HomeMy WebLinkAbout1994-05-10 City Council Summary Minutes
Special Meeting May 10, 1994 1. 1994-95 Enterprise Fund Budget Issues ................. 72-491 ADJOURNMENT: The meeting adjourned at 7:50 p.m. ........... 72-508
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The City Council of the City of Palo Alto met on this date in the Council Chambers at 6:15 p.m. PRESENT: Andersen, Kniss, McCown, Rosenbaum, Schneider, Simitian, Wheeler ABSENT: Fazzino, Huber ORAL COMMUNICATIONS None. REPORTS OF OFFICIALS 1. 1994-95 Enterprise Fund Budget Issues City Manager June Fleming said the purpose of the meeting was to discuss Enterprise Fund issues, specifically to discuss rates; not to review budgets and to provide Council with an opportunity to ask questions, clarify issues, and gain any background information in order to facilitate proceeding with the budget review portion of the Enterprise Fund. The staff reports which had been distributed to Council included the subjects of: 1) Proposed Water Rate Decrease (CMR:232:94); 2) Proposed Gas Rate Increase (CMR:237:94); 3) Proposed Revision to Utility Connection Fees (CMR:233:94); 4) Proposed Increase in Traffic Signal Rates (CMR:234:94); 5) Proposed Introduction of a Natural Gas Transportation-Only Service Rate (CMR:238:94); 6) Review of Utility Fund Reserves Levels (CMR:240:94); and 7) Refuse Rate Increase (CMR:258:94). The materials before Council that related to Utilities had been reviewed by the Utilities Advisory Commission (UAC). After Council had reviewed the issues, the Finance Committee would adjourn into its meeting to discuss the storm drain issue. Proposed Water Rate Decrease (CMR:232:94) Assistant Utilities Director Randy Baldschun said the proposed 15 percent water rate decrease, the largest decrease the City had seen in over 20 years, would become effective July 1, 1994, and was companion to the 7 percent decrease the City had seen in July 1993. The staff report (CMR:232:94) discussed a turnaround in the financial health of the Water Fund which had resulted in the need to no longer fund the Rate Stabilization Reserve (RSR). It was expected that the RSR would be within an acceptable level. The money that had been going into the RSR would be returned to the ratepayers in the form of a rate decrease. The amount of the decrease varied in the staff report (CMR:232:94). The largest decrease would be applied to the largest water users, residential, and business sectors, and the smallest water users, who already had the lowest rates on the system, would not see any decrease. Staff was waiting to hear from the San Francisco Water Department (SFWD) because the wholesale water rate could be increased and anticipated and planned for as a 10 to 20 percent wholesale rate increase. If such an increase occurred, staff could still maintain the proposed 15 percent water rate decrease. In the
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event the SFWD announced a rate change significantly different, staff would need to return to the Finance Committee and Council with a different proposal. Council Member McCown appreciated the commentary regarding the possible impact of the SFWD changes. The latest news indicated water levels were the lowest of any drought year, resulting in cutbacks to Central Valley farmers. She asked whether staff was confident it could proceed with the proposed decrease without putting the City in a position of needing an increase in the near future. She also asked how staff projected the rate change would affect the degree of conservation efforts. The City should not make short-term adjustments but should instead be predictable and stable in the long term. Mr. Baldschun said staff was concerned about the rate stability issue and had held back passing the wholesale rate decrease onto ratepayers in order to build reserves. If another drought should occur, the City would not have to increase rates because it could draw upon reserves. The last drought caught the Water Fund without significant reserve levels, and expenses had to be paid through increased rates. The City would have to respond if SFWD indicated there would be a drought and the City had to cut back. If SFWD introduced mandatory or voluntary reductions in water usage, staff would change the proposal. It was difficult to predict the weather or SFWD. The proposed decrease would not require an increase in rates within the next two years. The model had been run several years out. Director of Utilities Ed Mrizek said there were no indications of curtailments in the water supply. The snow pack had been generous the previous year, and the snow pack in the Winter of 1994-95 would dictate what would be done in 1995. There were adequate water supplies to carry the City through 1994. The level of conservation efforts had been reduced since Palo Alto was not in a drought condition. Staff continued to work with its customers to encourage water conservation. The three-tiered inverted rate encouraged customers to conserve water. Council Member Andersen said there were structural changes proposed in addition to rate reduction which, although conservation incentives were built-in, were much less painful for large quantity water users. He asked whether staff anticipated establishing a structure which would be more in keeping with what had previously existed if a drought condition occurred or whether staff anticipated recommending a change similar to the proposed structure. Mr. Baldschun said staff reevaluated every option whenever the City entered into a drought. If staff received messages of a drought from SFWD requiring curtailment, it would develop or review past alternatives to reduce usage. The changes could involve a percent of past usage which correlated lot sizes with the number of residents in a household, inverted rate structures, etc. Everything would be reexamined. The UAC would also play an important role. During the last drought, the UAC had not yet been
