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HomeMy WebLinkAbout2025-04-15 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 20 Special Meeting April 15, 2025 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room and by virtual teleconference at 5:30 PM. Present In-Person: Burt (Chair), Lythcott-Haims, Reckdahl Absent: Public Comment None Action Items 1. Recommendation to the City Council to Adopt a Resolution Approving the FY 2026 Electric Financial Forecast, including Transfers, Amending Rate Schedules E-1 (Residential Electric Service), E-2 (Residential Master-Metered and Small Non- Residential Electric Service), E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service), E-4 (Medium Non-Residential Electric Service), E-4-G (Medium Non-Residential Green Power Electric Service), E-4 TOU (Medium Non-Residential Time-of-Use Electric Service), E-7 (Large Non-Residential Electric Service), E-7-G (Large Non-Residential Green Power Electric Service), E-7 TOU (Large Non-Residential Time-of-Use Electric Service), E-14 (Street Lights), E-16 (Unmetered Electric Service), E-EEC-1 (Export Electricity Compensation), and E-NSE-1 (Net Metering Surplus Electricity Compensation) Lisa Bilir, Senior Resource Planner, addressed the Committee. A 5.1% overall rate increase was proposed for the electric utility (11% distribution rate increase combined with a 1% supply rate increase). Drivers for this increase included the electric utility’s investment in grid modernization, recovering reserves from the 2020-2022 drawdowns, rising transmission costs and renewable energy targets, and an expected increase in Resource Adequacy costs while Resource Adequacy sales revenues decline. The proposed rates included a new warehouse and laydown yard for grid modernization, replacement of emergency generators, increased General Fund transfer estimates to reflect grid modernization asset value, climate action budget, and the supply forecast update. Rates were proposed to increase 6% for FY 2027, 8% for FY 2028, 8% for FY 2029, and 6% for FY 2030. SUMMARY MINUTES Page 2 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 Palo Alto’s residential and commercial rates were an average of 51% lower than PG&E. Palo Alto’s residential rates were an average of 22% higher than Santa Clara. A slide was shown of electric cost and revenue projections. The capital investment for grid modernization was modeled as a large spending item in 2025 and appeared as 0 in 2026 because of reimbursement from bond proceeds but the pattern of spending was increasing in 2025 and 2026. The electric supply operating reserve projections showed a large increase in 2023 due to a successful litigation against the Bureau of Reclamation of $24 million in overcharges. The operations reserve will be kept within the guideline range throughout the forecast period. The electric distribution operating reserve projections showed a decrease in 2023. Staff did not complete a transfer at the end of 2023. The risk assessment dotted line reflected key risks such as the largest fluctuation in the Utility’s revenue during the last 10 years or a 10% increase in necessary CIP. The reserve target was set in accordance with the reserve guideline policy of 90 days of operating reserves and commodity cost. The reserve maximum was 30 additional days and the minimum was 30 fewer days. A chart was shown of the impact of the electric bill rate increase based on the customers’ usage level. Because of the monthly service charge, customers with the lowest usage have a larger percentage increase on their total bill. Catherine Elvert, Utilities Communications Manager, spoke about the communication strategy to inform customers about the reasons for the rate increases and the benefits to customers. Customers will be notified about their ability to engage in the public participation process. The Utility’s goals were to ensure continued safe, reliable, environmentally sustainable, and cost- effective operations. Safety was the top priority, so there was a focus on maintenance and replacement of aging infrastructure. Some of the reasons for the electric rate increase were increasing costs, upgrades to the City’s distribution system, State mandates for clean energy, capital improvement, and replenishing the Utility’s financial reserves. Despite the proposed rate increases, Palo Alto’s electric rates were around 50% to 60% less than PG&E and roughly half the cost of Community Choice Aggregators such as Silicon Valley Clean Energy. Community members will be informed about what the City was doing to keep costs down and utility rates low, efficiency programs and services to keep bill costs low, and financial assistance for those who need it. Earlier this month, the UAC voted unanimously to support staff’s recommendation for the Finance Committee to recommend that the City Council adopt the following resolution: (1) Approve the Fiscal Year 2026 Electric Utility Financial Forecast shown in the staff report and attachments; (2) approve the transfer at the end of FY 2025 of up to $5 million from the electric utility supply operations reserve to the distribution operations reserve; and (3) amend rate schedules in Attachment B effective July 1, 2025. [audio lost 18:24-25:05] SUMMARY MINUTES Page 3 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 Referring to Page 18 of the Staff Report, Council Member Lythcott-Haims wondered why it was okay to transfer $5 million from the supply operations reserve to the distribution operations reserve when there were separate costs passed through to the ultimate user for buying the commodity, transporting it, and the cost of distribution through the City’s systems. Ms. Bilir, Senior Resource Planner, replied that the reserve management guidelines outlined when it was okay to transfer money between the two operations reserves, when it required Council approval, and when staff could transfer it themselves based on previous Council approval. Not every dollar in supply operations was related to commodity nor was every dollar in distribution operations related to distribution. Dave Yuan, Utilities Strategic Business Manager, thought staff separated supply and distribution as a protection from the risk of deregulation of electric utilities. Council Member Lythcott-Haims asked how conservative or aggressive we were or if we intended to be more aggressive in our efforts to attain revenue by selling excess Resource Adequacy (RA) to third parties. Jim Stack, Senior Resource Planner, managed the supply portfolio and said we were as aggressive as possible while complying with our obligations imposed on us from the California Independent System Operator (CAISO). Once we have enough capacity to meet our peak demand every month plus a 15% margin, we sell the excess RA in our portfolio, trying to maximize the revenue received. Council Member Reckdahl inquired if Santa Clara had renewable energy and how Santa Clara cut costs. Karla Dailey, Assistant Director of Utilities and Resource Management, explained in what ways Santa Clara was different than Palo Alto. Santa Clara owned generation, had a large commercial customer base, and had very large data centers. Commercial customers and data centers were much less expensive to serve than residential customers. Alan Kurotori, Utilities Chief Operating Officer, was formerly employed by the City of Santa Clara and offered the following insights. Santa Clara had natural gas generation in the city and owned other generation resources outside the city. Santa Clara was about six or seven times the size of Palo Alto. Santa Clara had about 50 or 55 data centers. Santa Clara built up their system with manufacturing, so they were able to leverage their excess ability and capacity in addition to leveraging the efficiency in serving data center customers, resulting in more affordable rates. About 20 percent of Palo Alto’s load was residential, 80 percent was commercial/industrial. Santa Clara was about 5-6 percent residential. Palo Alto had 100 percent carbon-free electricity whereas Santa Clara did not. Chief Operating Officer Kurotori offered to look up how much