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HomeMy WebLinkAbout2025-09-02 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 8 Regular Meeting September 2, 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: Reckdahl, Lythcott-Haims, Burt (Chair) Absent: None Call to Order Chair Burt called the meeting to order. The clerk called the roll. Public Comment None Agenda Items 1. Recommend the City Council Adopt Voluntary Residential Electric Service Time-of-Use Rates (E-1 TOU); CEQA Status: Not a Project Alan Kurotori, Director of Utilities, reiterated that the program in this item was voluntary. Lisa Bilir, Senior Resource Planner, stated this item had unanimous support of the Utilities Advisory Commission (UAC). Time of Use (TOU) rates were a way of pricing electricity that varied depending upon the time of day. A slide was presented showing Peak (4 p.m. to 9 p.m.), Off-Peak (3 p.m. to 4 p.m. and 9 p.m. to 9 a.m.), and Super Off-Peak (9 a.m. to 3 p.m.) times of day. It was explained this was a voluntary opt-in rate for residential customers who were currently on the E-1 rate with an AMI (Advancing Metering Infrastructure) meter and would be available as of January 1. This program would provide helpful data about demand and cost. It would be offered to NEM-2 customers in the future. The TOU rates were aligned with the requirements of Proposition 26 and also marginal cost of electricity at the time of use. It was SUMMARY MINUTES Page 2 of 8 Regular Finance Committee Meeting Summary Minutes: 09/02/25 designed to produce the same amount of revenue as E-1 assuming customers did not change their behavior. Slides were shown which listed proposed TOU rates for winter months (October through May) and summer months (June through September) including the Peak, Off-Peak, and Super Off-Peak hours for each. Four factors were considered when determining the TOU time periods: 1) Marginal Cost of Energy, 2) Distribution System Capacity and Peak Demand, 3) Greenhouse Gas Intensity of Market Energy, and 4) Best Practices in Ratemaking. These voluntary TOU rates would be brought to Council in September, and a detailed report on implementation and communication plans would go to the UAC at the October meeting. Staff was preparing for the TOU launch by modifying the billing system, developing logistics related to customer enrollment and information tools, developing measures of program success, and preparing to analyze changes in customer usage patterns. A smooth roll-out was planned with a small group of approximately 10 customers in January 2026, with full roll-out being in July. It was desired that the Finance Committee recommend that the City Council adopt a resolution adding this voluntary rate schedule for E-1 Time of Use rates for residential customers beginning in January 2026. There were no requests to speak for public comment. Councilmember Reckdahl thought the TOU program matched the City's cost of electricity with the cost being charged and gave incentive to be environmentally responsible. Councilmember Reckdahl was concerned about adverse selection by customers of the program causing revenue to be reduced. Planner Bilir responded that regular updates to the rates and data would be done. Councilmember Reckdahl asked how E-1 rates were currently set. Director Kurotori added that if customers used power at a lesser cost, it would reflect on the City's cost of purchasing power, which was a benefit. Councilmember Reckdahl expressed concern about customers who did not move to the TOU program and used electricity at a flat fee, causing loss of revenue. Chair Burt suspected that the early adopters of the TOU rate program would be people who were more environmentally conscientious than economically conscientious. Planner Bilir stated that it was expected to enroll approximately 10 customers per month for January, February and March, and then possibly a larger number such as 50 customers per month after that. Chair Burt asked if monitoring would be done on these early customers change-in-use patterns, and Karla Dailey, Assistant Director of Resources for Utilities, replied yes. Chair Burt felt that analyzing this small group of early TOU customers would help to expose if there would be loss of revenue. Assistant Director Dailey reiterated that rates were updated annually and would adjust over time to account for changes in usage patterns. Councilmember Reckdahl inquired about how quickly rates could be changed. Assistant Director Dailey stated that it was not expected that a huge number of customers would shift to the TOU program right away but that rates could be adjusted more than once a year. Councilmember Reckdahl hoped that the roll-out could be sped up if things