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formed. Therefore, much more public input would result if another drought occurred. Council Member Andersen anticipated staff would keep careful tabs on the quantity used by customers in the higher tiers. Mr. Baldschun replied yes. Council Member Andersen asked why the rate of return of 9.76 percent had decreased from higher returns in the past. Mr. Baldschun said interest rates had decreased during the past two years which directly affected the rate of return granted to investor-owned utilities, especially since a significant part of the cost of capital was through loans with banks and financial institutions. It had translated into a lower rate of return for Pacific Gas & Electric (PG&E) and California Water Service (CWS), which had been consistently decreasing for the past three years. Council Member Andersen said the City had seen a three-year drop in rates at the same time rates had begun to increase. He asked what the trigger point was and when it would be reassessed. The rate of return on investment had been dropping for some time, yet the City had maintained its reserve transfer at the level for the previously higher rate. He asked whether it was the first time a drop had occurred. Director of Finance Emily Harrison said the rate of return was adjusted every year. Mayor Kniss said the percentage of conservation during the drought for Palo Altans had increased to 38 percent from 27 percent. She asked about Palo Alto's current percentage of water conservation. Mr. Baldschun said the figures had not been calculated. The graph of water sales on page 3 of the staff report (CMR:232:94) indicated usage. Mayor Kniss asked for the percentages to be provided, as it was a question people often asked. Mr. Baldschun said staff would return with the figures. The City currently used 6 million cubic feet (ccf) annually. During the drought, the City had dropped to below 5 million ccf. City Manager June Fleming said the information would be available for the budget review. Proposed Revisions to Utility Connection Fees (CMR:233:94) Council Member Andersen asked whether the 40 percent increase in the single-family connection fee on page 2 of the staff report (CMR:233:94), a rather significant increase, was truly a cost-of-service adjustment or a result of comparisons to other communi-ties.
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Utilities Rate Analyst Lucie Hirmina said the change was, in fact, cost of service based. It had been anticipated that each connec-tion would provide service to four family dwellings but had turned out to only service two or three at the most. The reason for readjusting connection fees was to cover cost. Council Member Andersen asked when the increase would go into effect. Ms. Hirmina said July 1, 1994. Council Member Andersen thought the Southgate area would clearly be affected. Mr. Mrizek said the increase would only occur for new connections and new services. Council Member McCown asked when the rates had last been adjusted. Ms. Hirmina said in 1992. Council Member McCown asked whether the changes in 1992 were of the same magnitude. Ms. Hirmina replied yes. Council Member McCown clarified the changes had increased by 10 to 75 percent. Ms. Hirmina said there had been even higher percentage adjustments in 1992. Council Member McCown said the initial reaction whenever large fee increases were seen was that the fees had not been increased in some time. To hear the City had recently, significantly increased the fees caused her to wonder why another set of substantial increases had to be seen. Mr. Mrizek said in 1992, an increase had occurred. The current major increase was being considered because less properties were being served, i.e., rather than serving four properties, the service only served two. The costs of construction were spread to far fewer customers, creating the need to increase rates to collect the full amount of construction. Council Member McCown asked whether the increase was the result of less construction. Vice Mayor Simitian suggested the reason was because work was in-fill construction on a lot-by-lot basis. Mr. Mrizek said Vice Mayor Simitian was correct. For a new customer in a new area with a new house, all construction had to be installed underground to the new house. The construction would only serve two or three houses adjacent to the property in the future; however, it had not been the case in studies of how many
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houses were served in the future from the underground system extension. Vice Mayor Simitian asked whether the issue was service to a single dwelling in an area which was not otherwise developed or serving a single dwelling where three or four other units were immediately adjacent. Mr. Mrizek said the situation existed for dwellings where three or four units were adjacent, but the dwellings were already being served overhead. Underground system extensions being installed would, in the future, serve the dwellings underground. However, the other units were not currently being charged, but when the unit went underground in the future, the portion of the fee for the underground system would be paid. Council Member McCown asked when homes would be forced to have underground utilities. Mr. Mrizek said instances included: 1) if an underground district was established, at which time the Utility would pick up the full cost; 2) if an individual decided to build a larger house on a particular parcel, it had to be undergrounded and a new connection fee paid; or 3) if an individual remodeled and had to go under-ground because it could not be serviced overhead, at which time the individual had to pay the underground connection fee. Council Member McCown thought the City had