of Santa Clara’s excess RA was sold in the market. Palo Alto compared very well to other public-owned utilities throughout the state. Council Member Reckdahl queried if Palo Alto had data centers coming online, who paid for the required infrastructure costs, and what was staff’s opinion about data centers. Assistant Director Dailey replied the Tesla Data Center was ramping up and a couple other customers were contemplating data centers. The Tesla agreement included cost sharing on the needed upgrades. The other data centers were hypothetical, so no agreements were in place yet. Chief Operating Officer Kurotori mentioned the Utility was actively engaging with CAISO on getting a SUMMARY MINUTES Page 4 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 second transmission corridor to bring additional capacity to Palo Alto, although it will take several years. Data centers in Palo Alto were of a different scale than Santa Clara. Palo Alto’s system limit peak was around 160-180. Data centers in Santa Clara were in the 50-100 megawatt range, a much larger capacity. Palo Alto’s strengths were brain trust, lab space, and firms having their information data located locally. Staff was performing internal studies on this topic to bring back to the UAC in response to information requested for their annual work plan. In answer to Council Member Burt’s question, Assistant Director Dailey stated SVP was 28 percent gas and 19 percent unspecific market power. Council Member Burt asked about the desirability of data centers, if staff believed it was a favorable opportunity. Chief Operating Officer Kurotori replied that Palo Alto had entered agreements that ensured the customer paid its fair share to connect to the City in developer charges or by paying for capacity and infrastructure improvements. The Utility would make sure any new customers such as a large data center or a larger load was paying their share, as well as staff would evaluate the risks associated with new resources. Council Member Burt pointed out there were General Fund benefits and community benefits such as fire coverage. Council Member Reckdahl noticed on the staff report the net metering rate had decreased from $0.14 to $0.10 and asked how the new rate compared to 5 or 10 years ago, and if there was a plan to have local batteries store excess solar. Mr. Stack, Senior Resource Planner, answered the net metering rate had been decreasing. As more solar generation was built in California, it pushed down the value of generation during solar hours. As a result, the generation produced by rooftop solar in Palo Alto was becoming less valuable because of the saturation of solar generation. The decrease in the net metering rate from last year to this year was due to an updated methodology for calculating the rate, now using an hourly model to track the hourly value of generation. One or two battery storage projects were being actively pursued with a proposal expected in the next few months, which were larger facilities not within the city but in an advantageous region with a lot of solar generation. The Utility would have access to the solar generation, can charge from the grid where the battery is sited, and discharge to the grid during pricier hours to recover the value of generation. Mr. Stack, Senior Resource Planner, stated staff was evaluating storage within city limits but it was more complicated to obtain siting permits and land. Council Member Reckdahl inquired if the program had been fully subscribed for selling generated electricity to the Utility. Mr. Stack, Senior Resource Planner, replied the CLEAN feed- in tariff program had about 160 kW of capacity remaining under the solar limit for the $0.165 rate. The CLEAN program did not have a cap on the total subscription but the contract rate will drop down to the avoided cost of about $0.08 or $0.09/kWh when the 3 MW cap was reached. From an environmental standpoint, Council Member Reckdahl asked if it was permissible with our cost of service to have a slightly higher rate instead of a fixed monthly bill amount to give customers more incentive to conserve. Ms. Bilir, Senior Resource Planner, answered the monthly flat charge was the result of the cost of service analysis (COSA) completed last year SUMMARY MINUTES Page 5 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 and put into effect, so there was no option to reduce the charge but it could be evaluated during the next COSA update. Council Member Burt commented that local storage provided a value in Palo Alto’s reliability and resiliency whereas remote storage had economic benefits and provided resiliency for the state grid. Council Member Burt asked if improving local reliability and resiliency was included in staff’s evaluation of the pros and cons of storage location. Last year, an update was brought to the Council with a graph showing Palo Alto had a modest decline in reliability in recent years and PG&E had a significant decline. Some residents and commercial ratepayers were nervous about moving toward electrification because they would no longer have gas as an alternative. During the study session at that time, Council Member Burt recalled he requested staff to come back after looking at what was needed to set goals to restore to the City’s 10-year reliability average and what goals to set commensurate with electrification to provide ratepayers with greater reliability. Council Member Burt recalled a discussion about staff exploring the prospects for storage at the Hanover Substation. Assistant Director Dailey stated that work was being done and more information will be brought to the UAC and the Council regarding the Reliability and Resiliency Strategic Plan. Chief Operating Officer Kurotori stated that part of the plan and grid modernization included updating the Colorado Receiving Station and East Meadow Substation, so staff will perform an in-depth study on the possible placement of utility-scale storage at substations, what circuits it will serve, as well as the benefits of energy arbitrage, resiliency and reliability. Council Member Burt thought it was important to have an estimate or range as to how much grid modernization was anticipated to improve reliability. Referring to Page 15, Council Member Burt saw the debt issuance of $186 million and $229 million was the estimate for grid modernization on Page 14. Council Member Burt recalled a clarification made last year that 40 percent of the grid modernization cost had to be done anyway to replace equipment nearing the end of its useful life, so the remainder of the $229 million was the net cost of increasing capacity for electrification. Chief Operating Officer Kurotori stated the benefits of grid modernization included replacing aging infrastructure with strong poles and new transformers. Aging transformers could fail; new transformers increased reliability as well as added capacity. The Utility had a more assertive program of line clearing (tree trimming) to ensure best practices and to bring customers back sooner when outages occur. As part of grid modernization, staff was looking at tools to help analyze the system using AMI and other grid technologies to narrow down the location of outages, which helped to bring customers back earlier. In the future, staff could bring back some results from the studies they were doing and provide metrics. Council Member Reckdahl knew of cases where a traffic accident or a Mylar balloon knocked out a huge area, so he wondered if grid modernization included changing the structure of the grid to make outages smaller. Chief Operating Officer Kurotori replied that as part of re- envisioning the grid, staff was looking at rebalancing feeders in terms of how areas were served SUMMARY MINUTES Page 6 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 and how many customers were served, and looking at areas to put remote devices to isolate issues sooner and bring customers back online in less amount of time. The grid modernization plan had phases. Staff can bring back data on outages, comparing before and after the new systems are built. Council Member Burt recalled an