf, ~~ts.st~n . J tiVlrQnmentl!l: •1~/v,A Cepi~I .. 1,1.'6/~ ~ ra. tklns:• . .. ' . r '. S.9'.ivr FVio19 FY..202~ (Projecte(J)« 1FY 202_8 (Pi'oje~).., iGas s~pply, E'rivtronmentill, aod ::rr~nsniission Cdsts l!IClpJt_al t,ovestment •• ■ Gas ot,aratlans ,, F,oree,as.f i!I on~rtaln and will IIO,Y with th,! mprlrets .., P.ro];cted <JP.:.ls an tlVeryge ~f.!'Mi ~rs illlf! to ~t!gg~re,J mblirreplace1r1eilt schetlv/e Figure 3 shows total gas supply costs, including commodity and transm ission and environmental costs. Together these supply costs increased by 13% annua lly on average from FY 2019 to FY 2024. Gas commodity costs, a component of the supply costs in Figure 3, are the most variable component and represent the largest jump i n costs from FY 2022 to FY 2023. Staff projects commodity costs to approximately double from FY 2022 to FY 2023 and then de cl ine by FY 2024 (consistent with current gas market forecasts from various sources, including forward gas contracts on exchanges, forecasts from suppliers, and the Federal Energy Information Administration). For the remainder of the five-year forecast period from FY 2024 through FY 2028, these forecasts show gas market prices per therm expected to decrease gradually, though longer-term projections are even more uncerta in. Despite the projected gradual increase in FY 2024 -FY 2028 in gas market cost estimates, there are several smaller components of supply costs that are expected to increase significantly during that time period, leading to an overall gradual increase in total gas supply costs. Cap and Trade allowance costs are increasing by 15. 7% annually from FY 2024 to FY 2028 .4 Staff projects transmission costs to increase steadily at 4 -6% annually from FY 2024 to FY 2028 .5 Carbon offset 4 Based on allowance broker quotes. 5 Th e transportati on rate s for calendar years 2022-2026 reflect t he r ates i n the September 30, 2021 p repared testimony (A.21-09-018) regard ing PG&E's 2023 Gas Tr ansmi ssion & Storage (GT&S) Cost Allocation and Rate Design (CARD); afterward a 3% escalation rate is applied. Item No. {{item .number}}. Page 10 of 15 products are also increasing at 7% per year on average.6 This leads to a gradual increase in gas supply costs over the forecast period, despite the projected decline in gas market prices (which itself is inherently uncertain). Averaging the cost of CIP over the two-year main replacement cycles, staff expect costs to increase by around 11% on average annually from FY 2024 through FY 2028 as main replacement costs continue to rise. Capital Improvement Program (CIP) costs vary from year to year and staff projects the two-year average CIP costs to increase by about 10% on average over the forecast horizon. While CPAU has historically planned a new gas main replacement project every year, higher than expected bid proposals have required resizing and redesign of some projects. Since FY 2020, staff has been budgeting for a new, larger main replacement project every other year, and this revised main replacement schedule has allowed CPAU to reasonably meet its main replacement needs while addressing challenges in the construction market and optimizing staffing resources. However, replacement costs continue to rise and holding the gas main replacement program budget steady results in a reduction of the rate of main replacement over time. This Financial Plan addresses these challenges in a way that will allow CPAU to meet its main replacement needs by increasing main replacement budget beginning in FY 2025 and including a 3% annual construction inflationary increase thereafter. Staff also projects operations costs to increase by about 2% annually on average from FY 2024 to FY 2028, prima~ily due to inflation and salary and benefit increases. Operations costs include funding for the cross-bore 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 dear a sewer line and accidentally cuts the gas line. While a majority of sewer laterals have been inspected, staff has come across several services which are not able to be scoped, either due to infiltration by roots or broken/collapsed p i pe segments. Staff has included $0.6 million to $0.8 million per year in additional funding between FY 2024 and FY 2028 to complete the inspections w i thin the next S years. Gas Purchases Forecast The ongoing pandemic recovery, as we ll as usage declines sim ilar to what has been seen in the electric utility, leads to questions of how long the trend of reduced gas consumption will last. As seen with prior economic and drought-related gas usage declines, it is likely that consumption will not come back to pre-conservation/pandemic levels but will likely become a longer-run usage decline. Further changes, such as the voluntary replacement of gas appliances with electric appliances, building electrification of new construction as mandated by the 2019 Reach Code, and customer behavior are also expected to lower long run usage, and this forecast will be revised accord i ngly as more customers adopt these measures. Based on billing data through the end of 2022, gas usage has shown modest recovery with the return of winter heating. It is too early in the winter heating season to tell what the trend will be for the whole season. However, long term declining gas consumption will put upward pressure 6 Based on carbon offset provider quotes. Item No. {{item .number}}. Page 11 of 15 on rates, as a generally increasing cost to operate and distribute gas will be spread across fewer units of sale. Figure 4 shows -the gas supply purchases actuals through the end of 2022 and projected for the next 10 years. 40 _ 38 Ill ·E 36 a, ~ 34 "' C: ~ 32 ! 30 "' a, "' 28 Ill .&: ~ 26 :i Cl. 24 "' Ill ~ 22 20 Figure 4: Gas Supply Purchases Forecast -Actual •••~Projected N N 0 N Gas Bill Comparison with Surrounding Cities U) N a N co N 0 N Table 10 presents residential bills for Palo Alto and PG&E for Calendar Years 2021 and 2022 compared to winter months in 2022 -2023 during the recent supply price spikes at median usage levels. The annual gas bill for the median residential customer for CY 2022 was $821, about 11% lower than the annual bill for a PG&E customer with the same consumption. PG&E's distribution rates for gas have increased to collect for needed system improvements for pipeline safety and maintenance. The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which includes the surrounding communities. Table 10: Residential Monthly Natural Gas Bill Comparison ($/month) Year/Month Median Usage Palo Alto PG&E Zone X % Difference (therms)' CY 2021 402 $ 631.28 $ 701.60 {14%) CY 2022 402 821.33 868.62 {11%) November 2022 32 62.64 76.93 (19%) December 2022 69 175.06 171.96 2% January 2023 76 393.57 217.25 81% Historically, Palo Alto's residential gas bills have been competitive relative to PG&E. During January 2023, bills increased significantly relative to PG&E. Staff is looking into reasons why gas prices spiked this winter and why PG&E's gas rates did not rise as rapidly as Palo Alto's gas rates 7 Median usage data based on CY 2022 Item No. {{item.number}}. Page 12 of 15 during the recent market price spikes. Governor Newsom has requested that the Federal Electric Regulatory Commission start an investigation of winter gas prices. The Mayor sent a letter to the Governor on February 7, 2023 expressing the City's support for pursuing these investigations. Similar investigations are underway by the Cal ifornia Public Utilities Commission (CPUC) in collaboration with the California Energy Commission and California Independent System Operator (CAISO). Staff is also in the process of doi ng a more extensive competitiveness review and will provide updates in the future. Alternative Gas Increase Plans The gas utility's transfer to the City's General Fund is a component of the City's gas rates. City voters first authorized the transfer in 1950, and in November 2022 voters approved Measure L, affirming the continuation of this practice by amending the Municipal Code. Specifically, section 2.28.185, "Natural Gas Utility Transfer" states: Each fiscal year the City Council may transfer from the natural gas utility to the general fund an amount equal to 18% of the gross revenues of the gas utility received during the fiscal year two fiscal years before the fiscal year of the transfer. At its discretion, the City Council may decide to transfer a lesser amount. The projected cost of the transfer shall be included in the City's retail natural gas rates as part of the cost of providing gas service. The attached Financial Plan proposes an 18% transfer, $7,191,000 for FY 2023, which aligns with the voter-approved changes codified in PAMC 2.28.185. Measure L authorized Council to make the transfer annually, and granted Council the ability to approve a lower amount. Although Council will formally direct the FY 2024 transfer amount next year, Staff has provided preliminary projections for FYs 2024-2026 for the UAC's consideration and feedback: Alternative 1 proposes transferring 18% of gross revenue as voters approved in Measure L, and Alternative 2 proposes a transfer between 15.5% and 11.1% annually through FY 2026. Staff prepared Alternative 2's lower transfer percentages in response to recent increases in gas distribution rates and supply costs; this alternative is projected to create FY 2024. 2026 transfers similar to the annual 2% to 3% growth rate in the transfer prior to Measure L. To illustrate, Alternative 2 links the FY 2024-2026 transfers to the Consumer Price Index (CPI}. CPI is projected to be 3% long term, though staff projects 5% CPI increases in FY 2024 and FY 2025. Table 11 shows a 6% per year projection as the maximum proposed increase under Alternative 2; actual increases for the years shown would be capped at 6% or CPI, whichever is less. Table 11 shows the amount of the transfer both in dollars and as a percentage of utility revenue for each fiscal year, as well as the projected rate of annual growth in the transfer. Table 12 below shows the distribution rate increases (as a percentage of the total bill, excluding supply cost changes) associated with each alternative. Item No. {{item.number}}. Page 13 of 15 Table 11: Proposed/ Projected General Fund Transfers as% of Gross Sales Revenues Two FVs Prior' Proposed Projected FY2023 FY 2024 FY 2025 FY 2026 Gas Utility Gross Sales Revenue Two Fiscal Years Prior ($000) Alternative 1 39,950 49,634 72,570 I 66,927 Alternative 2 I 66,269 Percent of gas utility gross revenue to transfer Alternative 1 18.0% 18.0% 18.0% 18.0% Alternative 2 15.5% 11.1% 12.9% Transfer amount ($000) Alternative 1 7,191 8,934 13,063 12,047 Alternative 2 7,622 8,080 8,565 Change in Transfer from Prior Fiscal Year(%) Alternative 1 -1% 24% 46% -8% Alternative 2 6% 6% 6% Table 12: Summary of Distribution Rate Changes for Transfer Proposal and Alternatives FY 2023 FY 2024, FY 2025 FY2026 Alternative 1 4% 9% 10% 8% Alternative 2 8% 7% 5% TIMELINE The Finance Comm i ttee is scheduled to review the FY 2024 Gas Fi nancial Plan in March 2023. The City Council will consider adopting the Financial Pl an and rate adjustments as part of the FY 2024 budget review and adoption process. If Council approves the proposed rate changes, they will become effective July 1, 2023. RESOURCE IMPACT Normal year sa l es revenues for the Gas Utility are projected to increase by roughly 8 percent or $5. 7 mi llion as a result of the proposed rate increases. If commodity costs declin~ 36% as forecasted, total supply revenue is proj ected to decrease by 36% as well. Commodity costs are uncertain, but any changes in costs from these forecasts would be passed through to customers via the monthly varyi ng rate adjuster. The FY 2024 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 2024 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 deve loped using a cost-of-service study and 8 Measure l authorizes a transfer based on 18% (or a lesser percentage if approved by Council) of the revenue for two fiscal years prior, so the FY 2024 transfer is based on FY 2022 revenue. Item No. {{item.number}}. Page 14 of 15 methodology consistent with the California constitution and industry-accepted cost of service principles. As noted in the Reserves Management Practices (Attachment B), if reserves fall below the minimum guidelines, Council approval is required for a rate plan that requires more than one year to return reserves to within guideline levels. STAKEHOLDER ENGAGEMENT Staff and the UAC's recommendation on the FY 2024 gas rate increases will go to the Finance Committee in March and be presented to City Council in June during the budget adoption process. ENVIRONMENTAL REVIEW The Utility Advisory Commission's review and recommendation to the Finance Committee on the FY 2024 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: Gas Resolution FY24 Attachment B: Reserve Management Practices Redline Changes Attachment C: Gas Rate Schedules FY24 Attachment D: Gas Presentation FY24 Report#: {{item.Custom_ Tracking_Number}} Item No. {{item.number}}. Page 15 of 15 • o * NOT YET APPROVED * Resolution No. ---- Attachment A Resolution of the Council of the City of Palo Alto Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfers and 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) RECITALS 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, including reserves. 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. Pursuant to Chapt er 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. C. On June 19, 2023, 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 2024 Gas Utility Financial Plan. SECTION 2. The Council hereby approves the amendment to the Gas Utility Reserves Management Practices as shown in Attachment B. SECTION 3. The Council hereby approves the transfer of up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund in FY 2023. SECTION 4. The Council hereby approves the transfer of up to $3.82 Million from the CIP Reserve to the Operations Reserve, as described in the FY 2024 Gas Utility Financial Plan approved via this resolution. SECTION 5 . Pu rsuant 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, 2023. 6056713 Attachment A * NOT VET APPROVED * SECTION 6. 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, 2023. SECTION 7. 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, 2023. SECTION 8. 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, 2023. SECTION 9. Th·e 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 10. 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. SECTION 11. The Council finds that approving the Financial Plan 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)(S), 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. 60S67 U II INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: City Clerk APPROVED AS TO FORM: Assistant City Attorney 6056713 * NOT YET APPROVED * Mayor APPROVED: City Manager Director of Utilities Attachment A Director of Administrative Services S: • n • • • r F r Attachment B APPENDIX C: GAS UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Gas Utility Financial Plan: Section 1. Definitions a) "Financial Planning Period" -The Financial Planning Period is the range of future fiscal years covered by the Financial Plan. For example, if the Financial Plan delivered in conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015 to FY 2019 would be the Financial Planning Period. b) "Fund Balance" -As used in these Reserves Management Practices, Fund Balance refers to the Utility's Unrestricted Net Assets. c) "Net Assets" -The Government Accounting Standards Board defines a Utility's Net Assets as the difference between its assets and liabilities. d) "Unrestricted Net Assets" -The portion of the Utility's Net Assets not invested in capital assets (net of related debt) or restricted for debt service or other restricted purposes. Section 2. Supply Ft.ind Reserves The Gas Utility's Supply Fund Balance is reserved for the following purposes : a) For existing contracts, as described in Section 4 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 5 (Reserve for Re-appropriations) Section 3. Distribution Fund Reserves a) For existing contracts, as described in Section 4 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 5 (Reserve for Re-appropriations) c) For cash flow management and contingencies related to the Gas Utility's Capital Improvement Program (CIP), as described in Section 6 (CIP Reserve) d) For rate stabilization, as described in Section 7 (Rate Stabilization Reserve) e} For operating contingencies, as described in Section 8 (Operations Reserve} f) Any funds not included in the other reserves will be considered Unassigned Reserves and shall be returned to ratepayers or assigned a specific purpose as described in Section 9 (Unassigned Reserves) Section 4. Reserve for Commitments At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for Commitments will be set to an amount equal to the total remaining spending authority for all contracts in force for the Wastewater Collection Utility at that time. Section 5. Reserve for Reappropriations At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for Reappropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re -appropriated to the following fiscal year for each fund in accordance with Palo Alto Municipal Code Section 2.28 .090. Section 6. CIP Reserve The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff will manage the CIP Reserve according to the following practices: The following guideline levels are set forth for the CIP Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of CtP expense budgeted for that year. Minimum Level 12 months of budgeted CIP expense Maximum Level 24 months of budgeted CIP expense a) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added to or removed from the Reserve for Commitments as a resu lt of a change in contractual commitments relat ed to CIP projects. Any other additions to or withdrawals from the CIP reserve require Council action . b) Minimum Level: i) Funds held in the Reserve for Commitments may be counted as part of the CIP Reserve for the purpose of determini ng compliance with the CIP Reserve minimum guideline level. ii) tf, at the end of any fi scal year, the minimum guideline is not met, staff shall present a plan to the City Counc il to replenish the reserve. The plan shall be delivered by the end of the following fisca l year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is below its minimum level at the end of FY 2017, staff must present a plan by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff may present, and the Counci l may adopt, an alternative plan that takes longer than one year to replenish the reserve, or that does so in a shorter period of time. c) Maximum Level: If, at any t i me, the CIP Reserve reaches its maximum level, no funds may be added to this reserve. If there are funds in this reserve in excess of the maximum tevet staff must propose to transfer these funds to another reserve or return them to ratepayers in the next Financial Pl an. Staff may also seek Council approval to hold funds in this reserve in excess of the maximum level, if they are held for a specific future purpose related to the CIP. Section 7. Rate Stabilization Reserve Funds may be added to the Rate Stab ilization Reserve by action of the City Council and held to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Gas Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. Section 8. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Gas Utility's Fund Balance not included in the reserves described in Section 4-Section 7 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 8 d) below. Staff will manage the Operations Reserve according to the following practices: a) The following guideline levels are set forth for the Operations Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of Operations and Maintenance (O&M) and commodity expense forecasted for that h F . I Pl ,,ear int e InancIa an. Minimum level 60 days of O&M and commodity expense Target Level 90 days of O&M and commodity expense Maximum Level 120 days of O&M and commodity expense b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations Reserve are lower than the minimum level set forth above, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered within six months of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the following fiscal year. For example, if the Operations Reserve is below its minimum level at the end of FY 2014, staff must present a plan by December 31, 2014 to return the reserve to its minimum level by June 30, 2015 . In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve. c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower than the target level, any Financial Plan created for the Gas Utility shall be designed to return the Operations Reserve to its target level by the end of the forecast period. d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no funds may be added to this reserve. Any further increase in the Gas Utility's Fund Balance shall be automatically included in the Unassigned Reserve described in Section 9, below. Section 9. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Gas Utility's Fund Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to assign them to a specific purpose or return them to the Gas Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period . For example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds or returns them over a longer period of time. Section 10. Intra -Utility Transfers Between Supply and Distribution Funds The Gas Utility records costs in two separate funds: the Gas Supply Fund and the Gas Distribution Fund. At the end of each fiscal year staff i s authorized to transfer an amount equal to the difference between Gas Supply Fund costs and Gas Supply Fund Revenues, from the Gas Distribution Fund Operations Reserve to the Gas Supply Fund, or vice versa. Such transfers shall be included in the ordinance clos ing the budget for the fiscal year . Section 11. Cap and Trade Program Reserve This reserve tracks revenues from the sale of carbon allowances freely allocated by the California Air Resources Board to the gas utili ty, under the State's Cap and Trade Program. Funds in this Reserve are managed in accordance with the City's Policy on the Use of Freely Allocated Allowances under the State's Cap and Trade Program (the Policy), adopted by Council Resolution 9487 in January 2015. At the end of each fiscal y ear staff is authori zed to transfer all revenues from the sa l e of allocated carbon allowances to this reserve. * Attachment C RESIDENTIAL GAS SERVICE UTILITY RA TE SCHEDULE G-1 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from City of Palo Alto Utilities: 1. Separately-metered single-family residential Customers; 2. Separately-metered multi-family residential Customers 'in multi-family residential facilities. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides Gas Service. C. UNBUNDLED RA TES: Per Service Monthly Service Charge: .................................................................................................. $1 4.01-J..M Tier I Rates: Per Thenn Supply Charges: I . Commodity (Monthly Market Based) .............................................. $0.10-$4.00 2. Cap and Trade Compliance Charge ............................................ $0.00-$0.25 3. Transportation Charge................................................................. $0.00-$0.25 4. Carbon Offset Charge.................................................................. $0.00-$0.10 Distribution Charge: .......................................................................................... $0.6807~ Tier 2 Rates: (All usage over I 00% of Tier I) Supply Charges : I. Commodity (Monthly Market Based) .............................................. $0.10-$4.00 2. Cap and Trade Compliance Charge............................................. $0 .00-$0.25 3. Transportation Charge ................................................................. $0.00-$0.25 4. Carbon Offset Charge ....................................................... ........... $0.00-$0.10 Distribution Charge: ............................................................................................ . ............................................................................................................ $1.740643- ~ CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-1-1 dated 1+-1-202~ • CITY O F PALO ALTO UTILITIES Sheet No G-1-1 Effective Z+-1-2023 D. SPECIAL NOTES: 1. Calculation of Cost Components RESIDENTIAL GAS SERVICE UTILITY RA TE SCHEDULE G-1 The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer's Meter. The Cap and Trade Compliance Charge reflects the City's cost of regulatory compliance with the state's Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City's Gas Utility's compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Transportation Charge is based on the current PG&E Gas Transportation Rate to Wholesale/Resale Customers (G-WSL) rate for Palo Alto, accounting for delivery losses to the Customer's Meter. The Carbon Offset Charge reflects the City's cost to purchase offsets for greenhouse gases produced in the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per therm cap. The Commodity, Cap and Trade Compliance, Transportation, and Carbon Offset Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic per therm rates for these Charges are posted on the City Utilities website.1 2. Seasonal Rate Changes: The Summer period is effective April I to October 31 and the Winter period is effective from November I to March 31. When the billing period includes use in both the Summer and the Winter periods, the usage will be prorated based on the number of days in each I Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.cityofpaloalto.org/files/assetslpublic/util ities.lrates-schedules-for-utilitieslmonthl y-gas-commodity-rates.pdf CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No G-1-2 dated 1+-1-202~ • CITY OF PALO ALTO UTILITIES Sheet No G-1-2 Effective Z-1-1-2023 RESIDENTIAL GAS SERVICE UTILITY RA TE SCHEDULE G-1 seasonal period, and the charges based on the applicable rates for each period. For further discussion of bill calculation and proration, refer to Rule and Regulation 11 . 3. Calculation of Usage Tiers Tier l natural gas usage shall be calculated and billed based upon a level of 0.667 therms per day during the Summer period and 2.0 therms per day during the Winter period, rounded to the nearest whole therm, based on meter reading days of service. As an example, for a 30 day bill, the Tier l level would be 20 therms during the Summer pe riod and 60 therms during the Winter period months. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No G-1-3 d ated 1+-1-202~ O C I TYOF PALO ALTO UTILITIES {End} Sheet No G-1-3 Effectiv e Z-:1-1-2023 RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE UTILITY RA T E SCHEDULE G-2 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto Utilities: 1. Commercial Customers who use less than 250,000 therms per year at one site; 2. Master-metered residential Customers in multi-family residential facilities. B. TERRITORY: C. This schedule applies anywhere the City of Palo Alto provides Gas Service. UNBUNDLED RATES: Per Service Monthly Service Charge: ............................................................................................. $1 29.7806-.-90 Supp]y Charges: I. Commodity (Monthly Market Based) ....................................... .. 2. Cap and Trade Compliance Charges ......................................... .. 3. Transportation Charge ................................................................ . 4. Carbon Offset Charge ................................................................. . Per Therm $0. 10-$4.00 $0.00-$0.25 $0.00-$0 .25 $0.00-$0. 10 Distribution Charge: ...................................................................................................... $0.&94 I~ D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer's Meter. The Cap and Trade Compliance Charge reflects the City's cost of regulatory compliance with the state's Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City's Gas Utility's compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required . CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-2-1 dated 1:/-1-202~ • CITYOF PALO ALTO UTILITIES Effective 1+-1-2023 Sheet No G-2-1 RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE UTILITY RA TE SCHEDULE G-2 The Transportation Charge is based on the current PG&E Gas Transportation Rate to Wholesale/Resale Customers (G-WSL) rate for Palo Alto, accounting for delivery losses to the Customer's Meter. The Carbon Offset Charge reflects the City's cost to purchase offsets for greenhouse gases produced in the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per thenn cap. The Commodity, Cap and Trade Compliance, Transportation, and Carbon Offset Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic per therm rates for these Charges are posted on the City Utilities website.1 {End} I Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.cityofpaloalto.org/files/assets/public/utilities/rates-schedules-for-utilities/monthly-gas-commodity-rates.pdf CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-2-2 dated 1+-1-202~ • CITY OF PALO ALTO UTILITIES Effective 1 +-1-2023 Sheet No G-2-2 LARGE COMMERCIAL GAS SERVICE UTILITY RA TE SCHEDULE G-3 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto Utilities: 1. Commercial Customers who use at least 250,000 therms per year at one site; 2. Customers at City-owned generation facilities. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides Gas Service. C. UNBUNDLED RA TES: Per Service Monthly Service Charge: $593.79489.12 Per Therm Supply Charges: I. Commodity (Monthly Market Based) .................................................... $0. l 0-$4.00 2. Cap and Trade Compliance Charges .................................................... $0.00-$0.25 3. Transportation Charge .......................................................................... $0.00-$0.25 4. Carbon Offset Charge ........................................................................... $0.00-$0. l 0 Distribution Charge: ...................................................................................................... $0.8852~ D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based o,n the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes . On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer's Meter. The Cap and Trade Compliance Charge reflects the City's cost of regulatory compliance CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No G-3-1 dated 1+--1-202~ O CITYO F PALO ALTO UTILITIES Effective 1~ 1-2023 Sheet No G-3-1 LARGE COMMERCIAL GAS SERVICE UTILITY RA TE SCHEDULE G-3 with the state's Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City's Gas Utility 's compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Transportation Charge is based on the current PG&E Gas Transportation Rate to Wholesale/Resale Customers (G-WSL) rate for Palo Alto, accounting for delivery losses to the Customer's Meter. The Carbon Offset Charge reflects the City's cost to purchase offsets for greenhouse gases produced in the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per therm cap . The Commodity, Cap and Trade Compliance, Transportation, and Carbon Offset Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic per therm rates for these Charges are posted on the City Utilities website.1 2. Request for Service A qualifying Customer may request service under this schedule for more than one account or meter if the accounts are located on one site. A site consists of one or more contiguous parcels of land with no intervening public right-of-ways (e .g. streets). J. Changing Rate Schedules Customers may request a rate schedule change at any time to any applicable City of Palo Alto full-service rate schedule. {End} I Monthly gas and commodity and volumetric rates are available here, or by visiting https:/lwww.cityofpaloalto.org/files/assets/public/utilities/rates-schedules-for-utili1 ies/month ly -gas-comm odity-rales.pdf CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No G-3-2 dated 1 +-1-202~ • CITY OF PALO ALTO UTILITIES Effective Z-1-1-202 3 Sheet No G-3-2 COMPRESSED NATURAL GAS SERVICE UTILITY RATE SCHEDULE G-IO A. APPLICABILITY: This schedule applies to the sale of natural gas to the City-owned compressed natural gas (CNG) fueling station at the Municipal Service Center in Palo Alto. B. TERRITORY: Applies to the City's CNG fueling station located at the Municipal Service Center in City of Palo Alto. C. UNBUNDLED RA TES: Per Service Monthly Service Charge: ............................................................................................... $8 7.77~ Per Therm Supply Charges: Commodity (Monthly Market Based) ................................................................ $0. l 0-$4.00 Cap and Trade Compliance Charges .................................................................. $0.00-$0.25 Transportation Charge ....................................................................................... $0.00-$0.25 Carbon Offset Charge ........................................................................................ $0.00-$0.10 Distribution Charge ......................................................................................................... $0.0 145~ D. SPECIAL CONDITIONS 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer's Meter. The Cap and Trade Compliance Charge reflects the City's cost of regulatory compliance with the state's Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City's Gas Utility's compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No G-10-1 dated 11-1-202J;2 • CITY OF PALO ALTO UTILITIES Effective 14--1-2023 Sheet No. G-10-1 COMPRESSED NATURAL GAS SERVICE UTILITY RATE SCHEDULE G-10 The Transportation Charge is based on the current PG&E Gas Transportation Rate to Wholesale/Resale Customers (G-WSL) rate for Palo Alto, accounting for delivery losses to the Customer's Meter. The Carbon Offset Charge reflects the City's cost to purchase offsets for greenhouse gases produced in the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council­ approved per therm cap. The Commodity, Cap and Trade Compliance, Transportation, and Carbon Offset Charges will fall within the minimum/maximum range set forth in Section C. Current and historic per therm rates for these Charges are posted on the City Utilities website.1 {End} I Monthly gas and commodity and volumetric rates are available here, or by visiting https:l/www.cityofpaloalto.org/files/assetslpublic/utilities/rates-schedules-for-utilities/monthly-gas-commodity-rates.pdf CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-10-2 dated 11-1-202~ • CITY OF PALO ALTO UTILITIES Effective 1 +-1-2023 Sheet No . G-10-2 • FY 2024 GAS UTILITY FINANCIAL PLAN FY 2024 TO FY 2028 GAS UTILITY FINANCIAL PLAN GAS UTILITY FINANCIAL PLAN FY 2024 TO FY 2028 TABLE OF CONTENTS Section 1: Definitions and Abbreviations ................................................................................ 4 Section 2: Executive Summary and Recommendations ........................................................... 5 Section 2A: Overview of Financial Position .................................................................................. 