relied on guesswork as to how many units and over what time frame the units would be included into the service. She asked how the cost was spread against future connections. Mr. Mrizek said when an underground system was being designed to serve one house, the Utilities Department wanted to put in a system which would service the entire area. Staff planned to serve as many properties as possible with an underground system which could serve adjacent properties in the future. Vice Mayor Simitian said the single-family homeowner should be entitled to some cost recovery on the fees paid if the homeowner was being charged to provide service for some later date on other properties when extended. Mr. Mrizek said the fee would be higher if one property owner had to pay the full fee and a smaller system was installed. Council Member McCown clarified if the City put a system for a single household only, the fee would be higher than the cost for more. Mr. Mrizek said the installation was spread over more customers. Sometimes a pole was located on one side of the street and service had to be run across the street, which was very expensive. The cost was spread to a number of parcels, not just to the one house. Council Member McCown understood the methodology; but in light of
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the fact the City had adjusted the fees within a two-year time frame for a different set of assumptions, it seemed an area which would continually need to be refined. Mr. Mrizek said it was all based on information which had indicated what the cost to the Utilities to provide the service would be. Vice Mayor Simitian asked for a clear, written explanation of how the cost had been allocated between current single property owners and future recipients of undergrounding service. Mr. Mrizek said the information would be provided. Vice Mayor Simitian said it was a difficult issue to understand and he would be unhappy to find the fee was $400 or $600 more, not because of an incremental cost of service increase but because of coming in a year or two earlier and the figures had not been recalculated. City Attorney Ariel Calonne said the area of the level of due process required for reimbursement on utility extensions had been fertile for litigation in nearby cities. He suggested examining the question, particularly as no due process had been established for reimbursement of initial costs at a later time. Council Member Wheeler was as uneasy about user fees as she had been about general utility rate schedules. She was particularly concerned about the developer of a single-family home and the total amount of fees the individual was charged, not just utility fees. She asked whether staff could provide a report which listed the kind of fees the owner of a new single-family home would pay the City as part of construction costs. City Manager June Fleming replied yes. She clarified Council Member Wheeler wanted to know what the comprehensive fee a person would pay if building a single-family residence in the City. Council Member Wheeler replied yes. Ms. Fleming said the information would be provided as soon as possible. Council Member Wheeler said the issue would probably be dealt with until at the same time as the Municipal Fee Schedule. Vice Mayor Simitian was sympathetic with the issue raised by Council Member Wheeler concerning the fees with which new homeown-ers were confronted and asked whether the property transfer tax should be included as well, even though it was not a fee. He understood a custom or practice existed as an industry standard as to how the tax was shared. Mayor Kniss disagreed and suggested an investigation. Realtors had indicated payment of the transfer tax was very much negotiated.
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Vice Mayor Simitian wanted to know the stated industry practice and whether or not there was something besides the industry practice. In theory, the 6 percent brokerage fee was negotiated as well. Ms. Fleming said staff would call the Board of Realtors to obtain some consensus and, if obtained, provide the amount to Council. Proposed Increase in Traffic Signal Rates (CMR:234:94) Ms. Hirmina said the proposed increase in traffic signal rates was the second of the rate increases. Staff had conducted cost-of-service studies in 1993, the result of which was a revenue shortfall for traffic signal maintenance. The revenue increase was for 165 percent. In a staff report to Council in 1993, staff indicated the increase would be divided into a three-year period, 1994 being the second year at 38 percent. In 1995, another cost-of-service study would be conducted to determine the remaining need. Mayor Kniss said the staff report (CMR:234:94) appeared to indicate the issue was in-house. Even though it sounded as though the City charged someone else, the City actually charged itself. Ms. Harrison replied yes. It was one of many Utility charges to departments levied on the General Fund. Utilities also charged for gas, electric, water, etc. Mayor Kniss clarified it was a in-house problem. Ms. Harrison said it went into how General Fund resources were spent, so it did not net out to zero but was an expense for the General Fund. Council Member Andersen asked whether staff had drawn the numbers from comparisons with PG&E. Ms. Hirmina said the numbers were actual costs of maintaining traffic signals calculated by the Utilities Department. Director of Public Works Glenn Roberts said the issue could be described as a maintenance cost issue rather than a power cost issue. A better analogy would be with other cities without a Utilities Department where another department cared for the traffic signals. Since Palo Alto was fortunate to have its own electric utility with similar equipment such as lift trucks and high rangers, it was able to do the work and consolidate it with other electric functions. It made a great deal of sense, but the actual cost of maintaining the signals was not one the Electric Utility should incur, rather it was a traffic operations cost. The Electric Utility performed the work and billed it back to the Public Works Department. Most cities did not have similar circum-stances. Proposed Gas Rate Increase (CMR:237:94)