unusual spike in outages in 2021 and 2022. Several causes were identified as contributing to having more outages, one of which was low staffing levels in utility dispatch and response crews. Council Member Burt thought it was important to repeatedly communicate to the community that the City’s $229 million investment in grid modernization would provide good reliability, the measures that were done and were planning on being done to facilitate electrification and increase reliability. Referring to Slide 2, Council Member Burt asked how rising renewable targets affected the City. Mr. Stack, Senior Resource Planner, explained that the City had to achieve the State’s RPS level, which he thought was currently around 45 or 46 percent and it increased every year until it reaches 60 percent in 2030. Palo Alto achieved carbon neutrality using a lot of out-of-state lower cost resources; however, about 90 percent of the resources used to achieve RPS compliance had to come from in-state bundled resources, the remainder could be large hydro or out-of-state renewables under the City’s carbon neutrality rules. The City sold its surplus of high-value in-state renewables and replaced them with lower cost out-of-state renewables but will have less surplus to sell over time because of the increasing amount needing to come from more expensive in-state bundled resources. Council Member Burt told staff it was important to explain that trend to the Council. Council Member Burt asked for more details on Palo Alto signing on to a power purchase agreement (PPA) through NCPA for a new solar project with associated storage. Mr. Stack, Senior Resource Planner, stated a couple new projects were being evaluated (one combined solar and storage, the others were separate solar and storage projects) to replace contracts set to expire in the next 5 to 10 years and to add capacity to meet additional data center load that has started to come online and was projected to continue coming online over the coming years. Solar PPAs about 10 years ago were priced in the $70-$80/MWh range. Prices for new solar coming online were $45-$50/MWh. Chief Operating Officer Kurotori reminded staff that some contracts were being actively negotiated, so he would rather not have a full discussion on those negotiations or what we were seeing in the market. The RPS goals were 52 percent for 2027 and 60 percent for 2030, so Palo Alto needed to add renewables and RA to ensure supply coverage for the city. The planning reserve margin was anticipated to increase from 15% to 17% and potentially higher, depending on regulations. Council Member Burt said he had previously asked for longer term projections to model what will happen as older, more expensive renewable contracts were retired and replaced with cheaper ones, in addition to expanding supply presumably at a lower average cost than our oldest contracts or than the average of our portfolio. Council Member Burt assumed commodity costs would go down on average. Council Member Burt wanted a projection of the portion of electricity cost attributable to our PPAs, what will happen if the amount of supply SUMMARY MINUTES Page 7 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 stayed the same and was replaced over the next 5-10 years with new contracts and the range of projected costs, and what will happen if we add capacity for electrification. Chief Operating Officer Kurotori stated the question arose in the Climate Action Committee and staff will bring it back to that group at the next meeting. Mr. Yuan, Utilities Strategic Business Manager, clarified the estimated total cost for grid modernization was about $300 million. The $229 million was a forecast between FY 2026 to FY 2030 but there were some dollars budgeted past FY 2030. About 40 percent ($120 million) was to replace existing CIP for infrastructure over 50 years old. Mr. Yuan guessed the new equipment lifespan was between 50-75 years. Council Member Burt pointed out it was not a massive investment when you amortize it over its life. Referring to Figure 2 on Page 7, Council Member Burt noted 2024 and the current fiscal year had shown growth and he was interested in having it broken down in the future between residential and commercial to understand the impact of building and vehicle electrification, trends that were important especially for S/CAP. Looking at the dotted line, the projection for the base had increased from the previous long-term forecast but the rate of decline was projected to stay the same, which Council Member Burt was skeptical of. Assistant Director Dailey explained that a conservative forecast was used for financial planning. When setting rates, staff wanted to make sure the revenue requirement was covered and not overestimate the amount of sales. In a month, staff will start the process of updating next year’s forecast, taking into account the latest information. Council Member Burt wanted to emphasize that Palo Alto was half the cost of PG&E on the cost comparison. It was noteworthy that the Community Choice Aggregators (CCA) such as Peninsula Clean Energy and Silicon Valley Clean Energy were almost the same cost as PG&E yet they had a lower cost structure than PG&E. In comparing Palo Alto to neighboring communities, Council Member Burt wanted to see a comparison of the portion of gross revenue being invested into electrification programs. Ratepayers who signed up to CCAs were willing to pay more for its greener power, therefore Council Member Burt wondered what Palo Alto’s ratepayers were willing to fund for electrification. Council Member Burt recalled the Palo Alto Green program from 15 years ago had 20-some percent of ratepayers willingly pay a premium for offsets. At a conference, Council Member Burt spoke to someone from the East Coast who said our Palo Alto Green program had triple the subscription rate of any other comparable program in the country, although Council Member Burt had not verified that statement. Going forward, Council Member Burt wanted the comparisons to include Alameda and the CCAs because the only muni we were comparing ourselves to was the outlier with dirtier power. Looking at Attachment E, Council Member Lythcott-Haims did not see an example of what we were doing to inform electric customers about the PG&E comparison, and she wondered how a highly technical message could be explained with language most people could understand. Council Member Burt saw information in a bill insert recently. Ms. Elvert, Communications Manager, said staff was reiterating the environmental benefits Palo Alto customers receive despite our rates being much lower than PG&E. A variety of communication channels was SUMMARY MINUTES Page 8 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 utilized, including utility bill inserts if you receive a paper bill in the mail, via email with your e- bill statement, as well as through other print and digital means. There will be a City blog post and website to tell the story about the rate changes with the key messages including how Palo Alto compared to PG&E and the CCAs as well as the benefits. Staff will continue to explore other creative, innovative ways to share the messaging. In the past, staff may have shied away from providing comparisons in its outreach. There were benefits and reasons why rate increases were necessary. The benefits of electrification included enhancing the reliability of our electric grid. Messaging included the measures the City was taking to keep costs low despite rising costs everywhere else from inflation, such as negotiating contracts for renewable energy and selling surplus energy or Resource Adequacy to bring in additional revenues. Council Member Lythcott-Haims asked if today’s short-term message connected the dots to the longer-term message of 5, 10, and 20 years. Ms. Elvert, Communications Manager, answered yes, the strategy looked at the big picture of long-term investment in the ultimate good for the community. The electric grid modernization project will take many years and it will take many years for the City to continue to drive homes and businesses toward electrification. Council