5 Section 28: Summary of Proposed Actions .................................................................................. 8 Section 3: Detail of FY 2023 Rate and Reserve Proposals ........................................................ 9 Section 3A: Rate Design ............................................................................................................... 9 Section 38: Current and Proposed Rates ................................................................................... 10 Section 3C: Bill impact of Proposed Rate Changes .................................................................... 12 Section 3D: Proposed Reserve Transfers ................................................................................... 13 Section 4: Utility Overview .................................................................................................. 14 Section 4A : Gas Utility History ................................................................................................... 14 Section 48: Customer Base ........................................................................................................ 16 Section 4C: Distribution System ................................................................................................. 17 Section 4D: Cost Structure and Revenue Sources ...................................................................... 17 Section 4E: Reserves Structure ................................................................................................... 18 Section 4F: Competitiveness ...................................................................................................... 19 Section 4G: Gas Supply Rates .................................................................................................... 19 Section 5: Utility Financial Projections ................................................................................. 21 Section SA: Load Forecast. ......................................................................................................... 21 Section SA: FY 2018 to FY 2022 Cost and Revenue Trends ........................................................ 23 Section 58: FY 2022 Results ....................................................................................................... 25 Section SC: FY 2023 Projections ................................................................................................. 25 Section SD: FY 2024-FY 2028 Projections .................................................................................. 25 Section SE: Risk Assessment and Reserves Adequacy ............................................................... 28 March 2023 21 Page GAS UTILITY FINANCIAL PLAN Section SF: Long-Term Outlook ................................................................................................. 29 Section SG: Alternative Gas Increase Plans ............................................................................... 30 Section 6: Details and Assumptions ..................................................................................... 32 Section 6A: Gas Purchase Costs ................................................................................................. 32 Section 68: Operations .............................................................................................................. 35 Section 6C: Capital Improvement Program {CIP} ....................................................................... 36 Section 6D: Debt Service ............................................................................................................ 38 Section 6E: Equity Transfer ........................................................................................................ 40 Section 6F: Revenues ................................................................................................................. 40 Section 6G: Communications Plan ............................................................................................. 40 Appendices ......................................................................................................................... 42 Appendix A: Gas Financial Forecast Detail ................................................................................ 43 Appendix 8: Gas Utility Capital Improvement Program (CIP) Detail ......................................... 44 Appendix C: Gas Utility Reserves Management Practices ......................................................... 45 Appendix D: Description of Gas Utility Cost Categories ............................................................ 49 Appendix E: Gas Utility Communications Samples .................................................................... 50 March 2023 3 1 Page GAS UTILITY FINANCIAL PLAN I SECTION 1: DEFINITIONS AND ABBREVIATIONS 1 ABS: Acrylonitirile butydene styrene, a p l astic gas mai n material AMI: Advanced Metering Infrastructure CARB: California Air Resources Board CIP: Capital Improvement Program CNG: Compressed Natural Gas CPAU: City of Palo Alto Utilities Department CPUC: California Public Utilities Commission Cross-bore: A cross-bore exists when one utility l ine has been drilled or "bored" through a portion of another line. Gas cross -bores can occur i n sewer lines as a result of "horizontal boring" construction practices. Distribution: transportation of gas to customers. GMR Program: Gas Main Replacement Program Local Transportation: transportation of gas to Palo Alto across PG&E's distribution system from PG&E Ci ty Gate. Malin: a delivery hub referred to in gas purchase contracts and located in Malin, Oregon, where the northern end of PG&E's Redwood Transmission Pipeline is located. MMBtu: Millions of British thermal units, a unit of gas measurement equal to ten therms. Commonly used for high volume gas measurement. Wholesale purchases of gas from suppliers are typically measured in MM Btu. O&M: Operations and Maintenance PE or HOPE: Polyethyl ene, a .gas ma in material (more specifically, High-Dens ity Polyethylene) PG&E: Pacific Gas and Electric PG&E Citygate, or Citygate: a delivery hub referred to in gas purchase contracts. Any gas delivered to PG&E's distribution system (such as gas delivered at the southern end of PG&E's Redwood Transmission Pipeline) is said to have been del ivered at PG&E Citygate. PVC: Polyvinyl ch l oride, a pl astic gas main material Summ.er: April 1 to October 31 Therms: The standard uni t of measurement for natural gas sates to customers, equal to 100,000 Briti sh thermal units. Therms measure the heating va l ue of the gas, rather than its volume. Transmission: transportation of gas between major gas de•ivery hubs via a ·gas transmission pipeline, such as PG&E's Redwood pipeline. UAC: Utilities Advisory Commission, an appoi nted body that advises the City Council on CPAU issues. Winter: November 1 to March 31 March 2023 41 Page GAS UTILITY FINANCIAL PLAN SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City's Gas Utility for the next five years. This Financial Plan provides revenues to cover the costs of operating the utility safely over that time while adequately investing for the future. It also addresses the financial risks facing the utility over the short term and long term and includes measures to mitigate and manage those risks. SECTION 2A: OVERVIEW OF FINANCIAL POSITION Gas commodity costs were extremely high in FY 2023 due to unprecedented supply and demand conditions throughout the western United States. These commodity costs are not projected to recur in FY 2024, and staff plans to propose hedging alternatives to Council that could mitigate futures increases. Staff is proposing to increase the distribution component of the gas rates in FY 2024 to ensure the utility is recovering its costs of operations. Revenues were already below costs after keeping rate increases low through the pandemic, but construction inflation and other factors have driven costs up. The distribution rate increase is projected to increase overall customer bills approximately 8% if supply costs remain the same in FY 2024 as they were in FY 2023, though staff does not expect this. This 8% increase in customer bills results from increasing the distribution component of the rates 21% to fully recover distribution costs and avoid decreasing reserves further. Even with this distribution rate increase, staff expects average annual customer gas bills to decline 13% in FY 2024 compared to FY 2023 because gas supply costs were extremely high in FY 2023, particularly in the winter. FY 2024 annual gas supply costs are forecasted to be about 36% lower than FY 2023. Gas market prices are uncertain, however, and these forecasts can change. From FY 2024 through FY 2028 gas supply costs are projected to increase by only 1% per year (though this forecast is uncertain)1 and distribution operational costs are projected to increase by about 4% per year, leading to average overall costs for the gas utility to increase about 3% per year. Total gas bills (including both commodity and distribution components) are forecasted to rise at a slightly higher average rate, 4% per year. However, because distribution rates are currently below costs, distribution rates will have to increase faster than distribution costs to ensure full cost recovery. The commodity component of the rates is forecasted to increase no more than 1% per year on average, but the distribution component is expected to increase 6% per year on average, for a net 4% per year on average over the forecast period. Gas commodity costs are extremely uncertain, and changes in commodity costs are passed directly to customers through a month-varying rate adjuster (capped at $4/therm). This Financial Plan projects that increasing gas utility distribution operational costs will cause distribution rates (all costs excluding commodity, transportation, or environmental rate components, which includes operational costs, capital costs, overhead, transfers, and other similar costs) to increase 1 This results from a projected gradual decline in the main component of gas supply costs, the cost of gas purchased in the market (the "commodity" charge), combined with significant increases in smaller components of commodity costs: gas transportation and environmental charges. The net result is a gradual increase in costs. However, forecasting commodity costs if very uncertain. For more detail gas supply rate design and the sources for these forecasts, see Section 4G: Gas Supply Pass-Through Rates and Sectio~ 6A: Gas Purchase Costs March 2023 SI Page GAS UTILITY FINANCIAL PLAN customer bills by 6% per year on average over the forecast period, with higher rate increases in FY 2024 and FY 2025. The significantly higher rate changes are due to the fact that distribution revenues are currently approximately 20% below distribution costs, leading to a need for distribution rate increases to exceed distribution cost increases. Distribution rates are not high enough to recover costs because the utility minimized rate increases in FY 2021 and FY 2022 to minimize the impact of gas rate increases on a community struggling to manage the economic impact of the pandemic. As shown in Table 1, below, total gas utility costs are projected to be 20% higher in FY 2024 than they were in FY 2022. This is pri mari ly due to higher long-term commodity prices, which are projected to be 25% higher than FY 2022 and are forecasted to remain approximately at those levels through the forecast period (though these forecasts are uncertain). Staff projects operations costs to increase by about 2.6% on average annually through the forecast period primarily due to salary and benefit increases both in the gas util ity and for adm inistrative functions provided by the City's General Fund staff. Capital Improvement Program (CIP) costs vary from year to year and staff projects the two-year average CIP costs to increase by about 10% on average over the forecast horizon. While CPAU has historically planned a new gas main replacement project every year, higher than expected bid proposals have required resizing and redesign of some projects. Since FY 2020, staff has been budgeting for a new, larger main replacement project every other year, and this revised main replacement schedule has allowed CPAU to reasonably meet its main replacement needs while addressing challenges in the construction market and optimizing staffing resources. However, replacement costs continue to rise and hold i ng the gas main replacement program budget steady results in a reduction of the rate of main replacement over time. Th i s Financial Plan addresses these cha ll enges in a way that will allow CPAU to meet its main replacement needs by in creasing main replacement budget beginn i ng in FY 2025 and including a 3% annual construction inflationary increase thereafter . Table 1 shows the Gas Utitity expenses over the period of this Fi nancial Plan. Staff is also controlli ng costs by applying for grant funding for the upcoming main replacement project and is currently awai t i ng a response on a Natural Gas Distribution Infrastructure Safety and Modernization grant opportunity. Table 1: Gas Utility Expenses for FV 2022 to FY 2028 (Thousand $'s) Expenses FY 2022 FY 2023 FY 2024 FY 2025. FY 2026 FY 2027 FY 2028 ($000) (act.) (est.) Commod ity Costs 24,103 48,057 29,948 28,556 29,625 30,289 31,178 Operations 23,225 26,590 26,101 27,393 28,276 28,363 29,134 Capital Projects 4,674 8,217 7,036 10,347 7,500 10,150 7,818 TOTAL 52,002 82,863 63,085 66,296 65,401 68,802 68 ,13 0 In order to move towards full cost recovery while minimizing rate impacts, the Financial Plan includes the rate trajectory shown in Table 2. March 2023 6 1Page GAS UTILITY FINANCIAL PLAN Table 2: Projected Gas Rate Trajectory for FY 2024 to FY 2028 Projection FY FY FY FY FY 2024 2025 2026 2027 2028 Current (FY 2024) Financial Plan 8% 7% 5% 5% 5% FY 2023 Financial Plan 4% 4% 4% 3% N/A FY 2022 Financial Plan 5% 5% 0% N/A N/A The unprecedented and extreme gas prices in FY 2023 impacted the gas utility's reserves significantly, and very high double-digit rate increases would be required to return reserves to within guidelines. Staff is proposing to allow the Gas Operations Reserve to be below the risk assessment levels for two fiscal years and below the minimum guideline for three . If costs exceeded available reserves during this time, the gas utility could explore borrowing from another City fund or other short-term financing. See Section SE: Risk Assessment and Reserves Adequacy for more information. The gas utility's transfer to the City's General Fund is another component of the City's gas rates. City voters first authorized the transfer in 1950, and in November 2022 vote rs approved Measure L, affirming the continuation of this practice by amending the Municipal Code. The measure states that each year the City Council may transfer from the gas utility to the general fund an amount up to 18% of the gross revenues of the gas utility, 2 though Council may choose to transfer a lesser amount. This Financial Plan proposes an 18% transfer, $7,191,000 for FY 2023, which aligns with the voter-approved changes codified in PAMC 2.28.185. Although Council will formally direct the FY 2024 transfer amount next year, Staff has provided preliminary projections for FYs 2024-2026: Alternative 1 proposes transferring 18% of gross revenue as voters approved in Measure L, and Alternative 2 proposes a transfer between 15.5% and 11.1% annually through FY 2026. Additional details are shown in Section SG: Alternative Gas Increase Plans. Table 5 shows the projected reserve transfers over the forecast period. As noted above, staff i s proposing to allow the Gas Operations Reserve to be below the risk assessment levels for two fiscal years and below the minimum guideline for three. The Gas Utility Reserves Management Practices (Attachment B, Section 8) require returning Operations reserves to within minimum guidelines (60 days of O&M and commodity expense) within one year unless an alternative plan is approved by Council. 2 18% of t he gross revenues of the gas utility received "durin g the fis cal year two fi scal years b efore the fiscal year of the transfer." (Section 2.28.185, Palo Alto Muni cip al Code). March 2023 71 Page ~ GAS UTILITY FINANCIAL PLAN Table 3: Operations, Rate Stabilization and CIP Reserve Starting and Ending Balances, Revenues, Transfers To/(From) Reserves, Capital Program (CIP) Contribution To/(From) Reserves, and Reserve Guideline Levels for FY 2023 to FY 2028 ($000) FY 2023 FY 2024 FY 2025 FY 2026 FY2027 FY2028 -t-· Starting Reserve Balances a.~36 r -13. ~01 f--=-1 Operations Res~,ve• _!!,300 3,~66 4,!!i~.J-;:1 2 CIP Reserve 3,820 3 Cap and Trade Rese,ve 6,732 8,834 11,908 19.!294 I 23,623 ~ l 4 Debt Service Reserve 434 434 434 434 Revenues ~ 5 Total Revenues 70,468 63,223 65,479 68,993 72,516 76,622 6 Cap and Trade ~-_l,~£_-3,898 4,3~ 4,776 2,102 I 3,074 --r Transfers 1,718 1 I 7 Operations Reserve• (3,074)1 (3,487) (3,464) (4,329) (~776! 8 CI P Reserve {3,820) . I ~;.. _4,;29 d 9 Cap and Trade Reserve 2,102 4,776 1 10 Debt Service Reserve (434) -i ---. Expenses 11 t otal Non-CIP Expenses (71,704) (55,~) (55,318) {57,374) {57,800) (59,122) 12' Pla~ned Di;tribution CIP (10,217) (7,036) (10,347) (7,500) (10,1501 (11,818) l ----1 Endi ng Reserve Balances -------1 1+S+&t7+!1+12 1op~iations Reserve• 3,666 4,169 3,983 8,536 13,101 18,~ ----~ CIP Reserve ~ Cap and Trade 8,83i ~.908 15,395 19,294 23,623 ~398 I 4+10 Debt Service Reserve 434 434J 434 . I I I Operations Reserve Guidelines 10,044 l 1q,s1s 1 -13 Minimum 13,394 10,055 10,450 11.!504 14 Max i mum 26,788 I 2~._Q89 20,111 2q_900 21,151 23,008 -1 CI P Reserve Gui d @line s 15 M i nimum 10,217 7,036 10,347 7,500 10,150 11,_!!18 --i 16 Max i mum 17,253 ___E,383 !Z,847 17,65(!_ ~1,968 26,261 *Operations Reserve represents the Gas Supply Fund Rate Stabil i zation Reserve and the Gas Distribution Fund Operati ons Reserve combined. SECTION 28 : SUMMARY OF PROPOSED ACTIONS Staff proposes the following actions for the Gas Utility in FY 2023: 1. Transfer up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund; and 2. Transfer up to $3.82 mill ion from the CIP Reserve to the Operations Reserve; and 3. Amend the Gas Utility Reserve Management Practi ces reflected in Appendix C: Gas Utility Reserves Management Practices, section 11. Staff proposes the following actions for the Gas Utility in FY 2024: 1. Transfer up to_% of gas utitity gross revenues received during fiscal year 2022 to the general fund ; and March 2023 Bl Pa ge GAS UTILITY FINA NCIAL PLAN 2. Increase distribution rates by 21.4% (for an estimated 8% increase to tot al rates) for FY 2024, primarily reflecting increases to capital expenditures and increased operations costs. See Section 38: Current and Proposed Rates for more details. Staff is seeking UAC and Finance Committee feedback on the FY 2024 General Fund transfer before sending a final recommendation to Council and has provided two alternatives for determining the amount of the transfer, which are shown in Section SG: Alternative Gas Increase Plans. SECTION 3: DETAIL OF FY 2023 RATE AND RESERVE PROPOSALS SECTION 3A: RATE DESIGN The Gas Utility's rates are evaluated and implemented in compliance with cost of service requirements set forth in the California Constitution and applicable statutory law. The Gas Utility's proposed rates are based on the methodology from the March 2019 Natural Gas Cost of Service and Rates Study. The City's natural gas rates are based on the 2019 Natural Gas Cost of Service and Rates Study, updated with current and proposed operating costs. During the COVID-19 pandemic, usage amongst customer classes dropped to reflect people working and staying at home rather than going to the workplace. Similarly, businesses operated at minimum staffing conditions or fully remote. Costs related to salaries and benefits, administrative functions provided by the City's General Fund staff, and supply costs are increasing. In order to move towards full cost recovery while minimizing rate impacts, staff recommends a distribution rate increase to all customer classes of 21.4%, which staff estimates will result in an approximate 8% system average rate increase. If, after recovery from the pandemic, usage and/or spending projections change, staff may suggest a re-balancing of rates at that time. Distribution rates typically comprise approximately 70% of the overall rate, which consists of both gas supply and distribution components (though in FY 2023 it accounted for about 40% due to unprecedented supply cost increases). Supply-related costs include the cost of the natural gas itself (the "commodity" rate), gas transmission, and gas environmental charges, and these are a fluctuating component of the Gas Utility's expenses. Commodity rates, which typically make up approximately 30% of overall retail gas rates, vary significantly due to changes in market conditions. Staff monitors market prices monthly and automatically incorporates market prices into monthly supply rate adjustments, which are passed directly to customers as a line item on their utility bills. The overall rate changes (commodity plus distribution) referenced in this report are based on current gas market forecasts that indicate that the commodity portion of the overall rate is unlikely to continue at the unprecedented level observed in FY 2023. Current gas market forward prices indicate that average annual commodity costs are likely to decline 36% in FY 2024 from FY 2023. This is consistent with current gas market forecasts from various sources, including forward gas contracts on exchanges and forecasts from suppliers, but staff cautions that these March 2023 9I Page GAS UTILITY FINANCIAL PLAN forecasts can change rapidly due to changing weather, economic factors, or gas supply constrai nts. Staff recommends i ncreasing the distribution component of the rates by 21.4%, which equates to an 8% increase to total rates, if commodity rates remained unchanged from FY 2023 {which, as noted above, staff does not project to be the case). Table 6 below shows both the proposed increase in distribution rates {about 21%) and the net impact on rates including commodity costs {about 8% overall, as distribution is about 40% of total rate revenue in FY 2023). From FY 2023 to FY 2024, the distribution portion of customer gas bills will increase 8%, and the commodity portion of the bill is projected to decline 22%. The result is that customers should see a 13% overa ll decrease in their bills in FY 2024 over the prior year, if, as forecasted above, commodity rates drop 36% from FY 2023 to FY 2024. Table 4: Cost of Service (COSA) Distribution Revenue Requirement by Customer Class Cost of Service Analysis Proposed Distribution Forecasted Net Change for FY 2024 Rate Increase Commodity Rate Combined Commodity Change and Distribution Rate Gl -Residential G2 -Sma ll Commercial -36% G3 -Large Commercial 21% -13% Total Rate impacts of these changes are outli ned in Section 38: Current and Proposed Rates. SECTION 3B: CURRENT AND PROPOSED RATES Gas rates have two drivers: 1) Supply costs -these are costs related to the purchase of gas supply, transmission costs to bring the gas to Palo Alto's meters, and environmenta l costs, such as the purchase of cap and trade allowances for gas burned and carbon neutral offsets; and 2) Distribution costs. Supply costs are charged to customers via four pass-through rate components re lated to supplying gas to customers: 1) gas commodity, wh ich represents the cost of buying gas i n the markets, 2) gas transportation, which represents the cost of transporting purchased gas to Palo Alto, 3) Cap and Trade compliance, which represents the cost of mandated participation in the State's cap and trade program, and 4) carbon offset charge, which represents the cost of buying offsets for the Ci ty's Carbon Neutral Gas Portfolio. On July 1, 2012 CPAU restructured its rates so that the commodity component of the rat~s varied monthly to match changes in gas market prices. 3 In January 2015, the Council adopted a new rate component to .co ll ect the costs of purchasing allowances for the purpose of compliance with the 1 Staff Report 2812, 5/17/2012: htt!4{far_ch}ve .. _cityofpa!9alto.9rg/F ivic~/fileba_rn klblo.bdJoad.asp ?Bio bl D=31395 M a r c h 2 0 2 3 10 I P a g e GAS UTILITY FINANCIAL PLA N State's cap-and-trade program.4 This component changes depending on the cost of allowances and gas demand. Another component of the City's supply costs is the Transportation Charge, which is the cost that PG&E charges CPAU for transporting gas to Palo Alto via PG&E's pipelines. Th_is charge applies to Palo Alto and other cities and agencies who procure natural gas for resale. In October 2016, the Council adopted a resolution changing the Local Transportation rate (which had been collapsed into the Distribution rate in 2015 to streamline bill presentation), to be reflected on the bill as a pass-through of PG&E's Gas Transportation Rate to Wholesale/Resale Customers (G-WSL) charge to Palo Alto. 5 PG&E's G-WSL rate is currently $0.15/therm as shown in the "Transportation Charge" column of the linked schedule of monthly rates and has a cap of $0.25/therm, which went into effect on July 1, 2022. The transportation charge continues to increase as PG&E collects costs related to improving storage facilities, decommissioning older facilities, increased costs resulting from wildfire mitigation, accounting for and greenhouse gas mitigation costs. Based on PG&E's estimates, prices are going to continue to escalate between 6% and 22% between 2023 and 2026. Current and historic per therm rates for the Transportation Charges are posted on the City Utilities website.6 In December 2016, Council approved a carbon neutral gas plan, with a goal of achieving a carbon neutral gas portfolio by FY 2018. 7 Costs associated with the carbon neutral gas plan are passed directly to customers as well, although the maximum rate impact is $0.10 per therm. All gas supply, transmission, and environmental costs are passed through to customers as monthly prices change. Three years' worth of history of these supply rate components can be found on Palo Alto's website.8 CPAU has four rate schedules : one for separately metered resi dential customers (G-1), one for small commercial and master-metered multi-family residential customers (G-2), one for customers using over 250,000 therms per year (G-3), and a specific schedule for the City's Compressed Natural Gas (CNG) station (G-10). To recover distribution costs, all customers pay a monthly service charge, which funds meter reading, billing, and other customer service costs, as well as a portion of Operations and Maintenance (O&M) costs. All customers are also assessed a distribution charge based on each therm of gas used. Separately metered residential customers are charged on a tiered basis, differentiated by season. During the winter months, the first 2 therms per day (60 therms for a 30 day billing period) are charged a base price per therm, and all additional units charged a higher price per therm. During the summer months, the first tier level is 0 .667 therms per day, or 20 therms for a 30 day billing period . Commercial customers pay a uniform price for each therm used. Table 7 shows the current monthly service charges for all rate schedules. Table 8 shows the consumption charges related to distribution. As mentioned earlier, commodity charges change 4 Staff Report 5397, 1/26/2015: https:ljwww.cityofpaloalto.org/civicax/filebank/documents/45537 5 Staff Report 7260 10/17/2016 http:ljwww.cityofpaloalto.org/civicax/filebank/documents/54165 6 Monthly Gas Commodity & Volumetric Rates http://www.cityofpaloalto .org/civicax/filebank/documents/30399 7 Staff Report 7533 12/05/2016 http://www.cityofpaloa1to.org/civicax/filebank/documents/54882 8 Monthly Gas Commodity & Volumetric Rates http :ljwww.cityofpalo~l~o.:or~/~i'-'.i~~></fil~bank/~o~.u~~~~s/3_03~9 March 2023 111 Page GAS UTILITY FINANCIAL PLAN month ly, and transportation charges are tied to the PG&E G-WSL rate schedule. Some recent commodity price history is discussed in Section 6A: Gas Purchase Costs. Table S: Current and Proposed Monthly Service Charges Rate Schedule Current Proposed for Change($) Change{%) (as of 1/1/23) FY 2024 G-1 (Residential) $ 11.54 $14.01 $ 2.47 21 .4% G-2 (Small Commerci al) 106.90 129.78 22.88 21.4% G-3 (Large Commercial ) 489.12 593.79 104.67 21 .4% G-10 (CNG) 72.30 87.77 15.47 21.4% Table 6: Current and Proposed Gas Distribution Charges Current Proposed for Change($) Change(%) (as of 1/1/23) FY 2024 G-1 (Residential) Tier 1 Rates $ 0.5607 $ 0 .6807 $0.1200 21.4% Tier 2 Rates 1.4338 1.7406 0.3068 21.4% G-2 (Residential Master-Metered and Small Commercial) Uniform Rate 0.7365 0.8941 0.1576 21.4% G-3 (Large Commercial) Uniform Rate 0.7292 0.8852 0.1560 21.4% G-10 (CNG) Uniform Rate 0.0120 0.0145 0 .0025 20.8%* *Adjusted downward due to rounding SECTION 3C : BILL IMPACT OF PROPOSED RATE CHANGES Table 9 shows the impact of the proposed July 1, 2023 rate changes on the median residential bill for representative average winter and summer bills, with average winter bills forecasted to be significantly lower and summer bills higher. The average annual gas bill for the median residential customer is projected to be 13% lower in FY 2024 than FY 2023. However, since customer gas usage varies and the price of commodities changes monthly, the actual change may vary. Table 9 shows a representative winter period (November thru March) and summer period (April through October) bill comparison. March 2023 12 I P age GAS UTILITY FINANCIAL PLAN Table 7: Impact of Proposed Gas Rate Changes on Residential Bills Usage (Therms/month) Bill under Current Bill under Proposed Change Rates Rates $/mo. % Winter Commodity Average Actual Average Forecast Prices based on: Commodity Cost Commodity Cost Nov. 2022-Jan. Nov. 2023 -Jan. 2023 2024 30 $ 98.98 $ 66.53 $(32 .45) -33% 54 (median) 168.93 108.54 (60.39) -36% 80 262.18 175.25 (86.92) -33% 150 527.32 371.99 (155 .34) -29% --Summer (Based on May 2022 Commodity Prices) 10 $ 27.41 $ 31.08 $ 3.67 13% 18 (median) 40.11 44.74 4.63 12% 30 67.89 75.83 7.94 12% 45 104.80 117.34 12.54 12% Table 10 shows the impact of the proposed July 1, 2023 rate changes on various representative commercial customer bills. The overall increases for the G-2 and G-3 classes are projected to be about -13% on an annual basis, assuming gas commodity prices decline as described in Section 6A: Gas Purchase Costs. Table 8: Impact of Proposed Gas Rate Changes on Commercial Bills9 Usage Bill under Bill under Change (Therms/month) Current Rates Proposed Rates % 500 $ 1,282 $ 1,146 -11% 5,000 11,855 10,295 -13% 10,000 23,604 20,460 -13% 50,000 117,609 101,802 -13% SECTION 30: PROPOSED RESERVE TRANSFERS This Financial Plan includes a proposed transfer of up to $3.82 million from the CIP Reserve to the Operations Reserve in FY 2023, bringing the CIP Reserve to zero. These funds will be used to cover some of the costs for planned CIP . The CtP Reserve has a minimum level of 12 months of budgeted CIP expense (more details are in Section 6 of Appendix C: Gas Utility Reserves Management Practices). In FY 2024, the minimum level is $7 .04 million . According to the Reserves Management Practices, if at the end of any fiscal year, the minimum guideline is not met, staff shall present a plan to the City Council to replenish the reserve . Due to the extreme 9 Commodity prices for bills under current rates are based on the average actual commodity prices from July 2022 through February 2023 and projections for March 2023 to June 2023. Commodity prices for bills under the proposed rates are based on staffs forecast for July 2023 through June 2024. -- March 2023 131 Page GAS UTILITY FINANCIAL PLAN impact of the supply cost spikes during the winter of FY 2023 on the Gas Utility's reserves, balances needed to replenish the CIP Reserve are not projected to become available until FY 2028. In FY 2028, this Financial Plan projects that the Operations Reserve will reach target levels, and staff plans to transfer amounts above the target level at year end FY 2028 or sooner to the CIP Reserve and continue to replenish the reserve with available funds until the CIP Reserve is within the target range. Also i n FY 2023, staff forecasts $2.102 million in revenue from sales of allowances re l ated to Californi a's cap-and-trade program. These funds are comm itted for specific programs that reduce greenhouse gas and are tracked separately in the Cap and Trade Reserve. Staff requests Council authorization to transfer up to the $2.102 million from the Rate Stabilization Reserve to the Cap and Trade Reserve . Staff also recommends amending the Gas Utility Reserves Management Practices (see Appendix C: Gas Utility Reserves Management Practices) to authorize staff to perform thi s transfer each year into the future without a separate reso lution. In FY 2026, the final debt service payment is expected on the 2011 Utility Revenue Refunding Bonds, Series A. At that time, the $0.434 million in the debt service reserve will be returned to the Operations Reserve . The impact of these proposed transfers on reserves levels can be seen in Tab le 5 above and in Appendix A: Gas Utility Financial Forecast Detail. -------------------- SECTION 4: UTILITY OVERVIEW This section provides an overview of the utility and its operations. It is intended as general background information and to hel p readers better understand the forecasts in Section 5 : Utility Financial Projections and Section 6: Details and Assumptions. SECTION 4A: GAS UTILITY HISTORY On September 22, 1917, the City of Palo Alto issued a bond to purchase the property of Palo Alto Gas Company and continue it as a municipal enterpri se. At the time, the system was comprised of 21 miles of mains, 1,900 meters, and was valued at $65,500. PG&E supplied the gas, which was synthesized from coa l at its Potrero gasification facility. Almost immediately the City faced challenges. Losses were at nearly 25% according to PG&E's master meter, and PG&E had filed with the Ra ilroad Commission (the forerunner to today's CPUC) to increase rates by nearly 72.5%. Despite these initial hurdles, Palo Alto's system grew tremendously, and by 1924 revenues had exceeded those of the elect ric utility. Sa les were such that the annual reports of the time noted gas usage "appears to be greater than that of any other city in the state, showing that gas is a very popular form of fuel i n Pa l o Alto." Just pri or to the acquisition of the neighboring town of Mayfield's gas system (centered around today's Ca lifornia Avenue) in 1929, the m il es of main in servi ce and customer connections had doubled. Notable changes to the gas supp l y itself came in 1930, when PG&E ceased supplying purely manufactured (or coa l} gas from i ts Potrero Hill facility in San Francisco and instead switched to natural gas. In 1935, a supplementary butane injection system (later retired) was purchased from March 2023 14 I Page GAS UTILITY FINANCIAL PLAN Standard Oil to mitigate large wintertime peaks. Gas sales were at 248,658 million cubic feet (MCF) with 4,849 active services. Early gas mains in Palo Alto were made of steel, but in the 1950s, like many other utilities, CPAU switched to ABS plastic. CPAU switched to PVC plastic in the early 1970s, but around 100 miles of ABS mains had already been installed. A 1990 evaluation of the system found a steadily increasing rate of gas leaks associated with those mains, something that other gas utilities had also been experiencing. To reduce leaks, CPAU accelerated its main replacement program from 7,000 feet (1.3 miles) of replacements per year to 20,000 feet (3.8 miles) per year. This would enable the utility to replace all of its ABS and its most vulnerable steel and PVC mains with potyethy1ene (PE) mains over the course of the following 36 years.10 The Gas Utility has replaced all but .11 miles of ABS gas mains, which consists of mainly short sections of pipelines in various locations throughout the City. These sections will be replaced as the distribution mains around them are replaced. The majority of ABS, Taenite, and K40 gas services were replaced in 2020. The only ABS, Tenite and K40 gas services remaining are on moratorium streets; these services will be replaced ~s the street moratorium expires. The Gas Utility completed the replacement of approximately 22,000 linear feet of PVC gas main and over 250 natural gas services in FY22 under the Gas Main Replacement Project 23. This is an example of how local control of its Gas Utility has provided Palo Alto residents with substantial benefits. During the 1990s and 2000s, while CPAU was increasing its main replacement rate to ensure a robust gas distribution system, PG&E was underspending on safety-related infrastructure, according to a past audit.11 In the 1990s, while grappling with the issues surrounding its distribution system, CPAU was also participating in major changes to the structure of the gas industry in California. Until 1988 CPAU had a formal policy of setting its rates equal to PG&E's rates and successfully did so with the exception of one year in the mid-1970s. At times this led to inadequate revenue (1974 to 1981) as PG&E, the City's only gas supplier, regularly filed requests with the CPUC to increase the wholesale gas supply rates charged to the Gas Utility. In the 1990s, as the CPUC began deregulating the natural gas industry in California, the Gas Utility began purchasing gas from suppliers other than PG&E. In 1997 the CPUC adopted the "Gas Accord,"12 which enabled the Gas Utility (along with other local transportation-only customers) to obtain transmission rights on PG&E's Redwood transmission pipeline running from Malin, Oregon into California. In 2000/2001 the California energy crisis occurred, causing major disruptions to the Gas Utility's supply costs. Wholesale gas prices rose over 500% between January 2000 and January 2001. The Council approved drawing down reserves to provide ratepayer relief and, for two years following the crisis, CPAU rates were above PG&E's as reserves were replenished. In April 2001 the Council approved a hedging practice of buying fixed price gas one to three years into the future. After reaching a low point in October 2001, prices continued to rise, and the CPAU hedging strategy frequently resulted in a wholesale supply cost advantage compared to PG&E until prices began to decline steeply in mid-2008. At that point the Gas Utility's wholesale supply costs became 10 Staff Report CMR:183:90. /n/rostructure Review and Update, March 1, 1990 11 Focused Financial Audit of The Pacific Gas & Electric Company's Gas Distribution Operations, Overland Consulting, made available through a CPUC Administrative Law Judge's ruling on A12-11-009/113-03-007 on 5/31/2013 12 CPUC decision 97-08-055. Since then, the Gas Accord has been amended four times, with the most recent being Gas Accord V, application A.09-09-013 M a r c h 2 0 2 3 15 I P a g e GAS UTILITY FINANCIAL PLAN higher than market gas prices due to fixed price contracts entered into prior to 2008. As a result the Gas Utility's wholesale supply costs were higher than PG&E's for several years. In 2012 Council approved a plan to formally cease the hedgi ng strategy and purchase all gas on the short­ term ("spot") markets. As of July 1, 2012, the commodity portion of the gas rates changes every month based on the spot market gas price. In January 2015, the Council adopted a new rate component to coll ect the costs of purchasing allowances for the purpose of compliance with the State's cap-and-trade program.13 As of November 1, 2016, the Council adopted a resol ution changing the Local Transportation rate (which had been collapsed into the Distribution rate in 2015 to stream line bill presentation), to be a pass-through of PG&E's Gas Transportation Rate to Wholesale/Resale Customers (G-WSL) charge to Palo Alto . 