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Ms. Hirmina said staff proposed a Gas Utility revenue increase of 6.3 percent because of several reasons. A decision had been made not to draw too much from reserves in Fiscal Year 1994-95, and the gas consumption load was not increasing. Council Member Schneider asked about the 27 percent decrease for non-core gas customers on page 2 of the staff report (CMR:237:94). She asked how many non-core customers Palo Alto had and what percentage of non-residential customers it represented. Ms. Hirmina said staff had projected 7 customers with 14 non-core accounts. Some of the accounts would be served under commercial rate G-2 and shift to non-core service rate G-3. Because of curtailment, the interruptible factor and the load of the non-core customers, the rate was cheaper than the commercial G-2 rate, representing a $282,000 difference. The non-core customers would have a lower cost-based rate; there was no subsidy. Council Member Schneider asked whether Palo Alto would lose its customers if it no longer granted the non-core rate. Ms. Hirmina replied no. Palo Alto offered another service, non-core transportation of gas, which would allow customers to either purchase their own gas with Palo Alto transporting, or the customer could purchase the gas from Palo Alto. Council Member Schneider confirmed Palo Alto had to transport the gas regardless. Ms. Hirmina replied yes. Utilities Advisory Commissioner Paul Grimsrud said that in general, the UAC had been pleased with the 1994-95 budget. It was easy to read and had little controversy. A few Commissioners were interested in flat rates for the Water Utility, but the majority thought the City should continue conservation efforts. The proposal was well-balanced, within the regime of other cities' inverted rates, and overall was well received. The relationship between the General Fund and Utilities was important and had been brought out in the traffic signal rate. The UAC was also interested in the rate paid for rents. Palo Alto paid approximately $1.7 million per year for the land at the Colorado substation. Two former Mayors were particularly interested in determining who actually paid for the land and whether it made sense for the Utilities to pay market rates over a long period of time. There were issues on both sides of the table. As time went on, Palo Alto would become more competitive, as was seen in the Gas Utility and, in the future, the Electric Utility. It was important to look at how the various rates crossed between the General Fund and the Electric Fund to ensure competition. The UAC was pleased with staff's work. Council Member Andersen asked whether the UAC had given thought to the implications to the utility system as more and more large utility users sought alternatives, since so much was dependent
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upon large customers. Mr. Grimsrud said the UAC had asked staff how the rest of the system would be impacted should Palo Alto lose some of its larger customers. Apparently, there was enough flexibility in purchase contracts that a large loss or stranded cost to the system would not occur. The concern was well-founded for the electric system, particularly with Calaveras, etc., where Palo Alto had financial obligations. Palo Alto's utilities were in very good shape compared to most utilities because of its low costs and low rates. Most utilities throughout the country were worried about retail wheeling. Palo Alto maintained a very flexible situation and, although it could lose a gas customer or two, it would not cause a large impact. Ms. Fleming said Commissioner Grimsrud's statements were correct, however, internally it was a concern. Palo Alto was in a competi-tive mode and needed to be cautious about how it provided service and what its options were with the service provided in terms of the utilities. Palo Alto did not have a monopoly and had no assurance it would always be the best game in town unless it took aggressive steps to ensure it occurred. Palo Alto had to be the best or someone else would step in. It was a real concern, and staff was paying close attention to it. Proposed Introduction of a Natural Gas Transportation-Only Service Rate (CMR:238:94) Ms. Hirmina said the natural gas transportation-only rate was a new service Palo Alto had begun after being approached by some of its larger customers with requests to establish the service. Previously, Palo Alto had offered rate G-50, the interruptible rate. Rate G-3, the non-core service rate, would take G-50's place. It was cost-based, meaning the cost of the commodity was an exact cost, so if one customer chose to purchase gas elsewhere, Palo Alto would not lose money in the utility. Vice Mayor Simitian asked whether the issue related at all to the competition between PG&E and Mojave and, if so, how. Mr. Mrizek said Palo Alto would provide transportation, whether it was on the Mojave system or the PG&E system, with the rate to a customer should the customer elect to purchase the gas itself. Vice Mayor Simitian asked about the debate or competition between Mojave and PG&E. Mr. Mrizek said Mojave had offered Palo Alto a transportation contract for pipeline service to transport gas to Palo Alto from the southwest at a rate substantially lower than PG&E's rate. Mojave had offered Palo Alto a 15-year contract with a very minimal escalation of 1 percent per year. Vice Mayor Simitian asked whether the Mojave pipeline was already operating.