Member Burt pointed out that Palo Alto’s green electricity and low rates meant the return on investment when our ratepayers electrify was a better return than with PG&E because they pay twice as much for electricity when putting in a heat pump. Although one of the downsides of cheap electricity was the return on investment for putting in rooftop solar had less value. Our community has a high solar adoption rate. Battery storage with solar is not cost effective but almost everybody putting in solar these days was also putting in storage because they place a high value on reliability and resiliency for their homes, which Council Member Burt felt needed to be recognized in the City’s decision making process. Staff addressed Council Member Burt’s questions about Table 2 on Page 4 regarding actuals versus prior year’s forecast. Lower supply costs were primarily because we had a large hydro year. Mr. Stack, Senior Resource Planner, stated the long-term projections for an average hydro year were reduced by around 20 percent in the past few years largely due to climate change because we had seen lower generation given the amount of precipitation year over year. Council Member Burt wanted to see a graph demonstrating Mr. Stack’s explanation. On Page 9, Council Member Burt read that if demand increased we will need to buy more market supplies and RECs, and he wanted an explanation as to why we would not instead have additional PPAs of renewables. Mr. Stack, Senior Resource Planner, replied in California it typically took about four or five years for a new project to come online once you get a contract in place for it. Council Member Burt pointed out that if we underestimated growth, we were not locking in contracts as soon as we otherwise would have. Chief Operating Officer Kurotori stated that in response to Council Member Burt’s information request made as part of the S/CAP, staff will bring back a chart of existing PPAs by type (solar, geothermal, small hydro, large hydro), a projection under varying load predictions and layer in the renewable requirements. Staff was studying the addition of new PPAs. Council Member Burt stated that in determining the value of a PPA, one might be more expensive to buy but the potential to sell SUMMARY MINUTES Page 9 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 surplus goes up. Chief Operating Officer Kurotori explained there were market forces and other requirements, so the price varied and he did not want to presume something will be a high revenue source the more we buy. Staff will deliver a presentation at the next S/CAP meeting in response to Council Member Burt’s previous question. Public Comment: 1. Regarding transfers between utilities, Hamilton H. did not want our electric rates or other utility rates increased to compensate for a new money-losing fiber utility. The majority of municipalities who have added residential fiber have lost a lot of money, so Hamilton H. wanted to make sure there was no way that money from the other utilities could be transferred into fiber. Hamilton H. heard the second corridor will add more capacity, which concerned him because you can either have more capacity or full redundancy but you cannot have both unless the redundancy was increased on the original corridor as well. You must have the ability to handle peak capacity on both corridors so the City does not have to decide whose electricity to turn off if either corridor goes out. For 20 years, the community has pushed for full redundancy on a second corridor and Hamilton H. was concerned that staff would use the second corridor for capacity instead of redundancy. 2. Before the priorities retreat, Jennifer wrote an email to Council about performance metrics. Jennifer’s observation was that the City did not have good documentation about the relative value of long-term decisions to increase or decrease an investment. Jennifer believed there was a lack of reporting on this for adequate community engagement, so she will follow up in writing about the need for improving communications about the City’s relative allocations to its priorities. Council Member Burt asked for staff’s response to the question raised about the second transmission corridor. Chief Operating Officer Kurotori replied that as part of the CAISO’s transmission application process, staff provided the high load growth scenario which generates the project to bring additional capacity. Staff was working with the CAISO and partnering with PG&E on a second transmission corridor using a different connection to the CAISO grid and a different route to bring energy supply into Palo Alto, going to the Metcalf Energy Center in South San Jose and to Fremont. Staff looked at transmission planning as an N-1 scenario. If one of your largest lines goes out, you can still provide power when the redundancy and reliability factor are built into the system, similar to having four tires and a spare. Referring to Figure 6, Council Member Burt asked what was driving the big jump in administrative and other labor costs from FY 2022 to FY 2024. When we had high vacancy levels in Utilities, we were contracting out more. Now that those vacancies have been filled, Council Member Burt inquired why the staffing increase did not offset a decrease in contractors under Operations. Mr. Yuan, Utilities Strategic Business Manager, explained some of the labor was going up because six to eight FTEs were added in Engineering and Operations for electrification, which was reflected mostly in Operations. For grid modernization, there were contracting costs for VIP and MP Nexlevel helping with the construction and their engineers were designing the SUMMARY MINUTES Page 10 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 phasing of the project. Previously, there were eight vacancies for linespersons and four or five vacancies for assistant operators; currently, there was one vacancy of each of those job types. Mr. Yuan, Utilities Strategic Business Manager, did not have the numbers for Figure 6 but some of it he thought was due to administrative costs with IT and he did not know if the equity transfer was part of it. Ms. Bilir, Senior Resource Planner, mentioned it was seen across all the utilities. Council Member Burt asked if staff could follow up with a response. Kiely Nose, Assistant City Manager, stated the general cost of doing business was increasing. Central costs have grown at a greater pace than typically expected during those years because of additional investments, for example more IT investments in alignment with the City Auditor’s recent risk assessment. Staff refined the cost allocation mathematical formula over the last few years to make sure internal service charges were more accurately allocated to each of the enterprise or non-General Fund activities, which increased the costs in the utilities and refined the revenues to the General Fund to have better alignment. MOTION: Councilmember Reckdahl moved, seconded by Lythcott-Haims, to recommend that the City Council adopt a resolution approving the Fiscal Year 2026 Electric Utility Financial Forecast, approve the transfer at the end of FY 2025 of up to $5 million from the Electric Utility Supply Operations Reserve to the Distribution Operations Reserve, and amend Rate Schedules effective July 1, 2025 for FY 2026: E-1 (Residential Electric Service), E-2 (Small Non-Residential Electric Service), E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service, E-4 (Medium Non-Residential Electric Service), E-4-G (Medium Non-Residential Green Power Electric Service) , E-4 TOU (Medium Non-Residential Time-of-Use Electric Service), E-7 (Large Non-Residential Electric Service), E-7-G (Large Non-Residential Green Power Electric Service), E-7 TOU (Large Non-Residential Time-of-Use Electric Service), E-14 (Street Lights), E-16 (Unmetered Electric Service) to recover capital and maintenance costs for utility pole attachments and telecom conduit, E-EEC-1 (Export Electricity Compensation) to reflect 2024 avoided cost, and E-NSE-1 (Net Surplus Electricity Compensation) to reflect current projections of FY 2026 avoided