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HomeMy WebLinkAbout2023-03-21 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 28 Regular Meeting March 21, 2023 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room at 5:33 P.M. Present In-Person: Burt (Chair), Lythcott-Haims, Stone Present Virtually: Absent: Call to Order Chair Burt called the meeting to order. Deputy City Clerk Vinhloc Nguyen called roll and noted three were present. Chair Burt commented that the agenda was exceptionally large and complex. He provided suggestions for moving forward with the meeting. Public Comment There were no requests to speak. Utilities Director Dean Batchelor stated there were a lot of changes in the packet. He addressed water rates and explained why staff was asking for an increase in wastewater rates. Staff thought it would be better to look at an overall view of the rates, so they were bringing back a new proposal to look at offsetting the 9% rate increase in the wastewater. They had also taken into account the 7’s, and there was a cost breakdown of the 7’s as well as the 9’s. They brought back the water rates because the reserve was the healthiest between the two, and they wanted to have another conversation with the Commission. The electric had been changed due to the CVP, and they did a different forecast, which showed increased base rates higher than the prior ask, which he explained. He voiced that the entire rate package was less than what was proposed two weeks ago. He hoped the discussion would start with the water and how staff had come to their conclusions and then that the rates for gas, etc., would be addressed. He suggested not voting on each of the rates and to instead vote at the end of the meeting. He SUMMARY MINUTES Page 2 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 clarified that this would not be brought back to the Commission again, although the gas may have to be brought back another time. Chair Burt confirmed that there were would be placeholder concepts and, once it was determined how it integrated as a package, votes would be taken at the end. Assistant City Manager Kiely Nose expressed that it would be good practice for the Committee to make tentative motions, as was done in the budget process, and then revisit it at the end for a final action. Chair Burt understood that the reports compared the proposed FY2024 electric and gas rates to what had been effective charges in FY2023, which included the gas and the eHydro increases, but there was no comparison to the budgeted FY2023. He understood an increase in relation to gas and eHydro would be big spikes as opposed to where the City was versus what the City thought the rates for the year would be and what was budgeted for. He voiced why he thought both needed to be considered. Utilities Director Batchelor indicated it was more than the spike when they looked at the comparison. He remarked that there were no rate increases in 2021 or 2022 and, in the last year and a half, the City had spent close to over the $40M out of reserves, which was why hydro needed to be put back in place. He thought what Chair Burt was asking would come to the forefront as the meeting progressed. Utilities Assistant Director Jonathan Abendschein mentioned that they wanted to show there would be decreases from the high energy price spikes, but they also wanted to highlight the changes relative to long-term trends leaving out the price spikes, so both views would be presented to the Committee in the gas and electric presentations. Agenda Items 1. Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024 Water Utility Financial Plan, Including Revised 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) Acting Senior Resource Planner Lisa Bilir spoke about the water utility and provided an update on the alternative recommendation. She provided slides related to the water rate increase proposal. She explained why there was a proposed rate increase for 2024 and 2025, which included the distribution increase and the pass-through rate increase from SFPUC. She provided an overview of the impact of the alternative recommendation and supplied slides outlining the water cost, revenue projection, and the water operations reserve projection and noted that the SUMMARY MINUTES Page 3 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 recommendation would be modified from the 3% distribution rate increase to the 2% distribution increase. The options were to uphold the vote the Committee took two weeks ago recommending a 7% overall and a 2% water distribution rate increase or to consider the alternative for a 2% water distribution rate increase. She outlined how it would impact the total customer bill, which they had slides if the Committee wanted to review them at some point, and the dollar impact on the median resident was estimated at $11.70, which was $5.40 less than the staff proposal from two weeks ago, which included the electric and the water changes. Council Member Lythcott-Haims thought it seemed like a great approach to the situation. Vice Mayor Stone asked if the 1% decrease in the rate between Options 1 and 2 was the reason for necessitating the different transfers in Option 2. Acting Senior Resource Planner Bilir answered that the transfers had not changed from two weeks ago. The Capital Improvement Reserve transfer was to move the funding from the CIP Reserve to the Operations Reserve to ensure adequate funding for CIP needs in the current year, and the $3M from the Rate Stabilization Reserve was to mitigate the need to increase rates. She noted that the proposal was to use reserves available and to ensure the rate increase was mitigated for residents and businesses until FY2026/2027. This was one of the years that funding from the Rate Stabilization Reserve would be used, and they also planned to use it in two other years. Chair Burt inquired if there would be transfers under Option 1 related to B through C on Slide 7. He asked why the Capital Reserve ending balanced varied on Slide 6. Acting Senior Resource Planner Bilir answered that the transfers would remain the same under both options. She noted that the only changes were represented in bold on Slide 7. Regarding the Capital Reserve ending balanced varying, she detailed how they were trying to stabilize the Operations Reserve by showing just the CIP-related cost changes in the CIP Reserve. Utilities Director Dean Batchelor clarified why that pattern would be seen throughout for gas and electric. Chair Burt declared that before taking straw votes, the wastewater collection and gas and electric would be addressed to see how they integrated. 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) (Continued from March 7, 2023) SUMMARY MINUTES Page 4 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Acting Senior Resource Planner Lisa Bilir spoke of the Wastewater Utility and supplied slides reflecting wastewater projections. She discussed the impact of the proposal. The Wastewater Proposal with the Water and Electric changes would be an overall 3% rate increase on the bill in July for median residential customers, which would be a lower dollar impact of $10.80, which would be $6.30 less than the staff proposals discussed two weeks ago. She discussed and shared slides outlining wastewater cost and revenue projection, the Operations Reserve projection, and the Wastewater CIP Reserve projection. Chair Burt questioned why under the Modified Alternative B on Slide 6 the reserve was higher until 2028 than the original staff recommendation. Acting Senior Resource Planner Bilir answered that the main difference was the plan under the modified B was a different capital expenditure. Per the staff proposal, 2026 would begin the 2.5-mile/year replacement of sewer mains, and Modified Alternative B would do the same but not until 2032, and there needed to be funds to accommodate the change at that time. Chair Burt asked if staff felt comfortable increasing to a rate of 2.5 miles/year as soon as FY2026. He felt less necessity than he did two weeks ago to try to mitigate the rate increases this year. Acting Senior Resource Planner Bilir was confident that could be done by 2026. Council Member Lythcott-Haims inquired how Modified Alternative B related to the 100-year lifespan of the main equipment. She worried about the equipment going beyond its lifespan. She asked why the water reserves were in better shape than the wastewater reserves. Acting