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Mr. Mrizek said the Mojave pipeline had not even been built. Vice Mayor Simitian clarified PG&E's argument was that it might not be able to match the terms but provided a greater measure of reliability or certainty given the fact it had a pipeline in place. Mr. Mrizek said PG&E claimed it had pipelines to the north and the south, so Palo Alto could purchase gas from either Canada or the southwest. Vice Mayor Simitian confirmed the proposal for transportation-only service was only to Palo Alto's customers, and the ability to offer the service was a function of how Palo Alto availed itself of the service, to the extent Palo Alto offered a transportation service, either through PG&E or Mojave. Mr. Mrizek replied yes. Costs were based on cost-of-service to date which Palo Alto had to collect from its customers to transport gas. Vice Mayor Simitian confirmed Palo Alto had used PG&E because it was the only available supplier at the current time. Mr. Mrizek replied yes. Vice Mayor Simitian asked about the timing of the Mojave pipeline. Mr. Mrizek said the Mojave contract had been discussed with the UAC and would be recommended for approval in June 1994 by the UAC after which time the contract would be brought to Council for approval. If approved, Palo Alto had until November 1994 to make a final decision as to whether or not it wanted to proceed with the Mojave contract. Vice Mayor Simitian asked when Mojave would become Palo Alto's transportation provider rather than PG&E, if Palo Alto proceeded with the Mojave contract. Mr. Mrizek said Mojave would probably become Palo Alto's provider in 1996. Vice Mayor Simitian asked whether Palo Alto could continue to use PG&E if Mojave was unable to deliver. Mr. Mrizek replied yes. Vice Mayor Simitian clarified Palo Alto did not need to be concerned about offering a service to its customers, should Mojave be unable to deliver and Palo Alto continued to work with PG&E, which it could not provide based on projected availability. Mr. Mrizek replied yes. Palo Alto could still provide the service. City Attorney Ariel Calonne understood Palo Alto's desire to offer
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a transportation-only rate was independent of what occurred with PG&E or Mojave. Palo Alto was currently under no legal obligation to allow its customers to purchase the use of its pipelines only. Palo Alto could compel its customers to purchase a bundled service of pipeline plus gas. The state deregulation which began in 1986 had freed Palo Alto of the burden with PG&E. Palo Alto had taken advantage of the deregulation for a few years. By paying for the cost of transportation over PG&E's pipes in California and over interstate pipes outside of California, and separately purchasing gas from companies in Canada or the Southwest, Council's decision to offer similar service to users in Palo Alto was completely independent of whether Palo Alto used pipeline space provided by Mojave or PG&E. One of the advantages from a legal perspective was that Mojave was an interstate pipeline which would be free of the significant administrative burden and expense Palo Alto had experienced in its dealings with the California Public Utilities Commission (CPUC) to assure itself PG&E had not done something inappropriate in its rate calculations. Mojave was attractive in that it effectively bypassed the administrative overhead with the CPUC. Council Member Wheeler asked whether the service would involve an open enrollment or whether customers could sign up for the service only during certain periods. Ms. Hirmina said it was necessary for staff to make arrangements for Palo Alto's gas supplies, so if customers elected to use the service, Palo Alto needed to know within specific windows of opportunity in order to establish contracts with suppliers. Council Member Wheeler clarified it would allow Palo Alto time to adjust its purchases to compensate for the loss of business. Ms. Hirmina replied yes. Council Member Wheeler asked what would occur if one year after a customer had contracted with a Canadian company to purchase cheap gas, the customer decided it did not want to continue with the Canadian company. Ms. Hirmina said customers could return as Palo Alto's core customers. Council Member Wheeler asked whether customers would only be allowed to change during a particular time period to allow Palo Alto to make adjustments in its operations. Ms. Hirmina replied yes. Council Member Wheeler asked whether Palo Alto had set a fair rate for the transportation-only service. Ms. Hirmina said the rate was fair, as it was a cost-based rate, although it was higher than PG&E's transportation rate because of the characteristics of the load of the particular customers.
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Council Member Wheeler asked whether customers would be able to negotiate an agreement when the price of the gas resource was added to the transportation cost, which would actually save money. Mr. Mrizek said it was difficult to say, but staff believed customers would be able to negotiate agreements. Palo Alto allowed its customers to search for gas. The rate included enough to recover costs for transportation based on cost-of-service studies. Council Member Andersen said staff had suggested it was a policy decision with regard to the cost-of-service principle. He had difficulty understanding what policy decision alternatives Council had. It was difficult to make a policy decision. Mr. Baldschun said as far as rate making principles, cost-of-service was the default principle for almost all Utility rates. Staff deviated from cost-of-service under certain conditions. One example was life-line rates or rates for social reasons. The rate was based on the cost of providing the service. Staff wanted to ensure that if customers elected to purchase gas from other suppliers and use Palo Alto's transportation service, when they left the system, remaining ratepayers would not have to shoulder the cost absorbed by that customer leaving the system. The cost had been allocated and included in the transportation rate. As far as the principles or policies Council might want to consider to deviate from cost-of-service, one which had received much attention was economic development rates. If Council wanted to encourage large businesses, Council could set a policy which set rates below the cost of service but above the marginal cost of service. It was important because the cost-of-service study was based on accounting