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HomeMy WebLinkAbout2023-03-07 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 12 Regular Meeting March 7, 2023 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room at 5:30 P.M. Present In-Person: Burt (Chair), Lythcott-Haims, Stone Present Virtually: Absent: CALL TO ORDER Chair Pat Burt called the meeting to order and reviewed the agenda. PUBLIC COMMENT John Kelley stated that the Daily Post reported knowledge of a $40M surplus that was not communicated clearly to public prior to the vote on Measure K. He asked whether Staff, the Finance Committee, or City Council has investigated and reported the details back to the community publically. Chair Pat Burt responded that much of that was answered in public record from Council meetings preceding November 6. ACTION ITEMS 1. Utilities Advisory Commission and Staff Recommendation that the Finance Committee Recommend the City Council Adopt a Resolution Approving the Fiscal Year 2024 Water Utility Financial Plan, Including Proposed 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) SUMMARY MINUTES Page 2 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 Utilities Assistant Director Jonathan Abendschein gave an overview of what was happening with all four utilities to provide context for the discussions on water and wastewater tonight and future discussions on electric and gas on March 21. He stated various trends were contributing to increases or decreases across multiple utilities, with the most notable being skyrocketing energy prices this winter. He spoke more about the contributing factors and what options might protect against price spikes in the future. He gave some information about gas bills and rate assistance and explained the trends affecting utility bills in Calendar Year 2023. He presented a chart demonstrating the projected changes in the various utility bills. Vice Mayor Greer Stone asked for clarification on the Fiscal Year 2024 total monthly bill change. He asked how gas rates compare to other jurisdictions in California. Utilities Assistant Director Abendschein explained that different utilities contribute to the residential bill in different amounts. An increase in one utility will have a different impact on the overall utility bill, and there was a projected 5% increase on the median residential bill for Fiscal Year 2024. These increases happened across the West, more pronounced in California with nearly every utility in California experiencing the same increases in January. Average over the year, Palo Alto is often 5% to 10% below PG&E for residential rates, but it has been volatile over the winter. This was a California-wide issue. Council Member Julie Lythcott-Haims asked for an overview on the hydroelectric rate adjustor. Utilities Assistant Director Abendschein responded that the hydroelectric rate adjustor was activated with continuing low-hydroelectric generation due to drought. Low generation can increase overall costs but is usually absorbed with reserves. When drought lasts for an extended period, the reserves become exhausted, requiring a temporary rate adjustor to recover additional costs. Chair Pat Burt added that there were nearly fixed costs with the 2 large hydro contracts regardless of the hydro power generated. More electricity is produced in wet years than drought years but with the same costs, with the cost per watt increasing in a drought. There was discussion about the locations of the reservoirs on the hydro contracts and the effects on those of predicted rainfall. SUMMARY MINUTES Page 3 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 Chair Burt questioned if the 5% increase this year was on top of the 2023 rates that included the big spikes in E hydro and gas. He asked why the gas rate increase was only 4% even with the spike over the winter. Utilities Assistant Director Abendschein stated that the 5% included the spikes in hydro and gas but that the decline in gas rates and the hydroelectric adjustor were not reflected in the chart. He stated it was more accurately a 3% to 5% increase. The gas rate only reflected the change caused by increases in distribution rates, not gas supply. On March 21, Staff will show the same chart with gas supply included, which shows a significant decrease in 2024. Resource Planner Lisa Bilir spoke about the water utility, with a predicted overall increase of 7%, bringing the price per CCF from $4.75 up to $5.30. The plan was to utilize the healthy reserves and rate increases together to reduce the rate increase. Staff proposed transfers of $3M from the Rate Stabilization Reserve and $3.7M from the CIP reserve to the Operations Reserve to pay for the needed infrastructure upgrades and reduce the need to increase the rates. She presented a chart showing the costs and revenue for the water utility, including future projections, and then presented the Staff recommendation, supported by the UAC. Vice Mayor Stone asked if the water conservation efforts had worked, since Staff stated revenue was down because of customer response to water conservation calls. He asked if the bill reflects what portion of the rate increase is passthrough from the SFPUC. He