Senior Resource Planner Bilir indicated that under the staff proposal the age of the last remaining main would be 108 years. Under Modified Alternative B, the last remaining pipe would be 112 years. Utilities Director Dean Batchelor explained why water reserves were in better shape than wastewater reserves. Chair Burt added that not accomplishing all the capital projects planned for in a given year was not uncommon and inquired if staff was seeing a pattern. Utilities Director Batchelor addressed why they were now better able to do the engineering ahead of time. Another issue in the past had been negotiations with the construction companies, and there needed to be compromises in not doing as much, modifications, or internal crews doing more of the work. Other than some of the electric projects, Utilities had good success 95% of the time. SUMMARY MINUTES Page 5 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Vice Mayor Stone agreed with Chair Burt’s assessment as far as the urgency and the change from two weeks ago. He requested clarification of the importance a 2032 deadline versus a 2026 deadline. Utilities Assistant Director Matt Zucca answered that the importance a 2032 deadline versus a 2026 deadline was a hard question to answer as they were trying to manage that asset over the 100-year lifecycle. He noted there would be operational risks and resources would be needed for maintaining infrastructure. He touched on the implications of sewer system failures, which could include lawsuits by ENGOs and would be more expensive than infrastructure maintenance. He thought part of staff’s recommendation was to start on a pace to avoid such. Chair Burt queried why main replacement would suddenly increase to 2.5 miles a year. He wanted to encourage anticipating future capital needs and wanted to determine whether there should be a building of capital funds, basically savings for projects on the horizon. He asked when it would be appropriate for the UAC, the Finance Committee, and Council to reexamine a strategic approach. He wanted to ensure the process on the electric and gas sides were moved forward this year. Concerning wastewater treatment, he discussed partner agencies possibly withdrawing in the event of a charge to rebuild the plant. Utilities Assistant Director Zucca voiced that there were factors that predated his employment with the City of Palo Alto, but he remembered that the step increase stemmed from about 10 years ago, which he detailed. They were now trying to make up for the rate of progress they had wanted. Concerning reexamining a strategic approach, he thought that was what staff had proposed on the collections side in the 2.5 mile/year, which determined lifecycle and investment needed each year. He would have to come back to the Committee related to recurring cost for plants, which was on the order of every 30 years and was not just an annual investment. Utilities Assistant Director Jonathan Abendschein stated the process for gas and electric funding could be addressed with the gas and electric forecasts. The electric forecast had the costs built in, but the gas forecast did not. There could be discussion of some of the issues that needed to be considered. He thought most of the other utilities accounted for a rare, large one-time investment in the rate plans. Water Quality Control Plant Manager Jamie Allen commented, regarding wastewater treatment, that a partner agency backing out was not a likely scenario, and he detailed why he did not think they would pipe to anyone else. Public Comment There were no requests to speak. SUMMARY MINUTES Page 6 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Chair Burt was comfortable with the original staff recommendation. He questioned if staff was comfortable with the alternative related to water. Acting Senior Resource Planner Bilir acknowledged that staff was comfortable with the alternative related to water. Council Member Lythcott-Haims agreed with the revised Water Plan coupled with the original Wastewater Plan. Vice Mayor Stone also agreed with the revised Water Plan coupled with the original Wastewater Plan. 3. Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfers and Amending the Gas Utility Reserve Management Practices, and Increasing Gas Rates by Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master- Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) Utilities Assistant Director Jonathan Abendschein expressed that he expected gas utility bills to decrease over the next few months, and the past increases were expected on the median bills for June. He displayed a chart illustrating monthly median residential bills by utility for January 2022 through June 2023 and projections for July 2023 through January 2024. He emphasized that the projections were based on forecasted gas prices, which were uncertain. He indicated that the chart combined long-term and short-term views relative to past energy price spikes. He reviewed the gas rate design. He furnished a slide and explained the gas rate design and provided detail related to distribution rates. He noted that gas price spikes last winter, which were not entirely passed through to customers, deeply depleted the reserves and drove them below the minimum guideline levels. They could not phase in rate changes over several years, and they were proposing a 21% distribution rate increase this year to get revenues to match costs, which translated into an 8% overall bill increase. Even with the increase, reserves would not be back to minimum guidelines until FY2027. He reiterated that because gas supply costs were decreasing people would see decreases from this to next fiscal year even with the 8% bill increase. He explained that people would pay less for gas in FY2024 than FY2023 even with the rate increase. Chair Burt questioned what the rate impact was compared with the projection. Utilities Assistant Director Abendschein outlined why it was hard to determine the rate impact compared to what had been projected. He noted that they had been anticipating distribution rates of 4% per year for FY2024 through FY2026. Now they were proposing 8%, 7%, 5%, which was in large part related to a massive decrease in reserves in 2023. He presented slides showing the gas distribution rate projections. SUMMARY MINUTES Page 7 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Chair Burt inquired why FY2023 showed an increase in capital. Utilities Assistant Director Abendschein stated that FY2023 was a large year for capital investment. He supplied a slide showing gas operating reserve projections. They were not requesting a rate plan to bring reserves up to the minimum as it would require double-digit rate increases, and they were confident they had strategies for emergency funding if needed. Chair Burt asked if the spikes in the reserve min/max and target in FY2023 were because they were a percentage of the gross revenue and if when the commodity price increased it automatically indicated more reserves were needed. Utilities Assistant Director Abendschein confirmed the spikes in the reserve min/max and target in FY2023 were effectively because those were a percentage of gross revenue. It was 60 to 120 days of operating [inaudible]. He acknowledge that when the commodity price increased it automatically indicated more reserves were needed. They had looked at the long-term projection to set rates, which was a more normal level. They were seeking feedback from the Committee related to the General Fund transfer and for the UAC and the Finance Committee to make a recommendation to Council as to which alternative to choose (see Slide 4). He discussed the rate changes he had presented being based on Alternative 2 on Slide 13. Council Member Lythcott-Haims commented that her number-one concern was the rates set for customers. She inquired what would be gained or lost in terms of management of the financial resources of the Gas Utilities operations and the General Fund operations by passing 18% versus 15.5%. Utilities Assistant Director Abendschein specified that there would mainly be an impact on rates, which tied the two together. He explained that transferring the full amount could affect needed rate changes in future years, which was reflected on Slide 13, and was the single difference between Alternative 1 and Alternative 2. Regarding harm to the Gas Utility, there would be no change to the Gas Utility with either alternative, aside