costs, which were higher than variable or marginal costs. There could be other rate making considerations. Council Member Andersen said the cost-of-service rate seemed the most appropriate. He queried to what extent it would impact large customers' decisions and the City's interests. There was an even bigger issue, whether the City would see businesses which used large quantities of gas considering other communities rather than Palo Alto. Mr. Baldschun thought the City's exposure was not high because it had 7 customers or 14 accounts, which qualified under the defini-tion of non-core customer. It was consistent with the Public Utilities Commissions's definition of at least 250,000 therms per year, which was very large. Customers were currently on a G-50 rate schedule, which was very close to the rate proposed for G-3. The G-50 rate schedule was a bundle rate at 38 cents per therm. The rate proposed on G-3 included two rates, a transportation rate of 17 cents and a commodity charge of 23 cents. The two combined equalled 40 cents per therm, so it was a slight increase. If a customer wanted to transport gas, it had to find a supplier that would sell gas below 23 cents per therm, which would be difficult to do. One customer, a federal agency, had contacted staff indicating it had reserves and could transport gas because it was a sunk cost and did not need to go into the market. Customers
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having to go into the market would find Palo Alto's rates competi-tive. It was still a very low rate, bundled or unbundled, compared with what was available on the market. Refuse Rate Increase (CMR:258:94) Mr. Roberts said the refuse rate increase was a significant rate increase proposal, but there was background information which was pertinent for Council's consideration. Attachment A of the staff report (CMR:258:94) showed a block entitled "Expenses." For the year 1995, total Refuse Fund expenditures were $18,744,000, to which several different activities contributed. One, the cost of refuse collection was considered by most people as the major component, but was actually a minor component of the total fund at one-third of the expense. The other two-thirds was spent for the recycling program, household hazardous waste disposal, long-term hauling and disposal, and street sweeping. There were a number of activities which were paid for out of the fund, all of which had a common theme and all of which fell under waste management, but were not necessarily refuse collection. The fourth line item under expenses, showed projected expenditures for long-term hauling at $4.3 million. The cost was for hauling refuse to the Sunnyvale Material Recovery and Transfer (SMaRT) station, hauling from Sunnyvale to Kirby Canyon, and landfill disposal fees to the City of San Jose for disposal at Kirby Canyon. It represented the first full year of payment of the fees. In 1993-94, the budgeted amount for the item had been $1,716,000. The increase in the one item was $2.3 million or a 135 percent increase, which drove the vast preponderance of the recommended 18 percent average rate increase. It represented the continuation and full implementation of a policy Council had made three years before, where a conscious choice had been made to export the majority of Palo Alto's solid waste in order to preserve the long-term viability of its landfill operation and provide the service to Palo Alto residents. It was an issue which had been foreseen and forecast; however, it had previously been forecast at 15 percent, but was an 18 percent increase. The table at the top of page 2 of the staff report (CMR:258:94) showed the number of single-family customers subscribing to different service levels. It was pertinent to note that over the past three years, 62 percent of the total single-family residential base had changed at least one subscription level, moving down in the number of cans. The change had been driven by the conservation effort, recycling, and increases in rates, which had been more significant than staff had anticipated. In 1993, a 30 percent refuse rate increase was recommended because of Smart station start-up costs. The additional 3 percent between the original 15 percent forecast and the 18 percent recommendation came from the resulting down market move. There had been significant discussion about the proposed rate increase, as shown on page 5 of the staff report (CMR:258:94). Council had given staff direction to return in 1994 with a consideration of an element of progressivity in structuring the rate increase. Staff's recommendation attempted to follow Council's direction. The first alternative was an across the board 18 percent rate increase for all categories and the second alternative achieved the same average 18 percent increase but was structured to provide
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a lower amount of increase, 14 percent for the single-can user and a corresponding higher rate of increase for multi-can users. The second alternative rewarded customers who chose to conserve and reduce the amount of solid waste by subscribing to the single-can level. Staff's recommendation was for the second alternative. Vice Mayor Simitian thanked staff for responding to the progress-ivity as raised in 1993. There were a number of ways to describe the rate differential, not one of which was right or wrong. The question was which sounded simplest. The progressivity issue was simply described as the fact the first can cost $1 less than every other can thereafter or the second through the fourth cans cost $1 more than the first can. The whole progressivity issue could be reduced down to the fact that the first can was $1 cheaper. If compared to the first alternative, it was merely a question of reducing the cost of the first can by 50 cents over what it would otherwise be and add 50 cents on to the second, third, and fourth cans. He supported the recommendation and appreciated staff's efforts to follow Council's direction. He confirmed "RSR" stood for Rate Stabilization Reserve. Mr. Roberts replied yes. Vice Mayor Simitian asked about Council's previous direction to keep the local landfill viable. Transportation costs to the SMaRT station, operating the SMaRT station, and the Kirby Canyon landfill were designed in part to reflect Council's desire to keep the landfill operation going for a longer period of time than otherwise if it was filled up sooner rather than later. Mr. Roberts said Vice Mayor Simitian's assessment was absolutely