14 In December 2016, Council approved a carbon neutral gas plan, with a goal of achievi ng a carbon neutral gas portfoli o by FY 2018.15 The City's gas utility has been carbon neutral since FY 2018 through the purchase of offsets. SECTION 48: CUSTOMER BASE CPAU's Gas Utility provides natural gas service to the residents, businesses, and other gas customers in Palo Alto . Close to 23,800 customers are connected to the natural gas system, approximately 21,500 (90%) of which are residentia l and 2,300 (10%) of which are non­ residentia l . In a normal year, residentia l customers consume about 10 to 11 m illion therms of gas per year, roughly 40% of the gas so ld, whi l e non -residential customers consume 60% (about 15 to 18 million therms). Residential customers use gas primarily for space heat ing (46% of gas consumed) and water heating (42 %), with the remainder consumed for other purposes such as cooking, clothes drying, and heating pools and spas.16 Non-residential customers use gas for space and water heating (73% of gas consumed), cooking (20%), and industrial processes (6%).17 The Gas Utility receives gas at the four receiving stations within Palo Alto where CPAU's distribution system connects with Pacific Gas and Electric's {PG&E's) system. These receiving stations are jointly operated by CPAU and PG&E. CPAU purchases gas from various natural gas marketers, with PG&E providing only local transportat ion service (transportation from the PG&E City Gate gas delivery hub to Palo Alto). CPAU also has transmission rights on PG&E's transmission pipeline from Malin, Oregon to PG&E City Gate, all owing i t to purchase lower priced gas at that location. CPAU does not produce or store any natural gas, and purchases gas in the monthly and daily spot markets. The cost of the purchased gas is passed through directly to customers through a rate adjuster that varies monthly with market (Bidweek) prices. In a similar fashion, the costs for local transportation is tied to PG&E's G-WSL rate schedu te, and it varies when and if PG&E changes its rate schedule. The cost of purchased gas and PG&E local transportation service usually account for roughly one third of the uti lity's expenditures. 13 Staff Re port 5397, 1/26/201 5: ll_ttos;,/lwww .cit yofpaloalto .org/civic~ax /filebank /documents/45537 l 4 Staff Re po rt 7260 10/17/2016 hll.R:(/www.cit yofpaloa lto.o rg/civ icax/fileban k/documents/54165 15 Staff Report 7533 12/05/2016 http:l/www.cityofpaloalto .org/civicax /filebank /documents/54882 16 http:(lenergyalmanac.ca .gov/na tyra lgas/overview.bt ml 17 Source: Statewide Commercial End Us e Study, Ca liforni a En e rgy Commission report, 2006. Stat is tics s hown a re for end users in PG&E Clima te Zone 4 (the Peninsula) where Pa lo Alt o is located. M a r c h 2 0 2 3 16 I P a g e GAS UTILITY FINANCIAL PLA N SECTION 4C: DISTRIBUTION SYSTEM To deliver gas from the receiving stations to its customers, the utility owns 210 miles of gas mains (which transport the gas to various parts of the city) and close to 23,800 gas services (which connect .the gas mains to the customers' gas lines). These mains and services, along with their associated valves, regulators, and meters, represent the vast majority of the infrastructure used to deliver gas in Palo Alto. CPAU has an ongoing CIP to repair and replace its infrastructure over time, the expense of which normally accounts for around 15 to 20% on average of the · utility's expenditures. Costs for main replacements have been going up in recent years. In addition to the CIP, the Gas Utility performs a variety of maintenance activities related to the system, such as monitoring the system for leaks, testing and replacing meters, monitoring the condition of steel pipe, and building and replacing gas services for buildings being built or redeveloped throughout the city. The utility also shares the costs of other system-wide operational activities (such as customer service, billing, meter reading, supply planning, energy efficiency, equipment maintenance, and street restoration) with the City's other utilities. These maintenance and operations expenses, as well as associated administration, debt service, rent, and other costs, make up.roughly half of the utility's expenses. In addition to these ongoing activities, CPAU has conducted a program to find and replace cross­ bores over the last several years. Currently, an average of $0. 7 million is estimated per year for the cross-bore program through FY 2028. SECTION 4D : COST STRUCTURE AND REVENUE SOURCES As shown in Figure 1, the Gas Utility receives about 92% of its revenue from sales of gas and the remainder from capacity and connection fees, interest on reserves, and other sources. Appendix A: Gas Utility Financial Forecast Detail shows more detail on the utility's cost and revenue structures. Figure 1: Revenue Structure (FY 2022) ■ Sales of Gas ■ Other Revenue March 2023 17 I P ag e As shown in Figure 2, in FY 2022, gas purchase costs accounted for about 46% of the Gas Utility's costs. This percentage can vary widely from year to year, as this cost is based upon market purchases, and includes costs related to cap and trade. Operationat costs in FY 2022 represented 45% of expenses and capital investment was responsible for the remaining 9%. CIP is on average about 15 to 20% of expenses, but as main replacement projects are only occurring every other year, the percentage swings more. SECTION 4E: RESERVES STRUCTURE GAS UTILITY FINANCIAL PLAN Figure _2: Cost Structure (FY 2022) ■ Operations ■ Gas Purchases ■Capital CPAU maintains six reserves for its Gas Utility to manage various types of conti ngencies and track program spending. The summary below describes each of these briefly. See Appendix C: Gas Utility Reserves Management Practices for more detailed definitions and guidelines for reserve management : • Reserve for Commitments: A r~serve equal to the utili ty's outstand ing contract liabilities for the current fiscal year. Most City funds, i ncluding the General Fund, have a Commitments Reserve. • Reserve for Re-appropriations: A reserve for funds dedicated to projects re-appropriated by the City Counc il, nearly aU of which are cap i ta l projects. Most City funds, including the General Fund, have a Re -appropriations Reserve. • Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate funds for future expenditure on CIP projects. This CIP can also act as a contingency reserve for the CIP. This type of reserve is used in other . utility funds (Electric, Water, and Wastewater Collection) as well. • Rate Stabilization Reserve: This reserve is intended to be empty unless one or more large rate increases are an ticipated in the forecast period. In that case, funds can be accumulated to spread the impact of those future rate increases across multiple years. This type of reserve is used in other uti lity fu nds (Electric, Water, and Wastewater Collection) as well. • Operations Reserve: This is the pri mary contingency reserve for the Gas Utility and is used to manage year ly vari ances from budget for operati onal gas costs. This type of reserve is used in other utility funds (Electric, Water, and Wastewater Col lection) as well. • Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and is normally empty.· • Cap and Trade Reserve: This reserve tracks unspent or unallocated revenues from the sale of carbon allowances freely all ocated by the Ca lifornia Air Resources Board to the gas util ity, under the State's Cap and Trade Program. March 2023 18 I Page GAS UTILITY FINANCIAL PLAN SECTION 4F: COMPETITIVENESS Table 11 presents residential bills for Palo Alto and PG&E for Calendar Years 2021 and 2022 compared to winter months in 2022 -2023 during the recent supply price spikes at median usage levels. The annual gas bill for the median residential customer for CY 2022 was $821, about 11% lower than the annual bill for a PG&E customer with the same consumption. PG&E's distribution rates for gas have increased to collect for needed system improvements for pipeline safety and maintenance. The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which includes the surrounding communities. Table 9: Residential Natural Gas Bill Comparison ($/month or year) Vear/Month Median Usage Palo Alto PG&EZoneX % Difference (therms}18 CY 2021 402 $ 631.28 $ 701.60 (14%) CY 2022 402 821.33 868.62 (11%) November 2022 32 62.64 76.93 (19%) December 2022 69 175.06 171.96 2% January 2023 76 393.57 217.25 81% Historically, Palo Alto's residential gas bills have been competitive relative to PG&E. During January 2023, bills increased significantly relative to PG&E. Staff is looking into reasons why gas prices spiked this winter and why PG&E's gas rates did not rise as rapidly as Palo Alto's gas rates during the recent market price spikes. Governor Newsom has requested that the Federal Electric Regulatory Commission start an investigation of winter gas prices. The Mayor sent a letter to the Governor on February 7, 2023 expressing the City's support for pursuing these investigations. Similar investigations are underway by the California Public Utilities Commission (CPUC) in collaboration with the California Energy Commission and California Independent System Operator (CAISO). Staff is also in the process of doing a more extensive competitiveness review of commercial customer bills and will provide updates in the future. SECTION 4G: GAS SUPPLY PASS-THROUGH RATES The City has four pass-through rates related to supplying gas to customers: 1) gas commodity, which represents the cost of buying gas in the markets, 2) gas transportation, which represents the cost of transporting purchased gas to Palo Alto, 3) Cap and Trade compliance, which represents the cost of mandated participation in the State's cap and trade program, and 4) carbon offset charge, which represents the cost of buying offsets for the City's Carbon Neutral Gas Portfolio. Gas commodity rates are forecasted to decline slightly over the forecast period, but increases in other rate components are forecasted to lead to a net gradual increase in total gas supply costs over the forecast period. 18 Median usage data based on CY 2022 March 2023 19 I P age GAS UTILITY FINANCIAL PLAN For the gas commodity charge, starting in July 2012, CPAU replaced a "laddering" hedging strategy for purchasing gas supplies with a strategy to buy gas on the short-term, or "spot" markets and pass the commodity cost to customers on a monthly basis. Prior to December 2018, commodity prices had generally fluctuated in a fairly narrow band, averaging around $0.32/therm . Over the last few years, a variety of factors combined that led to more va r iability in prices: Regional temperatures were cooler than normal, but in addition, gas supplies stored in underground facilities have been lower than normal, as well as constrained due to problems with the Aliso Canyon faci lity in southern California. There have been periodic pipeline constraints at both the northern and southern California borders. While there was not an actual constriction on supply, the confluence of all these factors drove up the bidweek prices for all California delivery points . There has continued to be a bit more volatility in the market, and while the gas market price trend appears slightly downward over time, commodity prices are not projected to decrease to FY 2022 levels. Figure 3 shows the City's actual commodity rates through December 2022, and projected rates through FY 2025. Note that while gas commodity costs might be forecasted to decline slightly, increases in other gas supply components (transportation, environmental charges) are expected to offset that, leading to a gradual increase in overall gas supply costs. Natural gas prices through the forecast period are projected to remain higher than the very low levels seen in in FY 2022 and earlier due to a number of factors. These factors include inflation , the war in Ukraine, and growth in LNG exports due to global demand. Prices are also forecasted to be higher in the region due to more reliance on natural gas for power generation due to low or unpredictable hydro conditions, continued likelihood of extreme or unexpected weather events, lower gas storage levels, constraints on the transportation of gas, and overall increased market volatility resulting in pricing premiums. Figure 3: Palo Alto Gas Commodity Rates, Actual and Projected, FY 2012 -FY 2025 4.S E 4.0 ~ .t::. 3.S ~ ~ 3.0 ~ "' a:: 2.S -~ "0 2.0 0 E E 1.5 0 u "' 1.0 "' C) ,,~"\ - 0.5 _,,,,_ ... 0.0 -Actual - - •Projected During winter 2022/2023, gas commodity prices at the monthly and daily Citygate indexes were abnormally high . In mid-December, Citygate daily index prices sett led higher than $5/therm, the highest natural gas spot prices since December 2000. Severa l trends occurring simultaneously March 2023 20 I P age GAS UTILITY FINANCIAL PLAN contributed to prices rising to these levels including widespread below-normal temperatures, high natural gas consumption, reduced natural gas flows, transmission pipeline constraints, and low natural gas storage levels in the Pacific region. These extreme market conditions impacted most utilities throughout the Pacific and Rocky Mountain regions of the United States. Staff anticipated that the Citygate commodity price for January 2023 would exceed the Commodity rate cap of $2/therm, based on the monthly forward price data that suggested it would settle around $3.5/therm. The City Council approved staff's recommendation to double the commodity rate cap to $4/therm (see Reso #10090) effective January 1, 2023. The settled commodity price at Citygate index for January 2023 was around $5/therm -even higher than the updated rate cap. Due to the rate cap, CPAU was not able to recover the full costs of January 2023 supply purchases from customers, but the impact to the gas reserves was far less than if the commodity rate cap had stayed at $2/therm. Figure 4 below shows the actual and projected Palo Alto gas commodity rates and the settled Citygate price on January 2023. The projected commodity rates in February 2023 and beyond are expected to be lower than January 2023, but are not expected to decline to FY 2022 levels. Figure 4: Palo Alto Gas Commodity Rates, Commodity Rate Caps, and Citygate Actual Prices 6 s 4 $4/therm Cap $2/therm cap ,• 2 -•••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••••• 1 0 ->-Citygate Price ~Palo Alto Rate - -■ Prqected Rate SECTION 5: UTILITY FINANCIAL PROJECTIONS SECTION SA: LOAD FORECAST Gas usage in Palo Alto is volatile, varying with both economic and weather conditions. As shown in Figure 5, in the early 1970s, gas purchases reached over 45 million therms per year . Usage dropped dramatically in the 1976/1977 drought when customers saved significant amounts of (hot) water by upgrading to efficient showerheads . During the 1980s and 90s average gas usage was around 36 million therms per year. Usage dropped again in the early 2000s. In FY 2001, gas prices escalated during the California energy crisis and Palo Alto's rates increased by nearly 200%. From 2003 to 2011, usage decreased by 2.3% mainly as a result of continued customer investments in energy efficiency. March 2023 21 I Page GAS UTILITY FINANCIAL PLAN In 2014 and 2015, unusually warm winters, as well as ongo i ng drought, caused gas usage to tumble to historic lows. In 2017 and 2018, as the drought eased, gas usage increased again, but appeared to have stabilized. The COVID pandemic resulted in gas usage decreasing again, mainly in the commercial sectors as a result of many businesses operating staff remotely. Gas usage decreased by about 12% in 2020 and 2021, compared with 2019. Figure S: Historical Gas Supply Purchases 50 -FY basis - - -CT basis 20 The ongoing pandemic recovery, as well as usage decl ines similar to what has been seen in the electric uti lity, leads to questions of how long the trend of reduced consumption in gas will last. As seen with prior economic and drought-related gas usage declines in the past, it is likely that consumpt ion wi l l not come back to pre-conservation/pandemic levels but will li kely become a long-run usage decline. Further changes, such as the voluntary replacement of gas appliances with el ectr ic appli ances, building el ectrification of new construction as mandated by the 2019 Reach Code, and customer behavior are also expected to l ower long run usage, and this forecast will be rev ised accordingly as more customers adopt these measures. 19 In addition, separate strategic pl anning and financial anal ysis will be performed separate from this Financial Plan to address a financia l and infrastructure st rategy for the gas utility during a transition to an electrified community. Any insights from separate analyses w ilt be integrated into future Financial pl ans. Based on bi lli ng data through the end of 2022, gas usage has shown modest recovery with the return of w i nter heating. It is too early in the winter heating season to tell what the trend will con tinue to be. However, long term declining gas consumption will put upward pressure on rates, as a generally increasing cost to operate and distri bute gas will be spread across fewer units of sa te . 19 The City's Sustainability and Climate Action Plan (S/CAP) is currently being updated. As building electrification goals in the S/CAP are updated, they will be modeted i n this load forecast or alternative load forecasts. M a r c h 2 0 2 3 22 I P a g e -----GAS UTILITY FINANCIAL PLAN Figure 6: Gas Supply Purchases Forecast 40 -38 .. E 36 GI ~ 34 .. C ~ 32 ~ 30 ~ 28 ~ 26 :::, '; 24 .. I!> 22 20 -----·-- ----------- -- -Actual ••••Projected N ... 0 N '° ... 0 N i,;i 0 N ... .· ...... t.. ... -........... :e 0 N SECTION SA: FY 2018 TO FY 2022 COST AND REVENUE TRENDS Figure 7 and Appendix A: Gas Utility Financial Forecast Detail show how costs have changed during the last five years as well as how staff project costs to change over the next five years. While the gas utility strives to maintain a steady rate of funding for main replacement over time, this funding pattern was disrupted from FY 2015 to FY 2020. In FY 2015, no funding for gas main replacement was budgeted due to the fact that staff was completing a prior major gas main replacement project, the largest in utility history, which completed replacement of most of the ABS gas mains in Palo Alto. The next main replacement to be budgeted involved replacements of gas mains on University Avenue, a project that evolved into the Upgrade Downtown project involving a coordinated replacement of several different types of infrastructure to avoid multiple disruptions to the business district. This multi-year planning effort did not allow for design of other new projects, and the hiatus in starting a new main replacement project allowed the Gas Utility to temporarily keep rates lower. In FY 2021 the gas utility returned to routine funding for main replacement for the gas utility, though gas main replacement investment is likely to become more complex as the City plans for a transition to an electrified community. Revenues have fluctuated but generally matched expenses in the years between FY 2018 and FY 2022. The absence of new budget for main replacement projects for several years, as well as the availability of relatively large reserves, reduced the need for rate increases until FY 2019. The last adjustment to gas distribution rates was a 3% increase to the total system average gas rate (supply rates plus distribution rates) in July 2022. The commodity cost and revenue increases in FY 2022 were the result of higher market commodity prices. Figure 4 in Section 4G shows the gas commodity prices and Figure 3 Palo Alto's gas commodity rates . Gas supply costs are passed through to customers, and change month to month with a cap of $4/therm . Figure 7 shows the actual overall system average rate change from FY 2018 through FY 2023 (shown in grey) and the projected overall system average rate change for FY 2024 through FY March 2023 23 I Page GAS UTILITY FINANCIAL PLAN 2028 (shown in red) both excluding supply-related rate changes. The rate increases on ly include the needed i ncrease for the distrJbution rate as a percentage of the base gas utility sales revenue. Figure 7: Gas Utility Expenses, Revenues, Rate Changes Excluding Supply-Related Changes Actual Costs through FY 2022 and Projections through FY 2028 $100 $90 $80 ~ $70 .Q ; $60 .;;-$50 $40 $30 $20 $10 Rate Changes (excluding supply related rate changes) O",f, 4% 6% 2% 3% 3% 8% 7% 6% $0 +---..---... Acluals Projoctions 6% 6% -Revenue CIC8pltal Investment ■Gas Supply Cl Operations ■Transfers ■ Debt Senllce Figure 8 shows the actual overall system average rate change from FY 2018 through FY 2023 (shown in grey) and the projected overa ll system average rate increase for FY 2024 through FY 2028 (shown in red) including the supp ly-related rate changes. The rate changes include the overall change in the rate as a percentage of the base sales revenue for the gas utility. Because staff expects the spike in gas market commodity prices i n FY 2023 not to continue, the projected FY 2024 costs are much lower in FY 2024. This is effectively an overall decrease in the system average rate despite rising costs for operating and capital costs for the distribution system. Figure 8: Gas Utility Expenses, Revenues, Rate Changes Including Supply-Related Changes Actual Costs through FY 2022 and Projecti ons through FY 2028 Rate changes (with supply related rate changes} 0% 2"/o 33% 44% -13% 3•1,, $90 $80 +---------­ $70 ➔-----------llr..i 6% $60 oi' .§ $50 +----------L ~$40 tit' $30 $20 $10 $0 March 2023 Actuals Projections 4% 4% -Revenue a Capita I lnvKllnent aGasSupply ■ Oebt Senrit4t DOperat101111 ■Transfer,. 24 I P age GAS UTILITY FINANCIA L PLAN SECTION SB: FY 2022 RESULTS Sales revenues were higher than projected in the FY 2023 Financial Plan by about $3.6 million, due to higher revenue from higher gas commodity rates, but other sources of funds were lower by $0.7 million. On the expense side, purchase costs came in about $4.4 million higher than projected due to increased market commodity costs. Operational expenses were about $0.9 million higher than projected, with increases in Salary and Benefits and Allocated Charges. Total FY 2022 expenses were $52.7 million compared to $47.3 million projected in the FY 2023 Financial Plan. Table 12 summarizes the variances from forecast. Table 10: FY 2022 Actual Results vs. FY 2023 Financial Plan Forecast {$000) Net Cost/(Benefit ) T ype of Change Sales Increase due to Commodity Price Increases (3,624) Revenue Increase Lower Interest Income and Non-Sales Revenues 721 Revenue Decrease Higher Gas Purchase Costs 4,396 Cost Increase Hig her O&M and Customer Services Costs 941 Cost Increase Net Cost / (Benefit} of Variances 2,43S SECTION SC: FY 2023 PROJECTIONS Current projecbons indicate that sales revenues will be higher than last year's forecast by about $23.4 million, due to higher projected commodity costs. Other revenues and transfers are projected to be nearly $1 million lower. Operations costs estimated to be lower by about $0.6 million due to lower transfers. Gas purchase costs greatly increased due to higher than expected market commodity prices. Not all gas commodity costs were passed through to customers, leading to a $5 million variance for FY 2023 that significantly impacted the Operations Reserve. Table 13 summarizes the projected variances from the FY 2023 Financial Plan. Table 11: FY 2023 Projected Results vs. FY 2023 Financial Plan Forecast ($000) Net Cost/ {Benefit) Type of Change Sales Increase due to Commodity Price Increases (23,411} Revenue Increase Lower Interest Income and Non-Sales Revenues 963 Revenue Decrease Higher Gas Purchase Costs 28,045 Cost Increase Lower O&M and Customer Services Costs (565} Cost Decrease Net Cost / (Benefit} of Variances 5,031 SECTION SD: FY 2024-FV 2028 PROJECTIONS Figure 7 above shows overall costs for the Gas Utility increasing by over 50% from FY 2022 to FY 2023 due to the supply cost increases discussed above. Costs are projected to decline in FY 2024 and increase by 3% annually on average throughout the rest of the forecast period. Gas commodity costs are the most vari able component and represent the largest estimated jump in costs from FY 2022 to FY 2023. Staff projects commodity costs to approximately double from FY 2022 to FY 2023 and then decline in FY 2024, though not to FY 2022 levels. For the remainder _?f the five-year forecast period from FY 2024 through FY 2028, total gas supply costs ~r~ M a r c h 2 0 2 3 25 I P a g e GAS UTILITY FINANCIAL PLAN projected to increase gradually, with gas commodity costs projected to decline gradually, offset by significant increases in transportation and environmental costs. Commodity price forecasts that far into the future are highly uncertain. Market prices could increase or decrease. Cap and Trade allowance costs are increasing by 15.7% annuaHy from FY 2024 to FY 2028.20 Staff projects transmission costs to increase steadily at 4-6% annually from FY 2024 to FY 2028. 21 Carbon offset products are also increasing at 7% per year on average. 22 Staff anticipates annual capital expenditures will fluctuate during the forecast period due to planning for larger main replacement construction projects every other year instead of smaller projects annually. This main replacement schedule allows CPAU to meet its main replacement needs while addressing challenges in the current construction market and optimizing current staffing resources. Averaging the cost of CIP over these two-year cycles, costs are expected to increase by around 10.9% on average annually from FY 2024 through FY 2028. General inflationary increases for operating expenses are around 2 to 3% per year. Salaries and benefits expenses are projected to rise at 2 to 8% per year, per similar assumptions used in the City's Long-Range Financial Forecast. As shown in Figure 9, this Financiat Plan projects to utilize all funds from the CIP Reserve in FY 2023 in order to par~ially fund the CIP budget. Because of the sharp rise in commodity costs, there will be no available funds to replenish the CIP Reserve until around FY 2028. By FY 2026, staff expects gas fund costs to align more closely with revenues and this will allow the Operations Reserve to begin to replenish. In FY 2027 and FY 2028 the Operations Reserve reaches levels within the guideline range. Once those reserve balances are available, staff will consider transfers to replenish the CIP Reserve. Per the Reserves Management Practices (Appendix C), Section 6, any rate plan that does not return CIP reserves to minimum levels within one year requires Council approval. Figure 10 shows the year end FY 2022 CIP Reserve levels and shows the reduction to zero by the end of FY 2023. At the end of FY 2022 there were also balances in the CIP Reappropriations and Commitments Reserves, which is common because capital projects often cover multiple years . Figure 10 also shows an assumption that the level of funding in the CIP Reappropriations and Commitments Reserves will be the same during the forecast period as at year end FY 2022. However, even with the CIP Reserve together with the CIP Reappropriations and Commitments Reserves, staff does not expect that the reserve balances will reach the minimum level of 12 months of budgeted CIP expense. 20 Based on allowance broker quotes. 21 The transportation rates for calendar years 2022-2026 reflect the rates in the September 30, 2021 prepared testimony (A.21-09-018) regarding PG&E's 2023 Gas Transmission & Stor age (GT&S) Cost Allocation and Rate Design (CARD), afterward a 3% escalation rate is applied. 22 Based on carbon offset provider quotes. March 2023 26 I Page • $30 -;;- C ~ is2s $JO $1S $10 $5 $0 GAS UTILITY FINANCIAL PLAN Figure 9: Gas Utility Reserves Actual Reserve Levels for FY 2022 and Projections through FY 2028 N ,.., -.... ... ~ ~ g ~ g .... N t'.: ~ ~ :i,-... ~ .... $ "' >-... 