go well. Assistant Director Dailey noted that it would be explained to all customers that there was a climate benefit to shifting electricity usage to off-peak hours. Councilmember Reckdahl asked if data SUMMARY MINUTES Page 3 of 8 Regular Finance Committee Meeting Summary Minutes: 09/02/25 was being collected from AMI meters. Planner Bilir said that some information had been gathered and that some preliminary analysis was being done on AMI data. Councilmember Reckdahl was curious to see if customers' usage patterns would determine if they would switch to the TOU rate. Planner Bilir confirmed that data would be looked at once it was collected but admitted that more analytical processes needed to be put in place. Councilmember Reckdahl wanted to know if the current E-1 rates would be changed at all, and Planner Bilir confirmed that those rates would not be changed. Councilmember Reckdahl queried if the end goal was that everyone be on Time of Use rates, and Planner Bilir reiterated that currently it was only a voluntary rate for interested customers. Director Kurotori added that it was desired to provide options to customers and programs should be revenue neutral. Councilmember Reckdahl asked if TOU billing made utility-level batteries more attractive. Director Kurotori responded that a utility-scale battery project would be in front of the City Council soon. Director Kurotori indicated that the City as a whole does not over-generate solar power. Chair Burt stated that the wholesale price of solar power can greatly reduce because of utility-scale solar, not residential solar. Councilmember Reckdahl was concerned if the TOU rates would save money for low-income individuals due of the unavailability of technology. Director Kurotori felt that this program could help all customers as a whole if there was a shift in reduction of peak hours. It was reminded that Palo Alto has many utility programs for low-income customers and that income-qualified customers were offered rates that were approximately 25 percent less. Councilmember Lythcott-Haims wanted to understand why the TOU pilot group was so small at 10 customers. Assistant Director Dailey indicated that this group would be somewhat hand selected, i.e., staff who lived in Palo Alto or interested councilmembers, to ensure that all the systems were working correctly. Councilmember Lythcott-Haims asked what a positive customer experience would look like when dealing with the complexities of this TOU program. Assistant Director Dailey replied that correct billing and data would be beneficial and that this initial small roll-out would allow them to make sure that the billing system was working properly. Director Kurotori added that the idea was to provide a 12-month look-back to customers to be able to compare the different rates. Councilmember Lythcott-Haims wondered how long it would take for NEM customers to be included in TOU rates if they chose. Assistant Director Dailey acknowledged that it was frustrating that all customers could not immediately enroll in this rate. It was hoped that a plan would be in place by July 2026 for NEM-2 customers to be eligible for the program. Because of the billing system, it was not anticipated that NEM-1 customers would ever be eligible for TOU rates. Councilmember Lythcott-Haims wanted to know some suggestions that would be given to ratepayers in terms of shifting their usage patterns. Assistant Director Dailey responded that activities such as charging EVs during the day and running dishwashers and washing machines after the peak period were examples. It was recognized that activities such as taking a shower and cooking dinner would be harder to change. Councilmember Lythcott-Haims commented that it seemed like not much behavior shifting was expected in the beginning of the program. SUMMARY MINUTES Page 4 of 8 Regular Finance Committee Meeting Summary Minutes: 09/02/25 Planner Bilir answered that at this point they could only analyze what customers were currently using. It was expected that after collecting data, a better projection on impact of revenue could be made annually. Councilmember Lythcott-Haims queried if there were any predictions about how fast customers would adopt the TOU rates. Planner Bilir stated that there were no predictions for rate of adoption, although they would be capping rate of adoption at the beginning. The Cost of Service study cited an example of another utility where peak demand was reduced by 3 to 6 percent by residential customers utilizing TOU rates. Councilmember Lythcott-Haims inquired about a question by the UAC concerning maximizing price differential between super off-peak and peak hours in order to incentivize customers. Planner Bilir said