cost. MOTION PASSED: 3-0 2. Recommendation to the City Council to Adopt a Resolution Approving the FY 2026 Gas Utility Financial Forecast and Reserve Transfers, the Natural Gas Cost of Service and Rate Study, and General Fund Transfer; and 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,) and Implement a Climate Credit in FY 2026. Karla Dailey, Assistant Director of Utilities and Resource Management, stated a new cost of service analysis (COSA) was performed in compliance with the constitutional requirements of Prop 26. A COSA is performed for each utility approximately every five years. Staff explored different methodologies used in the industry and settled on a refinement of the methodology SUMMARY MINUTES Page 11 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 used in the last gas COSA in 2020. The results of the new COSA appropriately recovered cost from each customer class. As a result, the proposed rates for the G-2 customer class, the smallest businesses and multiunit residential customers, will be more competitive with PG&E. Staff worked closely with the consultant and carefully reviewed all the assumptions and calculations line by line through the COSA. Staff was in agreement and comfortable with the calculations resulting from this study. Staff’s proposal was supported by the Utilities Advisory Commission (UAC). The UAC recommended using gas Cap-and-Trade reserve funds to offer a climate credit to residential customers who would be impacted more than other customer classes by the new cost of service allocation. Those customers were better positioned to take advantage of electrification programs offered by the City. It is much easier to electrify single family homes than small businesses or multifamily residences. Lisa Bilir, Senior Resources Manager, provided an overview of the residential median bill projections. The median residential gas customer will have a 22% ($15.20/month) proposed impact, depending upon the usage level and customer class. The UAC’s recommendation was to provide a one-time credit of $73.20 to residential G-1 customers, lowering the impact for those customers to 13% in 2026, which would cost about $1.6 million from the Cap-and-Trade reserve funds. If the City used those funds for electrification, it was enough to fund whole-home electrification incentives for about 182 homes. The overall utility bill increase was 11% but with the one-time climate credit it was 9%. A 5.4% overall average gas rate increase was proposed, which varied based on customer class and usage level. Small residential master-metered customers will have a 53.6% reduction in their monthly bill. Some of the drivers for the rate increase were $2.2 million to replenish reserves, $1.6 million for operating expenses ($1.4 million for labor and the remainder for allocated charges, cross-bore and other mandatory programs, debt service, and transfers), and $0.7 million for the General Fund transfer. A $16.5 million federal grant was expected, which will allow additional CIP work to be accomplished. The gas General Fund transfer in FY 2026 was estimated at $9.735 million (18% of FY 2024 gross revenue as set by Council last year). Charts were shown of the gas cost and revenue projections as well as the gas operations reserve projections. The proposed plan brings the reserve to within the guideline range and will slowly bring the currently empty CIP reserve to within the guideline range. An outside consultant was hired to perform the COSA and design rates to allocate costs to customers. As per Prop 26, gas and electric rates must represent the cost of service. Social or environmental goals cannot be used to drive gas and electric rates. Rates cannot be phased in because the adopted COSA represented the most accurate cost of service. A slide was shown of gas bill comparisons. For the overall average median residential customer, Palo Alto was currently 16 percent below PG&E. With the proposed FY 2026 rates and the UAC recommended climate credit, Palo Alto’s median residential customer will be 9 percent below PG&E. Smaller commercial and multifamily master-metered customers currently are currently SUMMARY MINUTES Page 12 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 about 200 percent higher than PG&E. As a result of the COSA, commercial and multifamily master-metered customers will be 35%, 24%, and 17% higher than PG&E. Catherine Elvert, Communications Manager, stated the key messages that will be communicated to customers include explaining the reasons for the rate increase, the benefits to customers particularly from capital improvement projects, competitive rates to other utilities in neighboring cities, what the City was doing to keep costs down, as well as City programs and services to help customers keep utility bill costs low. Installing new gas pipelines, mains, and customer sewer laterals to replace aging infrastructure as part of the gas main replacement project has been occurring in various parts of the city to maintain the integrity, safety, and reliability of the gas utility. The City has embarked on cost containment strategies such as scheduling construction projects every other year, grouping construction projects to leverage efficiencies and reduce costs, improving work flow processes, and streamlining efficiencies to save labor time and costs. The Utility needed to invest in capital infrastructure and bring the Utility’s financial reserves up to minimum guidelines. Customers will be reminded that rates were kept low for a number of years during the pandemic. The gas utility saw a huge spike in energy prices during the winter of 2022-2023, and the City wanted to protect customers from the economic hardship of sudden rate spikes. The City will engage with stakeholders through a variety of means. Ms. Bilir, Senior Resource Planner, stated the COSA consultant recommended refinement of commercial and multifamily master-metered customers into three groupings based on the customer’s meter capacity, each grouping with a different fixed monthly service charge. Based on the recent summer average usage, another recommendation was to increase the residential summer baseline for the tiered rates from 20 to 23 therms per 30-day billing period. One of the main reasons for the increase in residential customer bills was driven by the consultant’s finding that residential customer usage was peakier. Staff and UAC recommendation: The Finance Committee recommends that the City Council adopt a resolution (1) Approving the Fiscal Year 2026 Gas Utility Financial Forecast; (2) Approving the transfer of up to $1.5 million from the Gas Utility Operations Reserve to the Distribution Rate Stabilization Reserve at the end of FY 2025; (3) Approving the Natural Gas Cost of Service and Rate Study; (4) Transferring up to 18% of gas utility gross revenues received during FY 2024 to the General Fund in FY 2026; (5) Increasing distribution rates by 8.7% (for an estimated 5.4% increase to overall rates) for FY 2026 by amending rate schedules G-1, G-2, G-3, and G-10. In addition, the UAC recommended the following: The Finance Committee recommends that the City Council approve the use of approximately $1.6 million of Cap-and-Trade allowance auction proceeds to provide a one-time flat credit of $73.20 to each residential G-1 customer only in FY 2026. Council Member Reckdahl asked staff to talk more about peak units and why it affected rates. Ms. Bilir, Senior Resource Planner, stated the consultant split costs into three groups and SUMMARY MINUTES Page 13 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 allocated those costs to each customer class. Customer-related charges do not vary. Demand- related charges were based on the peakiness of usage. Energy-related charges were based on the average usage of customers. To fairly allocate costs, the methodology took into consideration that some of the system needed to be built to serve the peakiness of the demand and the distribution system needed to be built to serve the average or minimum usage. Matt Zucca, Assistant Director Water, Gas, and Wastewater, explained that peakiness determined the