00 N 0 N i:: 0 CIP Reserve a Operations Reserve 11.'1 Rate Stabilization ■ Reserve for Reappropriations Figure 10: Gas CIP Actual Reserve Levels for FY 2022 and Projections through FY 2028 _$18 1 !. $16 $14 IIMII CIP Reserve $12 $10 -CtP Reapproprlatlo M./ $8 Commitments -Reserve Minimum $6 $4 -Reserve Maximum 52 $0 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 ------- March 2023 27 I P age GAS UTI LITY FINANCIAL PLAN Staff is evaluating when to implement a fixed funding amount that will be provided from the Operations Reserve to the CIP Reserve to fund capital improvements . This approach will provide stability to the Operations Reserve by providing for a steady funding stream for CIP work and by reflecting fluctuations due to CIP such as project delays or accelerations in the CIP Reserve; ultimately, this should result in more stable customer rates. The use of the CIP Reserve in this way will isolate fluctuations due to CIP delays or accelerations and allow those to be viewed together in the CIP Reserve. Conversely, other trends or factors affecting the Operations Reserve will be easier to identify and communicate. Without this change, both CIP costs and revenues flow solely through the Operations Reserve. Because of the substantial impacts to gas reserves due to recent increases in supply costs, CIP fixed funding will not be implemented at this time, and possibly not within the 5-year planning horizon. Staff will continue to evaluate as ending reserve balances become available. SECTION SE: RISK ASSESSMENT AND RESERVES ADEQUACY As noted earlier, unprecedented and extreme gas prices in FY 2023 and unexpected expenses in FY 2022 significantly impacted the gas utility's reserves, and double-digit rate increases would be required to return reserves to within guidelines. Staff is proposing to allow the Gas Operations Reserve to be below the risk assessment levels for two fiscal years and below the minimum guideline for three. This Financial Plan projects the Gas Utility's primary contingency reserve, the Operations Reserve, to be below guideline levels at the end of FY 2023 through FY 2026 and then return to w ithi n the gui deline range by the end of FY 2027 and i ncrease to approximately target levels by the end of the forecast period. Per the Reserves Management Practices (Appendix C) any rate plan that i nvolves returning the Operations Reserve to within guideline levels in more than one year requires Council approval. Figure 11 shows the Operations Reserve a longside the guideline levels . $30 $25 $20 -;;- c $15 ~ 'i -$10 $5 , ., Figure 11: Operations Reserve Adequacy , ' , '' , ' , ' , ', , ' ·-··-·~- $0 +---~--~---~--....... --....... ---....... --..... March 2023 -Reserve (Year-En d) -Reserve M aximum --Reserve Target -Reserve Minimum -Risk Assessment 28 1 Page GAS UTILITY FINANCIAL PLAN Forecasted Operations Reserve levels also drop below the short♦term risk assessment for the Utility at the end of FY 2023 through FY 2025, return to above the short-term risk assessment level by the end of FY 2026, and remain above this level for the remainder of the forecast period. Table 14 summarizes the risk assessment calcu l ation for the Gas Utility through FY 2028. The risk assessment includes the revenue shortfall that cou ld accrue due to: 1. Lower than forecasted distribution sales revenue; and 2. An increase of 10% of planned system improvement CIP expenditures for the budget year. Table 12: Gas Risk Assessment ($000) FY 2023 FY 2024 FY202S FY2026 FY 2027 FY 2028 Total non-commod ity revenue $26,328 $32,014 $35,518 $37,972 $40,519 $43,327 Max. revenue variance, 16% 16% 16% 16% 16% 16% previous ten years Risk of revenue loss -·-$4,222 $5,134 $5,696 $6,089 $6,498 $6,948 CIP Budget $9,050 $5,825 $9,100 $6,400 $9,050 $10,685 CIP Contingency @10% $905 $583 $910 $640 905 $1,069 Total Risk Assessment value $5,127 $5,716 $6,606 $6,729 $7,403 $8,016 SECTION SF: LONG-TERM OUTLOOK It is difficult to predict commodity costs in the long-term (S to 35 years) as a variety of trends can impact them positively or negatively. For example, advancements in gas extraction technology like tracking may lead to increased supplies of gas, but also face increased scrutiny for their environmental effects. Additionally, factors such as pipeline capacity for transporting natural gas, storage levels impacted by weather and changes in demand, and injection or withdrawal activity also play a role in determining commodity costs. On the demand side, a continued shift from coal to natural gas for electricity generation, ari expansion of liquified natural gas export capabilities, or an increase in manufacturing in the U.S. might drive up natural gas prices, but other factors, such as generally more mild winters or an increased drive towards electrification, might drive gas demand lower. It is also difficult to predict the magnitude of the additional cost impacts associated with the State's cap-and-trade program over the long term. In the face of this uncertainty, CPAU is able to protect the financial position of the Gas Utility by continuing its current strategy of passing these costs directly to its customers via month-varying rate adjustment mechanisms, though the City plans to evaluate a potential winter hedging program. The City pursues a policy of purchasing offsets to ma_ke gas usage in Palo Alto carbon neutral. The cost is not to exceed $0.10/therm. Future CIP investment needs for the Gas Utility may be lower than in the past, although costs per foot for main replacement have increased substantially. The Gas Utility has replaced nearly all of its ABS gas mains and its most problematic steel and PVC mains as well. The PE pipe being used now is expected to have at least a fifty-year lifetime, and there is growing evidence that it may last much longer than that. This would result in tower CIP investment over the long term. CPAU is continuing to study and develop its future main replacements priorities and strategy. Long-term state or local climate goats will also have a major impact on the Gas Utility. The Global Warming Solutions Act, Assembly Bill 32, set a goal of reducing greenhouse gas (GHG) emissions -------- M a r c h 2 O 2 3 29 I P a g e GAS UTILITY FINANCIAL PLAN to 1990 levels by 2020. In its December 2007 Climate Protection Plan, the City set a goal of lowering emissions to 15% below 2005 l eve ls by 2020. As a community Palo Alto achieved these goals in 2012 even with continued use of natural gas for heating, cooking, and industrial processes. However, to achieve the recently adopted Sustainability and Climate Action Plan (S/CAP) goal of an 80% reduction in carbon emissions by 2030, or the State's adopted goal of an 80% reduction in emissions by 2050, extensive electrification of gas-using appliances is necessary. Extensive electrification cou ld result in stranded investment and higher rates as the costs of the distribution system are recovered over a lower sales base. It is instructional that, in the recent discussion draft of its scoping plan update, CARB says, to meet those goals, natural gas use would have to be "mostly phased out."23 Staff has begun to evaluate how to manage potential impacts of these trends. Staff expects gas utility costs associated with electrification including safely decommiss ioning gas pipes. This Financi al Plan includes $4 million in FY 2028 for these costs, although detailed cost estimates are not yet available. These costs are expected to grow as staff studies them in more detai l, and alternative funding sources may be required. The S/CAP Goals and Key Ac'tions and Work Plan will include strategic planning for the gas utility for managing the transition to an electrified community, and this is also a strategic planning priority for the Utilities Department. SECTION SG: ALTERNATIVE GAS INCREASE PLANS The gas utility's transfer to the City's General Fund is a component of the City's gas rates. City voters first authorized the transfer in 1950, and in November 2022 voters approved Measure L, affirming the continuation of this practice by amend ing the Municipal Code. Specifically, section 2.28.185, "Natural Gas Utility Transfer" states: , Each fiscal year the City Council may transfer from the natural gas utility to the general fund an amount equal to 18% of the gross revenues of the gas utility received during the fiscal year two fiscal years before the fiscal year of the transfer. At its discretion, the City Council may decide to transfer a lesser amount. The projected cost of the transfer shall be included in the City's retail natural gas rates as part of the cost of providing gas ser:.vice. The attached Financial Plan proposes an 18% transfer, $7,191,000 for FY 2023, which aligns with the voter-approved changes codified in PAMC 2 .28.185. Measure L authorized Council to make the transfer annually, and granted Council the ability to approve a lower amount. Although Council w ill formally direct the FY 2024 transfer amount next year, Staff has provided prel i minary projections for FYs 2024 -2026: Alternati ve 1 proposes transferring 18% of gross revenue as voters approved in Measure L, and Alternative 2 proposes a transfer between 15.5% and 11.1% annually through FY 2026. Staff prepared Alternative 2's lower transfer percentages in response to recent increases in gas d i stribution rates and supply costs; this alternative is projected to create FY 2024 -2026 transfers similar to the annual 2% to 3% growth rate in the transfer prior to Measure L. To illustrate, Alternative 2 links the FY 2024-2026 transfers to the Consumer Price Index (CPI). CPI is projected 23 Climate Change Scoping Plan, First Update, Discussion Draft for Public Review and Comment, California Air Resources Board, October 2013, pg'-. 8_8 . __ M a r c h 2 0 2 3 30 I P a g e GAS UTILITY FINANCIAL PLAN to be 3% long term, though staff projects 5% CPI increases in FY 2024 and FY 2025. Table 15 shows a 6% per year projection as the maximum proposed increase under Alternative 2; actual increases for the years shown would be capped at 6% or CPI, whichever is less. Table 16 shows the amount of the transfer both in dollars and as a percentage of utility revenue for each fiscal year, as well as the projected rate of annual growth in the transfer. Table 12 below shows the distribution rate increases (as a percentage of the total bill, excluding supply cost changes) associated with each alternative. Table 13: Proposed/ Projected Transfers as% of Gross Revenues Two FY Prior24 Proposed Projected FY2023 FY2024 FY2025 FY 2026 FY 2027 FY 2028 Gas Utility Gross Revenue Two Fiscal Years Prior ($000) Alternative 1 39,950 49,634 72,570 66,927 71,878 78,305 Alternative 2 66,269 69,453 75,133 Percent of gas utility gross revenue to transfer Alternative 1 18.0% 18.0% 18.0% 18.0% 18.0% 18.0% Alternative 2 15.5% 11.1% 12.9% 13.1% 12.8% Transfer amount ($000) Alternative 1 7,191 8,934 13,063 12,047 12,938 14,095 Alternative 2 7,622 8,080 8,565 9,078 9,623 Change in Transfer(%) Alternative 1 -1% 24% 46% -8% 7% 9% Alternative 2 6% 6% 6% 6% 6% Table 14: Summary of Rate Changes for Alternatives (Excludes Supply Rate Changes) FY 2023 FY2024 FY2025 FY 2026 FY2027 FY2028 Alternative 1 4% 9% 10% 8% 5% 5% Alternative 2 8% 7% 5% 5% 5% 24 Measure L authorizes a transfer based on 18% (or a lesser percentage if approved by Council) of the revenue for two fiscal years prior, so the FY 2024 transfer is based on FY 2022 revenue. M a r c h 2 0 2 3 31 I Pa g e GAS UTILITY FINANCIAL PLAN Figure 12: Gas Utility Expenses, Revenues, and Rate Changes Excluding Supply•Related Rate Changes (Alternative 1) Actual Costs through FY 2022 and Projecti ons through FY 2028 Rate changes (excludi ng supply-related rate changes) 0% 4% 5% 2 % 3% 3% 9% 10% 8% 5% 5% $100 $90 $80 $70 -$60 u, _§ $50 ~ -;;:; $40 $30 $20 $10 $0 co CJ) ..... ..... ,- 0 0 ~ N N N Actuals Projections -- SECTION 6: DETAILS AND ASSUMPTIONS SECTION 6A: GAS PURCHASE COSTS -Revenue □ Capital Investment 1::1 Gas Supply □ Operations ■Transfers ■ Debt Service The Gas Utility purchases much of its gas for del ivery at Malin, Oregon which is almost always less expensive than delivery at PG&E Citygate, even including the costs of transmission from Ma lin to Citygate. The Gas Utility purchases gas on a month -ahead and day-ahead basi s in the spot market. The years from FY 2009 through FY 2022 have seen gas prices in a relative ly narrow but low band. Starting in late 2021, and becoming more acute starting in the summer of 2022, lower levels of natural gas in storage, afong with colder than normal weather and transmission pipeline constraints on both the northern and southern borders of Ca lifornia has created short­ term price spikes and increased vo latility, as shown in Figure 14. These market conditions exacerbated and caused unprecedented price spikes during December 2022 and January 2023 when Citygate prices reached as high as $49.52 on the monthly index and up to $57.07 on the daily index. Details of this event was descri bed in Secti on 4G: Gas Supply Rates. This event has greatly increased the commodity costs in FY 2023, esti mated at about $22 million or 327% above budgeted, through January 2023. The commodity costs are a pass-through to customers, and the gas utility was able to recover most of the costs. To mitigate impacts of March 2023 32 I P age GAS UTILITY FINANCIAL PLAN future short-term spikes for customers, the gas utility plans to investigate the possibility of a winter hedging program, with the goals to mitigate risks for the gas utility and bring price stability to ratepayers. Figure 13: Gas Commodity Monthly Market Prices at Malin and PG&E Citygate 60 -;-so ~ E E 40 ;a Ill ~ ~ 30 ~ ~ 20 E E 8 10 0 ~ II\ II\ II\ ID ~ ID I.Cl ,._ ~ ,._ ,._ c:o ~ ~ co CJ\ ~ ~ C1l 0 0 0 0 ... ... ... ... N N N N ... ... ... ... ... ... ... ... ... ... ... ... ... .-l 'l' 'l' N 'l' 'l' N N N 'l' N N r:i C: ,!_ ..I. t: C: ,!_ ..I. t: c!:: ,!_ ..I. t: c ,!_ ..I. t: c ,!_ ..I. t: C a ..J. ti C ,!_ ..I. t: C ,!_ ..1. t:: !!! Q.. :::, !!! Q.. :::, !!! Q.. :::, .!!! Q.. :::, !!! Q.. :::, 111 :::, 111 Q.. :::, 111 Q. :::, < .... 0 < .... 0 < .... 0 < .... 0 < .... 0 .... < .... 0 .... < .... 0 ..... < .... 0 -CitYl!ale Actual - - -Malin Actual Even as supply conditions improve, relieving the high prices seen in the winter of 2022/2023, natural gas prices through the forecast period are projected to remain higher than the very low levels seen in previous years due to a number of factors described in Section 4G: Gas Supply Rates. On September 15, 2014, Council adopted a resolution (Reso. #9451) authorizing the City's participation in a natural gas purchase from Mu nicipal Gas Acquisition and Supply Corporation (MuniGas) for the City's entire retail gas load for a period of at least 10 years . The MuniGas transaction includes a mechanism for municipal utilities to utilize t heir tax-exempt status to achieve a discount on the market price of gas. As of November 1, 2018, gas began flowing under this program, reducing the City's gas commodity cost by about $1 million per year and saving gas customers approximately $0.03 per therm on the commodity portion of their bills. Gas commodity costs are forecasted to stay fairly steady over the next several years, but forecasts of commodity costs are very uncertain. Figure 15 shows the projected gas prices used to generate this forecast. Projections for transmission costs associated with transporting gas over PG&E's Redwood transmission pipeline (from Malin, Oregon to the PG&E Citygate) are based on rates adopted in the most recent update to the Gas Accord. March 2023 33 I Page .... r:i C 111 .... GAS UTILITY FINANCIAL PLAN Figure 14: Annual Average Wholesale Gas Market Price Projections 14 ------------------ 2 0 FY2023 FY2024 FY202S FY2026 FY2027 FY2028 FY2029 FY2030 FY2031 FY2032 FY2033 -Citygate -Malin PG&E's Local transportati on rates have increased over the past few years and are projected to sl owly increase annually in future years. Figure 16 shows the average annual PG&E gas tran sportation rates without the Cap-and-Trade exemption rates for actuals up to Q2 of FY 2023 and projected up to FY 2033. -0.40 E ] 0.3S ~ .,,_ f 0 .30 .. ~ 02S 0 i 020 0 ~ 0 ,15 .. ~ "' 0.10 ~ ::a 0.05 ~ 0 .00 Figure 15: PG&E Gas Local Transportation Rates, Actual and Projected -------------------•• -.-••• ••" .... -••1 "' ..... ••••• Ii ♦ ••• Ii Ii • ----------................ . ,,,--· ······· ...... + ... 'Ii • FY FY FY FY FY FY FY FY FY FY FY FY FY FY FY 2019 2020 2021 202 2 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 -Actual · ··•·•Projected For Cap and Trade compliance costs, the gas utility has been regulated under California's greenhouse house (GHG) regulations since January 2015 with a GHG emi ssions cap that declines over time. The gas utility receives carbon allowances equal to the emissions allowed under the cap and is required to auction off a port i on (60% in 2022, increasing by 5% annually) of the allowances through the state Cap and Trade Program. To meet its annual GHG compliance obligation, the gas utility must purchase allowances based on actual gas load. Proceeds of allowance sales must be used with i n 10 years of their receipt, and Palo Alto is developing programs and plans to utilize them . March 2023 34 I Page GAS UTILITY FINANCIAL PLAN The auction price to either purchase or sell allowances also increases annually by 5% plus inflation. Given the rate of increased allowance purchases and the increasing market prices, these costs are anticipated to increase from $1.5 million in FY 2022 to $6.8 million in FY 2030, about an 18% increase per year on average. The City also has a Carbon Neutral Natural Gas plan (Staff Report 744125 ) whereby carbon offsets are purchased in an amount equal to the emissions generated by the communities' natural gas use. These high-quality carbon offsets support projects that reduce the amount of GHGs in the atmosphere, such as forest maintenance or capturing methane from dairy farms. Purchasing carbon offsets is a good first step towards reducing carbon in the atmosphere, but the longer­ term goal is to reduce the community's use of natural gas by maximizing efficiency and switching to high-efficiency electric appliances where possible. The costs for these offsets are projected to increase from $2.2 million in FY 2022 to $2.9 million in FY 2030. SECTION 6B: OPERATIONS Operations costs include the Customer Service, Demand Side Management, Operations and Maintenance (including Engineering}, Resource Management, and Administration categories in Figure 17, below. Debt service, rent, and transfers are also included in Operations costs (excluding the General Fund equity transfer). Appendix D: Description of Gas Utility Cost Categories includes detailed descriptions of the activities associated with these cost categories. Operations costs are generally projected to increase by 2 to 3% per year on average. Salary and benefits, inflation, and other assumptions match those used in the City's long-range financial forecast. Operations costs include funding for the cross-bore program. In the 1970s CPAU, like many other utilities, adopted horizontal drilling as an alternative to trenching when installing new gas services. This created the possibility of cross-bores, which can happen when a gas service is bored through a sewer lateral. Though cross-bores are very rare, they can create a dangerous situation when a contractor attempts to clear a blocked sewer line, because if the cross-bored gas service is damaged during the line, clearing it can result in a gas leak. CPAU has been inspecting new gas services since 2001, and in 2011 began video inspections of the sewer laterals at the location of horizontally-drilled gas services installed before 2001. This inspection program has cost roughly $1 million per year since FY 2012 and decreased in FY 2023 with the completion of Phase Ill of the cross-bore inspection project. While a majority of sewer laterals have been inspected, staff has come across several services which are not able to be scoped, either due to infiltration by roots or broken/collapsed pipe segments. Staff has included $0.6 million to $0.8 million per year in additional funding between FY 2024 and FY 2028 to complete the inspections within the next 5 years. During FY 2021, administration costs, that include charges for administrative functions provided by the City's General Fund staff, were lower than usual because of the impacts of the pandemic 25 https ://www.cityofpaloalto.org/ civicax/fi lebankj docu m~nts/~4588 March 2023 35 I P age GAS UTILITY FINANCIAL PLAN increasing vacancies as well as with cost reduction measures implemented across the City departments. Figure 16: Actual and Projected Operational Costs $»~------------------ ,~------------------- $15 ------ $i0 $0 SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP) • O.,bt $e1Vke and transfen ■ Resource Manaaemenl •O~dons& Malnt-n<e ■ Demond Side Mana1emen1 • customer SeNice • Admlnislr•Uon (nc:ludln1 debt sen,ioe •nd lr•mfen) The Gas Utility's CIP consists of the following programs and budgets: • The Gas Main Replacement Program, under which the Gas Utility replaces aging gas mains and mains ranked to have the greatest risk scores within the system. • Customer Connections, which cover the cost when the Gas Utility installs new services or upgrades existing services at a customer's request in response to development or redevelopment. The Gas Utility charges a fee to these customers to cover the cost of these projects. • Ongoi ng Projects, which cover the cost of routine meter, regulator, and service replacement, minor projects to improve reliability or increase capacity, and other general improvements. • Tools and Equipment, which cover the cost of capitalized equipment, such as directional boring, gas pipeline maintenance and emergency equipment . • One-time Projects, which represent occasional large projects that do not fall into any other category. Tab l e 17 shows the current status of these project categories and future projected spending. March 2023 36 I Page GAS UTILITY FINANCIAL PLAN Table 15: Budgeted Gas CIP Spending ($000) Project Category Current Budget* FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Gas Main Replacement 12,237 4,725 8,000 5,300 7,950 4,000 Gas Tools and Equipment 59 100 100 100 100 100 Ongoing Projects 1,541 1,000 1,000 1,000 1,000 1,000 Customer Connections 1,042 1,211 1,247 1,100 1,100 1,100 Electrification Transition . -. -4,000 TOTAL 14,880 7,036 10,347 7,500 10,150 10,200 *Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year Gas Main Replacements The Gas Main Replacement (GMR} Program is the largest budgeted category in the gas fund and is used to replace ageing natural gas infrastructure throughout the City . This program improves safety and reliability of the natural gas system by replacing pipe material and components, prior to failure, with reliable polyethylene pipe and fittings. The GMR Program completed a major milestone in 2013 with the replacement of gas mains made from Acrylonitrile-Butadiene-Styrene (ABS) plastic with Polyethylene (PE) pipe. The City's 2015 Distribution Integrity Management Plan (DIMP) identified ABS pipe and components as suitable for replacement due to the pipe's brittleness and difficulty of repair. There are 0.1 miles of remaining ABS in the system, which is scattered throughout the City in very small sections . After the replacement of ABS pipe, CPAU's 2015 Risk Assessment identified PVC pipe material as the next pipe material to be reviewed for replacement. In general, CPAU replaces about 4 miles (1.9% of the system) of pipe on each GMR project, accounting for approximately 75% of PVC and 25% of steel. The pipelines are replaced with PE pipe. With the ongoing discussions and direction from City Council related to electrification of homes and neighborhoods throughout the City and transitioning away from natural gas, it will be necessary at some point to scale back the rate of replacement of the existing gas system. Staff is working to develop an efficient phasing plan for electrification and the scaling back of the gas infrastructure. However, staff believes it is necessary to continue the current efforts to replace older and higher-risk materials within the gas system to maintain safety and system integrity. This investment is recommended until a more defined plan on electrification and the transition away from natural gas is completed. That transition plan may involve aggressive electrification in areas with PVC pipe to avoid future investments in PVC pipe replacement. The priority for the gas utility fund is continued safe operation to manage the overall risk and continue the reliable and safety delivery of natural gas throughout the City. In the short term that requires investing in replacement of highest risk PVC pipe, prioritizing areas of the gas system that will be needed the longest during the transition to an electrified community, and gradually that will be integrated with a strategy to aggressively electrify neighborhoods and abandon PVC pipe rather than replace it. · Several factors are contributing to an increase in construction costs in the Bay Area, such as a greater focus on infrastructure improvement by many municipal agencies and the higher demand for utility contractors within these fields. The current budget for the GMR program has held March 2023 37 I Page GAS UTILI TY FINANCIAL PLAN steady over the tast few years, which resu lts in a reduction of replacement due to the steady increase in the replacement cost. CPAU recently posted the Gas Main Replacement 24A Project for competitive bidding and resulted in one contractor subm itting a bi d for almost two times the engineering estimate, even after it was bid a second time. Future GMR projects will require a budget increase to maintain a similar rate of PVC and steel main replacement. Currently, CPAU plans to replace as many aging mains as possible within its current budget. However, if this trend of higher construction cost co.ntinues, the Gas Utility may require larger CIP budgets and as a result, an increase in rates to maintain an adequate rate of replacement to relieve the risks of PVC and steel pipe in the system. This Financial Plan addresses these challenges in a way that will atl ow CPAU to meet its main replacement needs. This plan includes approximately $12 m il lion to $13 million starting in FY25 and includes a 3% annual construction cost inflationary increase. This will assist in keeping up with the increasing cost of repl acement of PVC mains and steel mains as needed. Additionally, the GMR project schedule for gas wil l 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. Construction of the GMR 24A commenced during January 2023 and is anticipated to be completed in March 2023 (FY 2023). However, work wiH also conti nue on GMR 24B in FY 2024 and into FY 2025. The GMR 24B project is awaiting a response to an application submitted for a Natural Gas Distribution Infrastructure Safety and Modernization grant opportunity. CPAU intends to apply each year for the grant funding opportunity, which would assist with the replacement of PVC and steel distribution mains in the gas system. If CPAU determ i nes that grant funding is not likely to be awarded, CPAU will evaluate the merit of continuing to apply for the grant. Tools and Equipment, Ongoing Projects, and Customer Connections Staff estimates ongoing projects, tools and equipment, and customer connections to cost approximately $2 .2 million through the end of the forecast period. In pract ice, these projects can fluctuate dramatically depend ing on prices of material, system conditions and the pace of development and redevelopment in the city. It is worth noting that fee revenue pays for the Customer Connections program, so when costs go up fees will be adjusted as well. Aside from customer connections and transfers from other funds, the CIP plan for FY 2023 to FY 2028 is funded by utility rates. Appendix B: Gas Utility Capital Improvement Program (CIP) Detail shows the details of the plan . The Gas Utility currently makes debt service payments on one bond issuance, the 2011 Series A Utility Revenue Refunding Bonds. This bond issuance was to refinance the $18 million principal remaining on the Utility Revenue Bonds, 2002 Series A issued for the Gas and Water Utilities to finance various improvements to the distribution systems. $9.4 million of this issuance was March 2023 38 I Page • GAS UTILITY F/NANCIA~ PLAN secured by the net revenues of the Gas Utility. Table 18 shows debt service for this bond for the financial forecast period. Debt service on this bond w ill continue through 2026. Table 16: Gas Utility Debt Service FY 2024 FY 2025 FY 2026 2011 Utility Revenue 802 799 802 Refunding Bonds, Series A The 2011 bonds include two covenants stating that 1} the Gas Utility will maintain a debt coverage ratio of 125% of debt service, and 2) that the City will maintain "Available Reserves"26 equal to five times the annual debt service. Th i s Fi nancial Plan complies with these covenants throughout the forecast period, as shown in Table 19 and Table 20. Table 17: Debt Service Coverage Ratio ($000 ) FY2024 FY 2025 FY 2026 Revenues 66,297 68,966 72,891 Expenses (Excluding CIP and Debt Service) (54,882) (54,519) (56,572) Net Revenues 11,415 14,447 16,319 Debt Service 802 799 802 Coverage Ratio 1423% 1807% 2036% Table 18: Debt Service Minimum Reserves ($000) FY2023 FY 2024 FY 2025 FY 2026 Gas and Water Utilities a 28,383 20,108 23,904 18,266 Debt Service b 1463 1459 1454 1457 Reserves Ratio c 35x 25x 30x 23x a) CIP, Rate Stabilization, Operations, and Unassigned Reserves b) Gas and Water Utility's share of the debt service on the 2011 bonds. c) Calculated using combined Gas and Water Utility reserves. The actual reserves ratio for the 2011 bonds is calculated bosed on the combined Electric, Gas, and Water Utility reserves and total debt service and is higher than shown here. The Gas Utility's reserves and net revenue are also pledged as security for the bond issuances listed in Table 21, even though the Gas Utility is not responsible for the debt service payments. The Gas Utility's reserves or net revenues would only be called upon if the responsible utilities are unable to make their debt service payments. Staff does not currently foresee this occurring. 26 Avai lable Rese~es ~ defined in the 2011 bonds include the reserves for the Water, Electric, and Gas Utilities __ M a r c h 2 0 2 3 39 I P a g e GAS UTILITY FINANCIAL PLAN Table 19: Other Issuances Secured by Gas Utility's Revenues or Reserves Bond Issuance Responsible Utilities Annual Debt Secured by Gas Utility's Service ($000) Net Revenues Reserves 1999 Utility Revenue Wastewater Collection Bonds, Series A Wastewater Treatment $1,207 No Yes Storm Drain 2009 Water Revenue Bonds (Buitd America Water $1,977* No Yes Bonds) •Net of Federal interest subsidy SECTION 6E: EQUITY TRANSFER The equity transfer is discussed in Section SG: Alternative Gas Increase Plans SECTION 6F: REVENUES The Gas Fund receives most of its revenues from sales of gas, but about 8% comes from other sources including interest income, service connection and capacity fees, and sales of allowances related to California's cap &and~trade program. The Cap and Trade compliance charge is another revenue item related to the cap -and -trade program that is collected in customers' bills. While the State provides CPAU with a certain number of free allowances each year, the Gas Utility is required to sell a portion of those in accordance with the regulations. In order to have enough allowances to cover customers' natural gas emissions, CPAU must buy allowances at market, and subsequently passes through the cost of those allowances to customers. The regulations do not allow the revenue derived from the sale of the free allowances to offset allowance purchases, thus the pass-through rate component. These funds are transferred to the Cap and Trade Reserve (see Section 3D: Proposed Reserve Transfers for more details). This Financial Plan bases sales revenue projections on the load forecast in Section 5A: load Forecast. Except where stated otherwise, these load forecasts are based on normal weather. Weather can vary substantially, however, and this can affect revenues substantially. Also, changes in customer behavior, as well as changes to more efficient gas appliances, or switching to electric appliances, will modify these forecasts. Staff continually evaluates forecasts to see when new trends emerge . SECTION 66: COMMUNICATIONS PLAN The FY 2024 gas utility communications strategy covers these primary areas: natural gas market supply costs, supply and demand, operations, infrastructure, safety, efficiency, carbon neutrality, and cost containment measures. The City of Palo Alto Utilities (CPAU) communication methods include the website, utility bill inserts, messaging on bills and envelopes, email newsletters, print and digital ads in local publications, and participation in community outreach events. Since moving to market pricing for commodity rates several years ago, monthly gas rates can fluctuate for CPAU customers based on a variety of factors affecting the market. Staff post the March 2023 40 I P age • GAS UTILITY FINANCIAL PLAN monthly rates online at www.cityofpaloalto.org/RatesOverview and provide additional updates as necessary via other communication channels. During the FY 2023 winter, utilities across the region saw extremely high gas market prices projected for January and February; much higher than last year's winter prices, and the highest since the 2001 energy crisis. Staff have engaged in a robust and proactive outreach campaign to try to inform customers in advance about the extremely high gas rates to help avoid surprisingly high bills, emphasizing the importance of saving energy to keep utility costs low. Consistent with the Utilities Strategic Plan, CPAU is instituting cost containment as an ongoing priority that is part of our annual cycle. To keep customers apprised of its rates the status and accomplishments of capital improvement projects, the City maintains a network of project web pages. Print and digital ads, social media and email blasts drive traffic to the website. CPAU promotes gas use efficiency incentives year-round, but most heavily during winter months to impact heating activities. Programs such as the Home Efficiency Genie and commercial energy efficiency programs help residents and businesses better understand energy usage, activities and/or upgrades they can implement to improve efficiency and keep utility costs low. The MyCPAU online account management portal provides customers with direct access and more information about utility account and consumption data. CPAU communicates about safety for all utility services year-round including the need to call USA (811) before digging to check for underground utility lines. Staff also emphasize the importance of contacting CPAU to check for potential sewer and gas line cross-bores prior to clearing a sewer line. Every year, CPAU publishes an updated gas safety awareness brochure and mails it to all customers in Palo Alto as well as other stakeholders. CPAU will continue to promote messaging about safety, rates, and more, through a variety of marketing and media channels. Staff talk with business customers at special facilities meetings, attend neighborhood safety and emergency preparedness fairs and offer presentations to school and community groups. While print materials and webpages still feature prominently, CPAU is increasing use of other outreach channels such as email newsletters, direct mail, newspaper inserts, social media and online videos. The Gas Safety Public Awareness Plan contains saved copies of all outreach materials and activity logs. March 2023 4 1 I Page APPENDICES Appendix A: Gas Financial Forecast Detail Appendix B: Gas Utility Capital Improvement Program (CIP) Detail Appendix C: Gas Utility Reserves Management Practices Appendix D: Description of Gas Utility Cost Categories Appendix E: Gas Utility Communications Samples March 2023 GAS UTILITY FINANCIAL PLAN 42 l P age GAS UTILITY FINANCIAL PLAN APPENDIX A: GAS FINANCIAL FORECAST DETAIL City of Palo Alto Gas Utility Fiscal Year 27 2028 RAlE CIIANGE till Ii~ ti TOTAL SYSTEM AVERAGE RATE t"'110ffll) S 2 .613 S 2 .756 SUPPLY CO~ONE"1TS (SfTl,o,mj 0.597 $0412 S 0 ,513 5 0896 51.678 $1 .129 $1 .070 $ 1.125 $ 1.161 $ 1.207 $ 1.260 ~ SAi.ES IN THOUSAND Tl£RMS 28,314 29,110 26,610 25.451 25,428 26,501 26,870 26.310 26 ,058 25,805 25.658 CHANGE 1H RETAIL SALES REVENUE 910 1492 1 817 953 1191 1492 5669 4 ,330 4486 3 05 3448 Ull1111H Ratall Solos 34,056 39.017 34,294 36.071 45,816 66.881 58,013 60,010 84,595 67,430 70,702 S.Nlu Conn•ction & C.~c:fly FN5 1,078 997 902 840 475 1167 1,211 1,247 1,100 1,100 1,133 Ottl•r RtffnuH & Tran1r.n In 1,740 2.023 2,159 2 559 2,915 3,910 6,684 7,739 8.851 10,050 11,367 10 lnW'"t plus O&ln or Loss on fnwltmlnt 568 597 578 479 427 612 361 456 588 955 1,398 11 Total Sourcea of Funds 37,442 42.634 37,933 39950 49,634 72.570 66,269 69,453 75,133 79,535 84,599 12 13 PurchaMS ol UIIHtlQ.~ H Supply Commedlty & Cap and Trade 9,698 12470 8 ,376 9 .891 20,591 43.796 23,489 21,757 22,494 22,925 23.636 1$ 011pply Trwitport.tion 3,223 3.487 2 ,727 2.859 3,513 4.261 6,459 6,799 7,131 7 ,364 7,542 18 Total PurchHH 12,921 15.958 11 ,102 12 750 24,103 48.057 29,948 28,558 29,625 30,289 31 ,178 17 18 Administration fCIP + OpeatlngJ 3,574 . 3,353 3 ,711 3,248 4,403 4.512 4,759 4 ,982 5,121 5,261 5,410 19 C111tome, Servtc. 