that they did not set out to maximize those price differentials but instead reflected marginal costs in those time periods. Chair Burt opined that because the pilot group would be small, the impacts would be minimal and revenue changes would be inconsequential. Chair Burt asked when the AMI roll-out would be complete. Dave Yuan, Utilities Strategic Business Manager, stated that a new bay station was recently installed at City Hall which allowed for an additional approximately 3000 meters in the next few months. There were currently approximately 9000 meters for electric, gas, and water. It was expected that electric would be done at the end of 2025. Chair Burt pointed out that timeline would precede the TOU program roll-out. Chair Burt wanted to know about the marketing plan for the TOU rate program and if there was an intention to promote smart appliances and smart panels. Assistant Director Dailey explained that implementation and communication was being developed and encouraged the Finance Committee to share suggestions. Chair Burt was surprised by the Mayor's recent statement that doubling of electricity demand was anticipated over the next decade and wondered if that was accurate. Director Kurotori stated that their projections varied depending on the uptake of electrification and changes in the customer base. The Utilities Department would not anticipate doubling of demand. Chair Burt opined that if there was a fairly significant change in time of use of electricity, it levels the demand. Assistant Director Dailey said they would be coming back to the Finance Committee with preliminary rates and projections of the future portfolio. Chair Burt assumed that because the infrastructure within the City was sized for peak use, reducing peak uses would have a favorable impact on capital investment to expand capacity. Director Kurotori stated that doubling of the load would be seen more on the residential side, but it would not be pure doubling because most of the load was commercial. Chair Burt was interested in the band range of the commercial and industrial side. Director Kurotori explained that load growth was actively being looked at. Councilmember Reckdahl asked if the distribution cost could be transformed to higher rates at peak for TOU customers. Director Kurotori said there needed to be some inherent flexibility in SUMMARY MINUTES Page 5 of 8 Regular Finance Committee Meeting Summary Minutes: 09/02/25 transformer distribution costs. TOU rates would not drive reduction of the system but would hopefully inform customers about the actual price of the costs for energy and allow them to see the benefits of using power at a different time. MOTION: Councilmember Reckdahl moved, seconded by Councilmember Lythcott-Haims, that the Finance Committee recommend the City Council adopt a resolution (Attachment A: Resolution) adding voluntary Rate Schedule E-1 Time of Use (TOU) applicable to separately metered single-family residential dwellings receiving electric service effective January 1, 2026 (Attachment B: Rate Schedule E-1TOU). MOTION PASSED: 3-0 2. Recommend City Council Direct Staff to use Proposition 26 as the Design Principle for the Gas Cost of Service Analysis and Work with the Utilities Advisory Commission on Review of a Recommended Gas Rate Schedule Effective by January 2026 Lisa Bilir, Senior Resource Planner, stated the primary guiding principle for the Gas Cost of Service Analysis (COSA) would be Proposition 26, which required that rates be based on cost and did not address other policy considerations. The UAC had suggested forming a subcommittee of UAC members to work with Staff and the ratemaking consultant to develop the 2026 Gas COSA. A timeline was provided in order to have gas rates effective by January 1, 2026. It was desired that the Finance Committee recommend that City Council direct Staff to follow the reasonable cost analysis required by Proposition 26 and to accept the tentative gas rate design schedule. Alternatives were explained which the Finance Committee could consider including several design principles and an alternative timeline. It was reiterated that if substantial changes to the timeline were made, there would be impacts to the costs and schedule. Kiely Nosé, Assistant City Manager, said that the UAC had a long discussion about this subject and struggled with identifying specific principles, which was why they came to the conclusion of using Proposition 26 as the guiding principle. Public Comment: 1. Hamilton H. stated the staff report did not include the 2016 gas rate design guidelines, which addressed climate change, needs of low-income residents, and fairness. The commenter and his colleague, Jeff Levinsky, recommended the Committee adopt the 2016 gas rate design guidelines along with minor changes (previously emailed to the Committee) for the 2026 Gas COSA. 2. Peter T. (Zoom) proposed to use the 2016 design guidelines with minor modifications: 1) Adding the word "reasonable" to the 1st guideline to align it better with the requirements of Proposition 26. 