from the rate impact. For the General Fund, he asked Assistant City Manager Kiely Nose to confirm that the long-range forecast and budget projections were based on a Gas Utility Transfer similar to Alternative 2. Assistant City Manager Kiely Nose specified that the long range presented to Council prior to the rate forecast being developed was based on Measure L at 18%. She noted that gas costs had changed drastically over the last month or two and was why they brought it forward to the Committee. Chair Burt noted that the long-range forecast was based on 18% but not based upon the gross level, which had changed, so the dollar amounts that were planned to be transferred to the General Fund under Alternative 1 were higher than had been projected. SUMMARY MINUTES Page 8 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Council Member Lythcott-Haims questioned what would be the projected dollar amount difference for 18% versus 15.5% in terms of what would go to the General Fund. Assistant City Manager Nose answered that it would be about a $1M difference between the two. Chair Burt requested numbers in terms of the gas rate spike and expenses to the General Fund. That information was not known. Chair Burt voiced why that was a problem. Vice Mayor Stone queried if the $1M was for FY2024; if Measure L would be revisited every year to determine the percentage transfer; and if there were deficits in FY2024. Assistant City Manager Nose confirmed that the $1M was for FY2024. She remarked that there were deficits in FY2024. She explained the processing for developing the next year’s budget and mentioned that the percentages would be revisited as part of all normal budget process and rate-setting cycles. She spoke of deficits, which $14M had been set aside to manage forecasted deficits. City Attorney Molly Stump clarified that Measure L would not be revisited, but there would be decisions made about implementation for a fiscal year through the budget and the rate-setting process. Staff was showing projections, but Council was not to make a decision on FY2025 and FY2026 yet. Chair Burt asked if the deficit projections included the Measure K revenue. Assistant City Manager Nose answered that the long-range projections did not include Measure K revenue and when everything was combined, just the eligible components of Measure K were added in. The numbers she had cited included Measure K. Vice Mayor Stone asked if the $3M+ projection for FY2024 included an 18% transfer. Assistant City Manager Nose confirmed that was correct. Chair Burt asked if the $1M difference Assistant City Manager Nose cited was based on the FY2024 transfer and if the $1M would grow in FY2025 and FY2026. He questioned the impact to the FY2025 $8M deficit according to the blue line for FY2025 on the table on Slide 13. Assistant City Manager Nose acknowledged that the $1M difference was based on the FY2024 transfer. Concerning the $1M growing for FY2025 and FY2026, she explained that there was a CPI on it in the long range, so 2024 was based on the 18% calculation and just a CPI growth in SUMMARY MINUTES Page 9 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 2025 and 2026. Regarding the impact to the FY2025 $8M deficit, she thought it would be about $4M to the positive. Chair Burt voiced that the projected deficit may not be an actuality at the end of the year and the question for him was whether the additional $4M was needed for the General Fund and if transfers would be continued at 18% versus focusing on the dollar amount transferred to the General Fund being in the projected range but embracing the lower percentage transfer so there would not be a General Fund windfall as a result of rate payers’ hardships in the spike period. Assistant City Manager Nose declared that staff did not project the increase Chair Burt was describing. If the 18% of Measure L was followed, it would significantly impact the transfer to the General Fund, but it was not projected in the financial plans. It was an item they wanted to discuss with Council proactively. Chair Burt clarified if the 18% rate was adopted the Financial Plan should be adjusted accordingly. The issue was not whether it had been included but what would the City move toward if there was no adjustment of the 18%, which he noted would include a windfall from the gas spike. He referenced Slide 2 and inquired if the terms “commodity” and “transmission” in relation to gas had different meanings than when relating to electricity. Utilities Assistant Director Abendschein expressed that different nomenclature was used for gas and electric. He noted that they were expecting a 30% to 40% increase in electric load from achieving S/CAP goals, not doubling, which could be discussed. Chair Burt explained why he was suggesting consideration be given to how things were defined under electric and proposed it be broken down similar to gas. He was glad to hear they were expecting a 30% to 40% increase in electric load from achieving S/CAP goals, not doubling. Utilities Assistant Director Abendschein indicated that may need to be discussed more. He clarified that there would be a 30% to 40% increase in energy demand, which related to the commodity comment Chair Burt made, but the impact on the grid peak demand would double. He wanted the difference between residential demand impacts versus overall impacts to the energy demand for the City to be understood. Discussion ensued related to grid peak demand doubling versus not doubling, which could be discussed at the S/CAP Committee. Utilities Assistant Director Abendschein indicated that the City’s gas costs were projected to be roughly $1.2M, which were not all General Fund costs. He did not have an estimate for just the General Fund, but the plant was a significant [inaudible]. That would be about a 50% increase on total gas costs. They needed to research what proportion of that would apply to the General Fund, which he thought would be much smaller than $1.2M. SUMMARY MINUTES Page 10 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Chair Burt queried if the sales drop in gas during the pandemic was primarily due to commercial vacancies. He requested the projections on the future gas commodity cost and asked how conservative the projections were and how it might impact rate payors. Utilities Assistant Director Abendschein acknowledged that the sales drop in gas during the pandemic was primarily due to commercial vacancies. Regarding projections on the gas commodity cost, he displayed a chart showing the long-term cost trends in supply and distribution costs. Chair Burt was curious how much of that was transmission versus [inaudible]. He inquired why such a big spike had to be passed to customers. He asked when the decision was made to stop buying laddered contracts. He thought a hybrid approach with some percentage of contract purchases being market based and others being laddered should be reconsidered. He thought there was a question of rate payors valuing the lowest possible rate in any given month or year versus rate stability. He would like the issue to be agendized. Utilities Assistant Director Abendschein shared that they used a variety of sources to create their forecast for commodity in the gas sense. The commodity was showing gradual declines over time, but transmission costs and cap and trade environmental charges were increasing. He did not think cost of offsets would increase significantly over time. Transmission and environmental charge increases were offsetting gradual commodity declines in their forecast. Assistant Director Karla Dailey indicated that the purchase of laddering contracts was discontinued in 2012. She stated that staff was thinking about a hybrid approach to contract purchases, which they would bring before the UAC, the Finance Committee, and Council for consideration. Chair Burt asked if transmission costs per therm, in part because of lower commodity consumption, had increased or would increase. He queried if there were projections of that. He noted that with Measure L there was a two-year lag between the generation of revenue and the General Fund transfer. He questioned why there was a lag and, based on that lag, what would be the implications of the reduced transfer happening sooner than historic practice and if there was a way to reconcile what the City wanted to do with the established practice of the lag period. He struggled with wanting to reduce the impact