correct. Had the City continue in its prior pattern of disposing 100 percent of its refuse at the landfill, the anticipated life of the landfill would have run out in seven years. Going to the new proposal to export refuse, have it sorted, and further recycled at the Smart station with the remainder taken to Kirby Canyon, Palo Alto's landfill had an estimated life of 20 to 25 years plus. Vice Mayor Simitian asked whether the value of the extended life primarily meant residents and local businesses could "take things to the dump," otherwise, it could be filled up in seven years. Mr. Roberts said Vice Mayor Simitian was exactly correct. It was a service available to Palo Alto residents and small businesses like landscape firms, construction activities, and residents with weekend trash and hauling. It also enabled the City to continue its composting and recycling operations on site, which were extremely valuable. Vice Mayor Simitian asked about the largest priced item after the Smart station, Kirby Canyon, and transportation costs. Mr. Roberts asked whether Vice Mayor Simitian wanted to know what drove the total increases or the total cost. Vice Mayor Simitian said the cost increases. He received
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questions as to why the garbage rates had increased. People were not clear why garbage pickup cost 50 percent more to take to the dump. Part of the answer was that it was being taken to a new place with new requirements and new costs, but he wanted to know whether there was more to the answer. Mr. Roberts said Vice Mayor Simitian's assessment was the primary reason. The other increases were relatively small in nature and did not compare. Another issue, and the reason garbage rates had increased, was compliance with State and Federal mandates for dealing with source reduction, minimizing waste stream, and dealing with the treatment of hazardous materials, all of which continued to increase program costs. Vice Mayor Simitian asked what connection, if any, there was between increases and the City Auditor's audit of the Palo Alto Sanitation Company (PASCO) contract. Mr. Roberts said there was no connection at the current time. The City Auditor's work was still in progress and the review of rates and staff report (CMR:258:94) had been prepared prior to any information received from the City Auditor's Office. Furthermore, the City Auditor's work focused only on the component of refuse collection, roughly one-third of the total program, not on the components which drove the increase. Vice Mayor Simitian clarified the PASCO contract represented one-third of the total program, but 80 percent of the total revenue. Deputy Director of Public Works Mike Miller said in the current fiscal year, PASCO received 31 percent of the total Refuse Fund revenues. Under 34 percent of the total revenue was projected for Fiscal Year 1994-95's budget, or approximately $6 million, against revenues of $14 million on customer service alone. Vice Mayor Simitian asked whether the customer service base at $14 million included more than the portion actually allocated to PASCO. Mr. Roberts replied yes. The revenue stream did not go directly to PASCO, but came to the City of Palo Alto. Customers were billed by the Utility Department and fees were collected by the City. Only portions which represented the cost of collection service ever went to PASCO. A vast majority of the fund, two-thirds, never saw any contact with PASCO whatsoever. Vice Mayor Simitian said Council was required to make decisions about revenues and expenditures as part of the budget while the audit was in progress, which was the reason he wanted to know whether there was any relationship between the two. City Auditor Bill Vinson said Mr. Roberts was partially correct in the statement about the fact the City Auditor's audit related to the PASCO contract and was a portion of the total expenditure under discussion. It was important to note, however, that it was a significant expenditure. The audit, which would be presented
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within 30 to 60 days, might not have a direct major impact on rates because of extrapolating out to individual citizens or subscribers it appeared smaller. It was important to note that it was an expenditure from the City. The potential dollar savings should not lose its magnitude. Vice Mayor Simitian was sensitive to the issue because in 1993, he had suggested an adjustment in rates at the budget hearing and staff had indicated it was impractical to do so on relatively short notice. He thought the City Auditor was indicating that whatever the results of the audit, there would not be a twelfth-hour necessity for Council to take action in connection with rates. Mr. Vinson replied yes. He would characterized the type of potential cost savings which Council would see in the audit as being on a prospective basis rather than an historical basis. Council Member Andersen was unclear about the long-term hauling item. The staff report (CMR:258:94) indicated the cost in Fiscal Year 1993-94 was $1.716 million, while Fiscal Year 1994-95 was $4,030,000 million. He asked what the projections for Fiscal Year 1994-95 had been in Fiscal Year 1993-94. Mr. Miller said the Refuse Fund forecast which had been brought to Council in 1993, had projected Fiscal Year 1994-95 at $3.9 million. Council Member Andersen said staff's projection had not been far off. Mr. Miller agreed and said the current year was at $4,030,000. Council Member Andersen asked how the figure compared with the 3 percent over staff's previous projection. Mr. Roberts said it was a different issue. Staff had originally forecast a 15 percent increase based on the issue Council Member Andersen had addressed. The 3 percent difference came from the fact that more customers had moved down-market to a lower subscription level than anticipated. Therefore, revenues had come in lower than anticipated, creating a compensation effect to deal with in the rates. Council Member Andersen asked whether it was a death spiral. Mr. Roberts thought staff had stabilized the spiral. Council Member Wheeler asked whether staff had made conservative assumptions in the rates proposed for Fiscal Year 1994-95 related to people making further shifts downward. Mr. Roberts said staff had attempted to be conservative, but from staff's perspective, conservative might mean something different from Council Member Wheeler's question. Staff believed a majority of customers had already moved as far down-market as possible.