2) Adding "and support" to the 4th guideline to help the City meet the climate goals. 3) Adding a 6th guideline to help the upcoming and SUMMARY MINUTES Page 6 of 8 Regular Finance Committee Meeting Summary Minutes: 09/02/25 subsequent COSAs reflect the Council's recent intent to avoid large discretionary shifts in charges from one class of customer to another. Councilmember Lythcott-Haims believed that the UAC subcommittee would parse the details with Staff to bring a balanced recommendation by January. Councilmember Lythcott-Haims asked what the legal risk was at this time. Amy Bartell, Assistant City Attorney, explained that the legal landscape had changed since Prop 26 in 2010 and that Prop 26 does not say much. Results of litigation had been determined on a case-by-case basis, making it difficult for public agencies to set rates. Since about 2015 or so, Assistant City Attorney Bartell had seen a dramatic tightening-up on how the courts were determining Prop 26, which says rates must reflect the reasonable cost to provide service. Councilmember Reckdahl was interested in Staff's opinion about the 2016 guidelines. Planner Bilir stated that the Utilities Department would be happy to provide several items concerning analysis, including impact to low-income customers. The Utilities Department would also be happy to show their work and explain all the steps being taken with the UAC and City Council members. Councilmember Reckdahl queried Assistant City Attorney Bartell if the 2016 guidelines had any flaws that had become apparent. Assistant City Attorney Bartell explained that the problem was that the cases had evolved since 2016 and felt it should not be overcomplicated when legally it made sense to work with what was in the Constitution to ensure that the rates were cost based before any other considerations. Councilmember Reckdahl pointed out that in Numbers 4 and 5 of the 2016 guidelines, the word "evaluate" was used and did not see a downside to having those items in the current COSA. Assistant City Attorney Bartell said those kinds of evaluations would be done as part of a cost study anyway and that sometimes they could be used against public utilities legally. More recent California Court of Appeals cases had come up where statements in the record suggested additional goals and the courts then decided that the city favored those additional goals over the cost causation. Councilmember Reckdahl opined that the 2016 guidelines were a good starting point and supported a couple minor edits. Chair Burt was interested to know where the 2016 guidelines and the proposed edits might be problematic. Assistant City Attorney Bartell added that none of the rates that the City had adopted had been arbitrary and were backed by analysis of the cost studies by Staff and ratemaking consultants. Assistant City Manager Nosé opined that changes in case law had changed how to determine the Cost of Service. It was confirmed the date of the previous COSA was 2020. Chair Burt reflected that it was a question of how much they had been informed by case law since 2020 versus up to 2020. Chair Burt wished to discuss the proposed edits (sent in an email) to the 2016 guidelines in the context of more recent case law. Assistant City Attorney Bartell felt the 1st proposed edit was fine because it was what Prop 26 said anyway. Assistant City Attorney Bartell stated that the ratemaking expert needed to take a look at the 2nd proposed edit. Assistant City Attorney Bartell agreed with the 3rd proposed edit and that it goes without saying. Assistant City SUMMARY MINUTES Page 7 of 8 Regular Finance Committee Meeting Summary Minutes: 09/02/25 Attorney Bartell would not advise the 4th proposed edit. Chair Burt queried if there was language that could be included in this proposed edit that would be more defensible, and Assistant City Attorney Bartell felt that statements such as this were easily legally manipulated. Concerning the 5th proposed edit, Assistant City Attorney Bartell stated that low-income customers already had some considerations built into California statutes and felt that this would be redundant. It was reminded that the Cost of Service study was just supposed to look at the utility's cost to provide service, not the customer's cost. Chair Burt queried if using the 5th edit would put the City in jeopardy legally. Assistant City Manager Nosé suggested