1,529 1.583 1.872 1904 2,035 2 110 2,267 2343 2,388 2 ,424 2,475 o.tna"d Sid■ M&n11g1111W11t 829 536 550 417 306 316 338 350 358 365 374 EnglnNring (Opera!lngl 351 400 666 571 859 480 516 533 544 552 564 Opfflltton, Md MainWn■nc• 4,673 4,957 5,334 6600 7,422 7296 7,815 8,250 8.395 8 ,533 8,486 fhisourc. Mu•1•men1 357 401 463 551 668 694 748 771 785 795 811 Supply and D11tnbvUon Operations 11,313 11 211 12,596 13 291 15,493 15.408 16,442 17.2 29 17,592 17,931 18,121 Dlbt S.Mca Pa~t• 203 179 155 135 108 804 802 799 802 Roni 802 821 645 471 461 494 507 521 532 543 555 Tranlf1t1 t o Oenetal Fund 6,699 6 ,601 6 ,942 6.847 7,240 7.191 7,622 8,060 B,585 9 ,078 9,623 OCher Transfers Out 808 704 521 512 277 693 727 784 787 810 835 Clpltal lmprvv.n-.t Prog,ams 7,804 5.587 3,342 9 283 4,674 10.217 7,036 10.347 7 ,500 10,150 7,818 Total Uua of Funds 40,349 40.840 35,304 43.288 52,002 82863 83,085 66,296 65,401 88,602 68,130 Into/ Out Rourvea 2,907 1793 2 ,829 3.339 3,1 84 3,158 9 ,732 10733 16469 RHppropriatlons + Commitments 8,874 11,251 3,662 9 C88 5,541 5.541 5,541 5,541 5,541 5,541 5,541 Plane Repta~nt 0 0 0 0 0 0 0 0 0 0 0 Debt a.mca Rat,wve 795 795 804 434 434 434 434 434 0 0 0 CIPReHrw 3,820 3,820 3 ,820 3.820 3,820 0 0 0 0 0 0 R<t. S!obllluUon 7,090 2,533 8,419 2 766 0 0 0 0 0 0 0 0p..,.1:1o.,. Ruerw 8,638 9 ,968 13,450 11 981 11,300 2 724 2,834 2,504 8,771 15,175 22,889 Cap and Trad• ReMNe 0 4,542 6,731 8,834 11,908 15,395 19.293 23,623 28,398 Unuslgned 0 0 0 0 0 0 0 0 0 0 0 Total R ... twt 29,017 28.365 30,155 32 ,630 27,827 17534 20,718 2 3,874 33,605 44,339 58,808 Short Torm Risk Aueamont Value 4,051 4 .138 3,940 4,625 4,291 5.127 5,716 6 ,690 7 ,096 7,833 8,118 Op,,.Uons Roserve Guidelines Min (10 Doys Commodity+ O&MI 5,727 6 .173 5,254 6 ,051 7,780 13.549 10,104 10,159 10,537 10,715 11,70 0 T"llot Cto Days Commodity+ O&MI 8,590 9 .260 7,881 9 ,076 11,670 20.324 15,157 15,239 15,805 16,073 17,549 48 Mu Cl20 Days Commodity+ O&M) 11,454 12,346 10,508 12,102 15,560 27.098 20,209 20,318 21,074 21 ,431 23,399 March 2023 43 I Page APPENDIX B: GAS UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL Reappropri~ted / Carried Forward from Previous Current Yf!ar 0 PH1 fet.t ~ !GAS MAIN REPLACEMENT PROGRAM I Pi ojtK t N .am(I Yoar, /Accrual [Aj Estimate (B) 00 .4()() IGS-lSOOO GS-XXXXX GS-XXXXX [GS-11002 GS-80019 GS-80017 Gas Main Replacement • Project 23 Gas Main Replacement • Project 24 Gas Main Replacement • Project 2S Gas Main Replacement • Project 26 Gas Main Replacement • Project 27 1ect Gas Distribution System lmprow,ments Gas Meters and R•1ulators Gas S1lttem, Customer Connections ,subtotal Customer Connections ElEORIACATION TRANSITION GS-XXXXX Electrifia tion Transition Subtotal Electrification Transition GRAND TOTAL Fundln~ Sources Connection/Capacity Fees Other Utility Funds (Asset Mgmt, GIS Systems I Utih!); Rates CP·RELATtD RESERVES DETAIL Rea~!!!io~s & Commitments 2,282,610 2,282,304 1,9SS,001 9,!SS,.1)()1 I 4.237,611 12,237,305 9,096 59,096 9,096 59,096 r 410,796 910,796 129,987 629,987 540783 1.540783 T 124408 1042 486 I 124,408 1042,486 I 4,911,898 .. . 14,879 670 I I I 6/30/2022 Actual 4,150~~ March 2023 Current Yc.lr Fund in, (B·AI 8,000,000 I s,oool,oo I 50.000 50,000 500,000 S00 000 l 000,000 11"6 '""4 1166.,894 10-216894 1,166,894 I 9,oso,ooo I ;y 20,~ 4,725,~, 4,ns,ooo I 100,000 100,000 500,000 $00""" I 000000 1,210,900 1,210,900 I 7~900 1 1.210,900 I s,s2s ,ooo I GAS UTILITY FINANCIAL PLAN n·wts FY 2024 FY 2027 FY 20211 8,000,000 . I s.300.~I 7,950,000 I 4,000,000 1,000.!!!!!! I s~ooi2!!!! I 1,9so1000 I 4.000,000 100.000 100,000 100,000 100,000 100,000 100,000 100,000 100,000 S00,000 soo.ooo I 500,000 500,000 500,000 500,000 500,000 500,000 1mnnon 1000000 I 1,000000 1,000,000 1,247,200 I 1,100.000 I 1100000 1100000 1,241,200 I 1.100,0001 1,100,000 1,100,000 10,341,200 I 1,soo,000 I 10,lS0,000 l 10,200,000 1,241,200 I 1,100,000 I 1,100.000 I 1,100,000 9.100.000 I 6.400.000 I 9,oso.ooo I 9,100,000 44 1 Page GAS UTILITY FINANCIAL PLAN APPENDIX C: GAS UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Gas Utility Financial Plan: Section 1. Definitions a) "Financial Planning Period" -The Financial Planning Period is the range of future fiscal years covered by the Financial Plan. For example, if the Financial Plan delivered in conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015 to FY 2019 would be the Financial Planning Period. b) "Fund Balance" -As used in these Reserves Management Practices, Fund Balance refers to the Utility's Unrestricted Net Assets. c) "Net Assets" -The Government Accounting Standards Board defines a Utility's Net Assets as the difference between its assets and liabilities. d) "Unrestricted Net Assets" -The portion of the Utility's Net Assets not invested in capital assets (net of related debt) or restricted for debt service or other restricted purposes. Section 2. Supply Fund Reserves The Gas Utility's Supply Fund Balance is reserved for the following purposes : a) For existing contracts, as described in Section 4 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 5 (Reserve for Re-appropriations) Section 3. Distribution Fund Reserves a) For existing contracts, as described in Section 4 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 5 (Reserve for Re-appropriations) c) For cash flow management and contingencies related to the Gas Utility's Capital Improvement Program (CIP), as described in Section 6 (CIP Reserve) d) For rate stabilization, as described in Section 7 (Rate Stabilization Reserve) e) For operating contingencies, as described in Section 8 (Operations Reserve) f) Any funds not included in the other reserves will be considered Unassigned Reserves and shall be returned to ratepayers or assigned a specific purpose as described in Section 9 (Unassigned Reserves) Section 4. Reserve for Commitments At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for Commitments will be set to an amount equal to the total remaining spending authority for all contracts in force for the Wastewater Collection Utility at that time . Section 5. Reserve for Reappropriations At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for Reappropriations will be set to an amount equal to the amount of all remaining capital and March 2023 45 I P age GAS UTILITY FINANCIAL PLAN non-capital budgets, if any, that will be re -appropriated to the following fiscal year for each fund in accordance with Palo Alto Municipal Code Section 2.28.090. Section 6. CIP Reserve The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for capi tal contingencies. Staff will manage the CIP Reserve according to the following practices: The following guideline levels are set forth for the CIP Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of CIP expense budgeted for that year. Minimum Level 12 months of budgeted CIP expense Maximum Level 24 months of budgeted CIP expense . a) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added to or removed from the Reserve for Commitments as a result of a change in contractua l commitments related to CIP projects. Any other additions to or withdrawals from the CIP reserve require Council action. b) Minimum Level: i) Funds held in the Reserve for Commitments may be counted as part of the CIP Reserve for the purpose of determining compliance with the CIP Reserve minimum guideline level. ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered by the end of the following fiscal year, and shall, at a minimum, result i n the reserve reaching its m i nimum level by the end of the next fiscal year. For example, if the CtP Reserve is below its minimum level at the end of FY 2017, staff must present a plan by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In addi tion, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve, or that does so in a shorter period of time. c) Maxi mum Leve l : If, at any time, the CIP Reserve reaches i ts maximum level, no funds may be added to th i s reserve. If there are funds i n thi s reserve in excess of the maximum level staff must propose to transfer these funds to another reserve or return them to ratepayers in the next Financial Plan. Staff may also seek Council approval to hold funds in this reserve in excess of the maximum level, if they are held for a specific future purpose related to the CIP. Section 7. Rate Stabilization Reserve Funds may be added to the Rate Stabilizat ion Reserve by action of the City Council and held to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate Stabilization Reserve requires Council action. If there are funds i n the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Gas Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. Section 8 . Operations Reserve March 2023 46 I P age GAS UTILITY FINANCIAL PLAN The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Gas Utility's Fund Balance not included in the reserves described in Section 4-Section 7 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 8 d} below. Staff will manage the Operations Reserve according to the following practices: a} The following guideline levels are set forth for the Operations Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of Operations and Maintenance (O&M} and commodity expense forecasted for that year in the Financial Plan. Mini,:num Level 60 days of O&M and commodity expense Target Level 90 days of O&M and commodity expense Maximum Level 120 days of O&M and commodity expense b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations Reserve are lower than the minimum level set forth above, staff shall present a plan to the City Council to replenish the reserve. The plan shall be delivered within six months of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its minimum level by the end of the following fiscal year. For example, if the Operations Reserve is below its minimum level at the end of FY 2014, staff must present a plan by December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In addition, staff may present, and the Council may adopt, an alternative plan that takes longer than one year to replenish the reserve. c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower than the target level, any Financial Plan created for the Gas Utility shall be designed to return the Operations Reserve to its target level by the end of the forecast period. d) Maximum Level : If, at any time, the Operations Reserve reaches its maximum level, no funds may be added to this reserve. Any further increase in the Gas Utility's Fund Balance shall be automatically included in the Unassigned Reserve described in Section 9, below. Section 9. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Gas Utility's Fund Balance will be held in the Unassigned Reserve . If there are any funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council must include a plan to assign them to a specific purpose or return them to the Gas Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period . For example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next Financial Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a plan to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may present an alternative plan that retains these funds or returns them over a longer period of time. Section 10. Intra-Utility Transfers Between Supply and Distribution Funds March 2023 4 7 I P age GAS UTILITY FINANCIAL PLAN The Gas Utility records costs in two separate funds: the Gas Supply Fund and the Gas Distribution Fund. At the end of each fiscal year staff is authorized to transfer an amount equal to the difference between Gas Supply Fund costs and Gas Supply Fund Revenues, from the Gas Distribution Fund Operati ons Reserve to the Gas Supply Fund, or vice versa. Such transfers shall be included in the ordinance d osing the budget for the fiscal year. Section 11. Cap and Trade Program Reserve This reserve tracks revenues from the sa l e of carbon allowances freely allocated by the Ca l ifornia Air Resources Board to the gas utili ty, under the State's Cap and Trade Program. Funds in this Reserve are managed in accordance with the City's Policy on the Use of Freely Allocated Allowances under the State's Cap and Trade Program (the Policy), adopted by Council Resolution 9487 in January 2015. At the end of each fiscal year staff is authorized to transfer all revenues from the sale of all ocated carbon al lowances to this reserve. March 2023 4 8 I P age GAS UTILITY FINANCIAL PLAN APPENDIX D: DESCRIPTION OF GAS UTILITY COST CATEGORIES This appendix describes the activities associated with the various cost categories refe rred to in this Financial Plan. Customer Service: This category includes the Gas Utility's share of the call center, meter reading, collections, and billing support functions. Billing support encompasses staff time associated w ith bill investigations and quality control on certain aspects of the billing process. It does not include maintenance of the billing system itself, which is included in Administration. This category also includes CPAU's key account representatives, who work with large commercial customers who have more complex requirements for their gas services. Resource Management: This category includes gas procurement, contract management, rate setting, and tracking of legislation and regulation related to the gas industry. Operations and Maintenance: This category includes the costs of a variety of distribution system maintenance activities, including: • surveying the gas system (50% of the system each year) and repairing any leaks found; • investigating reports of damaged mains or services and perform emergency repairs; • building and replacing gas services for new or redeveloped buildings; and • testing and replacing meters to ensure accurate sales metering. This category also includes a variety of functions the utility shares with other City utilities, including: • the Field Services team (which does field research of various customer service issues); • the Cathodic Protection team (which monitors and maintains the systems that prevent corrosion in metal pipes and reservoirs); and • the General Services team (which manages and maintains equipment, paves and restores streets after gas, water, or sewer main replacements, and provides welding services, including certified gas line welding services) Administration: Accounting, purchasing, legal, and other administrative functions provided by the City's General Fund staff, as well as shared communications services and Utilities Department administrative overhead and billing system maintenance costs. Demand Side Management: Includes the cost of administering gas efficiency programs and the direct cost of rebates paid. Engineering (Operating): The Gas Utility's engineers focus primarily on the CIP, but a small portion of their time is spent assisting with distribution system maintenance. March 2023 4 9 I P age APPENDIX E: GAS UTILITY COMMUNICATIONS SAMPLES KEEP EMERGENCY SUPPLIES HANDY --------c,,u.,-...o1,,.... _""'.,. ,-~------­--...--.... ---.--...------_ .. __ .,,.. ___ _ __ ....,.. --------~ ..__,_.,._,....,.._,.. -·------... ---...-----. ·--PROTECT YOURSELF AND YOUR FAMILY ___ ...._ ............. --.-...--.---.., ______ _ -___ ......, ___ ,., ........... ...-... ,.. .... .., ___ , ___ _ ...... _,_.,._. __ _ ____ .,.__,,.._ ---·---.......... ___ ...,_,,_ __ _ ....... --............ __ .,., _____ ..,..,. _ ........... 0o .... -....... __ ._ ____ _ ·-•--.•c:ar--­--...,.~ C:.••111111----~ --------......... ~~111---.... -----........ ~'a.DadlilGII. _____ ...,.._ 5 _..,.. t L ,__"'_,...,_......._____. _.,,.,._. ...... .,,C19111, ....... >I ..... ., __ _ -■ I D: SOWONWI i CMUNl'IIOM ill ■dLPIID PCMIII . a. ............. -----=-·---..--•· ..... ,..--...~--.---------.-.... --..,.,_....,.. __ _ .....,____ .--------.. ....-... -----. ------..... -._...., ___ _ --·-·--- COOPERATE WITH U1'UJTY CREWS ___ _,._..., __ _ ........ ----­______ ,.... __ -------- YourEMrgy ,.,, ___ ,,...,,_ Oanltfor•--Clur _.,...,.__ ..... _ --~-orar of __ hMl.._ ~ uporodlng lo& -~. "··~ ldeneyllpa •. ~· ~ • HPWHslll • neytlpa . NIL GOOD ABOUT YOURIBP, YOUR COMPANY,AND YOUR PLANET. Mr-,~1o1-.•-~---_ _.,. ___ ,_........,.,._ _ ___ ., ... .....,_......, .. _....,, •..-W11t•~111e--"1111t-...... V1"'­.....,_ .. _~ Wlfl.,. ____ A!Mew(alAt~llllslrlen-..... fllhe _____ lO~-W--.-.,........., ..._ _ _, ............... ._ ....... ...._......., ,___ ______ ..., ____ .,...._ .............. ------------­____ ...._..,......, ----prlflld-i-...., ... --...,_ ___ ..,.._,....,.. ____ _ ____ .._.. ......... ,.,..., --•••-I I , ___ ..., __ Clftlll _____ ..__...,_.._.., ____ ...,.....,.. . ---•--111,DOO--. ____ ......,___ --.-- ...., .. _ __, ................ ,........._ _ ........ ..,,..., _ _., __ ,._.,, ......... , ., .... . ■ ,.............. , ......... .,~ .. .. •allllCII--, . ............................... ___ ....... ......_... .......... --CLEAResult" UAC MEETING []] March 01, 2023 3 0 Received Before Meeting Staff: Jonathan Abendschein • CITY OF PALO ALTO GAS RATE DESIGN • Rate Design: • Gas Supply rate components: • commodity {reflects cost of gas purchased at market prices) • transmission {reflects cost of transporting gas to Palo Alto) • environmental {reflecting cost of mandatory Cap and Trade program participation and Carbon Neutral Gas Portfolio) • These rates vary monthly, quarterly, or annually according to market-driven costs that are passed directly to customers • Distribution rates are set based on the City's costs for maintaining its gas distribution system (gas mains, services, related equipment) Ac1rv OF .PALO ALTO • GAS RATE PROPOSAL • 8% overall rate increase to customer bills due to 21% distribution rate increase; • Projecting gas supply costs to be lower in FY 2024 (36% decrease), down from extreme r:.. lUc FY 2023 prices . .... • Net effect is a 13% net decrease in average annual customer bills from'. FY23 to FY24 • ~. • 7% projected increase il'.'t EY 2025 and 5% annually from FY 2026 through FY 2028 •1 '•18% Measure L General Fund (GF) transfer for FY 2023 (PAMC 2.28.185) . ' .• 1 . •· l . • • '--- f\l .,.. ( f~~dback requested on EV 2024 Measure L transfer ft CITY OF ¥PALO ALTO l 3 I ·Alternative Gas Rate Projections • Seeking feedback on proposed FY 2024 General Fund transfer • Measure L: 18% of gas utility gross revenues from two fiscal years prior; Council may transfer 1 less d. ~ .. • d • FY 2024 'Alternative 1:·Transfer 18% • FY 2024 Alternative 2: Transfer 15.5%, approximates 2-3% annual growth in transfer from past years, CPI ,AclTY OF VPALO ALTO !v $14,000 $12,000 ..., C g $10,000 E < .... $8,000 ~ .,, C n, t= $6,000 "iii ::::, $4,000 C C < $2,000 $0 FY 2023 FY 2024 FY 2025 FY 2026 -Alternative 1 (18% of Gross Revenue Per Measure l) ....,_Alternative 2 (15.5% Transfer in FY 2024) I -· 4 I Gas Utility Cost Structure Gas Distribution (in green): The cost to distribute gas within Palo Alto, including: maintaining and replacing gas infrastructure, customer service, billing, administration, etc. *Gas Supply (in blue): All pass-through Acirv OF WPALOALTO capital Investment $7 .0 million 11% Distribution $24.9 mi 11 ion 40% ~Gas Supply ■ Distribution Gas Supply $19.7 million Gas Environmental $2.4 million 6%* Gas Transmission $6.5 million 11%* lil Gas Environmental ■ Gas Transmission § Capital Investment Long Term Cost Trends 80 70 -60 11'1 C: .Q so ~ 40 -,v). 30 20 10 Ann ua Ii zed I ncre-as-e;------Annttafired-tnefe-as-e-t:o-,------ ______ FY19-FY2Ll: FY24-FY28: Transmission Environmental FY 2019 FY 2024 (Projected)* FY 2028 (Projected)* ■ Gas Supply, Environmental, and Transmission Costs □ Capital Investment** ■ Gas Operations * Forecast is uncertain and will vary with the markets ** Projected CJP is an average of two years due to staggered main replacement schedule Ac tTY OF UPALOALTO Gas Supply Cost Drivers* • Gas supply -high volatility in gas market prices. Gas prices have risen in recent years as demand has increased, paired with transmission pipeline constraints, low regional storage issues • PG&E gas transmission rates continue to rise to fund safety investments • Cap-and-trade costs continue to rise (as intended by design) • Carbon Neutral Gas -offset costs rising * All of the above costs are passed through to customers via rate adj usters ,Ac1rv OF VPALOALTO GAS DISTRIBUTION COST TRENDS 45 40 35 "ii, 30 C 0 25 ~ 20 V). 15 10 5 FY 2019 Annuali zef.1------- Annualized Increase, -····· Increase. FY24-FY28: FY19-FY24: 8%/vr* Gas Operations: 3%/yr FY 2024 (Projected}* FY 2028 (Projected}* ■ Debt Service □ Operations D Capital Investment * Projected CIP is an average of two years due to staggered main replacement schedule Ac11v OF VPALOALTO GAS DISTRIBUTION COST DRIVERS • Health, retirement, and associated overhead costs continue to increase • Underground construction costs have increased substantially as well • About $0. 7M/Year needed for Cross bore Projects through FY 2028 • Need to replenish reserves, which were depleted by significant losses due to FY 2023 commodity costs that could not be passed through to customers ftc1TY OF VPALO ALTO FY 2024 GAS COST AND REVENUE PROJECTIONS Distribution Rate Changes $100 0% 4% 5% 2% 3% $90 -1--- $80 ----~ $70 -1------- 0 = $60 :E * $50 1-~ $40 -, -re -E $30 - $20 $10 $0 Cl) I O') ..... T'" 0 0 N N Ac1Tv OF VPALOALTO ~ ~ Actuals T'" N ~ ~ 3% M ~ 8% ~ ~ 7% ~ ~ 5% ~ ~ Projections 5% 5% " ~ ~ 1 -Revenue □ Capital Investment Gas Supply □ Operations ■Transfers ■ Debt Service FY 2024 GAS COST AND REVENUE PROJECTIONS Overall Rate Changes {including supply rate changes) $90 $80 $70 $60 -(I) a sso ~$40 --$30 $20 $10 $0 I co ..... ~ Acnv OF WPALOALTO O> ... ~ 0% 2°.4 33% 44% -13°.4 3% 6% 4% 4% 0 N ~ Actuals ..... ~ ~ ~ ~ ~ ~ ~ ~ ~ Projections ~ ~ ~ ~ -Revenue □ capital Investment l!I Gas Supply ■ Debt Servfce □ Operations ■Transfers ------ --------- 11 I GAS OPERATING RESERVE PROJECTIONS -en C 0 $30 $25 $20 -,, , ... , ... I ' , ... ·-= $15 ~ I ' I -·· -· ' I - - -·-------~ - - - - - - - -.--I $10 __.. .. --··.,_,.,. ,__,. .. ..,... .. ...--.. __,_. ->-..-. _,, $5 I -· · "..._ _____ _ $0 +----,-----,----.....---.....---.....---....---------, FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Ac1rv oF VPALOALTO -Reserve (Year-End) -Reserve Maximum - -Reserve Target -Reserve Minimum -Risk Assessment Alternative Gas Rate Projections -- Alternative 1 (18% of Gross Revenue) ~ FY 2024 (Proposed) 9% FY 2025 (Projected) 10% FY 2026 (Projected) 8% Alternative 2 (15.5% of Gross Revenue in FY 2024) L_ 8% 7% 5% $14,000 $12,000 ... C g$10,000 E <( :U $8,000 't; C ~ $6,000 ni ;;;;, 2 $4,000 <( $2,000 so FY 2023 FY 2024 A_CITY OF V PALOALTO --I-Alternative 1 (18% of Gross Revenue Per Measure L) -Alternati ve 2 (15.5% Transfer in FY 2024) FY2025 FY 2026 Percent of gross gas utility revenue to transfer ---·----·- Alternative 1 r II Alternative 2 FY 2024 (Proposed) FY 2024 (Proposed) FY 2025 (Projected) 1s.0% JL 1s.0% 15.5% JI 11.1% FY 2026 (Projected} l[1s.0% J II 12.9% I ESTIMATED BILL CHANGES Residential Uaac•~..-dh) BUI under Currant BIii under Proposed ..... Aatal Winter Commodity Average Budget Prices based on: Average Nov. Forecast Nov. 2022 -Jan. 2023 2023 -Jan. 2024 30 $98.98 $66.53 S4(median} 168.93 108.54 80 262.18 175.25 150 527.32 371.99 Summer (Based on May 2022 Commodity Prices) 10 $ 27.41 18 (median) 40.11 30 67.89 45 104.80 A clTY OF W PALO ALTO $ 31.08 44.74 75.83 117.34 Chance $/mo. $(32.45) (60.39} (86.92) (155.34) $3.67 4.63 7.94 12.54 Commercial Usage Bill under Bill under Change " l!!!.nn/month) Current Rates Proposed Rates " 500 $ 1,282 $ 1,146 -11% 5,000 11,855 10,295 -13% -33% 10,000 23,604 20,460 -13% -36% 50,000 117,609 101,802 -13% -33% -29% 13% 12% 12% 12% CURRENT BILL COMPARISONS Residential Usap Sason (therms) PaloAlto PG&EZoneX 30 $ 59.45 $ 69.02 Winter IMedianl 54 97.77 125.08 (November 2022 Rates) 80 156.75 197.07 150 329.65 390.88 10 $ 27.41 19.66 Summer IMedianl 18 40.11 36.90 (May 2022 Rates) 30 67.89 65.99 45 104.80 102.34 Palo Alto median residential bill is about 11% below PG&E's median bill (based on CY 2022 data) AclTY oF VPALOALTO " Oiffantncie (14%) (22%} (20%) (16%) 39% 9" 3% 2% Commercial Staff is in the process of doing a more extensive review of commercial competitiveness and will provide updates in the future Acnv OF ¥PALO ALTO RECOMMENDATION Staff requests that the Utilities Advisory Commission (UAC) recommend that the Finance Committee recommend that Council adopt a resolution (Attachment A): • Approving the fiscal year (FY) 2024 Gas Utility Financial Plan (Linked Document ); and • Amending the Gas Utility Reserve Management Practices (Attachment B) • Transferring up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund in FY 2023; • Transferring up to_% of gas utility gross revenues received during fiscal year 2022 to the general fund in FY 2024; • Transferring up to $3.82 million from the CIP Reserve to the Operations Reserve in FY 2023; and • Increasing gas rates by amend i ng Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-M et ered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) (Attachment C). Service and Volumetric Charges Changes Service Charges Volumetric Charges 8CITY OF .PALO ALTO Rate SChedule CUrrent Proposed for (as of 1/1/23) FY2024 G-1 (Residential) $11.54 $14.01 G-2 (Small Commercial) 106.90 129.78 G-3 (large Commercial) 489.12 593.79 G-10 (CNG) 72.30 s1.n CUrrent Proposed for (as of 1/1/23) FY2024 G-1 (Residential) Tier 1 Rates $0.5607 $0.6807 Tier 2 Rates 1.4338 1.7406 G-2 (Residential Master-Metered and Small Commercial) Uniform Rate 0.7365 0.8941 G-3 {large Commercial) Uniform Rate 0.7292 0.8852 G-10 (Compressed Natural Gas) Uniform Rate 0.0120 0.0145 Change($) Changel") $2.47 21.4% 22.88 21.4% 104.67 21.4% 15.47 21.4% Charwe($J Changel") $0.1200 21.4% 0.3068 21.4% 0.1576 21.4% 0.1560 21.4% 0.0025 20.8% 17 I \oi . 'I I t·~ 14~~ \,(' -r" +,J " t,•·.~ ~•..,. ·., :¾.·· '.I,.,~, .. \;li,, •.,_,-~·· ;r.; ' ,. ... , g" t-0-:-"' .. ..; ~ -..,,•'. ,I .. -~,.'; • "} 1 UAC MEETING ~ March 01, 2023 4 !ZI Received Before Meeting Staff: Micah Babbitt and • • • Jonathan Abendschein Ut1ht1es Advisory Commission Staff Report CITY OF From: Dean Batchelor, Director Utilities Lead Department: Utilities PALO ALTO Meeting Date: March 1, 2023 TITLE Staff Recommends the Utilities Advisory Commission Recommend that the Finance Committee Recommend that the City Council Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E-HRA (Hydro Rate Adjuster), 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-NSE {Net Metering Net Surplus Electricity Compensation), and E-EEC (Export Electricity Compensation) Recommendation Staff recommends that the Utilities Advisory Commission (UAC) recommend the City Council adopt a Resolution {Attachment A): 1. Approving the Fiscal Year (FY) 2024 Electric Financial Plan {Li nked Document ); 2. Approving the following transfers at the end of FY 2023: a. Up to $15 million from the Supply Operations Reserve to the Distribution Operations Reserve; b. Up to $8 million from the Electric Special Projects (ESP) reserve to the Supply Operations Reserve; and c. Up to $4.5 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and 3. Approving the following transfers at the end of FY 2024: a. Up to $3 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and 4. Approving the following rate actions for FY 2024: a. A decrease to the retail electric rate schedule E-HRA {Hydroelectric Rate Adjuster) of 50% effective July 1, 2023; b. An increase to retail electric rates E-1 (Residential Electric Service), E-2 {Small Non­ Residential Electric Service), E-4 (Medium Non-Residential Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E-7 (Large Non- Item No. {{item.number}}. Page 1 of 15 Residential Electric Service), and E·?, TOU (large Non-Residential Time of Use Electric Service) of 14% effective July 1, 2023; c. An increase to the Export El ectricity Compensation (E~EEC-1) rate to reflect 2022 avoided cost, effective July 1, 2023; d. An increase to the Net Surplus Electricity Compensation (E·NSE-1) rate to reflect current projections of FY 2023 avoided cost, effective July 1, 2023; and e. An update to the Residential Master-Metered and Small Non-Residential Green Power Electric Service (E-2-G), the Medium Non-Residential Green Power Electric Service (E-4 -G), and the Large Non-Residential Green Power Electric Service (E-7- G) rate schedules (Li nked Document) to reflect modified distribution and commodity components, effective Ju ty 1, 2023. Executive Summary The FY 2024 Electric Utility Financial Plan includes projections of the utility's costs and revenues through FY 2028. Staff is forecasting a 1% increase to total electric utility revenue in FY 2024, which is the net effect of decreasing the hydroelectric rate adjuster (E-HRA) by 50% and increasing the base utUity rates by 14%. These rate changes are necessary to preserve Operations Reserves for the utility within guideline levels. As of the drafting of this report, precipitation for the 2022/2023 water year was still below the annual winter average, despite heavy rains in December 2022 and January 2023. If no significant additional rain comes th i s winter, Cal ifornia w ill likely end the year with average or below average precipitation, as happened in 2021-2022 after heavy earl y winter rains. If that happens, full recovery of hydroelectric generation is not projected until FY 2026, assuming average rainfall in the coming winters. If hydroelectric and market pricing conditions improve significantly, some additional reduction in the hydroelectric rate adjuster E-HRA may be possible in FY 2024.Staff will evaluate hydroelectric conditions in April and make a recommendation to Council for any additional amendments to the rate adjuster effective July 1, 2023. Staff is also evaluating converting the hydroelectric rate adjuster to a comprehensive power cost rate adjuster or pass-through rate that can be adjusted quarterly to reduce the likelihood of abrupt changes in electric rates that were adopted by Council and effective January 1, 2023 . To reduce hydroelectric-related volatility in the future, the FY 2024 Financial Plan assumes 20% lower production from the City's hydroelectric resources in the future . Staff projects total costs for the El ectric Utility to decline from FY 2023 through FY 2025, then increase steadily through the rest of the forecast period. Electric supply costs are foretasted to decline by FY 2025 under the assumption that hydroelectric conditions return to more normal levels (low generation rather than very low). This decrease in purchase costs is expected to be largely offset by increases in operational costs (due to increasing staffing costs, costs for contract line crews, and inflation) and CIP costs (due to steeply esca lating cost of equipment such as transformers due to supply issues as well as construction inflation). Long run increases to rates are driven by increasing transmission costs, continued increases in operational and capita l costs and debt service associated with grid modernization to support Sustainability and Cl imate Action Plan (S/CAP) goals, fiber system investment, and replacement of aging infrastructure. Revenues Item No. {{item.number}}. Page 2 of 15 remain well below cost, particularly in the Distribution Fund, because the utility did not raise rates in FY 2021 and FY 2022 to mitigate the economic impact of the COVID-19 pandemic on residents and businesses. The FY 2023 Electric Financial Plan included a plan to slowly bring rates up to full cost recovery over several years, starting with a 5% rate increase in FY 2023, but reserves are no longer sufficient to accommodate this. Operations Reserves were severely depleted in FY 2022 due to drought conditions and very high electricity market prices, and reserves are expected to decrease in FY 2023. The total increased electricity purchase expenses for these two fiscal years significantly exceeded the amount recovered to-date by the hydroelectric rate adjuster. In fact, staff is recommending an additional loan from the Electric Special Projects Reserve in order to maintain Operations Reserves at minimum levels. Background Every year staff presents the Finance Committee 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 staffs 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. 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 condit ion of infrastructure, and of other factors that could affect utility costs. Rates are then proposed that will move towards adequate cost recovery, based on the models developed in the 2016 Electric Cost of Service and Rates Study1, updated with current and proposed operating costs. Pro posed Actions for FY 2023 and FY 2024: The FY 2024 Electric Util i ty Financial Plan (Link ed Document) includes the following proposed actions : 1. Staff propose s the following reserve actions for the Electric Utility for FY 2023: a. Approve a transfer of up to $15 million from the Supply Operations Reserve to the Distribution Operations Reserve; b. Approve a transfer of up to $8 million from the Electric Special Projects (ESP) reserve to the Supply Operations Reserve; c. Approve a transfer up to $4.5 million from the Supply_Operations Reserve to the Cap and Trade Program Reserve; and 2. Staff proposes the following reserve actions for the Electric Utility for FY 2024: a. Approve a transfer up to $3 million from the Supply Operati ons Reserve to the Cap and Trade Program Reserve; and 1 https://www.cityofpaloa lto .org/fil es/a sset s/p ubl ic/age nda s-m inut es-reports/reports/city-man ager-reports­ cm rs/year-archive/2016/fina l-staff-report -i d -6857 _ el ectric-uti lity-financial-plan •and•rate-changes.pdf Item No. {{item.number}}. Page 3 of 15 3. Staff proposes the following rate actions for the Electric Utility for FY 2024: a. A 50% decrease to the retail electric rate schedule E·HRA (Hydroelectric Rate Adjuster) effective July 1, 2023; b. An increase to retail electric rates E-1 (Residential Electric Service), E-2 (Small Non ­ Residential Electric Service), E-4 (Medium Non-Residential Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Servi ce), E-7 (Large Non­ Residential Electric Service), and E-7 TOU (Large Non-Residential Time of Use Electric Service) effective July 1, 2023; c. Update the Export Electricity Compensation (EEC-1) rate to reflect current projections of avoided cost, effective July 1, 2023; d. Update the Net Surplus Electricity Compensation Rate (E-NSE} rate to reflect current projections of avoided cost, effective July 1, 2023; and e. An update to the Residential Master-Metered and Smalt Non -Residentia l Green Power Electric Serv ice (E-2-G), the Medium Non-Residential Green Power Electric Service (E-4-G), and the Large Non-Residential Green Power Electric Service (E-7- Gf rate schedules to reflect modified distribution and commodity components, effective July 1, 2023. The $15 million transfer in FY 2023 from the Supply Operations Reserve to the Distribution Operations Reserve is proposed to manage a $17 million revenue shortfa ll in the Distribut ion Operations Reserve. Distribution rates have not kept pace with rising distribution costs, but the proposed FY 2024 rate changes are intended to balance revenues to expenses for t his fund. To accommodate this transfer without reducing the Supply Operations Reserve below minimum guidelines, staff also recommends an $8 m illi on loan from the Electric Special Projects Reserve, to be repaid in FY 2025 through FY 2027 a l ong w i th other outstanding loans from that reserve . The transfers to the Cap and Trade Program Reserve within the Electric fund account for revenues from the sale of carbon allowances freely all ocated by the California Air Resources Board to the City's electric utility for use for l ocal decarbonization. Cap and Trade Program revenues are provided to the electric utility to support a wide variety of carbon reducing activities, including local decarbonization. On December 12 . 