pipe size, so we will have larger infrastructure when there is a high gas peak. As a result of the COSA, the apportionment strategy was for a portion of the cost of the pipe to go toward the low-peak users but the primary driver of size was volume and then the peak, so another portion of the cost goes to users generating high peaks because they were disproportionately affecting the size of the infrastructure. Peaks were not affected by the reduction in overall gas consumption because peaks happen on a diurnal or seasonal basis, such as a wintertime peak or peak hours of the day. Council Member Reckdahl noted G-1 increased 49% but costs were the same. Ms. Bilir, Senior Resource Planner, said the overall change was due to the cost of service, revenue requirement, and rate design. The Tier 1 rate went up by 49% and the Tier 2 rate went down as a result of the change in rate design to support the seasonal tiered structure. Council Member Reckdahl asked staff to elaborate on the rate design change. Ms. Bilir, Senior Resource Planner, explained the three components of the COSA were to figure out the revenue requirement, allocate costs across the customer classes, and the rate design was used to recover the revenue needed to be collected from each customer class. A uniform rate or a different rate structure could have been used; however, the proposed method allowed Palo Alto to retain the current tiered seasonal rate structure but updated the method for calculating the tiered rate using the average-and-excess method. Ms. Nose, Assistant City Manager, pointed out the rate schedules had different customer classes (G-1, G-2, G-3) in addition to tiers. Tiers were based on volumetric usage. Customer classes were based on the type of customer, which have different minimum and peak requirements. Council Member Lythcott-Haims commented that the 49% increase for Tier 1 implied they were previously not billed at a rate that captured their fair share of the use of the utility. Ms. Bilir, Senior Resource Planner, would not capture it that way but explained the last COSA was in 2020 and costs have gone up by about 70% in the gas utility. Council Member Reckdahl asked why the rates would not change uniformly. Ms. Bilir, Senior Resource Planner, replied this was the recommended cost-supported method for calculating the tiered seasonal rate and it was unknown if other options were less favorable. The COSA looked at every line item and what had changed in Palo Alto, which resulted in recommended changes to the overall method. It was a similar methodology. Methodologies have developed over decades in the gas industry and this consultant took a standard approach. There were differences in how they have selected certain allocators for costs and the consultant used their best professional judgment to advise us on what those should be. Council Member Burt noted it was a different consultant within the same consulting company used in 2020, so he wondered to what extent the big increase for certain ratepayers was due to SUMMARY MINUTES Page 14 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 a different consultant’s view or philosophy of what ought to be the methodology to allocate costs. Assistant Director Dailey replied the 2025 methodology was slightly different from 2020. Staff explored with the consultant the possibility of different types of methodologies, making sure that any result was fully supported by the COSA and that it resulted in more equitable, competitive rate comparisons across the classes. In reply to Council Member Burt wanting to know the results of using the 2020 methodology updated to our current conditions, Assistant Director Dailey answered it would require a new COSA. In response to Council Member Lythcott-Haims inquiring where in the staff report it mentioned that costs in the gas utility have gone up by 70% in recent years, staff said they will try to find it. Council Member Lythcott-Haims asked staff to go into detail about what the new average-and- excess methodology does and why it achieved the desired outcome versus the methodology in place before. Ms. Bilir, Senior Resource Planner, explained that the previous COSA had a similar methodology using average and excess but it was used slightly differently for different categories of assets. The new method compared the average seasonal peak usage from each customer class with the minimum month of usage or the average usage for each customer class and split the costs across the customer classes to represent the cost of the system and usage of customers on the system. Council Member Lythcott-Haims felt the 70% cost increase was helpful to communicate the reason for the rate increase for cost recovery and allocating costs as fairly and equitably as possible. Council Member Burt asked if larger users were driving the peak flow, why was the big price increase to smaller users. Ms. Bilir, Senior Resource Planner, replied there was a decrease for small commercial and an increase for small residential. Ms. Nose, Assistant City Manager, stated the pipe sizing needed to accommodate the peakiness, so the allocation of charges was split. Ms. Nose, Assistant City Manager, said the peakiness seen in the G-1 customer class was greater than the peakiness in the G-2 customer class, which was one of the reasons for the G-1 class seeing a greater share and a greater increase in the rates than the G-2 class. Ms. Bilir, Senior Resource Planner, responded to the previous question by Council Member Lythcott-Haims. Referring to Bullet Point 1 on Packet Page 172, the COSA identified the distribution revenue requirement was now 171% of the revenue requirement in 2020. Council Member Lythcott-Haims read the increase was due to multiple years of significant inflationary pressures and planned fund contributions. Council Member Lythcott-Haims asked how much of the huge jump from FY 2019 and FY 2020 was being processed through the system in FY 2026 because she wanted to find a logical explanation for the disproportionate impact on residential happening now. Council Member Lythcott-Haims inquired if the cost increases have been gradually happening or if it happened all at once. Ms. Bilir, Senior Resource Planner, answered yes, the cost increases have been gradually occurring. There is a 5% revenue increase in 2026. Since 2021, the Utility increased all rates by the same percentage across all customer classes. The large increase in the revenue requirement over that time was a contributing factor to the large increases as a result of this COSA. SUMMARY MINUTES Page 15 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 Council Member Reckdahl did not understand the differential for one customer class, how the accounting could be so different, the underlying cost of peakiness, and why would we penalize so much for peakiness. Ms. Bilir, Senior Resource Planner, stated the consultant looked at the assets line by line and changed the allocation of some of those assets to be most current with the actual numbers of the asset and the industry standards. Those allocations lead to changes in the expense allocations across customer classes. Council Member Reckdahl pointed out the previous COSA did the same thing in 2020 with a recent update in 2022. Council Member Burt asked if the costs changed that much or was it the change in the consultant’s methodology. Ms. Bilir, Senior Resource Planner, explained one of the largest changes in this COSA was the refinement of the G-2 service charge to the different groups. For those assets that this consultant allocated based on the average-and-excess method, more of those costs were assigned based on demand. Council Member Reckdahl requested some examples of demand-based costs. Ms. Bilir, Senior Resource Planner, answered some of the largest assets were mains and services. The consultant changed how the expenses for each asset were allocated across the classes. Council Member Burt pointed out that the assets did not change radically between the COSA update in 2022 and 2025, so apparently this consultant believed this was a more correct way to allocate costs. Council Member Burt