on rate payors, which Council thought could be done this year. He asked if the transfer could be more immediate under an anticipation of future revenue. He inquired what the impact would be if 11% was transferred this year. He queried if the preliminary budget projection Assistant City Manager Nose presented was long range. Utilities Assistant Director Abendschein answered that transmission costs per therm had been increasing. It was driven by electricity generation. He did not think decrease in building consumption was much of a factor. Regarding projections, he thought CPUC recognized the SUMMARY MINUTES Page 11 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 need for long-term planning for the gas utilities around electrification, and proceedings had been started. He commented that the lag was new and explained that it was built into Measure L to ease administration and make it more predictable and controllable. He declared that a one- year lag would be complicated to administer and detailed that it would have a similar issue. Concerning the transfer being more immediate, this meeting was about what percentage the Committee would recommend the Council transfer for FY2024. They were trying to set the transfer year by year, and there would be an opportunity to address FY2025 and FY2026 when setting the budget and rates next year. The impact of transferring 11% this year, would be about $5.5M in FY2024, which would average about $1.7M or $1.8M less than the FY2022 transfer. Assistant City Manager Nose clarified that the figures she quoted were presented to the Full Council as the ongoing impacts of the midyear budget in February, which were public figures. Council Member Lythcott-Haims asked if 15.5% was passed to the General Fund on the gas utility side where the extra 2.5% in savings would go and if there was a concern of hitting a maximum in the Gas Reserve Fund; why Palo Alto’s rates had spiked but PG&E’s had not; and related to the phasing plan for electrification and the scaling back of the gas infrastructure referenced on Packet Page 12 how staff would go about the analysis of a phase out while it was still being used by some. Utilities Assistant Director Abendschein answered that the 2.5% would not be collected. He did not yet have insight into why Palo Alto’s rates had spiked but PG&E’s had not. He thought FERC was considering starting an investigation. The CPUC had officially started an investigation, and he anticipated it would take three years. He expressed that investigations tended to take a long time. He thought the issues from the energy crisis in 2001 were sorted out in 2014 or 2015. He detailed the study that would be done related to the scaling back of the gas infrastructure. A preliminary analysis was done a couple years ago, which was delivered to the UAC, which he could forward to the Committee. If parts of the gas system were retired and there was a large decrease in gas usage, the system could run at similar rates projected for 2030, although that was a preliminary analysis, which they would like to refine and develop clearer strategies. He explained that there would be a need for some other source of funding, such as transfers from the electric utility or tax funding. Chair Burt inquired if inactive gas lines would need to be removed. Utilities Assistant Director Abendschein remarked that inactive gas lines would be abandoned in place. Chair Burt asked for a straw poll on recommendations and transfers referenced on Slides 13 and 16. He discussed transfers in FY2023 and FY2024 and the two-year lag, a large surplus for FY2023 that was not in a cash account, and policies for a surplus being divided between infrastructure and the unfunded pension liability, and he thought communications needed to SUMMARY MINUTES Page 12 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 emphasize that there was a deficit in infrastructure investment, which had no funding. He spoke of the unfunded pension liability not being paid down, which needed to be explained to the public. He addressed revenues exceeding projected expenses in the last year, which a portion went into restoring public safety and community services. He commented that surplus dollars provided a bridge until there was Measure K revenue. The City did not have that totality of money, but more end of the year surplus could go into the Infrastructure Fund and the unfunded pension liability, and the Committee could choose to transfer less than 18% of the gas utility revenues, which could go toward reducing the impact of the spike in the gas and the electric hydro costs. Assistant City Manager Nose reminded the Committee that Council provided direction for staff to return to the Full Council with a gas rebate program from the surplus funds. On the Council’s agenda for March 27 was a 20% rebate proposal that would be funded by the General Fund. The Council also asked staff to return to the Finance Committee to explore an electric rebate also from General Fund surplus funds, which was on this evening’s agenda as part of the electric discussion. Chair Burt stated it was interesting that a rebate from the General Fund was being considered rather than from the Enterprise Fund. He did not understand why customer rebates would be from the General Fund rather than reducing transfer over to the General Fund and then giving the dollars back. Assistant City Manager Nose specified if that was done, then the funds provided back to customers would be rate payor funds, and there would be certain restrictions. She had not considered how rebates would be calculated related to that. City Attorney Molly Stump thought Chair Burt’s characterizations were options, but directly using the Enterprise Funds for rebates that did not cover all the rate classes was not an option. She thought there could be a General Fund transfer through Measure L and the funds used to fund rebates. She thought what was being proposed was to do it as a General Fund matter on the rebates and then make the Measure L Gas General Fund transfer at whatever level as a policy matter. Assistant City Manager Nose noted that an important distinction to what City Attorney Stump noted was the restrictions associated with rate funds and all rate payors, and the direction from the Council was to look at only rebate programs for residential customers. Chair Burt queried if the Committee had the latitude to target rebates if General Fund dollars were used but not latitude if Enterprise Fund Gas Fund dollars were used. City Attorney Stump confirmed that was correct. SUMMARY MINUTES Page 13 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Utilities Director Dean Batchelor thought the Committee would have the latitude if the entire class was included [inaudible], but it could not be done focusing on residential. Chair Burt asked for Council members’ thoughts of Item D on Slide 13. Council Member Lythcott-Haims questioned, concerning Item C on Slide 13, if 18% of the gas utility gross revenues were transferred to the General Fund in FY2023 when customers would be billed for that. She asked if not recommending approval of Item C would disrupt a system already in place. She was considering transferring up to 15.5% and realized a rebate out of the General Fund would be considered. She liked the numbers of Alternative 2. Utilities Assistant Director Abendschein answered that the 18% would be built into the rates and the transfer would be done behind the scenes, so they would not be billed directly for the transfer but the amount would be built into the rates to collect to transfer to the General Fund [inaudible]. Assistant City Manager Nose replied that 2023 was the transition year, so the transfer for a period of the year would be under one methodology and a period of the year post Measure L would be a different methodology. She discussed the intention behind Measure L. She confirmed that not recommending approval of Item C would disrupt a system already in place. Vice Mayor asked what transferring up to 15.5% would mean for rate payors. Assistant City Manager Nose shared Slide 13, which included information related to Alternatives 1 and 2. She reminded the Committee that they could make a decision for FY2024 and revisit FY2025 and FY2026 or provide variations. Utilities Assistant Director Abendschein would do the calculation for a 15.5% transfer to determine the monetary impact to customers. Chair Burt queried if Alternative 2 