questioned the difference in the Staff report between the estimated monthly bill and the estimated bill impact. He asked the monetary amount of the current reserves and if there was a Council policy on where the reserves should be. Resource Planner Bilir stated there was an overall reduction in water use of about 11% regionally, and Palo Alto achieved a lot of reductions in the second half of the year. She stated the commodity charge was separated out on the bill. Regarding the Staff report, she stated the estimated monthly bill showed the 7% increase from the year prior, affecting a residential customer by about $6.60 in FY 2024, and the overall bill impact indicated the difference between the median monthly bill in 2023 and 2024. At the end of FY 2022, there was about $14M in the Operations Reserve, $9M in the Rate Stabilization Reserve, and $10.7M in the CIP Reserve. Each of those reserves has a policy, and as part of this resolution, the Council would be okaying the version of the policy included in the Financial Plan, with no change from the previous year. SUMMARY MINUTES Page 4 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 Council Member Lythcott-Haims asked how to prioritize and balance the desire to conserve water for reasons of ecology with the need for revenue from water sales, in particular because the drought surcharge looks like people paying for water they cannot use. She asked how to think about the future of water. Resource Planner Bilir explained there was a placeholder on the rate schedule for the drought surcharge but that was not being charged during this drought. Staff was working with a consultant to revise that calculation so it would be ready if needed. Acting Utilities Assistant Director Karla Dailey added that implementing the drought surcharge was a tricky message. She stated that even though people end up paying more per unit of water they consume, their bill should be lower if they are conserving water. Council Member Lythcott-Haims stated fire services seem to get a break in cost for the same meter size and questioned if that was public policy. Acting Utilities Assistant Director Dailey stated that charge was to reserve capacity for the case of having to put out a fire but was rarely used and a very small amount of water. Chair Burt stated there was a common perception by residents of being penalized for conserving and wanted to emphasize the context that even with increased water costs, the bill does not go up if less water is used. He also felt it was important to highlight to the community that water use has declined 40% over the past 20+ years alongside growth. Part of the reason that water still needed to be conserved in a drought despite those improvements was the fluctuations in water supply, which were predicted to become more volatile over time. Many drought restrictions were imposed at a statewide level, but Palo Alto had less risk of inadequate water supply than almost any water system in the state. He encouraged putting out all of these high-level messages to help people understand. He also suggested including the key tables on the reserves in the report to the Council and the public and also making it clear that funds can be moved from a surplus reserve to one in shortage in a given year. He asked about the projected increase in the water supply between the current and coming fiscal years. Resource Planner Bilir responded that SFPUC was projecting a price increase at 11.6% per unit. Chair Burt asked if rebuilding the Hetch Hetchy transmission system was part of the ongoing investment. He questioned how much of the 11.6% SUMMARY MINUTES Page 5 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 commodity rate was tied to the water use projections, what those projections were currently, and when they were made. Resource Planner Bilir agreed that the Hetch Hetchy transmission system was part of it. She added that the latest projection available was from mid February but did not have a breakdown of what portion comes from each of those three sources. Chair Burt felt that information would be helpful because agencies are conservative in projections. He thought the Hetch Hetchy system could be at capacity in the coming months and SFPUC has not yet acknowledged that change. He was hesitant to build into the rates the portion of the commodity rate increase attributed to water use projections being retarded due to water supply limitations. Acting Utilities Assistant Director Dailey added that sales drive the rates and it takes a while for people to start using water again. Chair Burt asked if it was possible to use a reserve to mitigate the projected commodity cost increase. He asked for an overview of the reserves. Resource Planner Bilir stated reserves could be used to pay for the cost of the purchased water. She presented charts showing the Operations Reserve projections and CIP Reserve projections, which remain within the guidelines throughout the period. There was further discussion about the levels in the reserves. Chair Burt wondered if there was a way to hold off on the significant increase pending the updates from SFPUC. Acting Utilities Assistant Director Dailey stated that whether