asked if the previous methodology and allocation method was still defensible under Prop 26 obligations or was the prior methodology wrong. Assistant Director Dailey would not say the previous methodology was wrong. Because there have been some changes in the system and usage among customer classes, Assistant Director Dailey did not know what the outcome would be if staff directed the consultant to do a new COSA using the previous methodology. This new COSA was more detailed, which resulted in some higher rates for single family residential but achieved more equity by subdividing the G-2 varied customer class to make sure the allocation of costs were directed to the appropriate subcategories. Council Member Lythcott-Haims stated if the 2025 COSA determined single family residential should pay more and the folks in G-2 get a reduction in rate, it implied that the construct in the past was inequitable, erring on the side of residential not paying its fair share and G-2 paying more than its fair share. Ms. Nose, Assistant City Manager, explained that costs were previously allocated on an average across the wide variety of customers in G-2. The 2025 in-depth analysis refined the G-2 customer class and broke it up into three subclasses. The lowest capacity in the G-2 class will see the greatest change in their rate whereas the highest capacity in the G-2 class will see a more marginal change in their rate because they are closer in size to G-3. It is not that one method was wrong and the other was right. Staff worked with the consultant to allocate costs more accurately among the three subdivisions of G-2. Council Member Burt saw a big spike under G-2 for the higher users and asked if it was related to higher users driving peak flows, and how did the Tier 1 big increase for the lower user correlate to peak flow under G-1. Assistant Director Dailey answered on the residential side there was also a rate design component because of the tiers, so Tier 1 had a higher increase. Ms. Bilir, Senior Resource Planner, explained the increase for the larger G-2 customers was the result of the consultant’s detailed analysis finding a correlation between customers’ usage SUMMARY MINUTES Page 16 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 patterns and meter capacities, and therefore came up with groupings based on meter capacity. The 2025 COSA was much more detailed and granular than had been done previously. Public Comment 1. This weekend, Hamilton H. sent a letter on behalf of Palo Alto Neighborhoods with cosignatories PAN co-chairs and other members of the executive committee including Becky Sanders, Sheri Furman, Jeff Levinsky, Annette Glanckopf, Arthur Keller, and CeCi Kettendorf. At the request of PAN, Hamilton H. researched this proposal extensively. Hamilton H. was concerned about the proposed 22% gas rate increase for residential customers despite only a 5% system-wide increase for all gas customers overall, caused by proposed methodology changes that unnecessarily shifted costs onto residents and made residents pay a higher percentage for the transfer of funds from the Gas Utility to the General Fund as well as penalizing peaky usage by residents heating their homes in the winter. The UAC met before the FY 2026 Natural Gas Cost of Service and Rate Study was released. The UAC did not realize they could retain the old COSA. Subdividing the G-2 category resulted in lower rates for the smallest business customers but almost tripled the rate increase for medium and large customers including large multifamily residential. Hamilton H. urged the Finance Committee to: (1) Maintain the current adopted COSA, which complied with California Prop 26 and used a widely accepted industry standard accounting method. Do not approve the new COSA. Remand the new COSA back to the UAC for further study during the next fiscal year. (2) Apply the 5% gas utility rate increase uniformly across all customer classes for FY 2026 in the same manner as previous years per the existing COSA. (3) Reject the reallocation of $1.6 million of Cap-and- Trade funds because it would delay part of the rate increase to the following year and this rebate was unnecessary if the current COSA was maintained. 2. Winter D. had concerns and a lot of questions. Winter D. agreed with Council Member Reckdahl’s comments. Hearing this conversation did not engender trust. Winter D. heard concerns, possible inequality, and not understanding the difference between the consultants. She hoped the Finance Committee did not make a decision until they get more answers and a clear understanding. Council Member Burt asked if there was an obligation to use the new COSA, if it was permissible to update the COSA this year or continue using the current COSA one more year, if staff could come back to the Finance Committee with alternative approaches, and if the prior COSA used an accepted industry methodology. Assistant Director Dailey replied both COSAs were supported by cost allocation principles. A new COSA would not be ready by June. The Council could make a decision to use the current COSA for one more year. Ms. Nose, Assistant City Manager, pointed out that any decision would result in ratepayers from a different customer class to object when they are financially impacted negatively. Council Member Burt thought it was odd to use Cap-and-Trade dollars to subsidize gas when it more naturally applied to electric. Council Member Burt inquired if there had been consideration to maybe applying half of the $1.6 million from Cap-and-Trade toward subsidizing SUMMARY MINUTES Page 17 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 the electric increase and half toward the gas increase. Ms. Nose, Assistant City Manager, replied the UAC extensively discussed the remediation options. There was some consternation over subsidizing natural gas because it did not align with the S/CAP goals; however, ultimately the UAC agreed because it was a one-time action to smooth the significant impact on that customer class, providing a year of transition for those customers to opt-in to programs subsidizing electrification. Assistant Director Dailey pointed out that using Cap-and-Trade funds for a climate credit would offset the impact on the total bill, so it was not necessarily for gas or electric. Staff had legal confirmation that Cap-and-Trade funds could be directed to one class of customers, which would go toward the residential customers that were disproportionately impacted by this gas rate increase. Council Member Burt noted a big portion of the rate increase was the $2.2 million to replenish the reserve, which would take us close to the reserve target per Slide 7. If less was allocated to reserves, it would be in the range. If we kept the reserve at approximately the same level this year, it might save over $1 million. Council Member Burt asked if it was an option to slow the rate at which we return to our reserve target. Ms. Bilir, Senior Resource Planner, responded that larger rate increases would be needed in future years to more gradually build up the reserves. Reserve minimums were set up based on the reserve policy. The reserve was below the minimum and the risk assessment level because of changes in the market, prices, costs, and revenue projections; not because it was planned. Referring to Table 12 on Packet Page 117, Council Member Reckdahl did not understand how the accounting changed so much that the G-1 rate increased by 49%. In Table 11, the G-2 fixed monthly service charge was lowering from $156 to $29. Council Member Reckdahl asked what costs were previously charged that were now being neglected to be charged to cause the dramatic change, and what costs go in to calculating the fixed rate. Ms. Bilir, Senior Resource Planner, explained fixed costs do not vary by customer usage, such as costs for billing, meters, operations, and maintenance. Assistant Director Dailey stated the $156 monthly charge used to apply to all G-2 customers regardless of size. Now having three subcategories based on the sizes of G-2 customers, the largest were going up and the smallest were going down. Council Member