included a projected commodity cost related to the current market. Utilities Assistant Director Abendschein noted that the numbers on Slide 13 excluded the commodity cost ant that the commodity cost was included only for illustration. He explained it was the distribution components’ contribution to changes in customers’ bills, and supply would also make changes, so the actual bill change would be different from [inaudible]. Chair Burt requested the slide be labeled to emphasize that it was distribution-based cost. He asked if the commodity cost was being projected lower for FY2024 than FY2023 but higher than what had been projected in previous years. He asked what the combined impact would be on rate payers related to a decline in the estimated commodity cost for FY2024 over FY2023 combined with Alternative 2. SUMMARY MINUTES Page 14 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Utilities Assistant Director Abendschein confirmed that the commodity cost was being projected lower for FY2024 than FY2023 but higher than what had been projected in previous years. He remarked that the combined impact on rate payors with the supply rate included would be -13%. He estimated that the change would be about 52 cents per month in the residential median bill, 9% versus 8%. Vice Mayor Stone queried if the impact on the transfer to the General Fund would be $1+M. Utilities Assistant Director Abendschein noted that it would be spread over quite a few customers and the impact on commercial customers would be significantly larger. Vice Mayor Stone noted that he had been considering 15.5%, but with that information, he was considering Alternative 1. Utilities Assistant Director Abendschein specified that the impact on customers would be cumulative, so in following years bills would increase about $1 to $2 per month. Council Member Lythcott-Haims asked what the additional 3% was. Utilities Assistant Director Abendschein referenced Slide 13 related to the additional 3%. Utilities Director Dean Batchelor added that there would be a proposal to increase services charges too. He drew the Committee’s attention to Page 8 of the Staff Report. Chair Burt was concerned about the dollar impact on the average resident and spike disruptions. He spoke of the possibility of the public not supporting electrification if they believed the Committee was indifferent toward the impacts on them. He thought the issue needed to be considered in terms of mitigating the past rate spike and considering the public’s interest. He was swayed to Alternative 2. Council Member Lythcott-Haims added that the public had been informed of the budget surplus, which they could interpret as customers being overcharged. Vice Mayor Stone was concerned about the conservative projection being accurate and possible future service cuts. Chair Burt discussed conservative projections causing possible problems. He wanted to ensure that the impacts on residents would be mitigated. Council Member Lythcott-Haims was persuaded by Chair Burt’s comments related to the impacts on residents. She was inclined to support Alternative 2. SUMMARY MINUTES Page 15 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Public Comment John Kelley drew the Committee’s attention to Slide 14 and 15 and found the bill information uninformative and suggested single-family and multifamily residences be separated and that mean rather than median numbers be used. Regarding rebates, he urged Council to provide some money to everyone on the residential side and to concentrate the rebates on those in need. He opined that a bigger cut should be taken from the Measure L transfers. He thought it was a mistake to provide projections up to 2028. He noted that many of the decisions were being made at a regional level by organizations such as the BAAQMD. Lynn Chiapella discussed her high utility bills. She explained why she was concerned with adding more and more to the General Fund and thought the perception of Palo Alto’s enterprises needed to be changed. David Coale agreed with John Kelley’s comments related to projections out to 2028. Chair Burt noted that this Item would be revisited after Item 4. 4. Recommendation to the City Council to 1) 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) and 2) Discuss and Potential Direction for an Electric Rebate in 2023 Utilities Assistant Director Jonathan Abendschein supplied slides related to the electric rate proposal. They learned that they were expected to receive a $24M payment from the Bureau of Reclamation, so the rate proposal had been revised to reflect a 5% rate reduction in FY2024, which included a 21% increase to the base rate and elimination of the Hydroelectric Rate Adjuster (HRA). He explained that they were anticipating the $24M would be used for rate reduction, which would reduce revenue needs and would allow rates to be held down. He spoke of the projections for supply and distribution operations reserves and the hydro stabilization reserve. They would like to avoid future activation of the rate adjuster. He detailed what the $24M could be used for. He provided a slide and discussed the background of electric rate changes. They were proposing a 21% increase in the base rate and elimination of the HRA for a net change of -5%. He commented on the drivers for this year’s rate increases, and most important were revenues being well below costs. The proposed rate changes would increase revenues but not sufficiently to cover all costs, and he explained why it was a manageable risk SUMMARY MINUTES Page 16 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 and noted that reserves would exceed the risk assessment levels. He spoke of trends driving long-term cost increases. He explained why the chance of activating the adjuster in the future would be decreased. He expected to return to the Committee later this year regarding management of the rate adjuster, and he expected above-average hydro [inaudible]. Chair Burt requested that the precipitation/drought data presented be divided into the Shasta- Trinity area and the Northern Sierra. He asked how much hydro came from North Sierra versus the Southern Cascades. Utilities Assistant Director Abendschein provided a map of the watershed being discussed, which affected most of Palo Alto’s hydroelectric generation. He would have to get back to the Committee as for as a distinction between the Sierras and the Cascades. He continued to speak on trends driving rate changes, which included higher electricity prices. There were investments related to grid modernization and fiber rebuild, which would be debt financed, and costs would be impactful later in the forecast. It would not affect the FY2024 proposal much, but it was hard to delay rate increases without risking more significant increases in the future. He provided a chart showing the proposed electric costs and revenue projections with HRA. There would be a 21% increase in the base rate but significantly less with the removal of the hydroelectric adjuster. He displayed a slide and spoke of electric supply operating reserve projections. He furnished slides with the staff recommendation. He noted that the financial plan, rate sheets, etc., had not been updated in the Staff Report, and they would update the documents to reflect the Committee’s recommendation when they presented to Council. Public Comment Andy Poggio spoke of the $24M and suggested using it to primarily upgrade the grid. He wanted to move ahead with electrification sooner and pay the higher rates. David Coale with CFPA agreed with Andy Poggio. He did not think the $24M should be used for a temporary rate reduction when there were more pressing issues, such as upgrading the grid. He referenced reports from the IPCC showing climate change happening faster than anticipated. He thought leaving the hydro adjuster in place would help the rates and payback of the funds. Vice Mayor Stone asked if upgrading the grid would be a more prudent use of the funds and if there were limitations on the funds. Utilities Assistant Director Abendschein expressed that the limiting factor on grid modernization was not currently money and the costs would need to be debt serviced over 30 years. He noted that the true cost of electricity going forward was reflected in the rate plan and included rate increases to pay for increasing amounts of debt service. Devoting $24M to offset a small portion of those costs and avoid issuing debt for them would not