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The conservation efforts had been well-served in Palo Alto and people had tried to maximize recycling and minimize waste generation. Staff did not see a continuing large move down market, so it had taken a small forecast for additional down-market moves. Council Member Wheeler hoped staff would estimate as many people as possible moving down to avoid getting caught in the same spiral as the drought rates. Palo Alto had forced people to behave in ways it never dreamt it could; Palo Altans were very resourceful. Mr. Roberts said people had tried to find other ways of disposing of refuse to avoid paying refuse collection fees and took refuse directly to the dump. Staff needed to return to Council to reinforce the issue of the community-wide benefit of a refuse rate because of all of the services it embodied and provided for the community. Council Member Wheeler asked why even in the progressive scenario the increase in the mini can rate was the same, at 18 percent. Mr. Miller said staff had attempted to keep the per dollar rate between the mini can and one can the same as it had been the previous year at $3.00. Council Member Wheeler said mention had been made in the staff report (CMR:258:94) that Palo Alto had done a remarkable job in recycling efforts and had reduced the waste stream by 41 percent. She asked whether it meant the City had used its rights to the SMaRT station and Kirby Canyon to the fullest or whether it had some excess capacity. If so, she asked whether the City had the ability to sell its excess capacity. Mr. Miller said the agreement was based on source reduction and recycling tonnages over the years which projected the solid waste stream would be reduced. When the contract with Kirby Canyon had been drawn, the range on a per year basis was from 25 percent less than the figure to a maximum of 10 percent over. On a 100 ton commitment, Palo Alto's minimum was 75 tons and maximum was 110 tons at the same rate. If Palo Alto residents ever reduced garbage to nothing, the City would be allowed contractually to sell the space to any outside party. There were two or three cities which had already expressed an interest in joining in the SMaRT station whenever excess capacity was available. The SRRE had been so successful, at a 41 percent reduction in solid waste stream, the City was able to reduce the proposed cost for programs during Fiscal Year 1993-94 by over $200,000 in source reduction. Council Member Wheeler asked how many tons Palo Alto currently shipped. Mr. Miller said Palo Alto would ship approximately 59,000 tons in a full fiscal year. Service for Fiscal Year 1993-94 had begun in October 1993. It was two-thirds of the waste stream. The other one-third still went to the landfill in the form of customer self-haul from businesses and residents, debris boxes, and unscheduled
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refuse. It was a shorter run and more cost-effective to run special boxes to the landfill rather than Sunnyvale. Mayor Kniss said staff had explained that the difference in the amounts charged by other collectors in other jurisdictions as seen on page 3 of the staff report (CMR:258:94) was due to the service rate. She asked whether there was anything else which could explain the differences, particularly Stanford and Mountain View which were substantially lower. Mr. Roberts said there were two components. First, the service provided in Palo Alto by PASCO was above the level of service provided in most neighboring communities, particularly the backyard pickup issue, which was very unique and special. Of the $34.30 proposed for two-can service, only $11.60 went to collection. The other two-thirds paid for street sweeping, etc., a service which might either not be provided by other agencies or might be paid for in other ways. Mayor Kniss confirmed most other communities did not have the backyard pickup. Mr. Roberts replied yes. Most cities had gone to curbside pickup. Mr. Miller said that in both Los Altos and Los Altos Hills, the garbage fee did not include the cost of street sweeping. Los Altos Hills did not include curbside compost and there was no monthly household hazardous waste program. People had to participate through the Santa Clara County program. The City of Los Altos had only a cardboard commercial recycling program, not a full service program. Los Altos Hills had no commercial recycling program. Council Member Schneider said Council received letters and phone calls, largely due to rate increases. She asked how the Utilities Department would communicate the information to the public to sell the increase. Mr. Miller said the Utilities Department would send out a Utility bill insert with a brief description of the rate increases. Subsequent to Council approving the budget and proposed rates on June 20, 1994, the Utilities and the Refuse Fund would run newspaper ads for four succeeding Wednesdays. Review of Utility Fund Reserves Levels (CMR:240:94) Ms. Harrison said the chart on page 2 of the staff report (CMR:240:94) summarized the projected reserve balances within each of the funds. The remainder of the report discussed both what the particular reserves had been established for and an analysis of balances. Of particular interest was the large balance in the Electric Fund, which staff was carefully monitoring. Staff suggested looking at the reserve policy for the Wastewater Treatment Fund over the coming year, since it was believed there was a need to create reserves for environmental and capital needs of the fund in excess of the Emergency Plant Reserve which
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currently existed. The Calaveras Reserve was being drawn down more quickly than anticipated because interest earnings were lower than projected. The final issue of interest was the relative health of the Water Rate Stabilization Reserve compared with where staff anticipated it would be, which tied into the rate decrease proposal. No Action Taken ADJOURNMENT: The meeting adjourned at 7:50 p.m.
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ATTEST: APPROVED: City Clerk Mayor NOTE: Sense minutes (synopsis) are prepared in accordance with Palo Alto Municipal Code Sections 2.04.200 (a) and (b). The City Council and Standing Committee meeting tapes are made solely for the purpose of facilitating the preparation of the minutes of the meetings. City Council and Standing Committee meeting tapes are recycled 90 days from the date of the meeting. The tapes are available for members of the public to listen to during regular office hours.
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