2022 2 Council approved continuation of the City's Renewable Energy Credit (REC) Exchange program and affirmed the aHocation of 100% of REC Exchange revenue for local decarbonization . These revenues are estimated to be between $2. 7 million and $4.5 million going forward, for future local decarbonization projects. The FY 2023 and FY 2024 proposed transfer reflect the REC Exchange revenue received in CY 2022 and CY 2023 . Table 1 below shows the effects of the proposed transfers on reserve funds. Table l: Reserves Starting and Ending Balances, Revenues, Expenses, Transfers To/(From) Reserves, Operations and Capital (CIP) Reserve Guideline Levels for FY 2023 to FY 2028 2 https ://www.cityofp aloalto.o rg/files /assets/pub lic/agendas-minutes-re ports/a gendas-minutes /city-c9 unci l­ age ndas-m lnutes/2Q22 l20221212 /2022 1212p ccsm-a m ended-linked .pdfllpage =28 Agenda Item 3, Utilities Advisory Commission Recommend the City Council Affirm the Co ntinuation of the REC Exchange Program, Staff Report #14375 Item No. {{item.number}}. Page 4 of 15 ($000) FY2023 FY2024 FY2025 FY2026 FY2027 FYZOZB Starting Resene Balances 1 Supply Operations 27,197 19,314 26,307 23,845 26,259 25,336 2 Distribution Operation 2,945 8,077 8,844 11 ,466 12,527 13.621 3 CIP 880 880 880 880 5,880 10,880 4 Electric Special Projects 24,649 9,649 6,649 12,649 20,649 28.649 5 Hydro Stabilization 400 400 400 400 400 400 6 Low Carbon Fuel Standard 7,236 6,214 5,142 4,574 4,121 3,668 7 Cap and Trade P100ram 1,189 5,612 8,577 11,307 11,307 11,307 R111oenues 8 Sunny 134,629 141,976 132,031 136,751 134,384 135,204 9 Distribution 60,314 77,506 84,878 91,108 99,858 104,688 Transfers -From Supply Operations to a Distribution (15,000) -From Supply Operations to Cap b and Trade Program (4,423) (2,965) (2,730) -Into Supply Operations from C ESP 8,000 a+b+c = 10 Supply Operations Total (11 ,423) (2,965) (8,730) (8,000) (8,000) (2,000) 11 Distribution Operations 15,000 . . (5,000) (5,000) (5,000) 12 CIP . . . S.000 5,000 5,000 13 Electric Soecial Projects (8,000) . 6,000 8,000 8,000 2,000 14 Hydro Stabilization . . . . . . 15 Low Carbon Fuel Standard . . . . . . 16 Cap and Trade Program 4,423 2,965 2,730 . . . Capital Program Contribution 17 Distribu1ion Operations 18 CtP ReseMJ Expens11s 19 Suooiv Funded Expenses (131,089) (132,018) (125,763) (126,337) (127,307) (129,604 20 Distribution Non-CIP El(penses (48,191) {54,231) (57,646) (62,403) (66,048) (76,762) 21 Planned CIP (21,991) (22.S08) (24.610) (22,644) (27,7 16) (21,730) 22 ESP Funded (7,000) (3,000) . . . (10,000) 23 Hydro Funded . . . . . 24 LCFS Funded (1,022) (1,072) (568) (453) (453) . Ending ReseMJ Balance 1+8+10+19 Supply Operations 19,314 26.307 23,845 26,259 25,338 28,936 2+9+11 +17+20+21 Distribution Operation 8,077 8,844 11,466 12,527 13,621 14,816 3+12+18 CIP 880 880 880 5,880 10,880 15,880 4+13+22 Electric Soecial Projects 9,849 6.649 12,649 20,649 28,649 20,849 5+14+23 Hydro Stabilization 400 400 400 400 400 400 6+15+24 Low Carbon Fuel Standard 6,214 5,142 4,574 4,121 3,668 3,668 7+16 Cap and Trade Program 5,612 8,577 11,307 11,307 11,307 11,307 Operations Resan.e Guidelines (Supply) 25 Minimum 21,749 21.76S 20,739 21,184 21,326 21 ,706 26 Maximum 43,499 43,530 41,478 42,328 42,652 43,412 Operations Resen.e Guidelines (Distribution 27 !Minimum 9,057 8,913 9,458 9,975 10,658 10,788 28 Maximum 15,785 15,419 16,437 17,396 18,687 18,867 CIP Resene Guidelines 29 Minimum 4,738 5,024 5,335 3,722 4,556 5 ,216 30 Maximum 23,688 2 5.119 26 ,675 31,943 38,045 38,045 Staff is forecasting a 1% increase to total electric utility revenue in FY 2024, which is the net effect of decreasing the hydroelectric rate adjuster by 50% and increasing the base utility rates by 14%. These rate changes are necessary to maintain the Operations Reserve within guideline levels. Item No. {{item .number}}. Page 5 of 15 This outlook assumes that low hydroelectric generati on and high electricity prices persi st into FY 2024, though conditions are expected to improve compared to FY 2023 . If winter 2022/2023 and 2()23/2024 show above average rainfall, FY 2025 is expected to see a return to more normal hydroelectric conditions, though electricity market prices are projected to remain high through the forecast period. Gi ven high electric supply costs, depleted reserves, and rates that are currently set well below long-term expected costs, in part because rates were not increased during the econom i c downturn associated with the COVID-19 pandemic, staff is proposing the rate changes above. If winter 2022/2023 high precipitation continues, it may permit the City to lower the hydroelectric rate adjuster further in FY 2024. Staff will evaluate its hydroelectric forecast again in April based on October through March precipitation. Even though this Financia l Plan includes FY 2024 revenues continuing at FY 2023 levels, Operations Reserves are still projected to drop to near their minimum guideli ne levels. Possible program and service cuts may be needed to make up the difference if the utility's financial position is significantly worse than forecasted. Table 2 shows the projected electric rates w _ith and without the hydroelectric rate adjuster. Table 1: Projected Electric Rates, FY 2024 to FY 2028 Current Proposed Projected Mid-FY FY FY FY I Projection Year FY FY2024 2025 2026 2027 2028 2023 II System Average Base Rates $0.171 $0.196 $0.212 $0.224 $0 .236 $0.249 ($/kWh) Proposed % Base Rate 14% 8% 5% 5% 5% Increase Hydroelectri c Rate Adjuster $0.048 $0.024 Inactive Inactive Inactive Inactive ($/kWh) Proposed % HRA Decrease -50% 0 % 0% 0% 0% Total System Average Rate ($/kWh) $0.219 $0.220 $0.212 $0.224 $0.236 $0.249 (with Hydroelectric Rate Adjuster) % Change in Total System 0.3% -3% 5% 5% 5% Average Rate FY 2024 Financial Plan Projected Rate Adjustments for the Next Five Fiscal Years Table 3 shows the impact on the annual median residential electric bill (453 kwh per month in winter, 365 kwh per month in summer). Customers are expected to see a small bill decrease as hydro conditions improve in FY 2025. Item No. {{item.number}}. Page 6 of 15 Table 3: Projected Residential Bill Impacts, FY 2024 to FY 2028 I Current Proposed Projected r Mid-FY FY FY I year FY 2024 FY 2025 2026 2027 2028 FY 2023 Estimated Bill Impact ($/mo) * Base Bill Only $63.73 $72.91 $79.03 $83.33 $87.86 $92.63 With Hydro Rate Adjuster $83.37 $83.62 $79.03 $83.33 $87.86 $92.63 * Estimated impact on median monthly residential electric bill These rate changes are needed to in order to move towards full cost recovery. From July 2019 through April 2022 the City did not increase rates to mitigate the economic impact of the COVID- 19 pandemic on residents and businesses. In that time supply and distribution expenses increased $50 million (30%). The expense increases combined with pandemic-related electricity sales revenue decline created a $43 million shortfall in FY 2022. Some of this was related to the impacts of extreme drought and rising electricity market prices, and in response, the City activated the E-HRA in April 2022. Starting in FY 2023 the City began increasing base rates to collect higher expenses, starting with a 5% rate increase on July 1, 2022. The intent was to use loans from the Electric Special Projects Reserve and Operations Reserves to phase in future rate increases gradually. But in late 2022 electricity market prices increased at unprecedented levels, leading to the need to increase the hydroelectric rate adjuster on January 1, 2023 to match the cost of replacing hydroelectric power with market power. Costs are projected to exceed revenues again in FY 2023, leading to further depletion of reserves, but with the proposed rate changes (increasing base rates 14% and decreasing the hydroelectric rate adjuster 50%) combined with a projected drop in electricity market prices by 2024, the electric utility should be able to match revenues and costs in FY 2024. Reserves are insufficient to phase these base rate increases over several years. In FY 2025, assuming hydroelectric generation returns to normal levels, staff forecasts a 3% decrease in customer bills resulting from removal of the hydroelectric rate adjuster, though the savings is expected to be partially offset by an 8% increase in the base utility rate. After that, 5% rate increases are projected due to increasing operational costs, greater capital investment to replace aging infrastructure, the cost of rebuilding portions of the dark fiber system, and debt payments associated with the grid modernization project to support Sustainability and Climate Action Plan (S/CAP) goals. Figure 1 shows the overall electric utility's costs (net of surplus sales revenues} in FY 2019, FY 2024, and FY 2028. Costs for the electric supply portfolio increased significantly from FY 2019 to FY 2024. Operational and capital investment costs increased as well. Combined, the utility's costs increased about 7% per year on average, the reasons for which are discussed below. Rates have not increased to keep revenues matched to these increasing expenses. Total costs are projected to increase by about 1% per year over the forecast horizon, but this involves increasing Item No. {{item.number}}. Page 7 of 15 distribution costs and declining energy supply costs, as discussed below. Figure 1: Electric Utility Costs, FY 2019 Actual vs. FY 2024 and FY 2028 Projections -"' C .2 ·-:E --v). 250 200 150 100 50 FY 2019 FY 2024 FY 2028 (Projected) (Projected) ■ Electric Distribution ■ Electric Supply Figure 2 shows distribution costs. Capital costs have doubled over the last five years due to a combination of increased rate of investment in aging infrastructure and construction inflation. Larger investments re lated to underground district rebuil ds, substation upgrades, and the rebuilding of the Footh ills system are budgeted to occur in the coming years. Operational costs increased about 6% per year from FY 2019 to FY 2024. Due to higher than anticipated staff vacan d es, more expensive external contracts have been needed to complete necessary electric system maintenance. Sal ary and benefit costs have increased, and inflation has increased operating costs. There is greater spend ing on sustainability and energy efficiency initiatives to achieve S/CAP goals, though much of this is funded by dedicated funding sources not reflected in the chart below. As mentioned above, staff has also i ncl uded anticipated debt payments starting in 2025 to finance grid modernization and electrificat ion measures. Item No. {{item.number}}. Page 8 of 15 Figure 2: Electric Distribution Costs, FY 2019 vs. FY 2024 and FY 2028 Projections -Ill C 0 ~ ~ 100 80 60 40 20 FY 2019 FY 2024 (Projected) FY 2028 (Projected} □ Ope ration s El Capital Inve stment • ■ Debt Service Figure 3 shows commodity costs.-Net electric supply portfolio costs greatly increased from FY 2019 to FY 2024 due to extreme drought and large increases in electricity market prices . Transmission costs increased by 6% annually in the same timeframe and are projected to increase by about 6% annually in future years. These increases are due to rehabilitation and replacement of the statewide electric transmission system as well as expansion of that system to accommodate new generation, mostly renewable. Generation costs are projected to drop between FY 2024 and FY 2028, partially driven by the fact that the debt costs with Calaveras are projected to decrease by $4 million in FY 2025. 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 also seeks to achieve cost savings in electric supply wherever feasible. Item No. {{item.number}}. Page 9 of 15 Figure 3: Electric Supply Costs, FY 2019 Actual vs. FY 2024 and FY 2028 Projections -II) C .2 ~ -(/). 120 100 80 60 40 20 p-:) . /Jill FY 2019 FY 2024 (Projected) FY 20 28 (Proje cted) ffil Generation II Transmiss ion II Overhead Staff recognizes the importance of managing operating costs and maximizing efficiency in order to minimize rate increases. As discussed above, staff i s working on cost containment measures related to transmission and renewable energy costs. As reflected in the Utilities Strategic Plan, staff regularly explores additional ways to effectively use available resources, particularly across divisions. Electric Bill Comparison with Surrounding Cities For the median consumption level, the annual CPAU residential electric b ill for calendar year 2022 was $792, which was 46% lower than the annual bill for a PG&E customer with the same consumption ($1,475) and approximately 3% higher than the annual bill for a Ci ty of Santa Clara customer ($771). The bill calcu lations for PG&E customers are based on PG&E Climate Zone X, which includes most surrounding comparison communities. Table 4 presents sample median residential bills for Palo Alto, PG&E, and the City of Santa Clara (Silicon Valley Power) for several usage levels. Rates used to calculate the monthty bills shown below were in effect as of January 1, 2023. Palo Alto bill calculations include the increased hydroelectric rate adjuster. Item No. {{item.number}}. Page 10 of 15 Tab le 4: Residential Monthly Electric Bill Comparison (Effective 1/1/2023, $/ mo.) Season Usage (kwh) Palo Alto PG&E Santa Clara 300 57.74 94.11 39.31 Winter 453 (Median) 94.42 143.32 60.09 650 143.94 221.07 86.85 1200 282.18 438.13 161.54 300 57.74 97.76 39.31 Summer (Median) 365 72.31 123.41 48.14 650 143.94 235.88 86.85 1200 282.18 452.94 161.54 Staff is updating its methodology for commercial customer rate comparisons and will provide an update at a later date. Pro posed Rate Changes The Council adopted the current rates effective July 1, 2022, when CPAU increased electric rates by 5%. Staff held back further rate increases duri ng the COVID-19 pandemic and instead drew down reserves. While using reserves mitigated larger increases during the pandemic, costs have continued to rise, and higher rates are needed to recover costs. In order to move towards full cost recovery and stabilize rates, staff recommends a one-time rate increase to all customer classes of 14% in FY 2024. Staff is also engaging the services of a consultant to review and revise the Electric Utility's Cost of Service study and rates. This study will examine how costs are allocated among the residential and commercial classes and realign them if needed. The study will also develop cost-based rates for several emerging groups, such as: all-electric customers, DC-fast charging facilities, and micro­ grid customers. The current rates and proposed FY 2024 rates are reflected in Table 5 below: Electric Hydro Rate Adjuster E-HRA ($/kWh) 0.04800 0 .02400 -0.02400 -50% E-1 (Residential) Tier 1 Energy ($/kWh) 0.14445 0 .16525 0.02080 14% Tier 2 Energy {$/kWh) 0.20335 0.23263 0.02928 14% Minimum Bill ($/day) 0.34470 0.39434 0.04964 14% Item No. {{item.number}}. Page 11 of 15 E-2 & E-2-G (Small Non-Residential) Summer Energy ($/kWh) ~ 0.21896 0.25049 0.03153 14% Winter Energy ($/kWh) 0.15355 0.17566 0.02211 14% Minimum Bill ($/day) 0.87770 1.00409 0.12639 14% E-4 & E-4-G (Medium Non-Residential) Summer Energy ($/kWh) 0.13490 0.15433 0.01943 14% Winter Energy ($/kWh) 0.10443 0.11947 0.01504 14% Summer Demand ($/kW) 30.36000 34.73184 4.37184 14% Winter Demand ($/kW) 19.92000 22.78848 2.86848 14% Minimum Bill ($/day) 18.13790 20.74976 2.61186 14% E-7 & E-7-G (Large Non-Residential) Summer Energy ($/kWh) 0.12004 0.13733 0.01729 14% Winter Energy ($/kWh) 0.08125 0.09295 0.01170 14% Summer Demand ($/kW) 32.22000 36.85968 4.63968 14% Winter Demand ($/kW) 17.90000 20.47760 2.57760 14% Minimum Bill ($/day) 51.56960 58.99562 7.42602 14% Table 6 shows the impact of the proposed July 1, 2023 rate changes on the residential and non­ res identia l bills for various consumpti on levels. Table 6: Impact of Proposed Electric Rate Changes on Customer Bills Item No. {{item.number}}. Page 12 of 15 BIii under BIii Under Chanse Peak Rates Rate Usage Demand Current Proposed Schedule (kWh/mo) (kW-mo) Rates 7/1/23 $/mo " ($/mo) ($/mo) 300 N/A $58 $57 ($1) -2% (Summer N/A $72 $71 ($1) -1% Median) 365 E-1 (Winter (Residential) N/A $94 $94 ($0) 0% Median) 453 650 N/A $144 $145 $1 0% 1200 N/A $282 $286 $4 1% E-2 (Small Non-1,000 N/A $234 $237 $3 1% Residential} E-4 160,000 274 $33,715 $33 ,624 ($91) 0% (Medium Non-500,000 856 $105,352 $105,067 ($285) 0% Residential} E-7 (Large Non-2,000,000 3,424 $383,095 $376,437 ($6,658) -2% Residential Net Energy Metering Buyback Rates The City operates two Net Energy Metering (NEM) programs. Solar customers served by the CPAU's original NEM program, NEM 1, are compensated at retail rates for net electricity they export to the grid, and solar customers served by the NEM successor program, or NEM 2 (effective after the City reached its N EM 1 cap at the end of 2017), are compensated at the Export Electricity Compensation (E-EEC-1) rate for exported electricity. Customers on the NEM 1 program who have chosen to have the value of any annual net generation they produced over the past 12 months credited back to their account do so under the Net Metering Net Surplus Electricity Compensation (E-NSE-1) rate. The Net Surplus Electricity Compensation rate represents the value of the City's avoided costs or value of customer­ generated electricity in Palo Alto during the prior calendar year, including compensation for the energy, avoided capacity charges, avoided transmission and ancillary service charges, avoided Item No. {{item.number}}. Page 13 of 15 transmission and distribution (T&D) losses, and renewable energy cred its {RECs), or environmental attributes. Staff proposes increasing the E-NSE-1 rate to $0.1535/kWh based on updated avoided cost calculations for 2022 reflecting the greatly increased electricity market prices expected to continue. Under the City's NEM 2 successor program, participating solar customers are billed at the current retail rate for electricity drawn from the grid, and receive a credit for electricity they export to the grid at the Export Electricity Compensation (E-EEC-1) compensation rate. This rate also reflects_ the avoided cost or value of customer-generated electricity in Palo Alto, ca lc ulated on a forward -looking basis for the upcoming fiscal year. As shown in the table below, the current avoided cost for solar generation in Palo Alto is 10.45 cents/kWh, which is significantly lower than the avoided cost on the proposed NEM compensation rate (16.85 cents/kWh). This increase in the overall avoided cost is driven by greatly increased electricity market prices. Table 8: NEM Compensation Rates -Current vs. Proposed Current Proposed Rate $/kWh $/kWh Export Electricity (E-EEC) $0.1045 $0.1685 Net Surplus Electricity (E -NSE) $0.1026 $0.1535 Palo Alto Green (PAG ) Prog ram The Palo Alto Green (PAG) program provides CPAU's commercial customers an opportunity to voluntarily pay a premium to receive renewable electricity credits to match their energy usage. Under this program, CPAU staff purchase and reti re Green-e certifi ed RECs in the wholesal e market on behalf of PAG customers. This enables participating commercial customers to claim credit for the REC purchases in order to satisfy their corporate sustai nability goals and meet federal "green cert ification" requirements. The . 75 cent per kWh PAG charge is a pass-through charge; the revenue collected set to recover the costs of administering the program. The PAG program has very low overhead costs (e.g., the cost of hiring an auditor to carry out an annual Green-e verification process for the program), so the vast majority of the program cost i s the purchase cost of the RECs. In the past year the wholesale cost of Green•e certified RECs in the Western US market has remai ned relatively flat at around $6.5/REC. As such, the PAG rate premi um should rema i n at $7.5 per 1,000 kWh block (.75 cents/kWh), enough to cover the cost of the RECs and admi nistrative overhead. Wh ile no change to the PAG rate premium w m be made, changes to the commodity and distribution components will be reflected on the ~esidential Master~Metered and Sma lt Non-Residenti al Green Power Electric Service (E-2-G), the Medi um Non-Residentia l Green Power Electric Service (E-4-G), and the Large Non -Residential Green Power Electric Service (E-7 -G) rate schedules in addition to other rate changes discussed in this Financial Plan will be reflected (Linked Document ). Timeline The Finance Committee is scheduled to review the FY 2024 Electric Financial Plan (Linked Document ) in March 2023. The City Council will consider adopting the Financial Plan and rate Item No. {{item.number}}. Page 14 of 15 amendments as part of the FY 2024 budget review and adoption process. Stakeholder Engagement Stakeholder engagement for the rate adoption process includes review by the UAC, Finance Committee, and City Council, as well as outreach to residents via the website and social media. Resource Impact FY 2024 revenues are projected to increase by $21 million (13%) compared to FY 2023 levels if Council adopts this report's recommendations. The City is a utility customer, so rate increases will also result in estimated City expense increases of about $655,000, approximately $228,000 of that being in the General Fund. In this case as well the expense increases relate to the fact that rates were only increased to current levels halfway through FY 2023. Resource impacts to City departments and funds of the recommended rate adjustments are programmed in the FY 2024 Proposed Operating Budget. If the final rates adopted by Council in June differ from those proposed in this report, further adjustments may be brought forward as part of the annual budget process. Environmental Review The UAC's review and recommendation to the Finance Committee on the FY 2024 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 Attachment B: Proposed Electric Rate Schedules Attachment C: Presentation Report#: {{item.custom _tracking_number}} Item No. {{item.number}}. Page 15 of 15 • r r • *Yet to be Passed* Resolution No. Attachment A Resolution of the Council of the City of Palo Alto Approving the Fiscal Year 2024 Electric Utility Financial Plan and Reserve Transfers, and Amending Utility Rate Schedules E-HRA {Electric Hydro Rate Adjuster), 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-NSE (Net Surplus Electricity Compensation Rate), and E-EEC (Export Electricity Compensation) RECITALS 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 June 19, 2023, 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 2024 Electric Utility Financial Plan. 6056715 Utility Electric Rate Schedules FY24 Electric Financial Plan Attachment A SECTION 2. The Council hereby approves the following transfers to be made by the end of FY 2023, as described in the FY 2024 Electric Utility Financial Plan: a. A transfer of up to $15 million from the Supply Operations Reserve to the Distribution Operations Reserve; b. A transfer of up to $8 million from the Electric Special Projects (ESP) reserve to the Supply Operations Reserve; and c. A transfer of up to $4.5 million from the Supply Operations Reserve to the Cap and Trade Program; and SECTION 3. The Council hereby approves the following transfers to be made by the end of FY 2024, as described in the FY 2024 Electric Utility Financial Plan: a. A transfer of up to $3.5 million from the Supply Operations Reserve to the Cap and Trade Program; and SECTION 4. Pursuant to Section 12.20.010 of the Palo Atto Municipal Code, Utility Rate Schedule E-HRA (Electric Hydro Rate Adjuster} is hereby amended to read as attached and incorporated. Utility Rate Schedule E-HRA, as amended, shall become effe~tive July 1, 2023. SECTION 5. Pursuant to Secti on 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-1 (Residential Efectric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-1, as amended, shall become effective Ju ly 1, 2023. SECTION 6. Pursuant to. Secti on 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-2 (Residential Master-Metered and Sma ll 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, 2023. SECTION 7. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Util ity 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, 2023. SECTION 8. 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, 2023. 6056715 Utility Electric Rate Schedules FV24 Electric Financial Plan Attachment A SECTION 9. 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, 2023. SECTION 10. 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, 2023. SECTION 11. 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, 2023. SECTION 12. 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, 2023. SECTION 13. 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, 2023. SECTION 14. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-NSE (Net Surplus Electricity Compensation Rate) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-NSE-1, as amended, shall become effective July 1, 2023. SECTION 15. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-EEC-1 (Export Electricity Compensation) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-EEC-1, as amended, shall become effective July 1, 2023. II 6056715 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. Utility Electric Rate Schedules FY24 Electric Financial Plan II II Attachment A SECTION 17. The Council finds that approving the Financial Plan and Reserve transfers does not meet the California Envi ronmental Quality Act's (CEQA) definition of a project under Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(S), because it is an admin istrati ve 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 operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital improvements necessary to ma i ntain service is not subject to the California Envi ronmental Qua lity Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Tltle 14 of the Ca lifornia Code of Regulations Sec. 15273(a). After reviewi ng 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 basi s for this claim of CEQA exemption. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: City Clerk APPROVED AS TO FORM: Assistant City Attorney 605 671 5 Utility Electric Rat e Sch edule s FY24 Electric Fi nancial Plan Mayor APPROVED: City Manager Director of Utilities Director of Administrative Services Attachment B JI:IT~ JUIA] r AH OHO {H )UI l ) >l r.J ELECTRIC HYDRO RATE ADJUSTER UTILITY RA TE SCHEDULE E-HRA ' '111 A. I B. C. D. l J( I II-I >I If A51 ( I ! l APPLICABILITY: This schedule applies to all Customers receiving Electric Service from the City of Palo Alto Utilities. ()J Vi'lf TERRITORY: t t C $I J ~ ~ .-l __ .., ___ .., __ tf. This schedule applies everywhere the City of Palo Alto provides Electric Service. ,. , RATES: Per kWh Hydro Rate Adjustment: ............................................................................... ($0.0 33e4) -$0.02443 ,, SPECIAL NOTES: 1. Hydro Rate Adjustment a. The Hydro Rate Adjustment is a surcharge or discount applied to Electric rates based on the strength of the City's hydrological generation portfolio, applied to manage volatility in energy costs and generation and the impact of that volatility on customer rates. b. The Hydro Rate Adjustment is determined based on the level of funding in the Hydro Stabiliz.ation Reserve, including transfers or withdrawals projected to be made in the current fiscal year according to the City's Electric Utility Reserve Management Practices, and on the forecasted amount of annual generation the City of Palo Alto Utilities will receive from its hydroelectric generation resources through the end of the current fiscal year. 2. Calculation of Hydro Rate Adjustment a) Staff calculates the Hydro Rate Adjustment surcharge or discount annually in May, or whenever hydrologic conditions are poor and Hydro Stabiliz.ation Reserves are projected to fall below the 25% level within the current fiscal year. b) The Hydro Rate Adjustment will be applied to all Customers' Electric rate schedules upon Council approval, and re-evaluated annually. c) The Hydro Rate Adjustment surcharge or discount will fall within the minimum/maximum range set forth in Section C, and will be applied as follows: IA I I' I CITY OF PALO AL TO UTILITIES Issued by the City Council <1 Supersedes Sheet No EHRA-1 dated 14-1-202J2 0 • CITY OF \\ PALO A il.TO UTILITIES Sheet No E-HRA-1 Effective 1-1-1-2023 H 1n~rnrbBHl H I f~!Jl,01\ :n ISi OHOYll )IH l )JI J~,J J\5IH-I i-1 J J_<l'H )~R1 A51 '(f Iii ELECTRIC HYDRO RA TE ADJUSTER UTILITY RA TE SCHEDULE E-HRA l"I f I Hvdro Rate Adiustment ($/kWh) l >JI I Hydro Projected Hydro Generation vs. Average Hydro Generation Stabilization . (GWh/year) ' Reserve Level Less than 319 319to480 480 to 642 Over 642 Above $-$(0.0.ll~) $(0.0 12~) ) $(0.033~) i Maximum 75%to 100% $-fl OJI/ JI 'I $:0 $(0.012~) l $(0.02448) 25%to75% $-$-$-$- 25% and below $0.02448 $0.0 12~ $-!'. • $- rlW ;1 • ,'l'Jl:>u:I 1 , ... > ,, 11 1 {End} .. flO.f..J/ l H'k' jn.,mt,wihJ.. '}1ivl o•l!J ill . I t •prrl .-•,If • I fl l,•,J, 1('l ., r ·,) I') ..,,,pr.rl·, ;, b ll )WHl !,mi;/>,' I 'l O 1/ • ,rll' c ,1.,1 • c, J(jH .oi 0!110 1 r,<l' '7 '..1.!:l 1 '! 11 i1•1, • ?' ,ti ) •1· t 1 11 ,,,, • ch , r i ,.., r ) ,:_ 1,I IJ , !:),i • r 'Jr" ,,,. no 1 '..IQ I 1 · 1 • > '"1 ri ,. LI r I n 1tl:,,wl J, ,J''} , Ir fl() I,, :.ill L, Ji :)t'.J· I • 1,//f. y 1 l 'l ~ Ill ) r (,I J c 'l JI I! I OJ 'l , I"' .,. 1 ,.11 fl d I i ~ ·r I " I' ,., : r ! 'I • J I) ' I 111/ () I t_l • ) ' 1' ''j • 1 ' :1r 1. lrJ l ,1 •fill, 1:>1 ti yqr ·• •I (1 ' 'i I JiJ1 ' 1') )[ J:J ')( l1 _f( , , JHtz 01 , r ,'u 11b 1 ' 1 I ) >11] ' / I J J .' • r '.) ,, 1 . 11 Ir i , 1 r 'I · 'l , ! / . -u;• t I I l Jf',1 II l r l.1 j ( ' l t ,l )'JJ)') ( ., ,11 S! :, 1 • •i > , • /') : In . · , . ! ') ( ) ii >r: ,,.,, >'l(. J I l, I ft! I , 1( f ( A!' ' J I~ '• 1, ! l',1 1 .-1 I / L 1-J 1 1 ·, ,. , • , ol 1·, .) , , , . n CITY OF PALO AL TO UTILITIES Issued by the City Council I I ) / I ) f J Supersedes Sheet No EHRA-2 dated 14-1-202~ 0 • CITY OF :-._ PALO ALTO UTILITIES JI V , I r\~ Sheet No E-HRA-2 Effective Z+-1-2023 RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-l A. APPLICABILITY: This Rate Schedule applies to separately metered single-family residential dwellings receiving Electric Service from the City of Palo Alto Utilities. B. TERRITORY: C. D. This rate schedule applies everywhere the City of Palo Alto provides Electric Service. UNBUNDLED RA TES: Per kilowatt-hour (kWh) Commodity Distribution Public Benefits Total Tier I usage $ $ $ $ 0 .091970-:,Q,g 0 .06792QJ)S429 0 ,005360.00469 0.165250 . l 4 4 4 w ~ Tier 2 usage Any usage over Tier l 0.127590:-l+ 0.099680.08008 0.0053 60.00469 0.2 32639.io;n 8$8 ~ Minimum Bill ($/day) 0 .39430 .3 4 47 SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Calculation of Usage Tiers Tier I Electricity us age shall be calculated and billed based upon a level of I l kWh per day, prorated by Meter reading days of Service. As an example, for a 30-day bill, the Tier 1 level would be 330 kWh. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. {End} CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-1-1 dated 7-1~2022 • C IT Y OF PALO ALTO UTILITIES Sheet No E-1-1 Effective 7-l ~2023 RESIDENTIAL MASTER-METERED AND SMALL NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-2 A. APPLICABILITY: This Rate Schedule applies to the following Customers receiving Electric Service from the City of Palo Alto Utilities: I. Small non-residential Customers receiving Non-Demand Metered Electric Service; and 2. Customers with Accounts at Master-Metered multi-family facilities . B. TERRITORY: C. This rate schedule applies everywhere the City of Palo Alto provides Electric Service. UNBUNDLED RA TES: Per kilowatt-hour (kWh) Summer Period Winter Period Minimum Bill ($/day) Commodity Distribution Public Benefits $ 0.13074 €1.1 iH $ $ ~ 0.1 14399 .@9~76 o .00536Q.Q04el.il 0.093770:08+ # o .076539 .... 61 7, o.oo53 60 .0Q4a9 Total $ 0.250490.~ 189 e 0.175660.1533 ~ 1.0041(}.8777 D. SPECIAL NOTES: l. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Seasonal Rate Changes The Summer Period is effective May l to October 31 and the Winter Period is effective from November I to April 30. When the billing period includes use in both the Summer and the Winter Periods, the usage will be prorated based on the number of days in each CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-2-1 dated 7-1 ~2022 O CITYOF PALO ALTO UTILITIES Sheet No E-2-1 Effective 7-1 ~2023 RESIDENTIAL MASTER-METERED AND SMALL NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-2 seasonal period, and the charges based on the applicable rates therein. For further discussion of bill calculation and proration, refer to Rule and Regulation 11 . 3. Maximum Demand Meter Whenever the monthly use of energy has exceeded 8,000 kWh for three consecutive months, a maximum Demand Meter will be installed as promptly as is practicable and thereafter continued in service until the monthly use of energy has fallen below 6,000 kWh for twelve consecutive months, whereupon, at the option of the City, it may be removed. The maximum Demand in any month will be the maximum average power in kilowatts taken during any 15-minute interval in the month provided that if the Customer's load is intermittent or subject to fluctuations, the City may use a 5-minute interval: A thermal-type Demand Meter which does not reset after a definite time interval may be used at the City's option. The billing Demand to be used in computing charges under this schedule will be the actual maximum Demand in kilowatts for the current month. An exception is that the billing Demand for Customers with Thermal Energy Storage (TES) will be based upon the actual maximum Demand of such Customers between the hours of noon and 6 pm on weekdays. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-2-2 dated 7-1 ~21222. • CITY OF . PALO ALTO UTILITIES {End} Sheet No E-2-2 Effective 7-1 ~2023 RESIDENTIAL MASTER-METERED AND SMALL NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-2-G A. APPLICABILITY: This Rate Schedule applies to the following Customers receiving Electric Service from the City of Palo Alto Utilities under the Palo Alto Green Program: I . Small non-residential Customers receiving Non-Demand Metered Electric Service; and 2. Customers with Accounts at Master-Metered multi-family facilities. B. TERRITORY: This rate schedule applies everywhere the City of Palo Alto provides Electric Service. C. UNBUNDLED RATES: 1. 100% Renewable Option: Per kilowatt-hour (kWh) Summer Period Winter Period Minimum Bill ($/day) Commodity $ 0.13074~ ~ 0.093 77™18 ~ 2. 1000 kWh Block Purchase Option: Per kilowatt-hour (kWh) Summer Period Winter Period Minimum Bill ($/day) Commodity $ 0.13074~ -h5+ 0 .09377(M}& ~ CITY OF PALO AL TO UTILITIES Issued by the City Council Public Distribution Benefits $ $ 0 J l439 ~ 0 .00536(};() m Q4e9 0.07653 ~ 0 .00536(};() +I+ 9#9 Public Distribution Benefits $ $ 0.11439~ 0.00536G.Q m Q4@ 0 .07653 ~ 0.005360-:G +I+ ~ Supersedes Sheet No E-2-G-1 dated 7-1-2023,.4 O C IT YOF PALO ALTO UTILITIES Palo Alto Green Charge Total $ 0.257990-: $_0.0075 ~ $ 0.1 8316 0.0075 Q. I~ H)S 1~0041 0.8777 Total $ 0 .250490-: ~ 0.175660-: ~ 1.0041 9 .8 7+':I Sheet No E-2-G-1 Effective 7-1-2021~ RESIDENTIAL MASTER-METERED AND SMALL NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-2-G Palo Alto Green Charge (per 1000 kWh block) $7.50 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Seasonal Rate Changes The Summer Period is effective May 1 to October 31 and the Winter Period is effective from November 1 to April 30. When the billing period includes use in both the Summer and Winter Periods, us age will be prorated based upon the number of days in each seasonal period, and the charges based on the applicable rates therein. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Palo Alto Green Program Description and Participation Palo Alto Green provides for either the purchas e of enough renewable energy credits (RECs) to match 100% of the energy usage at the facility every month, or for the purchase of IOOO kilowatt-hour (kWh) blocks. These REC purchases support the production of renewable energy, increase the financial value of power from renewable sources, and create a transparent and sus tainable market that encourages new development of wind and solar power. Customers choos ing to participate shall fill out a Palo Alto Green Power Program application provided by the Customer Service Center. Customers may request at any time, in writing, a change to the number of blocks they wish to purchase under the Palo Alto Green Program. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-2-G-2 dated 7-1-202g4 • CITY OF PALO ALTO UTILITIES Sheet No E-2-G-2 Effective 7-1 -202Ja RESIDENTIAL MASTER-METERED AND SMALL NON-RESIDENTIAL GREEN POWER . ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-2-G 4. Maximum Demand Meter Whenever the monthly use of energy has exceeded 8,000 kWh for three consecutive months, a maximum Demand Meter will be installed as promptly as is practicable and thereafter continued in service until the monthly use of energy has fallen below 6,000 kWh for twelve consecutive months, whereupon, at the option of the City, it may be removed. The maximum Demand in any month will be the maximum average power in kilowatts taken during any 15-minute interval in the month, provided that if the Customer-s load is intermittent or subject to fluctuations, the City may use a 5-minute interval. A thermal-type Demand Meter which does not reset after a definite time interval may be used at the City's option. The billing Demand to be used in computing charges under this schedule will be the actual maximum Demand in kilowatts for the current month. An exception is that the billing Demand for Customers with Thermal Energy Storage (TES) will be based upon the actual maximum Demand of such Customers between the hours of noon and 6 pm on weekdays. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-2-G-3 dated 7-1-20214 • CITY OF PALO ALTO UTILITIES {End} Sheet No E-2-G-3 Effective 7-1-202F, MEDIUM NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-4 A. APPLICABILITY: B. C. D. This Rate Schedule applies to Demand metered Secondary Electric Service for Customers with a maximum Demand below 1,000 kilowatts. This Rate Schedule applies to three-phase Electric Service and may include Service to master-metered multi-family facilities or other facilities requiring Demand-metered Service, as determined by the City . TERRITORY: This rate schedule applies any v,ch ere e very where the City of Palo Alto provides Electric Service. UNBUNDLED RA TES: Rates per kilowatt (kW) and kilowatt-hour (kWh): Public Commodit}'. Distribution Benefits To_taJ Summer Period Demand Charge (per kW) $4.8~ $29.87~ $34.73~ O. l 2 322G:-I-G 0.02575~ 0.0053 6G:004 Energy Charge (per kWh) %0 6-1-e9 O. I 5433(U349@ Winter Period Demand Charge (per kW) $_3_._0_3 ~ $ _1_2_. 7 6+7,..l-0 $22.79~ 0.0883 60m 0.02575~ 0 .0053 ~ Energy Charge (per kWh) 9-H 6-1-e9 0.11947Q.J044J Minimum Bill ($/day) 20.749818.1379 SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-1 dated 7-1-202249 • C I TY O F PALO ALTO UTILITIES Sheet No E-4-1 Effective 7-1-202~,l 2. Seasonal Rate Changes MEDIUM NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-4 The Summer Period is effective May 1 to October 31 and the Winter Period is effective from November I to April 30. When the billing period includes use both in the Summer and the Winter Periods, the usage will be prorated based on the number of days in each seasonal period, and the charges based on the applicable rates therein. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Maximum Demand Meter Whenever the monthly use of energy has exceeded 8,000 kWh for three consecutive months, a Maximum Demand Meter will be installed as promptly as is practicable and thereafter continued in Service until the monthly use of energy has fallen below 6,000 kWh for twelve consecutive months, whereupon, at the option of the City, it may be removed. The Maximum Demand in any month will be the maximum average power in kilowatts taken during any IS-minute interval in the month, provided that if the Customer's load is intermittent or subject to fluctuations, the City may use a 5-minute interval. A thermal-type Demand Meter which does not reset after a definite time interval may be used at the City's option. The Billing Demand to be used in computing charges under this schedule will be the actual Maximum Demand in kilowatts for the current month. An exception is that the Billing Demand for Customers with Thermal Energy Storage (TES) will be based upon the actual Maximum Demand of such Customers between the hours of noon and 6 pm on weekdays. 4. Power Factor For new or existing Customers whose Demand is expected to exceed or has exceeded 300 kilowatts for three consecutive months, the City has the option of installing applicable Metering to calculate a Power Factor. The City may remove such Metering from the Service of a <::ustomer whose Demand has been below 200 kilowatts for four consecutive months. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-2 dated 7-1-202249 O C I TYOF PALO ALTO UTILITIES Sheet No E-4-2 Effective 7-l-202il MEDIUM NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-4 When such metering is installed, the monthly Electric bill will include a "Power Factor Adjustment", if applicable. The adjustment will be applied to a Customer's bill prior to the computation of any primary voltage discount. The Power Factor Adjustment is applied by increasing the total energy and Demand charges for any month by 0.25 percent (0.25%) for each one percent (1%) that the monthly Power Factor of the Customer's load was less than 95%. The monthly Power Factor is the average Power Factor based on the ratio of kilowatt hours to kilovolt-ampere hours consumed during the month. Where time-of-day Metering is installed, the monthly Power Factor shall be the Power Factor coincident with the Customer's Maximum Demand. 5. Changing Rate Schedules Customers may request a rate schedule change at any time to any City of Palo Alto full­ service rate schedule as is applicable to their kilowatt-Demand and kilowatt-hour usage profile. 6. Primary Voltage Discount Where delivery is made at the same voltage a s that of the line from which the Service is supplied, a dis count of 2 1/2 percent for available line voltages above 2 kilovolts will be offered, but the City is not required to supply Service at a particular line voltage where it has, or will install, ample facilities for supplying at another voltage equally or better suited to the Cus tomer's electrical requirements, as determined in the City's sole discretion. The City retains the right to change its line voltage at any time after providing reasonable advance notice to any Customer receiving the discount in this section. The Customer then has the option to change his system so as to receive Service at the new line voltage or to accept Service (without voltage dis count) through transformers to be supplied by the City subject to a maximum kilovolt-ampere size limitation. 7. Standby Charge a. Applicability: The standby charge, subject to the exemptions in subsection D(7)(e), applies to Customers that have a non-utility generation source interconnected on the · Customer 's s ide of the City's revenue meter and that occasionally require backup power from the City due to non-operation of the non­ utility generation source. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-4-3 dated 7-1-202249 • CI T Y OF PALO ALTO UTILITIES Sheet No E-4-3 Effective 7-l-202~J b. c. d. MEDIUM NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-4 Standby Charges: Commodit~ Distribution Total Standby Charge (per kW of Reserved Capacity) Summer Period $0.69 $15.23 $15.92 Winter Period $0.63 $9.04 $9.67 Meters. A separate Meter is required for each non-utility generation source. Calculation of Maximum Demand Credit. (I) In the event the Customer's Maximum Demand (as defined in Section D.3) occurs when one or more of the non-utility generators on the Customer's side of the City's revenue meter are not operating, the Maximum Demand will be reduced by the sum of the Maximum Generation of those non-utility generators, but in no event shall the Customer's Maximum Demand be reduced below zero. (2) If the non-utility generation source does not operate for an entire billing cycle, the standby .charge does not apply and the Customer shall not receive the Maximum Demand credit described in this Section. e. Exemptions. (1) The standby charge shall not apply to backup generators designed to operate only in the event of an interruption in utility Service and which are not used to offset Customer electricity purchases. (2) The standby charge shall not apply if the Customer meets the definition of an "Eligible Customer-generator" as defined in California Public Utilities Code Section 2827(b)(4), as amended. (3) The applicability of these exemptions shall be determined at the discretion of the Utilities Director. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-4-4 dated 7-1-2022-W • CI T Y OF PALO ALTO UTILITIES {End} Sheet No E-4-4 Effective 7-1-202iJ_ MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-4-G A. APPLICABILITY: B. C. This Rate Schedule applies to Demand metered Secondary Electric Service for Customers with a maximum Demand below 1,000 kilowatts (kW) who receive power under the Palo Alto Green Program. This Rate Schedule applies to three-phase Electric Service and may include Service to Master-metered multi-family facilities or other facilities requiring Demand metered Service, as determined by the City. TERRITORY: The rate schedule applies everywhere the City of Palo Alto provides Electric Service. UNBUNDLED RA TES: 1. 100% Renewable Option: Palo Alto Public Green Commodit):'. Distribution Benefits Charge Total Summer Period $ 34.73~ Demand Charge (per kW) $4.86~ $29.87~ ~ 0 .123220:4-0 0 .02 575~ 0.00536().;. 0.16183(h Energy Charge (per kWh) %0 6+ 0046-9 0.0075 ~ Winter Period $ 22_.79~ Demand Charge (per kW) $3.03~ $19.7~ J 0.0883~ 0 .02575~ 0 .005 3 6().;. 0.l2697(h Energy Charge (per kWh) 9-H 6+ 004M-0.0075 +H-93, Minimum Bill ($/day) 20.749818.1 ~;?9 CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-1 dated 7-1-202j4 • C I TY OF PALO ALTO UTILITIES Sheet No E-4-G-1 Effective 7-t-202;lJ_ MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-4-G 2. 1000 kWh Block Purchase Option: Commodity Distribution Summer Period Demand Charge (per kW) · $ 4.86~ $ 29_._87~ Public Benefits 0.123220-,-i-0 0.02575 ~ 0.00536G,. Energy Charge (per kWh) %0 6+ G9#9 Palo Alto Green Charge (per 1000 kWh block) Winter Period Demand Charge (per kW) $ 3.03~ 0.0883~ Energy Charge (per kWh) 9-1-J. $ 19. 7 6-1-7-:-1-@ 0 .02575~ 6+ Palo Alto Green Charge (per I 000 kWh block) Minimum Bill ($/day) D. SPECIAL NOTES: 1. Calculation of Cost Components 0.005360,. 004&9- $ 34.73~ --6 0,1 5433G. ~ $7 .50 $ 22. 79-1-9.9 ~ 0.11947(). ~ $7 .50 20.7498 18 .1 379 The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges , and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Seasonal Rate Changes The Summer Period is effective May I to October 31 and the Winter Period is effective from November I to April 30. When the billing period includes use both in the Summer and the Winter Periods, the usage will be prorated based on the number of days in each seasonal period, and the charges based on the applicable rates therein . For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Maximum Demand Meter Whenever the monthly use of energy has exceeded 8,000 kilowatt-hours for three consecutive months, a Maximum Demand Meter will be installed as promptly as is practicable and thereafter continued in Service until the monthly use of energy has CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-2 dated 7-1-2021.4 O C I T YOF PALO ALTO UTILITIES Sheet No E-4-G-2 Effective 7-l-202iJ_ MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-4-G dropped below 6,000 kilowatt-hours for twelve consecutive months, whereupon, at the option of the City, it may be removed. The Maximum Demand in any month will be the maximum average power in kilowatts taken during any 15-minute interval in the month, provided that if the Customer's load is intermittent or subject to fluctuations, the City may use a 5-minute interval. A thermal-type Demand Meter, which does not reset after a definite time interval, may be used at the City's option. The Billing Demand to be used in computing charges under this schedule will be the actual Maximum Demand in kilowatts for the current month. An exception is that the Billing Demand for Customers with Thermal Energy Storage (TES) will be based upon the actual Maximum Demand of such Customers between the hours of noon and 6 PM on weekdays. 4. Power Factor For new or existing Customers whose Demand is expected to exceed or has exceeded 300 kilowatts for three consecutive months, the City has the option of installing applicable Metering to calculate a Power Factor. The City may remove such Metering from the Service of a Customer whose Demand has dropped below 200 kilowatts for four consecutive months. When such Metering is installed, the monthly E lectric bill will include a "Power Factor Adjustment", if applicable . The adjustment will be applied to a Customer's bill prior to the computation of any primary voltage discount. The Power Factor Adjustment is applied by increas ing the total energy and Demand charges for any month by 0 .25 percent or (1/4) for each one percent (I %) that the monthly Power Factor of the Customer's load was less than 95%. The monthly Power Factor is the average Power Factor based on the ratio of kilowatt­ hours to kilovolt-ampere hours consumed during the month. Where time-of-day Metering is installed, the monthly Power Factor shall be the Power Factor coincident with the Customer's Maximum Demand. 5. Changing Rate Schedules Customers may request a rate schedule change at any time to any applicable full-service rate schedule as is applicable to their kilowatt-Demand and kilowatt-hour usage profile . CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-3 dated 7-1-2022-1- • C I T Y OF PALO ALTO UTILITIES Sheet No E-4-G-3 Effective 7-l-202 ~J MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-4-G 6 . Palo Alto Green Program Description and Participation Palo Alto Green provides for either the purchase of enough renewable energy credits (RECs) to match I 00% of the energy usage at the facility every month, or for the purchase of I 000 kilowatt-hour (kWh) blocks. These REC purchases support the production of renewable energy, increase the financial value of power from renewal sources, and creates a transparent and sustainable market that encourages new development of wind and solar. Customers choosing to participate shall fill out a Palo Alto Green Power Program application provided by the Customer Service Center. Customers may request at any time, in writing, a change to the number of blocks they wish to purchase under the Palo Alto Green Program. 7. Primary Voltage Discount Where delivery is made at the same voltage as that of the line from which the Service is supplied, a discount of 2.5 percent for available line voltages above 2 kilovolts will be offered, but the City is not required to supply Service at a particular line voltage where it has, or will install, ample facilities for supplying at another voltage equally or better suited to the Customer's electrical requirements, as determined in the City's sole discretion. The City retains the right to change its line voltage at any time after providing reasonable advance notice to any Customer receiving the discount in this section . The Customer then has the option to change the system so as to receive Service at the new line voltage or to accept Service (without voltage discount) through transformers to be supplied by the City subject to a maximum kilovolt-ampere size limitation. 8. Standby Charge a. Applicability: The standby charge, subject to the exemptions in subsection D(8)(e), applies to Customers that have a non-utility generation source interconnected on the Customer's side of the City's revenue Meter and that occasionally require backup power from the City due to non-operation of the non­ utility generation source. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-4 dated 7-1-202Z,4 • C I TY OF PALO ALTO UTILITIES Sheet No E-4-G-4 Effective 7-1 -202~1_ b. c. d. MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-4-G Standby Charges: Commodit}'. Distribution Total Standby Charge {per kW of Reserved Capacity) Summer Period $0.69 $15.23 $15.92 Winter Period $0.63 $9.04 $9.67 Meters: A separate Meter is required for each non-utility generation source. Calculation of Maximum Demand Credit: {I) In the event the Customer's Maximum Demand (as defined in Section D.3) occurs when one or more of the non-utility generators on the Customer's side of the City's revenue Meter are not operating, the Maximum Demand will be reduced by the sum of the Maximum Generation of those non-utility generators, but in no event shall the Customer's Maximum Demand be reduced below zero. (2) If the non-utility generation source does not operate for an entire billing cycle, the standby charge does not apply and the Customer shall not receive the Maximum Demand credit described in this Section. e. Exemptions: ( 1) The standby charge shal I not apply to backup generators designed to operate only in the event of an interruption in utility Service and which are not used to offset Customer electricity purchases. (2) The standby charge shall not apply if the Customer meets the definition of an "Eligible Customer-generator" as defined in California Public Utilities Code Section 2827(b)(4), as amended. (3) The applicability of these exemptions shall be determined at the discretion of the Utilities Director. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-5 dated 7-1-2023.4- • C IT YOF PALO ALTO UTILITIES {End} Sheet No E-4-G-5 Effective 7-1-202~;! MEDIUM NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RA TE SCHEDULE E-4 TOU A. APPLICABILITY: This voluntary Rate Schedule applies to Demand metered Secondary Electric Service for Customers with Demand between 500 and 1,000 kilowatts per month and who have sustained this level of usage for at least three consecutive months during the most recent 12 month period . This Rate Schedule applies to three-phase Electric Service and may include Service to Master­ Metered multi-family facilities or other facilities requiring Demand-metered Service, as determined by the City. In addition, this Rate Sch~dule is applicable for Customers who did not pay power factor adjustments during the last 12 months. B. TERRITORY: This rate schedule applies everywhere the City of Palo Alto provides Electric Service . C. UNBUNDLED RA TES: Rates per kilowatt (kW) and kilowatt-hour (kWh): Commodit~ Summer Period Demand Charge (per kW) Peak $2.99~ Mid-Peak l.00~ Off-Peak l.00~ Energy Charge (per kWh) $ 0 .112470-A-0 Peak ~ 0.142 50~ Mid-Peak 64+ 0.08615 0-,M Off-Peak ~ Winter Period Demand Charge (per kW) Peak $ l._68~ Off-Peak l .68~ CITY OF PALO AL TO UTILITIES Issued by the City Council Distribution $ I 0.28&:-iQ 10.28~ 10.288-:89 $ 0.025750.020€i0 0.02575 Q.O~OeQ 0 .025750.020€i0 $ I IJ)29M I 1.029M Supersedes Sheet No E-4-TOU-1 dated 7-1-20~-W • CITY OF PALO ALTO UTILITIES Public Benefits Total $13.2 7~ 11.28~ l1.28~ $ $ 0.0053 60,0()4@ 0.143580 , 1251H 0.0053 6(U}04e9 Q. 17361 Q. I~ I +e 0.0053 6Q.OQ4fi9 0 .117260 .102§0 $ I 2 . 7 O-t--1-,.+Q 12.704+.+0 Sheet No E-4-TOU-l Effective 7-1-2021~ MEDIUM NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RA TE SCHEDULE E-4 TOU Commodity Energy Charge (per kWh) $ 0.13817~ Distribution Public Benefits Total Peak ~ $ 0.025750.02060 0.1 1812();.I.G $ 0.005360 .00469 $ 0.005360.09469 $ 0.169280.14797 Off-Peak Minimum Bill ($/day) M-6 0.025750.02060 0.14923 0.1304 S 20.7498 l&. l 3 79 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Definition of Time Periods SUMMER PERIOD (Service from May I to October 31 ): Peak: Mid Peak: Off-Peak: 12:00 noon to 6:00 p.m. 8:00 a.m. to 12:00 noon 6:00 p.m. to 9:00 p.m. 9:00 p.m. to 8:00 a.m. All day Monday through Friday (except holidays) Monday through Friday (except holidays) Monday through Friday (except holidays) Saturday, Sunday, and holidays WINTER PERIOD (Service from November I to April 30): Peak : Off-Peak: 8:00 a.m. to 9:00 p.m. 9:00 p.m. to 8:00 a.m. All day Monday through Friday (except holidays) Monday through Friday (except holidays) Saturday, Sunday, and holidays SEASONAL RA TE CHANGES: When the billing period includes use in both the Summer and the Winter periods, the usage will be prorated based on the number of days in each seasonal period, and the charges based on the applicable rates therein. For further CITY OF PALO AL TO UTILITIES Issued by the City Council · Supersedes Sheet No E-4-TOU-2 dated 7-1-202249 0 CITYOF PALO ALTO UTILITIES Sheet No E-4-TOU-2 Effective 7-1-2021:;l MEDIUM NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RA TE SCHEDULE E-4 TOU discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Demand Meter Whenever the monthly use of energy has exceeded 8,000 kilowatt-hours for three consecutive months, a Demand Meter will be installed as promptly as is practicable and thereafter continued in Service until the monthly use of energy has fallen below 6,000 kilowatt-hours for twelve consecutive months, whereupon, at the option of the City, it may be removed. The Billing Demand to be used in computing charges under this schedule will be the actual Maximum Demand in kilowatts taken during any 15-minute interval in each of the designated time periods as defined under Sect ion D.2. 4. Power Factor Adjustment Time of Use Customers must not have had a power factor adjustment assessed on their Service for at least 12 months. Power factor is calculated based on the ratio of kilowatt hours to kilovolt-ampere hours consumed during the month, and must not have fallen below 95 % to avoid the power factor adjustment. Should the City of Palo Alto Utilities Department find that the Customer's Service should be subject to power factor adjustments, the Customer will be removed from the E-4-TOU rate schedule and placed on another applicable rate schedule as is suitable to their kilowatt Demand and kilowatt-hour usage. 5. Changing Rate Schedules Customers electing to be served under E-4 TOU must remain on said Rate Schedule for a minimum of 12 months. Should the Customer so wish, at the end of 12 months, the Customer may request a Rate Schedule change to any applicable City of Palo Alto full­ service Rate Schedule as is suitable to their kilowatt Demand and kilowatt-hour usage. 6. Primary Voltage Discount Where delivery is made at the same voltage as that of the line from which the Service is supplied, a discount of 2 1/2 percent for available line voltages above 2 kilovolts will be offered, but the City is not required to supply Service at a particular line voltage where it has, or will install, ample facilities for supplying at another voltage equally or better suited to the Customer's electrical requirements, as determined in the City's sole CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-4-TOU-3 dated 7-1-20224-Q O CITYOF PALO ALTO UTILITIES Sheet No E-4-TOU-3 Effective 7-l-202F MEDIUM NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RA TE SCHEDULE E-4 TOU discretion. The City retains the right to change its line voltage at any time after providing reasonable advance notice to any Customer receiving the discount in this section. The Customer then has the option to change his system so as to receive Service at the new line voltage or to accept Service (without voltage discount) through transformers to be supplied by the City subject to a maximum kilovolt-ampere size limitation. 7. Standby Charge a. Applicability: The standby charge, subject to the exemptions in subsection D(7)(e), applies to Customers that have a non-utility generation source interconnected on the Customer's side of the City's revenue Meter and that occasionally require backup power from the City due to non-operation of the non­ utility generation source. b. Standby Charges: Commodit:t Distribution Total Standby Charge (per kW of Reserved Capacity) Summer Period $0.69 $15.23 $15.92 Winter Period $0.63 $9.04 $9.67 c. Meters. A separate Meter is required for each non-utility generation source. d . Calculation of Maximum Demand Credit. (I) In the event the Customer's Maximum Demand occurs when one or more of the non-utility generators on the Customer's side of the City's revenue Meter are not operating, the Maximum Demand will be reduced by the sum of the Maximum Generation of those non-utility generators, but in no event shall the Customer's Maximum Demand be reduced below zero. (2) If the non-utility generation source does not operate for an entire billing cycle, the standby charge does not apply and the Customer shall not receive the Maximum Demand credit described in this Section. e. Exemptions. (I) The standby charge shall not apply to bac kup generators designed to operate only in the event of an interruption in utility Service and which are not used to CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-TOU-4 dated 7-1-2022.:/-9 • C IT YOF PALO ALTO UTILITIES Sheet No E-4-TOU-4 Effective 7-1-2021~ MEDIUM NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RA TE SCHEDULE E-4 TOU offset Customer electricity purchases. (2) The standby charge shall not apply if the Customer meets the definition of an "Eligible Customer-generator" as defined in California Public Utilities Code Section 2827(b)(4), as amended. (3) The applicability of these exemptions shall be determined at the discretion of the Utilities Director. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-TOU-5 dated 7-1-2022:W O CI T YOF PALO ALTO UTILITIES {End} Sheet No E-4-TOU-5 Effective 7-1-202Ji LARGE NON-RESIDENTIAL ELECTRIC SERVICE U TILITY RA TE SCHEDULE E-7 A. APPLICABILITY: This Rate Schedule applies to Demand Metered Service for large non-residential Customers with a Maximum Demand of at least l,OOOKW per month per site, who have sustained this Demand level at least 3 consecutive months during the last twelve months. B. TERRITORY: C. D. This rate schedule applies everywhere the City of Palo Alto provides Electric Service. RATES: Rates per kilowatt (kW) and kilowatt-hour (kWh): Public Commodity Distribution Benefits Total Summer Period Demand Charge (kW) $ 5.55➔-+6 $31._31 ~ $36 .8 ~ O. l 3 l 23G.H-0.005360 .0046 Energy Charge (kWh) 4+6 0.000740.00059 9 0.137330.12004 Winter Period Demand Charge (kW) $ 3.1 82-B& $ 17 ,3()U,.Q4 $20.48~ 0.08685~ 0.005360.0040 Energy Charge (kWh) ¥)+ 0 .000740.00059 9 0.09295 9 .98 J 2j Minimum Bill ($/day) 58 .995651 .5696 SPECIAL NOTES: l. Calculation of Charges The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-1 dated 7-1-202249 • C I T Y OF PALO ALTO UTILITIES Sheet No E-7-1 Effective 7-1-202],~ 2. Seasonal Rate Changes LARGE NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7 The Summer Period is effective May I to October 31 and the Winter Period is effective from November I to April 30. When the billing period includes use both in the summer and in the winter periods, the usage will be prorated based on the number of days in each seasonal period, and the charges based on the applicable rates therein . For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Request for Service Qualifying Customers may request Service under this schedule for more than one Account or one Meter if the Accounts are on one site. A site, for the purposes of this Rate Schedule, consists of one or more Accounts which cover contiguous parcels of land with no intervening public right-of-ways (e.g. streets) and which have a common billing address. 4. Maximum Demand Meter Whenever the monthly use of energy has exceeded 8,000 kilowatt-hours for three consecutive months, a Maximum Demand Meter will be installed as promptly as is practicable and thereafter continued in Service until the monthly use of energy has fallen below 6,000 kilowatt-hours for twelve consecutive months, whereupon, at the option of the City, it may be removed .. The Maximum Demand in any month will be the maximum average power in kilowatts taken during any 15 -minute interval in the month provided that if the Customer's load is intermittent or subject to fluctuations, the City may use a 5-minute interval. A thermal­ type Demand Meter which does not reset after a definite time interval may be used at the City's option. The Billin g Demand to be used in computing charges under this schedule will be the actual Maximum Demand in kilowatts for the current month. An exception is that the Billing Demand for Customers with Thermal Energy Storage (TES) will be based upon the actual Maximum Demand of such Customers between the hours of noon and 6 pm on weekdays. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-2 dated 7-1-202249 • CITY OF PALO ALTO UTILITIES Sheet No E-7-2 Effective 7-1-202~ 5. Power Factor LARGE NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-7 For new or existing Customers whose Demand is expected to exceed or has exceeded 300 kilowatts for three consecutive months, the City has the option to install applicable Metering to calculate a Power Factor. The City may remove such Metering from the Service of a Customer whose Demand has been below 200 kilowatts for four consecutive months. When such metering is installed, the monthly Electric bill shall include a "Power Factor Adjustment", if applicable. The adjustment shall be applied to a Customer's bill prior to the computation of any primary voltage discount. The power factor adjustment is applied by increasing the total energy and Demand charges for any month by 0.25 percent (0.25%) for each one percent (1%) that the monthly Power Factor of the Customer's load was less than 95%. The monthly Power Factor is the average Power Factor based on the ratio of kilowatt hours to kilovolt-ampere hours copsumed during the month. Where time-of-day Metering is installed, the monthly Power Factor shall be the Power Factor coincident with the Customer's Maximum Demand. 6. Changing Rate Schedules Customers may request a rate schedule change at any time to any applicable full service rate schedule as is applicable to their kilowatt-Demand and kilowatt-hour usage profile. 7. Primary Voltage Discount Where delivery is made at the same voltage as that of the line from which the Service is supplied, a dis count of 2 1/2 percent for available line voltages above 2 kilovolts will be offered, but the City is not required to supply Service at a particular line voltage where it has, or will ins tall, ample facilities for supplying at another voltage equally or better suited to the Customer's electrical requirements , as determined in the City's sole discretion. The City retain s the right to change its line voltage at any time after providing reasonable advance notice to any Customer receiving the discount in this section. The Customer then has the option to change his system so as to receive Service at the new line voltage or to accept Service (without voltage discount) through transformers to be supplied by the City subject to a maximum kV A size limitation . CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-3 dated 7-1-202249 • CITYO.F PALO ALTO UTILITIES Sheet No E-7-3 Effective 7-1-202J,i LARGE NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-7 8. Standby Charge a. Applicability: The standby charge, subject to the exemptions in subsection D(S)(e), applies to Customers that have a non-utility generation source interconnected on the Customer's side of the City's revenue Meter and that occasionally require backup power from the City due to non-operation of the non­ utility generation source. b. Standby Charges: Com mod it~ Distribution Total Standby Charge (per kW of Reserved Capacity) Summer Period $0.84 $12.55 $13.39 Winter Period $0.72 $6.04 $6 .76 c. Meters. A separate Meter is reguired for each non-utility generation source. d. Calculation of Maximum Demand Credit. ( 1) In the event the Customer's Maximum Demand (as defined in Section D.4) occurs when one or more of the non-utility generators on the Customer's side of the City's revenue Meter are not operating, the Maximum Demand will be reduced by the sum of the Maximum Generation of those non-utility generators, but in no event shall the Customer's Maximum Demand be reduced below zero. (2) If the non-utility generation source does not operate for an entire billing cycle, the standby charge does not apply and the Customer shall not receive the Maximum Demand credit described in this Section. e. Exemptions. ( 1) The standby charge shall not apply to backup generators designed to operate only in the event of an interruption in utility Service and which are not used to offset Customer electricity purchases. (2) The standby charge shall not apply if the Customer meets the definition of a n "Eligible Customer-generator" as defined in California Public Utilities Code CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-4 dated 7-1-202249 • CITY OF PALO ALTO UTILITIES Sheet No E-7-4 Effective 7-1-202J.~ LARGE NON-RESIDENTIAL ELECTRIC SERVICE UTILITY RA TE SCHEDULE E-7 Section 2827(b)(4), as amended. (3) The applicability of these exemptions shall be determined at the discretion of the Utilities Director. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-7-5 dated 7-1-2022~ • CITY OF PALO ALTO UTILITIES {End} Sheet No E-7-5 Effective 7-1-202.~ . I LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G A. APPLICABILITY: This Rate Schedule applies to Demand metered Service for large non -residential Customers who choose Service under the Palo Alto Green Program. A Customer may qualify for this Rate Schedule if the Customer's Maximum Demand is at least l ,00OKW per month per site, who have sustained this Demand level at least 3 consecutive months during the last twelve months. B. TERRITORY: The rate schedule applies everywhere the City of Palo Alto provides Electric Service. C. UNBUNDLED RA TES: 1. 100% Renewable Option: Commodity Distribution Summer Period Demand Charge ( per kW) $5.55~ $..1!.J.l~ 0.13 I 230,+l. 0 .0007 4~ Energy Charge (per kWh) m ~ Winter Period Demand Charge (per kW) $3 .18~ $1 7.30~ 0.08685~ 0.000749,GQ Energy Charge (per kWh) ¥)1. M9 Minimum Bill ($/day) CITY OF PALO ALTO UTILITIES Issued by the City Counc il Supersedes Sheet No E-7-G-1 dated 7-1-2022,4 • CITY OF PALO ALTO UTILITIES Public Benefits 0 .005360-: 00499 0.005360-: 00449 Palo Alto Gree n Charge Total $ 36.86~ ~ 0 .14483 0.0075 G.117§4 $ 2_Q.48-I+. 