the SFPUC rate ends up being higher or lower than anticipated, the proposal for how to use reserves would not change. There was further discussion on this. Vice Mayor Stone asked if the drop in future years was based on the assumption of being out of the drought and operating normally. Resource Planner Bilir stated the chart showed the combination of the commodity rate increase and Palo Alto's distribution increase. The distribution increase of between 3% and 5% incorporates lower-than-normal water usage. The SFPUC projects this commodity increase in the upcoming year and then relatively flat rate projection over the next several years. SUMMARY MINUTES Page 6 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 Utilities Director Dean Batchelor added there was a strong possibility of being able to drop the hydro rate adjustor even lower than 50%, so the bottom-line dollar amounts as a whole would go down even further. MOTION: Vice Mayor Stone moved, seconded by Council Member Lythcott- Haims, to recommend the City Council adopt a resolution approving: a. FY 2024 Water Utility Financial Plan b. Up to a $3.746M transfer from the Capital Improvement Projects Reserve to the Operations Reserve in FY 2023 c. Up to a $3.0M transfer from the Rate Stabilization Reserve in FY 2023 d. Increasing Water Utility Rates Via the Amendment of Rate Schedules W-1, W-2, W-3, W-4, and W-7 MOTION PASSED: 3-0 2. The Utilities Advisory Commission and Staff Request that the Finance Committee Recommend the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan, Including Proposed 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) Resource Planner Lisa Bilir described the 9% overall rate increase projection for the wastewater utility, $4 per month for an average residential customer. The drivers were the treatment plant cost increases over the next years and the acceleration of the rate of sewer main replacement. She described the Staff recommendation for sewer main replacement at 2.5 miles per year starting in FY 26 and offered 3 alternatives. She showed photos of the types of pipes prioritized in the replacement program and charts of the wastewater cost and revenue projections as well as the Operations Reserve and CIP Reserve projections. The UAC unanimously approved the Staff recommendation for the Financial Plan, including the 9% overall increase, transfer of $3.2M from the CIP Reserve to the Operations Reserve, transfer of the remaining $342,000 from the Rate Stabilization Reserve to the Operations Reserve, and the rate schedules. SUMMARY MINUTES Page 7 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 Council Member Julie Lythcott-Haims asked about the evidence for the degree of risk if the mains were not replaced in their 100-year lifetime. Utilities Assistant Director Matt Zucca stated the 100 years was more of an average based on industry experience and assumptions about the overall life cycle, with a lot of factors like soil conditions, groundwater levels, depth of the pipe, etc. When the condition of the sewer pipe deteriorates and can no longer pass the flow along, it will back up and overflow through a manhole and into a creek, which has a fair amount of environmental liability. Vice Mayor Greer Stone stated the incremental increase each year was not bad but was concerned about the aggregate $20-per-month increase between now and FY28. He felt it would be surprising to residents to go from being 28% lower than neighboring communities to 5% higher. He asked how likely it was that rates may be lowered if circumstances change. Resource Planner Bilir clarified that the 5% assumed the neighboring communities would not increase their rates at all and was therefore a conservative estimate. Other communities would likely face similar increases. Chair Burt stated that Palo Alto’s rates had been lower by not charging customers for necessary capital investments on the horizon, which now are being charged real time as the wastewater treatment plant is rebuilt. Vice Mayor Stone questioned if the goal for wastewater revenue was to have normal profit and if these rate increases would achieve that goal. Resource Planner Bilir stated this covered the treatment costs, collection system costs, and ensuring the reserves remain within the guideline range. Chair Burt stated that water use and treatment goes up after a drought and asked if the projections assumed a return to normal water use in the wastewater collection volume. Resource Planner Bilir explained the residential charge was a fixed monthly amount of about $45. For nonresidential, restaurants were charged on the previous monthly water usage and commercial were charged based on winter water usage. During COVID policies, nonresidential declined about 11%. That has started coming back but is not quite back to pre-pandemic levels; this was included in the projections. SUMMARY MINUTES Page 8 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 Chair Burt asked for clarification on the extent to which main sewer lines were inspected and how that data was used to make decisions on the plan for the next several years versus longer-term generalized projections. Utilities Assistant Director Zucca stated there