adding wording for the 5th edit that referenced alignment with the specific California law, and Assistant City Attorney Bartell agreed this could be done. For the 6th proposed edit, "to minimize fixed cost shifts between customer classes and explain any change," Assistant City Attorney Bartell opined that the City should refrain from trying to direct how the rates were going to be designed at the start and that it should not be included. Chair Burt said there was an assertion in the email that the UAC did not receive the 2016 guidelines. Assistant City Manager Nosé confirmed that the 2016 guidelines were cited in the staff report for the UAC members. Chair Burt wanted to know what the procedural steps would be for merging what the UAC had proposed with the 2016 guidelines. Assistant City Manager Nosé clarified that it would go from the Committee to Council to the UAC, which would be a significant extension in time. To uphold the January timeframe, it was recommended the Committee come up with the recommendation to Council on what those principles were. Planner Bilir clarified that the 4 Design Principles in the staff report were the principles that Staff proposed to the UAC. Chair Burt suggested that the Finance Committee could propose those 4 Design Principles in the staff report and proposed edits 1, 3, and 5 from Mr. Hitchings' email, which were all consistent with Prop 26. Councilmember Reckdahl stated that the previous analyst and the more recent analyst used different approaches for how fixed costs were applied and felt that was arbitrary. Assistant City Attorney Bartell opined that this was probably based on the consultant's and Staff's analysis of the facts at that time but that it was acceptable as long as the utility could support this with sufficient data. Councilmember Reckdahl wanted to find a way to include proposed edit #6. Councilmember Lythcott-Haims was inclined to trust the UAC's guidance and, because of Assistant City Attorney Bartell's feedback, was concerned with coming up with additional design guidelines. Chair Burt reiterated that was why they should only consider the edits that the attorney thought were not problematic. Chair Burt wished to know if the UAC had deliberately looked at the footnote about the 2016 guidelines. Planner Bilir remembered that Chair Scharff had the 2016 guidelines printed out and was asking questions about them during the UAC meeting. Councilmember Lythcott-Haims trusted that Staff had made an informed decision that the 2016 guidelines were out of date, even if the 2016 guidelines in the staff report were only a footnote. Assistant City Manager Nosé stated that the UAC did not go point by point through the 2016 guidelines but at least some of the Commissioners looked at them. SUMMARY MINUTES Page 8 of 8 Regular Finance Committee Meeting Summary Minutes: 09/02/25 Assistant City Manager Nosé stated that from what was heard in this meeting, the Finance Committee's recommendation to Council should be that the UAC would be the body to work out the details with the following guidelines: Prop 26 would be the overarching principle with proposed edits 1, 3, and 5 as amended, Design Principles 3 and 4 from the current staff report would be included, and implementation would be in January. It was repeated that anything outside of Prop 26 posed a risk. MOTION: Councilmember Reckdahl moved, seconded by Chair Burt, that the Finance Committee recommend the City Council direct Staff to follow the reasonable-cost analysis required by Proposition 26, and that Staff work with the Utilities Advisory Commission on a recommendation to the Council on revised gas rates effective January 2026, including: 1. Rates must be based on the reasonable cost to serve customers. This is the overriding principle for the cost-of-service analysis (COSA); all other rate design considerations are subsidiary to this basic premise. 2. The COSA should involve a review of all existing rate schedules for applicability in the COSA. 3. The impact of any proposed changes on low-income customers should be evaluated in alignment with California Law. 4. Design Principle 3: Determine the proper allocation of fixed and variable costs and how those can be implemented in various rate designs. 5. Design Principle 4: Review non-rate revenue sources that may be available for rate discounts or rebates. MOTION PASSED: 3-0 Future Meetings and Agendas Lauren Lai, Director of Administrative Services/CFO, stated the next Finance Committee meeting would be held on September 16 and would include studying the CalPERS rates and the actuary report that was recently released and also the connection fees for various utilities. Adjournment: The meeting was adjourned at 7:21 PM.