make a significant SUMMARY MINUTES Page 17 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 difference in the rates long term. He voiced that holding reserves as low as they had been would increase risks. Chair Burt asked if a slightly above average eHydro production was anticipated this year and the mechanism for replenishing the eHydro reserve in normal times, for example without the $24M. Utilities Assistant Director Abendschein specified that their eHydro production projections were very uncertain. Regarding replenishing the eHydro reserve, rates were set on average hydro for the most part. The hydroelectric stabilization reserve and the rate adjustor in combination were meant to manage the variability in hydroelectric. He spoke of the City having a short history as an organization managing hydro variability. He recognized that a lower average of hydro needed to be predicted and that the revenue needed to be spread over more years than had been done previously, which they would be exploring. Chair Burt noted that evaporation of hydro and release of water for flood control needed to be recognized. He discussed contributing factors to the increase in gas and electricity costs. He encouraged there be a clear summary to the public and that there be repeated messaging, which should also address Palo Alto’s residential rates being below PG&E’s rates, which he requested be in every report. He suggested there be a summary explaining the loans and transfers. He inquired if the debt service listed in Figure 1 on Slide 9 was separate from the debt for grid modernization. He commented that it was important for the Council to be aware of total expenses for the transformation of the grid and noted that expenses could be mitigated with technology, etc. He voiced that the investment would be a small percentage of total rates and was manageable, which he did not think the public understood. He outlined why investment in grid reliability was important and asked what was being done to improve reliability. Utilities Assistant Director Abendschein discussed reservoirs, storage capacity, environmental issues, and pricing related to hydroelectric, which needed to be factored in when developing future management plans. He confirmed that the debt service listed in Figure 1 on Slide 9 was separate from the debt for grid modernization. He discussed that the grid modernization costs could occur sooner than what had been modeled. Utilities Director Dean Batchelor explained, regarding investment and improvement in grid reliability, that wires, connectors, and poles needed to be replaced; trees needed to be trimmed; and there needed to be upgrades in the substation. Chair Burt suggested it be explained to residents that the matters Utilities Director Batchelor spoke of would improve reliability. Utilities Assistant Director Abendschein mentioned that the project would replace some of the aging infracture. SUMMARY MINUTES Page 18 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Council Member Lythcott-Haims spoke of Sync Energy AI and offered an introduction to anyone interested. She wondered if staff could create a guide/blueprint for cities seeking to become a 100% carbon neutral city. Chair Burt noted that Sync Energy AI was a good illustration of emerging technologies. Utilities Assistant Director Abendschein replied that staff resources would be an issue in creating a guide/blueprint for other cities, but they did share information with public power partners through informal connections. They had ambitions and occasionally were able to share insights from research through presentations at conferences, etc. Chair Burt believed a leveraged impact could be addressed through the S/CAP going forward. He understood that the third bullet on Page 4 meant that $6M would be put into phasing in rate relief versus doing it more abruptly. He asked that the technical information be simplified when presented to Council. He believed it needed to be reemphasized that there were no rate increases during the COVID years and that residents were being charged less for services than it was costing the City to provide. Assistant City Manager Nose noted that the Committee had not yet addressed rebates. She expressed that Attachment A of the Staff Report/Packet Pages 97 and 98 outlined a potential rebate program for electric customers, which would be funded by the General Fund. She stated that the Gas Rebate Program had been agendized for Council for March 27. Utilities Director Batchelor noted that the Electric Rebate Program was not agendized for Council but was to be considered by the Finance Committee. Utilities Strategic Business Manager Dave Yuan displayed a chart breaking down the bill range categories and outlined rebate amounts based on each range, which was based on a 20% flat rate of consumption. The other alternative was a flat rebate, which would amount to $27.05 for every customer. The Council motion was to provide up to a 20% rebate, which the Committee could modify. He noted that the funding of the rebate would come from the General Fund through the Reserves surplus or through reduction or transfer back to the Electric Fund. Chair Burt asked if Option 1 would have to come out of the General Fund. Utilities Strategic Business Manager Yuan answered that Option 1 would have to come from the General Fund and noted that residents made up about 20% of the total utility customer base and that commercial was about 80%. Council Member Lythcott-Haims questioned how much above the median electric bill January 2023 was and if the bill warranted the kind of relief the gas bill did. SUMMARY MINUTES Page 19 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Utilities Strategic Business Manager Yuan thought the electric bill for January was $3.6M above the median bill and that December was about $2.9M above. He answered that the electric bill did not warrant the kind of relief needed for the gas bill. He noted that the spike for gas was in the month of January and a little in December, whereas electric was recurring until July when the hydro rate adjuster would end. Chair Burt wondered if the hydro adjuster should end before July. Utilities Assistant Director Abendschein noted there was a long delay from the time of rain to hydroelectric production, and production was July through September or October. He spoke of price spikes and issues related to timing when using a rate adjuster. He detailed the drawbacks of removing the HRA before July 1. Chair Burt inquired if low-income households consumed less electricity and if Option 2 should be considered to focus the rebate on those most in need. He noted that the flat-amount rebate would be a higher percentage of some customers’ bills. Utilities Assistant Director Abendschein noted that there was a correlation with low-income residents using less electricity. Utilities Strategic Business Manager Yuan clarified that Option 2 would provide a $27 flat rate to every customer. He noted that there were about 700 customers on the Rate Assistance Program, which included an increase of about 40% in January. The program provided a 25% discount on certain utilities. Council Member Lythcott-Haims did not think the $27 flat rate would have the intended impact. She thought relief funds should be directed to those in need. She would rather see those on the Rate Assistance Program get more relief than giving everyone $27. Chair Burt added that gas and electric increases were severe impacts to some not participating in the Rate Assistance Program. Council Member Lythcott-Haims did not know how to find those who could use assistance but who did not participate in the Rate Assistance Program. Chair Burt noted that a flat rebate would tilt toward those needing assistance. He clarified that since it would come out of the General Fund it needed to be weighed if an increase in the rebate could result in service cuts. Utilities Assistant Director Abendschein spoke of possibly putting money toward the Project PLEDGE Program, which could be Option 3. SUMMARY MINUTES Page 20 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Chair Burt thought of that could possibly be an Option 2B. He asked how people would apply for the Project PLEDGE Program and how much should be contributed to the program, especially if people could use the program once a year. Utilities Strategic Business Manager Dave Yuan answered that an application would need to be submitted and