was an entire crew dedicated to CCTV cameras and maintenance. That information was relied on to help prioritize selecting pipes for the next round. Immediate prioritization was based around hard data, with more projections long-term. Near the end of construction on one grouping of pipes, the next high-priority grouping was selected. Chair Burt asked if selecting Alternative B would allow the high-priority replacements to be accomplished in 2024 through 2026, with rate increases to be looked at thereafter. Utilities Assistant Director Zucca stated the next grouping of pipes could be determined; however, 2.5 miles per year would not be reached until 2034 and the last assets would no longer be 108 years old. There was further discussion about the pace of replacement in the various alternatives. Chair Burt was inclined toward a version of Alternative B with 7% the first two years and then 6% thereafter, with an understanding that the rate of replacement could be further increased. Council Member Lythcott-Haims clarified that going from the recommended plan to Alternative B would only save 90 cents a month. She was inclined to go with the recommendation. She asked if there was a way all utilities were coordinated regarding digging up streets and achieving efficiencies. Utilities Director Dean Batchelor stated the engineering group has three separate maps of the city, and Staff looks for synergies around upcoming projects. There was more discussion about this. Chair Burt explained that while individual rate increases might not be bad, there was also an acute focus in the community on spikes in rates. He stated the willingness of the community to embrace the financial investments needed to address the climate plan were tied to their perception of other rate increases, and he wanted to mitigate that, especially with the even bigger categories of gas and electric coming up in two weeks. He was inclined to mitigate costs where possible. SUMMARY MINUTES Page 9 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 Council Member Lythcott-Haims felt if the concerns were about the gas and electric coming up in two weeks, she would want to be more fiscally conservative on those utilities but let wastewater proceed. Resource Planner Bilir added that since this report was finalized, there were changes in the budget related to the pending sewer replacement. There may be impacts on that near-term project in lowering the increase beyond what was expected in the alternatives presented. Chair Burt did not want to do anything having a detrimental impact on that project. He suggested continuing this item in order to obtain supplemental information on the implications to the current projects on the horizon with the adoption of Alternative A or a modified version of Alternative B as suggested. MOTION: Chair Burt moved, seconded by Vice Mayor Stone, to continue this item to the March 21, 2023, Finance Committee Meeting MOTION PASSED: 3-0 3. Adoption of a Resolution Amending Utility Rate Schedule D-1 (Storm and Surface Water Drainage) Reflecting a 4.9 Percent Consumer Price Index Rate Increase to $16.76 per Month Per Equivalent Residential Unit for Fiscal Year 2024 Assistant Public Works Director Karin North described the storm water management fee increase approved by voters in 2017, with 55% going toward storm water management programs and 45% for projects and infrastructure. The proposed rate increase was 4.9%, increasing the monthly charge by 78 cents from $15.98 per Equivalent Residential Unit to $16.76. Council Member Julie Lythcott-Haims asked why this was being discussed since it was approved by ballot initiative. Assistant Public Works Director North stated this was for the public to understand the rates, for transparency. Assistant City Manager Kiely Nose added that voters are typically approving maximums, but in most modern ordinances, agencies include a clause reserving the right for Council to do something lower. When the rate is variable based on the CPI, it is brought to Council every year for approval of that adjustment. SUMMARY MINUTES Page 10 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 Chair Burt described the green storm water drainage system tried in the district of Southgate, which worked well and was ecologically better. He stated that was described as a preferred design alternative on this ballot measure and asked for more context on how that fits with this set of projects. Assistant Public Works Director North explained that the green storm water infrastructure was more for urban drool and smaller storms and did not handle anything larger. The current system was designed for the ten-year storms. Staff was trying to figure out other ways of incorporating green storm water infrastructure, which slows the flow of water and also helps treat it. There is a state requirement to treat a certain amount of water through green storm water infrastructure, and part of this funding goes to identifying, building, rehabilitating, and maintaining that. Chair Burt added that there was runoff of pollutants on streets, like copper in brake pads or organic pollutants from tires. He described the process of pyrolysis, turning wastewater into biochar, which