9G 0 .10045 0.0075 0.0887§ 58.9956e:LS6% Sheet No E-7-G-1 E ffect ive 7-l-20 2J.~ LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G 2. 1000 kWh Block Purchase Option: Commodity Distribution Public Benefits Summer Period Demand Charge (per kW) $ 5 .55&-l-6 $ 3_1_.3_1 ~ 0.131230:+t-0.0007~ Energy Charge (per kWh) 4¾ ~ 0.005360.00469 Palo Alto Green Charge (per 1000 kWh block) Winter Period Demand Charge (per kW) Energy Charge (per kWh) $ 3.18~ $ 17.30+4,94 0.08685~ 0.00074(}.00 m ~ o .0053 60.oo4a9 Palo Alto Green Charge (per 1000 kWh block) Minimum Bill ($/day) D. SPECIAL NOTES: I. Calculation of Charges Total $ 36.8~ ~ 0 .13733 0.1 2-{)94 $7.50 $ 20.48+7. 9(} 0.09295 0 .08 12S $7.50 58.995651.§696 The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharg es an d/or taxes. On a Customer's bill statement , the bill amount may be broken down into appropriate components as calculated under Section C. 2. Seasonal Rate Changes The Summer Period is effective May 1 to October 31 and the Winter Period is effective from November I to April 30. When the billing period includes use both in the Summer and the Winter Periods, the usage will be prorated bas ed on the number of days in each seasonal period, and the charges based on the applicable rates therein. For further discussion of bill calculation and proration, refer to Rule and Regulation 11 . 3. Maxim um Demand Meter Whenever the monthly use of energy has exceeded 8,000 kilowatt-hours for three CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-7-G-2 dated 7-1-2022_4 • CI T Y O F PALO ALTO UTILITIES Sheet No E-7-G-2 Effective 7-1-20212-· LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G consecutive months, a Maximum Demand Meter will be installed as promptly as is practicable and thereafter continued in Service until the monthly use of energy has qropped below 6,000 kilowatt-hours for twelve consecutive months, whereupon, at the option of the City, it may be removed. The Maximum Demand in any month will be the maximum average power in kilowatts taken during any 15-minute interval in the month, provided that if the Customer's load is intermittent or subject to fluctuations, the City may use a 5-minute interval. A thermal-type Demand Meter which does not reset after a definite time interval may be used at the City's option. The Billing Demand to be used in computing charges under this schedule will be the actual Maximum Demand in kilowatts for the current month. An exception is that the Billing Demand for Customers with Thermal Energy Storage (TES) will be based upon the actual Maximum Demand of such Customers between the hours of noon and 6 PM on weekdays. 4. Request for Service Qualifying Customers may request Service under this schedule for more than one Account or one Meter if the Accounts are at one site. A site, for the purposes of this Rate Schedule, consists of one or more Accounts which cover contiguous parcels of land with no intervening_ public right-of-ways (e.g . streets) and which have a common billing address. S. Power Factor For new or existing Customers whose Demand is expected to exceed or has exceeded 300 kilowatts for three consecutive months, the City has the option of installing applicable Metering to calculate a Power Factor. The City may remove such Metering from the Service of a Customer whose Demand has dropped below 200 kilowatts for four consecutive months. When such Metering is installed, the monthly Electric bill shall include a "Power Factor Adjustment", if applicable. The adjustment shall be applied to a Customer's bill prior to the computation of any primary voltage discount. The power factor adjustment is applied by increasing the total energy and Demand charges for any month by 0.25 percent or (1 /4) for each one percent (1%) that the monthly Power Factor of the Customer's load was less than 95%. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-G-3 dated 7-1-2022.4 • CITYO F PALO ALTO UTILITIES Sheet No E-7-G-3 Effective 7-1-202.J.i LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G The monthly Power Factor is the average Power Factor based on the ratio of kilowatt­ hours to kilovolt-ampere hours consumed during the month. Where time-of-day Metering is installed, the monthly Power Factor shall be the Power Factor coincident with the Customer's Maximum Demand. 6. Changing Rate Schedules Customers may request a rate schedule change at any time to any applicable full service rate schedule as is applicable to their kilowatt-Demand and kilowatt-hour usage profile 7. Palo Alto Green Program Description and Participation Palo Alto Green provides for either the purchase of enough renewable energy credits (RECs) to match 100% of the energy usage at the facility every month, or for the purchase of I 000 kilowatt-hour (kWh) blocks. These REC purchases support the production of renewable energy, increase the financial value of power from renewal sources, and creates a transparent and sustainable market that encourages new development of wind and solar. Customers choosing to participate shall fill out a Palo Alto Green Power Program application provided by the Customer Service Center. Customers may request at any time, in writing, a change to the number of blocks they wish to purchase under the Palo Alto Green Program. 8. Primary Voltage Discount Where delivery is made at the same voltage as that of the line from which the Service is supplied, a discount of 2 I /2 percent for available line voltages above 2 kilovolts will be offered, but the City is not required to supply Service at a qualified line voltage where it has, or will ins tall , ample facilities for supplying at another voltage equally or better suited to the Customer's Electrical requirements, as determined in the City's sole discretion. The City retains the right to change its line voltage at any time after providing reasonable advance notice to any Customer receiving the discount in this section. The Customer then has the option to change the system so as to receive Service at the new line voltage or to accept Service (withm~t voltage discount) through transformers to be supplied by the City subject to a maximum kilovolt-ampere size limitation. 9. Standby Charge CITY OF PALO AL TO UTILITIES Issued by _the City Council Supersedes Sheet No E•7•G•4 dated 7-1-2022.4 • C I T Y OF PALO ALTO UTILITIES Sheet No E-7-G-4 Effective 7-l-202Ji!- LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G a. Applicability: The standby charge, subject to the exemptions in subsection D(9)(e), applies to Customers that have a non•utility generation source interconnected on the Customer's s ide of the City's revenue Meter and that occasionally require backup power from the City due to non-operation of the non­ utility generation source. b. Standby Charge s: Standby Charge (per kW of Commoditx Distribution Total Reserved Capacity) Summer Period $0.84 $12.55 $13.39 Winter Period $0.72 $6.04 $6.76 c. Meters: A separate Meter is required for each non-utility generation source . d. Calculation of Maximum Demand Credit : (1) In the event the Customer's Maximum Demand (as defined in Section D .3) occurs when o ne or more of the non-utility generators on the Customer's side of the City's revenue Meter are not operating, the Maximum Demand will be reduced by the sum of the Maximum Generation of those non-utility generators, but in no event shall the Customer's Maximum Demand be reduced below zero. (2) If the non-utility generation source does not operate for an entire billing cycle, the standby charge does not apply and the Customer shall not receive the Maximum Demand credit described in this Section. e. Exemptions: ( 1) The standby charge shall not apply to backup generators designed to operate only in the event of an interruption in utility Service and which are not used to offset Customer electricity purchases. (2) The standby charge shall not apply if the Customer meets the definition of an "Eligible Customer-generator" as defined in California Public Utilities Code Section 2827(b)(4), as amended. (3) The applicability of these exemptions shall be determined at the discretion of CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No £-7-G-5 dated 7-1-202Z.4 • C IT YOF ' PALO ALTO UTILITIES Sheet No E-7-G-5 Effective 7-1-202Ja, LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G the Utilities Director. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-G-6 dated 7-1-202Z,~ • C IT YO F PALO ALTO UTILITIES {End} Sheet No E-7-G-6 Effective 7-l-202J.~ LARGE NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RA TE SCHEDULE E-7 TOU A. APPLICABILITY: This voluntary Rate Schedule applies to Demand Metered Service for non-residential Customers with a Maximum Demand of at least l ,000KW per month per site, who have sustained this Demand level at least 3 consecutive months during the last twelve months. In addition, this Rate Schedule is applicable for Customers who did not pay power factor adjustments during the last 12 months. B. TERRITORY: This rate schedule applies .everywhere the City of Palo Alto provides Electric Service. c. UNBUNDLED RATES: Rates per kilowatt (kW) and kilowatt-hour (kWh): Commodity Distribution Summer Period Demand Charge (per kW) Peak $3 .58~ $ 10.5 19:93 Mid-Peak .LQ! Q.:.99 10.5 1~ Off-Peak I.OJ ~ 1 0 .5 19-:()3 Energy Charge (per kWh) $ 0 .1363 2();.H. $ Peak ~ 0.000740.00059 0.17167~ Mid-Peak G-l--1-0.000740.00()59 0.10533(M)Q Off-Peak ~ 0.000740.00()59 Winter Period Demand Charge (per kW) Peak $ 1.63-l-M $8 .75~ Off-Peak J .63-l-M 8.75~ Energy Charge (per kWh) $ $ Peak 0.091430:-0+ 0.00074 0.00059 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-TOU-1 dated 7-1-2022-W • CITY OF PALO ALTO UTILITIES Public Benefits Total $14 .09~ ll.52~ 11 ._52~ $ $ 0.005360 .0Q469 0 . I 4242Q. I 2449 0.005360.0Qi469 0 .177770.1 iS39 0 .005360 .0Qi469 0 .1 I 1439.Q974Q $10.38~ l_Q.3894+ $ $ 0.005360 .004~9 0.097530.08521 Sheet No E-7-TOU-1 Effective 7-I-202J.i LARGE NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RA TE SCHEDULE E-7 TOU 9W- 0.0784~ Off-Peak Minimum Bill ($/day) &e4 0.000740 .00C}§9 0.0053 60 .00469 0.08456(H)7392 58. 995651.5090 D. SPECIAL NOTES: 1. Calculation of Charges The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer's bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. 2. Definition of Time Periods SUMMER PERIOD (Service from May I to October 31 ): Peak: 12:00 noon to 6:00 p.m. -,1. ____ Mid Peak: 8:00 a.m. to 12:00 noon 6:00 p.m. to 9:00 p.m. Off-Peak: 9:00 p.m. to 8:00 a.m. All day Monday through Friday (except holidays) Monday through Friday (except holidays) Monday through Friday Saturday, Sunday, and holidays WINTE R PERIOD Peak: (Service from November I to April 30): Off-Peak: 8:00 a.m. to 9:00 p.m. 9:00 p.m. to 8 :00 a .m . All day Monday through Friday (except holidays) Monday through Friday (except holidays) Saturday, Sunday, and holidays SEASONAL RA TE CHANGES: When the billing period includes use in both the Summer and the Winter periods, the usage will be prorated based on the number of days in each seasonal period, and the charges based on the applicable rates therein. For further discussion of bill calculation and proration , refer to Rule and Regulation 11. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-TOU-2 dated 7-1-202 2~ • C I TY O F PALO ALTO UTILITIES Sheet No E-7-TOU-2 Effective 7-1-2021~ LARGE NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RA TE SCHEDULE E-7 TOU 3. Request for Service Qualifying Customers may request Service under this schedule for more than one Account or one Meter if the Accounts are on one site. A site, for the purposes of this Rate Schedule, consists of one or more Accounts which cover contiguous parcels of land with no intervening public right­ of-ways (e.g. streets) and which have a common billing address. 4. Demand Meter Whenever the monthly use of energy has exceeded 8,000 kilowatt-hours for three consecutive months, a Demand Meter will be installed as promptly as is practicable and thereafter continued in Service until the monthly use of energy has fallen below 6,000 kilowatt-hours for twelve consecutive months, whereupon, at the option of the City , it may be removed. The Billing Demand to be used in computing charges under this schedule will be the actual Maximum Demand in kilowatts taken during any 15-minute interval in each of the designated time periods as defined under Section D.2. 5. Power Factor Adjustment Time of Use Customers must not have had a power factor adjustment assessed on their Service for at least 12 months. Power factor is calculated based on the ratio of kilowatt hours to kilovolt­ ampere hours consumed during the month, and must not have fallen below 95 % to avoid the power factor adjustment. Should the City of Palo Alto Utilities Department find that the Customer's Service should be subject to power factor adjustments, the Customer will be removed from the E-7-TOU rate schedule and placed on another applicable rate schedule as is suitable to their kilowatt Demand and kilowatt-hour usage. 6. Changing Rate Schedules Customers electing to be served under E-7 TOU must remain on said Rate Schedule for a minimum of 12 months . Should the Customer so wish, at the end of 12 months, the Customer may request a Rate Schedule change to any applicable City of Palo Alto full-service Rate Schedule as is suitable to their kilowatt Demand and kilowatt-hour usage. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-TOU-3 I · dated 7-1-202249 • CITY OF PALO ALTO UTILITIES Sheet No E-7-TOU-3 Effective 7-1-202,;l;!. LARGE NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RA TE SCHEDULE E-7 TOU 7. Primary Voltage Discount Where delivery is made at the same voltage as that of the line from which the Service is supplied, a discount of 2 1/2 percent for available line voltages above 2 kilovolts will be offered, but the City is not required to supply Service at a particular line voltage where it has, or will install, ample facilities for supplying at another voltage equally or better suited to the Customer's electrical requirements, as determined in the City's sole discretion. The City retains the right to change its line voltage at any time after providing reasonable advance notice to any Customer receiving the discount in this section. The Customer then has the option to change his system so as to receive Service at the new line voltage or to accept Service (without voltage discount) through transformers to be supplied by the City subject to a maximum kilovolt-ampere size limitation. 8. Standby Charge a. Applicability: The standby charge, subject to the exemptions in subsection D(8)(e), applies to Customers that have a non-utility generation source interconnected on the Customer's side of the City's revenue Meter and that occasionally require backup power from the City due to non-operation of the non-utility generation source. b. Standby Charges: Standby Charge (per kW of Reserved Capacity) Summer Period Winter Period Commodity $0.84 $0.72 Distribution $12.55 $6.04 Total $13.39 $6.76 c. Meters. A separate Meter is required for each non-utility generation source . d. Calculation of Maximum Demand Credit. (I) In the event the Customer's Maximum Demand occurs when one or more of the non-utility generators on the Customer's side of the City's revenue Meter are not operating, the Maximum Demand will be reduced by the sum of the Maximum Generation of those non-utility generators, but in no event shall the Customer's Maximum Demand be reduced below zero . CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sheet No E-7-TOU-4 dated 7-1-202249 • C I TY OF PALO ALTO UTILITIES Sheet No E-7-TOU-4 Effective 7-1-202.l;;!. LARGE NON-RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RATE SCHED ULE E-7 TOU (2) If the non-utility generation source does not operate for an entire billing cycle , the standby charge does not apply and the Customer shall not receive the Maximum Demand credit described in this Section. e . Exemptions. (I) The standby charge shall not apply to backup generators designed to operate only in the event of an interruption in utility Service and which are not used to offset Customer electricity purchases. (2) The standby charge shall not apply if the Customer meets the definition of an "Eligible Customer-generator" as defined in California Public Utilities Code Section 2827(b)(4), as amended. (3) The applicability of these exemptions shall be determined at the discretion of the Utilities Director. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-TOU-5 dated 7-1-202249 • CITY OF PALO ALTO UTILITIES {End} Sheet No E-7-TOU-5 Effectiv e 7-l-20 21i NET METERING NET SURPLUS ELECTRICITY COMPENSATION UTILITY RA TE SCHEDULE E-NSE-1 A. APPLICABILITY: This Rate Schedule applies to eligible residential and small commercial Net Energy Metering Customers who, at the end of an annual settlement period, as described in Rule 29, are Net Surplus Customer-GenerF'-tors of electricity who elect to receive monetary compensation as such preference is indicated on the net surplus electricity election form. This Rate Schedule only applies to Customers who participate in Net Energy Metering, and does not apply to Customers that take service under the City's Net Energy Metering Successor Rate, as each of these terms are defined in Rule and Regulation 2. B. TERRITORY: This rate schedule applies everyf¼RYwhere the City of Palo Alto provides e.l;_lectric ,S_service. C. RATES: Per kWh Net Surplus Electricity Compensation rate $ 0 .1535 0.1 02 €i D. SPECIAL CONDITIONS I. Net Surplus Electricity Compensation Rate eligibility shall be determined as specified in Rule 29. Net surplus electricity, as specified in Rule 29, if appli cable, will be multiplied by the above compensation rate to determine the Customer's annual net surplus electricity compensation stated in dollars. 2. Additional terms, conditions and definitions govern Net Energy Metering Service and Interconnection, a s described in Rule 29. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. E-NSE-1 dated 07-01-20224 • C IT YOF PALO ALTO UTILITIES {End} Sheet No. E-NSE-1 Effective 7-l -202J,~ A. APPLICABILITY: EXPORT ELECTRICITY COMPENSATION UTILITY RATE SCHEDULE E-EEC-1 This Rate Schedule applies in conjunction with the otherwise applicable Rate Schedules for each Customer class. This Rate Schedule may not apply in conjunction with any time-of-use Rate Schedule. This Rate Schedule applies to Customer-Generators as defined in Rule and Regulation 2 who are either not eligible for N et Energy Metering or who are eligible for Net Energy metering but elect to take Service under this Rate Schedule. B. TERRITORY: Th is rate schedule A!lpplies everywhere lo loeat ioAs within4he serviee area ef the City of Palo Alto prov ides Electric Service. C. RATE: The following compensatfo nln~:)'hi!ek rate shall apply to all electricity exported to the grid. Per kWh Export electricity compensation rate $ 0.1685 9. 1+)45 D. SPECIAL CONDITIONS I. Metering equipment: Electricity delivered by CPAU to the Customer-Generator or received by CPAU from the Customer-Generator shall be measured using a Meter capaole of registering the flow of electricity in two directions (aka "bidirectional meter"). The electrical power measurements will be used for billing the Customer-Generator. CPAU shall furnish, install and own the appropriate Meter. 2 . Billing: a. CPAU shall measure during the billing period, in kilowatt-hours, the electricity delivered and received after the Customer-Generator serves its own instantaneous load. b. CPAU shall bill the Customer-Generator consumption charges for the electricity delivered by CPAU to the Customer-Generator based on the Customer-Generator's applicable Rate Schedule. c. In the event the electricity generated exceeds the electricity consumed and therefore is received by CPAU, the Customer will receive a credit for all electricity received by CPA U at the buyback Rate designated in section C above. CITY OF PALO AL TO UTILITIES Issued by the City Council Supersedes Sh eet No. E-EEC-1 dated 7-1-202./-J. • CITY OF PALO ALTO UTILITIES {End} Sheet No.E-EEC-1 Effective 7-1-202.J.i UAC MEETING~ March 01, 2023 4 IZI Received Before Meeting Staff: Micah Babbitt and Jonathan Abendschein .PAtO ALTO Electric Rate Proposal FY 2024 proposal: • Total system average rate increase of 0.3%, which consists of a 14% base rate increase and 50% reduction in the Hydroelectric rate adjuster (HRA) • Significantly higher purchase costs due to very low hydro generation • Reserves are below minimum guidelines. Some combination of cost reductions or rate increases are necessary • 14% base rate increase incorporates long-term hydroelectric and cost trends, allowing reduction of the H~A from $0.048/kWh to $0.024/kWh Future years: • FY 2025 assumes 8% base rate increase and HRA removed, pending market conditions • FY 2026 -FY 2028 assumes 5% per year for grid modernization and electrification costs A c1rv OF .PALO ALTO ---- 2 Electric Rate Changes • This chart shows recent rate changes in both the base electric rates and the hydroelectric rate adjuster (HRA). • Base rate recovers costs for all routine utility expenses • HRA recovers costs for additional expenses associated with low hydroelectric generation • Recent rate increases driven by: • No rate increases during pandemic • Depleted reserves • Extended drought • High electricity market prices A clTY OF ~PALO ALTO 0:3000 0.2500 0.2000 0.1500 0.1000 0.0500 ~ ~ It, .,,. ~,-- - ,,. ~~ -,..., ] -~ .. . ,.. 89(, 5% ' .! . --....---&, ... ~,,. .,_ 5 " _.,¥ ~ropose? ( Forecast, d .... _ .... ··-• -· -- . Jul 2019 Jul 2020 Jul 2021 Jul 2022 Jul 2023 Jul 2024 Jul 2025 -+-System Average Base Rate 96 Change (Sys Avg Base Rate) Current Proposal: -+-System Average Base Rate with HRA % Change (Sys Average with HRA) Overall FY 2024 rate essentially flat (.3% increase) HRA to decrease 50%, base rate to increase 14% Tr~nds Driving Rate Changes -Depleted Reserves • Through the pandemic, the utility held its electric rates flat to help customers impactec;t by the pandemic. • Costs continued to rise due to: • Rising electricity supply costs • Increasing operational costs • Construction inflation • Rising capital investment • Costs are now well above revenues, requiring . increases to base rates • Reserves are much lower than was forecasted in last year's (FY 2023) Financial Plan due in part to extended drought and high electricity market prices • Last year staff had hoped to gradually raise rates to match costs about 5% per year over several years. • This requires reserves to absorb shortfalls until rates match costs. Reserves are no longer adequate. I§ $300 i~ $250 I $200 $150 $100 $5 0 $- Ill $50 ~ ~ $40 $30 $20 $10 $- -TofafCosts -Base+ HRJfRe venues --Base R-evenues $_ FY 22 Deficit FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current Reserves Projection ~·-·-·-·-· -. -. -. -. -. -.,-. -. FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 -FY23 Total Operations Reserves-FY24 Total Operations Reserves -Minimum Operations Reserve - • Risk Assessment ... Trends Driving Rate Changes -Multiple Years of Drought • Alongside pandemic, California experienced extreme drought • Heavy rains in Dec 2022 / Jan 2023, helped, but much more rain would be needed to remove California from drought. • Years of drought mean much precipitation will be absorbed by the parched ground rather than going to hydroelectric generation. • Activating the hydroelectric rate adjuster is intended to be a rare event, but staff believes declining average hydroelectric generation levels are making it more likely. • Current forecasting methodology assumes higher average hydroelectric, increasing chance of activation • Staff intends to use a lower hydroelectric forecast in this "financial Plan to reduce the likelihood of activating HRA 600GWh SOOGWh 400GWh 300GWh 200GWh lOOGWh OGWh ----. - - -. ' I i I I - -----------____ .,. ___ • ► 4 ► Jul2019 Jul2020 Jul 2021 Jul2022 Jul2023 Jul2024 Jul2025 • Hydroelectric Generation - -Long-term Average Hydro Generation :: i. - --l ..... -:J.---:-A--► -i-.: :-:- 400000 300000 200000 100000 0 Jul 2019 Jul 2020 Jul 2021 Jul 2022 Jul 2023 Jul 2024 Jul 202S • Hydroelectric Generation --New FY24 Financial Plan Forecast -,,. Long-term Average Hydro Generation (Historical) • Trends Driving Rate Changes -Multiple Years of Drought -; '5 g 100 H 90 81 80 7S 70 1 · 81 j ii. IO • . I 66 •-·· ]:o -= 6D a :::E 41 ~ : 40 s ' 35 ; :i 30 E a 2s 20 11 1- 10 ••· ... 0 +•-- l ... Northam Sierra Precipitation: 8-Statlon Index, February 02, 2023 --c:air Per1:11nt of Anrq■ for lhla Date: 1 $4'1 . · · -,:::::i-_ __ _ .. :2011J-20~7 n,uy_Pre~tp_(~ett••~L --201'-2019:DaUy Prec:!i:>_--1---~ t: 0 ! a. ~ t .. ! 2 021 ;_,2022 Da l~ Preclp ~ ! ~ s ~ 2019 -2020 Dallt Precl 2020-2021 Dally Preclp (3rd drlHt) 1923-1924 (drla ■!) ii78-1977 (2nd driest) Oct 1 Nov 1 Dec 1 .1111 t Feb 1 ll ■r 1 Apr t llay t Jun 1 Jul 1 Aug 1 Sep 1 Oct t Water YNr (October 1 -September 30) Trends Driving Rate Changes - High Electricity Prices • Long-term electricity prices have been rising • FY 2023 and FY 2024 forward power prices increased ~$0.025/kWh-$0.035/kWh compared to last year's projections • Increases due to: • Drought decreasing hydroelectric generation across the West • High Natural Gas Prices • Generating capacity limitations leading to market price spikes • High prices forecasted to continue, though not at FY 2023 levels. YoY Changes in Forward Market Prices O.lOOkWh ·• 0.090kWh O.mK>kWh 0.070kWh 0.060kWh O.OSOkWh 0.040kWh 0.030kWh 0.020kWh 0.010kWh O.OOOkWh _,, 2020 -~ / / .r ~ -A . --~ 2021 2022 -FY24 Forward Prices• Around the Ooclc ~Actual Day Ahead~ -Around the Clodt ---....... - ;:- ·---i:~sted . --·-- 2023 2024 2025 2026 -FY23 Forward Prices-Around the Oodc - Trends Driving Rate Changes -Grid Modernization (Long-term) Current financial plan assumes grid modernization and electric utility fiber backbone investment will start in FY 2024 and run through the course of the financial plan. Emenses ($000) Grid Modernization Projects Electric Utility Fiber Backbone TOTAL Emenses ($000) Bond Proceeds Debt Service Costs FY2024 FY 2025 25,000 25,000 13,000 0 38,000 25,000 i FY2024 FY 2025 63,000 50,000 0 -2,032 FY2026 FY2027 FY2028 50,000 50,000 50,000 0 0 0 50,000 50,000 50,000 FY2026 FY2027 FV2028 0 50,000 50,000 -3,632 -6,432 -9,632 '"' Proposed: Electric Cost and Revenue Projections with HRA Q) :> c:: Q) > Q) a:: ~ VI 0 u &C I TY OF .PALO ALTO $300 I $250 $200 .. I :E $150 $100 $50 $0 TOTAL SVS'TBI RAlE QWIQD: 14" 6" 8" -(1% °" ~-.-..i--.s•2 .. ..,.__,.._,.......,.._21121 5" 10%• o.n ·"' 5" 5" 5" EElettrlc: Commodity '-CCapltal Investment c:JTrarisfers I_ □Operations •Grid Modernization Debt •Debt 5etvice -Revenue ~ I ~ I ~ l ~ I ~ i ~ I ~ Ac:tuals Projer:tlons 9 Proposed: Electric Cost and Revenue Projections $300 ··-··········-··· ·-·-····· --·-------- RATE C~ 1ft 14% 6% 8% 0% j $250 I Q) :::l C: $200 ------ ~ Q) a:: -;:.. "' 0 u -C I TY OF PALO ALTO $150 $100 $50 $0 co en .-4 ~ 0 .-4 .-4 N 0 0 N N 0 N N it it it i::: 0% s" 14% ft. 5% 5% 5,r. N N ..,., ~ N in ~ 0 N N •\O .... N 0 0 N N co N N 0 0 N N N 0 N i::: it i::: it it i::: i::: i:mlElectric Commodity C=Jtapital Investment 6Transfers □Operations •Debt Service -Revenue Electric Supply Operating Reserve Projections • so C .2 i5 ~ 45 ·-·--·-·······-·---.. ----------------.. --.. --.--.. --.------------------------------------------------------------------· 8c 1TY OF VPALO ALTO ----------------40 +------·----·-----------·--··--··-·-----·-·---··-·-·----·-----·--······--·······-····-·····--·······-····-··················--- 35 f·····--···-···-······---··-···---···---·-···--···-·········-·-··-···-···-·······--··---·······--- --~----------....... .._._ -----------------30 +·····-·····-·····-···-·····-·····-·····-·····-····-···----·•··•···-····---············-·························-·····-·······-·····-··· B +-:s ···-~ ·-·· ===--- 20 +-············--···-···· 'V ·-········-·····--·····-·······-········--···--···-·······-·················--···-············-•·--·· 15 -+······--··········-···················-······-···-··············-···--·····-·····--·---··-··-················-··---··············· 10 t--···-·········-·········-······ · •···················-·······························-···-·······-····· Rese~M11Jdmum····--·· - -Reserve Target 5 +--·················--···-·····-·····-·····-·····-···---··········-·····-··----~Minimum-·········· -Reserve (Year-End) 0 FY 2022 FY2023 FY2024 FY202S FY2026 FY2027 FY 2028 11 Electric Supply Reserve Adequacy &c1Tv OF WPALOALTO -$60 j "i =Hydro St1b!llzotlon R...,rve (YHr•Endt ,r::::,0per1Nons Reserve (Year-End) $50 ......Jl:lsl:Assessment ~ $)(1 $20 $10 $0 rt l<IU fl' 21):1} ------ NlID P'l'M24 Pram FrjOM, fl' 2(127 12 I Electric Distribution Operating Reserve Projections • $20 ! i $18 ·••·-·-·----·······------~ ·--······-·-·-·----· $16 $14 t·········-/ ---········-·········-··········-····-··········-··-····--_ ·--·-_. --------$2 + ,-------1 ··-···--···-·····-·; -----··--------·······--~-·-···-··-··-··-·····--•··•·•----····-·····-· , , ,, $10 +-····-·-····-·-·----·-·····--~·· _..,. == ~ .:.::;_;;;.--.--ilO-.. ---·!!-.~--~~;--------"'.'.~"'.-~::._::_:-__ ~:"I_.~ .. ·_ ... _ .. -_________ _ $8 -_..,, . ···--···-----·---·-------···----------···-·----·----- $6 -+----------------,-············-····-·····--·-··-·--·-··---··--···-·---··--··--·-·-·--··-·-·-·-·······-·--· -Reserve Maximum $4 f---······ / ····--··············--··········-······---·············-···-····---·----·-·-Reserve·T~··-·····-·· -Reserve Minimum $2 +·---··········-····-···-·-··-········-·-·-··--·-········----······-·····-··---...ReseNl!·(Year-cnd)--··· -Risk Assessment $0 +-----.----...-----,,----,----,---.....------, FY 2022 FY 2023 FY2024 FY2025 FY2026 FY2027 FY2028 &ctTY OF .PALO ALTO Alternative: Remove HRA July 1, 2023 (I) ::, C: ;l! (I) > 0 (I) i 0::: ~ .,, 0 u 8\C I TY OF ¥PALO ALTO $300 ~----------------------- 14% 6% 8% 0% 0% 8% 25" 4" 3" 4" 4" RAlE cttANOU: $250 EBElectric Commodity $200 1--ffi!ffl -1--H-CCapital Investment l a .........------Jffl lfflll Ill l!jj mml l1!ffl IEJTransfers s150 I lffl mi lll.ffl ~ Rm mi t;I ffl!I lffl (!II fl! c:::JOperations . -------~ --,~ . ..,,... ... "~ -IGrid Modernization $100 L...J. L Debt $50 +~........l $0 . !I I I I I I !I en 0 ... N ..,, SI ~, '° 00 ... N N N N g N N 0 0 0 0 , 0 0 0 N N N N N N N N N c:: c:: c:: c:: c:: c:: c:: c:: c:: Actuals Projections 14 Estimated Bill Changes Rate Schedule E-1 (Residential) E-2 (Small Non- Residential) E-4 (Medium Non- Residential) E-7 (Large Non- Residential Ac1Tv OF VPALO ALTO Usa1e (kWh/mo) 300 (Summer Median) 365 (Winter Median) 453 650 1200 1,000 160,000 500,000 2,000,000 Peak Demand (kW-mo) N/A N/A N/A N/A N/A N/A 274 856 3,424 Bill under Bil Under Chanp Rates Cunent Proposed $/mo " Rates ($/mo) 7/1/23 ($/mo) $58 $57 ($1) -2% $72 $71 ($1) -1% $94 $94 ($0) 0% $144 $145 $1 0% $282 $286 $4 1% $234 $237 $3 1% $33,715 $33,624 ($91) 0% $105,352 $105,067 ($285) 0% $383,095 $376,437 ($6,658) -2% ... Current Bill co·mparison Season Usage (kwh) 300 Winter 453 (Median) 650 1200 300 Summer (Median) 365 650 1200 Ac1Tv OF ¥PALO ALTO Palo Alto 57.74 94.42 143.94 282.18 57.74 72.31 143.94 282 .18 • PG&E Santa Clara 94 .11 39.31 143.32 60.09 221.07 86.85 438.13 161.54 97 .76 39.31 Residential 123.41 48.14 235.88 86.85 452.94 161.54 16 Staff Recommendation Staff recommends the Utilities Advisory Commission (UAC) request that the Finance Committee recommend that the City Council adopt a Resolution (Attachment A): 1. Approving the Fiscal Year {FY) 2024 Electric Financial Plan; 2. Approving the following transfers at the end of FY 2023: a. Up to $15 million from the Supply Operations Reserve to the Distribution Operations Reserve; b. Up to $8 million from the Electric Special Projects (ESP) reserve to the Supply Operations Reserve; and c. Up to $4.5 million from the Supply Operations Reserve to the Cap and Trade Program; and 3. Approving the following transfers at the end of FY 2024: a. Up to $3.5 million from the Supply Operations Reserve to the Cap and Trade Program; Ac1rv OF ¥PALO ALTO 17 Staff Recommendation (continued) Staff requests that the Utilities Advisory Commission (UAC) request that the Finance Committee recommend that the City adopt a Resolution (Attachment A): 4. Approving the following rate actions for FY 2024: a. A 50% decrease to the retail electric rate schedule E-HRA {Hydroelectric Rate Adjuster) effective July 1, 2023; b. An increase to retail electric rates E-1 (Residential Electric Service), E-2 {Small Non-Residential Electric Service), E-4 (Medium Non -Residential Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E-7 (Large Non-Residential Electric Service), and E-7 TOU (Large Non -Residential Time of Use Electric Service) effective July 1, 2023; c. An update to the Export Electricity Compensation (E-EEC-1) rate to reflect current projections of avoided cost, effective July 1, 2023; d. An update to the Net Surplus Electricity Compensation (E-NSE-1) rate to reflect current projections of avoided cost, effective July 1, 2023; and e. An update to the Palo Alto Green program rate schedules, including the Residential Master-Metered and Small Non-Residential Green Power Electric Service (E-2-G), the Medium Non -Residential Green Power Electric Service (E-4-G), and the Large Non-Residential Green Power Electric Service (E-7-G) to reflect modified distribution and commodity components, effective July 1, 2023. A c1Tv oF 9 PALO ALTO ------------ 18 Date: March 1, 2023 FORECAST 12-MONTH ROLLING CALENDAR Utilities Advisory Commission City Council March 2023 - FY 2024 Water Financial Plans and Rates - FY 2024 Wastewater Financial Plans and Rates - FY 2024 Gas Financial Plans and Rates - FY 2024 Electric Financial Plans and Rates * VIP Powerlines C23185980 Electric Utility (FCM) * Calpine Agreement (FCM) * FY 2024 Gas Financial Plans and Rates (FCM) * FY 2024 Water Financial Plans and Rates (FCM) * FY 2024 Electric Plans and Rates (FCM) * FY 2024 Wastewater Collection Financial Plans and Rates (FCM) * Audit for Work Orders (P&S) April 2023 - COTP Analysis and Recommendation - Electric Supply Portfolio Modeling Results * Legislative Update (C) * AMI Rules and Reg Changes (C) * Sanitary Sewer Replacement 31 (C) * Calpine Geothermal Energy (C) * SEW Amendment 3 (C) * GoGreen Home Financing Program (FCM) May 2023 - FY2024 Budget - Strategic Plan Update * Sanitary Sewer Management Plan Updates (C) * GoGreen Home Financing Program (C) * Solid Dielectric Switches REQ (C) June 2023 - 2023 Wildfire Mitigation Plan Presentation * FY24 Financial Plans and Rates (C) To be Scheduled - 60kV Breaker Contract (C) (currently under review in the RFP process) - Educational Update on any Type of New Technology or Terminology - Projects with a Resiliency Component - Quarterly Reports (Q1-3 Info Rpts)(Q4 Discussion Summary of the year) Financial Report Utilities Programs Update Informational EV Charger Installation Updates Informational Bucket 1 REC Sales Updates Informational Fiber Updates Permit Processes for Various Energy Technologies (Lait) - Recycled Water Purple Pipe - 5 yr WGW and Electric Project Review (2015-2020) - Underground Process and Progress - Water quality in response citizen Bob Wenzlau - GM Update: Fiber Hut Count (update June 2023) - DER discussion - Second transmission line update - Resiliency update (September) - Grid modernization update (September)