reviewed for eligibility, which was a one-time event but could be revised to be one time a year. Utilities Assistant Director Abendschein addressed the criteria on the website for Project PLEDGE, which may need to be adjusted. He noted that proof of unexpected hardship may need to be redefined. Chair Burt indicated that staff should investigate who would qualify and how and suggested there be more promotion. He wondered staff should return to Council with revisions to the program. Utilities Strategic Business Manager Yuan noted they could bring that to Council on Monday. Assistant City Manager Nose did not think that could be done by Monday but they could bring a referral. Discussion ensued related to Council reviewing the gas rebate and the electric proposal at the same time. Chair Burt asked the Committee if they were comfortable with the staff recommendations referenced on Slides 13 and 14. He asked staff if the Committee needed to consider alternatives. He noted that the straw vote indicated the Committee was comfortable with staff recommendations. Utilities Assistant Director Abendschein did not think alternatives needed to be considered. Assistant City Manager Nose summarized that the Committee was in favor of Option 2 in relation to the water rates, that the Committee agreed with the staff recommendation related to the wastewater rates, and that the Committee was in favor of the gas proposal with some discussion concerning 15% versus 18% for the natural gas transfer. Chair Burt declared there would be a vote concerning transferring an amount for FY2022 to the General Fund for FY2024. MOTION: Chair Burt moved, seconded by Council Member Lythcott-Haims, for a 15.5% Gas Utility transfer for FY2022 to the General Fund in FY2024. Vice Mayor Stone voiced that he supported 18%. SUMMARY MINUTES Page 21 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 MOTION PASSED: 2-1, Stone no Chair Burt noted that the Committee agreed with the Staff Report. There was a question of a referral to staff for the electric rebate. He asked if the Committee agreed with Option 2 with an additional request that staff go to Council with recommendations on an additional amount to Project PLEDGE with modifications to the eligibility criteria. Council Member Lythcott-Haims was not necessarily in favor of Option 2. She wanted to learn about Project PLEDGE, and depending on that, she may be interested in Option 1, a 20% rebate to all. Chair Burt supported Option 2 with a request that staff make a recommendation to Council to increase the amount to Project PLEDGE and to broaden the eligibility criteria. He asked for a second. Chair Burt asked if there was an alternative proposal. Utilities Director Dean Batchelor pointed out the differences in rebate amounts using the 20% versus the flat rate. Chair Burt was expressed why he was interested in Option 2 over Option 1. He stated that the Project PLEDGE program could be strengthened under either option. Council Member Lythcott-Haims was concerned that a rebate of $27 would not be sufficient for those with lower income and a high utility bill. Assistant City Manager Nose added that Utilities Assistant Director Abendschein’s suggestion to allocate a dollar value and letting folks self-select might bridge all the intentions. She suggested an option for self-selection and allocating funds toward a program and having staff return with one-year amendments that would allow folks to reach the criteria. She indicated that the Committee may chose Project PLEDGE instead of Option 1 or 2. Council Member Lythcott-Haims was interested in Project PLEDGE if it helped achieve the goal, and she suggested that the website address the present need. Vice Mayor Stone asked how people would learn of Project PLEDGE. Utilities Assistant Director Abendschein voiced that Project PLEDGE was not promoted well enough. The Customer Service Manager needed to be consulted to determine if this was an appropriate channel. SUMMARY MINUTES Page 22 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Council Member Lythcott-Haims stated, if this was something that should also be done for gas, that Project PLEDGE would not be before Council on Monday. Assistant City Manager Nose declared that on Monday Council would see similar options, and if Council’s direction was to rework [inaudible], it would be valid feedback from Council to staff. She noted that gas had a higher impact, and she believed the flat rate for the gas rebate would be about $80 per customer. Chair Burt was concerned that those with modest income would not opt in to Project PLEDGE. He did not believe Project PLEDGE would address those in need and those in desperate need, and he wanted to address both groups. Vice Mayor Stone acknowledged that was also his concern. He wondered what a rebate might look like if the floor was $24 or $25 with some tiered reductions above that. Assistant City Manager Nose remarked that the decision could be deferred and taken up again by the Committee as part of the budget discussions in May. She noted that there was not anything slated for the April 4 agenda, and that packet would need to go out Thursday of this week, which was not feasible. Chair Burt was agreeable to not having it in a packet, although it could be in a late packet. Utilities Director Batchelor indicated they could provide a packet by March 30. Utilities Strategic Business Manager Yuan [inaudible] Customer Service Manager. Council Member Lythcott-Haims queried if Project PLEDGE information could be included with customers’ bills. Utilities Assistant Director Abendschein answered it would be manageable to include Project PLEDGE information in bills. He declared that there were also other options for promoting the program. Utilities Director Batchelor would speak with Customer Service, but he thought they could contact customers who were in arrears. He believed there were ways to identify customers in need. Chair Burt asked staff to come back on April 4 with a set of options or a recommendation. MOTION: Council Member Lythcott-Haims moved, seconded by Chair Burt, to recommend staff’s recommendation for the Electric Utility Rate Item and to defer the decision to the April 4 meeting regarding the Electric Rebate. SUMMARY MINUTES Page 23 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 MOTION PASSED: 3-0 MOTION: Council Member Lythcott-Haims moved, seconded by Vice Mayor Stone to recommend the City Council adopt a resolution approving 1. FY 2024 Water Utility Financial Plan, including 2% water distribution rate increase 2. Up to a $3.746 million transfer from the Capital Improvement Projects Reserve to the Operations Reserve in FY 2023 3. Up to a $3.0 million transfer from the Rate Stabilization Reserve in FY 2023 4. Increasing Water Utility Rates Via the Amendment of Rate Schedules W-1, W-2, W-3, W- 4, and W-7 5. The Fiscal Year 2024 Wastewater Collection Financial Plan, including 9% overall rate increase 6. Transfer up to $3.178 million from the Capital Improvements Projects Reserve to the Operations Reserve in FY 2023 7. Transfer up to $342 thousand from the Rate Stabilization Reserve to the Operations Reserve in FY 2023 8. Increase Wastewater Collection Utility Rates Via the Amendment of Wastewater Collection and Disposal Rate Schedules S-1 (Residential), S-2 (Commercial), S-6 (Restaurant) and S-7 (Industrial Discharger) 9. Approving the fiscal year (FY) 2024 Gas Utility Financial Plan (Linked Document) 10. Approving the Fiscal Year (FY) 2024 Electric Financial Plan modified to reflect the transfers and rate actions listed below in sections 2, 3, and 4; 11. Approving the following transfers at the end of FY 2023: a. Up to $12 million from the Supply Operations Reserve to the Distribution Operations Reserve; and b. Up to $4.5 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and 12. Approving the following transfers in FY 2024: a. Up to $10 million to the Electric Special Projects (ESP) reserve from the Supply Operations Reserve; and b. Up to $8 million to the Hydroelectric Stabilization Reserve from the Supply Operations Reserve; and c. Up to $3 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and 13. Approving the following rate actions for FY 2024: a. Deactivation of the hydroelectric rate adjuster from customer bills 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) of 21% effective July 1, 2023; SUMMARY MINUTES Page 24 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 c. An increase to the Export Electricity 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 to reflect modified distribution and commodity components, effective July 1, 2023. 