has been studied for use in highway runoff filtration with promising results. The process also produces a biogas that can be used to produce electricity. It is viewed as a carbon- negative process. There could be a synergy between the green storm water approach and the next generation of wastewater treatment technologies. MOTION: Chair Burt moved, seconded by Council Member Lythcott-Haims, to recommend the City Council adopt a resolution amending Utility Rate Schedule D-1 (Storm and Surface Water Drainage) to implement a 4.9% rate increase consistent with the applicable Consumer Price Index, increasing the monthly charge per Equivalent Residential Unit (ERU) by $0.78, from $15.98 to $16.76 for Fiscal Year 2024. MOTION PASSED: 3-0 4. Approval of the Electric Utility Construction Services Contract with VIP Powerline Corp. (C23185980) for a Total Not-to-Exceed Amount of $20,000,000 over Five Years; CEQA status – exempt (Existing Facilities, Replacement or Reconstruction) Utilities Director Dean Batchelor stated the electric construction division had insufficient resources to meet the daily demand. This contract was brought to the Finance Committee rather than going on Consent because the large dollar amount. Out of 20 authorized positions, there are only 5 linepeople with 3 apprentices currently. The contractor will help with maintenance work as well as some electrification work and will be important for SUMMARY MINUTES Page 11 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 emergency services. This is a larger contract for all the work that needs to be done. Going to a five-year deal allows cost reductions that would not be seen in a shorter contract. Staff asked Finance to adopt determination of this action to exempt the environmental rules under Class 1, Existing Facilities, and approve authorization for the City Manager to execute the contract. Chair Pat Burt asked how familiar Staff was with VIP Powerline. Utilities Director Batchelor stated Staff was not very familiar with VIP but had done research on them and included language in the contract about termination for not fulfilling the needs and the need to respond from an emergency standpoint within two hours. Staff had six references for VIP, three given by the company. Chair Burt recommended this item be put on Action rather than Consent because of the size of the contract. Assistant City Manager Kiely Nose noted that the Action calendars were full until April. Part of the reason this was brought to the Committee was to try to expedite it to manage the Council’s calendar. It is at the Committee’s discretion whether it should still be placed on the Action calendar. Utilities Director Batchelor believed, but was not sure, that the current contract was through February 2023 and that there was an amendment until May to keep the current contractor in place. Chair Burt suggested a motion that recommends the item go on Action provided it would not have an impact on operations to do so. Council Member Julie Lythcott-Haims opposed that. She stated there were 5 lineman in place out of 20, this work is critical, and people are frustrated with downed lines not being fixed more quickly. She preferred to put it on Consent with adequate explanation. Vice Mayor Greer Stone was fine with this continuing on Consent due to the packed calendar. There was further discussion about placing this on Action versus Consent. Chair Burt added that trying to hire internally or find available contractors with high-voltage line workers was a real challenge. He felt it was the most overlooked choke point and constraint in the climate goals. SUMMARY MINUTES Page 12 of 12 Finance Committee Meeting Summary Minutes: 3/7/2023 Council Member Lythcott-Haims wanted to encourage more Palo Alto kids to pursue more trades and come up with a program that incentivizes kids to become an apprentice. MOTION: Chair Burt moved, seconded by Vice Mayor Stone, to recommend: a. The City Council adopt a determination that this action is exempt from environmental review under Class 1 (Existing Facilities) and/or Class 2 (Replacement or Reconstruction) (CEQA Guidelines section 15301- 15302) b. The City Council approve and authorize the City Manager to execute the construction contract C23185980 (Attachment A) with VIP Powerline Corp. (VIP) in an amount not to exceed $20,000,000 over five (5) years, with an annual not-to-exceed amount of $4,000,000 for Electric Construction Services to provide essential ongoing operational work including construction maintenance and system improvement work on the City’s electric distribution system at various locations throughout the City of Palo Alto c. This item go to Council as an Action Item provided that it does not impact operations; otherwise it will go on Consent. MOTION PASSED: 3-0 FUTURE MEETINGS AND AGENDAS Assistant City Manager Kiely Nose stated that upcoming on March 21 will be discussions on the gas and electric utilities, another utilities contract, and the wastewater rates carrying forward. Following that, there will be an email polling on dates for May for budget discussions. There was discussion about dates for those meetings. ADJOURNMENT: The meeting was adjourned at 8:20 P.M.