Reckdahl noted the analyses from three and five years ago had totally different results and questioned how the assumptions could be so different. Ms. Bilir, Senior Resource Planner, stated the monthly charge used to be around $100 for each G-2 customer but it had significantly increased with the rate increases that had gone into effect in the last few years. Staff wanted the consultant to take a closer look at that monthly charge. The consultant’s detailed analysis of the G-2 customer data resulted in a refinement according to the usage patterns and meter capacities of those customers. Ms. Nose, Assistant City Manager, said the smaller G-2 customers will see a reduction in the monthly charge while the higher level G-2 will see an increase, which almost net out. Previously, the math was not wrong but everyone was paying an average of $156 regardless of size. The greater detail has resulted in a different calculation to allocate costs to each of the G-2 subsets. SUMMARY MINUTES Page 18 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 Council Member Reckdahl asked for the percentages of ratepayers in each rate schedule. Assistant Director Dailey explained that one of the reasons COSAs were done periodically, even for systems that do not grow or change, is because eventually things get out of whack when uniform rate increases were applied year after year. With the new revenue requirement, COSAs have to be done to make sure costs are appropriately allocated. In reply to Council Member Reckdahl’s question, Ms. Nose, Assistant City Manager, said the customer classes were on Page 150 along with the number of service hookups/connections and annual use of therms. Referring to Tables 11 and 12 on Packet Page 117, Council Member Lythcott-Haims asked if the dollar impact to residential customers was about $3/month. Council Member Reckdahl noted the fixed cost on the first line of Table 11 goes up $2.59 but the per therm rate increased significantly. Ms. Nose, Assistant City Manager, stated Table 13 showed the dollar amount of impact on residential monthly bills due to proposed gas rate changes in summer and winter, and the proposed change was an average of $15.20/month. Assistant Director Zucca pointed out the meter sizes within the G-2 class ranged from less than 220 SCFH to greater than 4000 SCFH but the meter charge was the same regardless if the meter capacity was 20 times greater because the methodology was to average costs across the entire G-2 class. Through this new detailed COSA, a proportionate cost of service will be applied according to the size of customer’s meter. G-1 had a high number of residents. Council Member Burt was struggling with making small households or efficient gas users see their annual bill increase from $180/year to close to $300/year while the big user at 150 therms/month will see half to a third of an increase in their bill and big houses or inefficient users will have a very small increase. Council Member Lythcott-Haims wondered if there was time for staff to provide additional information, new charts, and options at future meetings. Ms. Nose, Assistant City Manager, answered there were opportunities for follow-up. Staff will meet with the Finance Committee on the Utilities budget on May 7. A Study Session with City Council will be held on May 12 where staff will report out on issues and seek the Council’s feedback. The Finance Committee meets on May 20 to wrap things up before adoption. It was not feasible within that time for a new COSA. Depending on the areas for follow-up or additional clarity, staff will do what they can to bring back information to the Finance Committee. Council Member Burt wanted options to consider, if it was permissible to continue using the current COSA for another year, and better guidance if it was legally justifiable for ratepayers not getting a favorable change. Ms. Nose, Assistant City Manager, said the Finance Committee could consider a bigger climate credit, spreading the climate credit over two years, and moving forward with this proposed rate schedule. Council Member Burt asked how the climate credit would be put on the bill, in one lump or spread monthly to see a reduction in the monthly charge. Council Member Burt did not want customers to get the climate credit once and forget about it, and then see the monthly charge increase thereafter. Ms. Nose, Assistant City Manager, said that was an administrative question because one lump was most SUMMARY MINUTES Page 19 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 administratively feasible; however, staff could take it back as a follow-up question to maybe find a balance between monthly and lump sum. Council Member Burt wanted to know if it was administratively feasible to have a line item for a Climate Credit every month for this coming year for that category of customers. Caio Arellano, Chief Assistant City Attorney, addressed the question of what was legally justifiable with regard to the rate increase proposed by staff and the alternate idea of using the previous rate study for one more year while we revisit things. The 2020 COSA was defensible under Prop 26 requirements for rates reasonably reflecting the cost of service. This year’s proposal was also defensible and reasonably reflected the cost of service but in a more precise way. Prop 26 did not allow ratemaking decisions based on policy or equitable considerations because rates needed to be fair from a mathematical standpoint. Given the amount of time left in the budget cycle and the time needed to approve new rates, staff was constrained in what could be brought back. If both COSAs were fair under Prop 26 but one was more granular, Council Member Burt wanted to know if we had the discretion to use the COSA that was less granular. The Finance Committee was in consensus to defer the decision until May 7, 2025. Ms. Nose, Assistant City Manager, suggested revisiting this as part of the Utilities Department budget on May 2, 2025. Lauren Lai, Director of Administrative Services/CFO, made note of the three items for staff to follow up: The question about whether we could use the 2020 COSA for another year, consideration of a higher climate credit, the ability to show and spread the climate credit over the year, and staff can bring back an illustration of what a bill might look like. Council Member Burt asked if the climate credit could be applied half to electric and half toward gas. Referring to Tables 11 and 12 on Page 117, Council Member Reckdahl wanted an explanation for the Tier 1 rate increasing 49% and why the G-2 fixed rate was so high. To feel comfortable that the proposed rates were fair, Council Member Reckdahl wanted a handful of examples of major charges that drove the increase. Council Member Reckdahl recalled many people were mad with the big spike in 2023 but this proposal will cause a bigger spike. Council Member Lythcott-Haims asked for more explanation of why this change was starkly different, why it made sense, and why it was justifiable under this methodology. ACTION: The Finance Committee directed staff to continue review at the Special Finance Committee meeting scheduled for May 7, 2025. Future Meetings and Agendas Lauren Lai, Director of Administrative Services/CFO, mentioned the April 29 meeting will address a real estate item, a follow-up on PDS fees, and a Citywide fee update on different department fees because a cost-of-service study had not been done for about 10 years. Budget study sessions will be held on May 6, 7, and 20. SUMMARY MINUTES Page 20 of 20 Finance Committee Special Meeting Summary Minutes: 04/15/2025 Kiely Nose, Assistant City Manager, stated staff will attempt to provide packets in sufficient time for the Finance Committee to review but some stuff may be coming late packet. Staff will do their best to keep the Committee apprised at the regular schedule. Council Member Lythcott-Haims remarked that the Finance Committee cannot do their job if they do not get the packet in time, and she wanted to be as well prepared as possible and read every word that staff writes. Adjournment: The meeting was adjourned at 8:21 PM.