14. Defer Rebate decision to April 4 meeting MOTION PASSED: 3-0 MOTION: Chair Burt moved, seconded by Council Member Lythcott-Haims to recommend the City Council adopt a resolution approving 1. Approving the Fiscal Year (FY) 2024 Electric Financial Plan modified to reflect the transfers and rate actions listed below in sections 2, 3, and 4; 2. Approving the following transfers at the end of FY 2023: a. Up to $12 million from the Supply Operations Reserve to the Distribution Operations Reserve; and b. Up to $4.5 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and 3. Approving the following transfers in FY 2024: a. Up to $10 million to the Electric Special Projects (ESP) reserve from the Supply Operations Reserve; and b. Up to $8 million to the Hydroelectric Stabilization Reserve from the Supply Operations Reserve; and c. 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. Deactivation of the hydroelectric rate adjuster from customer bills 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) of 21% effective July 1, 2023; c. An increase to the Export Electricity 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 SUMMARY MINUTES Page 25 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 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 to reflect modified distribution and commodity components, effective July 1, 2023. 5. Defer Rebate decision to April 4 meeting MOTION PASSED: 2-1, Stone no 5. Recommendation to the City Council to 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 Senior Resources Planner Jim Stack shared slides and requested the Committee move forward with the recommendation. He noted that his presentation would address the current electric supply portfolio and how the new resource would interact and affect that; electric load projections through 2045; California energy market dynamics in California through 2045; and particulars of the contract and how the economics of it were being evaluated. He shared a slide related to the supply portfolio and discussed the energy off-peak and on-peak load balances. He explained that the geothermal project would help make up for deficits. He discussed the load and supply and the annual load resource balance through 2045. They were projecting a modest level of load increase. He noted that the slide may have overstated the contribution hydro resources would provide on average. He noted that some contracts would be expiring the end of this decade, and they may extend the contracts, but there had not yet been discussions with the suppliers. He declared that the load was increasing and new suppliers would be needed in the coming years, and resources of this Item would help make up for that. Regarding the average local and system capacity balances, he noted that, in addition to the energy from the Geothermal Project, they received resource adequacy (RA) capacity. Every year they were required to procure a certain amount of local system and flexible capacity, which he detailed, and noted there was a substantial deficit every year in local capacity, which needed to be purchased from other suppliers, which had become scarce and expensive. He clarified what the benefits of the geothermal contract would be related to RA. He spoke of electric load projections through 2045, and they expected roughly 25% growth by then. He shared insights and forecasts of the overall energy markets in California and noted that the geothermal resource could produce around-the-clock generation. He mentioned that the contract would provide RA. The contract would be for 12 years between NCPA and Calpine, starting in 2025. He discussed the geothermal megawatts it would provide and Palo Alto’s share of the total and the fixed contract price. He declared that the value of the contract would include energy, the REC, the RA capacity. He discussed energy, REC, and RA price projections, and noted that the contract would provide a monetary value to the City. They would be getting new results related to the Integrated Resource Plan from the consultant in the coming weeks, which would SUMMARY MINUTES Page 26 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 probably be shared with the Committee in the late summer or fall. He specified that the baseload profile and the geothermal resource would be a good fit for the City’s portfolio and that the locked-in contract price was attractive. As for next steps, the contract would be between NCPA and Calpine and third-phase agreements for all NCPA members sharing the contract. He noted that the UAC unanimously recommended approval of the contracts. They planned to go to Council the middle of April if the Finance Committee recommended it for approval, and the deadline for approval was the end of April. The contract would start in 2025. Vice Mayor Stone questioned why solar power would decline near the end of 2045. He voiced that the contract seemed to provide good rates and a good opportunity for the City. Senior Resources Planner Stack explained that they were showing contracts phasing out, although there may be opportunities to extend the contracts. Council Member Lythcott-Haims wanted people to know that the higher load was planned. She asked for an explanation of RA. She inquired why the total value would exceed the cost of the contract to $550K in the first year and $1.1M in each of the remaining 10 years. Senior Resources Planner Stack explained RA, which included local, system, and flexible, which he detailed. Related to exceeding the cost of the contract, he clarified why there would be a shift in year three. Chair Burt supported the contract. He requested a forum for a closer look by the Finance Committee and the S/CAP Committee. He commented that he had about 20 or 30 questions. He was interested Peninsula Clean Energy’s approach to the topic, which could possibly be integrated with Palo Alto’s approach and in moving in the direction of local in-city capacity related to reliability advantages. He asked if they could get more of the project. He mentioned that the net value of baseline power was an interesting concept. He questioned whether the hydro sources were considering increasing pumped hydro capacity to improve baseline power out of hydro. Senior Resources Planner Stack noted that the UAC recommended getting more of the project, but there was a lot of demand from other members of the contract. He would have to defer the question concerning hydro sources increasing pumped hydro capacity to Senior Resource Planner, Utilities, Lena Perkins. He stated there had been discussions a few years ago of increasing the reservoir size. He did not know if that conversation had proceeded or if there had been discussions related to the development of new pumped hydro projects. Chair Burt requested there be a future update related to pumped hydro capacity. Public Comment There were no requests to speak. SUMMARY MINUTES Page 27 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 MOTION: Chair Burt moved, seconded by Council Member Lythcott-Haims to recommend the City Council: 1. Authorize the City Manager, or their designee, to execute a Third Phase Agreement 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. MOTION PASSED: 3-0 Future Meetings and Agendas Chair Burt suggested there be a study session/briefing on April 4 with Senior Resources Planner Jim Stack to better understand the balance of the information in his report. Staff did not need to put out another Staff Report. Senior Resources Planner Jim Stack confirmed he could participate in a study session on April 4. They were planning to take the consultant’s initial findings of their analysis of Palo Alto’s portfolio to the UAC in June and invited the Committee to that presentation. Assistant City Manager Kiely Nose indicated that staff’s normal process for this would be to draft a memo to arrange the conversation for the Committee or the Council. Chair Burt noted that the Committee wanted to go through the presentation methodically and ask questions. Assistant City Manager Nose clarified that staff would provide just the presentation. It would be agendized for just the presentation and it would be reissued. SUMMARY MINUTES Page 28 of 28 Finance Committee Meeting Summary Minutes: 3/21/2023 Adjournment The meeting was adjourned at 10:04 P.M.