HomeMy WebLinkAboutRESO 9764DocuSign Envelope ID: 654775C2-4891-48D9-881A-74843641 F101
Resolution No. 9764
Resolution of the Council of the City of Palo Alto Approving the
FY 2019 Gas Utility Financial Plan
RECITALS
A. Each year the City of Palo Alto ("City") regularly assesses the financial position of
its utilities with the goal of ensuring adequate revenue to fund operations. This includes
making long-term projections of market conditions, the physical condition of the system, and
other factors that could affect utility costs, and setting rates adequate to recover these costs. It
does this with the goal of providing safe, reliable, and sustainable utility services at competitive
rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and made
part of the Financial Plans.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby adopts the FY 2019 Gas Utility Financial Plan.
SECTION 2. The Council hereby approves the transfer of up to $129,000 in FY 2019
from the Rate Stabilization Reserve to the Operations Reserve, as described in the FY 2019 Gas
Utility Financial Plan approved via this resolution.
SECTION 3. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act's (CEQA) definition of a project under Public Resources
Code Section 21065 and CEQA Guidelines Section 15378(b)(S), because it is an administrative
II
II
II
II
II
II
II
180327 jb 6055005
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
FY 2019 GAS
UTILITY
FINANCIAL PLAN
FY 2019 TO FY 2028
DocuSign Envelope ID: 654775C2-4891-48D9-881A-74843641F101
GAS UTILITY FINANCIAL PLAN
GAS UTILITY FINANCIAL PLAN
FY 2019 TO FY 2028
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations ••••••••••...............••....•.....••••••...........•........••............... 4
Section 2: Executive Summary and Recommendations ........•.•.•..................•••....•.......•••••••....•• 5
Section 2A: Overview of Financial Position .................................................................................. S
Section 28: Summary of Proposed Actions .................................................................................. 6
Section 3: Detail of FY 2018 Rate and Reserve Proposals ........................................................ 6
Section 3A: Rate Design ............................................................................................................... 6
Section 38: Current and Proposed Rates ..................................................................................... 6
Section 3C: Proposed Reserve Transfers ...................................................................................... 9
Section 4: Utility Overview .................................................................................................. 10
Section 4A: Gas Utility History ................................................................................................... 10
Section 48: Customer Base ........................................................................................................ 11
Section 4C: Distribution System ................................................................................................. 12
Section 4D: Cost Structure and Revenue Sources ...................................................................... 13
Section 4E: Reserves Structure ................................................................................................... 13
Section 4F: Competitiveness ...................................................................................................... 14
Section 4G: Gas Supply Rates .................................................................................................... lS
Section 5: Utility Financial Projections ................................................................................. 16
Section SA: Load Forecast .......................................................................................................... 16
Section SA: FY 2013 to FY 2017 Cost and Revenue Trends ........................................................ 17
Section SB: FY 2017 Results ....................................................................................................... 18
Section SC: FY 2018 Projections ................................................................................................. 19
Section SD: FY 2019-FY 2028 Projections .................................................................................. 19
Section SE: Risk Assessment and Reserves Adequacy ............................................................... 20
Section SF: Long-Term Outlook ................................................................................................. 22
March 2018 21 Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
Section 6: Details and Assumptions ..................................................................................... 23
Section 6A: Gas Purchase Costs ................................................................................................. 23
Section 68: Operations .............................................................................................................. 24
Section 6C: Capital Improvement Program {CIP) ....................................................................... 25
Section 6D: Debt Service ............................................................................................................ 27
Section 6E: Equity Transfer ........................................................................................................ 28
Section 6F: Revenues ................................................................................................................. 28
Section 6G: Communications Plan ............................................................................................. 29
Appendices ......................................................................................................................... 31
Appendix A: Gas Financial Forecast Detail ................................................................................ 32
Appendix B: Gas Utility Capital Improvement Program {CIP) Detail ......................................... 33
Appendix C: Gas Utility Reserves Management Practices ... : ..................................................... 35
Appendix D: Description of Gas Utility Cost Categories ............................................................ 39
Appendix E: Gas Utility Communications Samples .................................................................... 40
March 2018 3I Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
SECTION 1: DEFINITIONS AND ABBREVIATIONS
ABS: Acrylonitirile butydene styrene, a plastic gas main material
AMI: Advanced Metering Infrastructure
CARB: California Air Resources Board
CIP: Capital Improvement Program
CNG: Compressed Natural Gas
CPAU: City of Palo Alto Utilities Department
CPUC: California Public Utilities Commission
GAS UTILITY FINANCIAL PLAN
Cross-bore: A cross-bore exists when one utility line has been drilled or "bored" through a portion
of another line. Gas cross-bores can occur in sewer lines as a result of "horizontal boring"
construction practices.
Distribution: transportation of gas to customers.
GMR Program: Gas Main Replacement Program
.Local Transportation: transportation of gas to Palo Alto across PG&E's distribution system from
PG&E City Gate.
Malin: a delivery hub referred to in gas purchase contracts and located in Malin, Oregon, where
the northern end of PG&E's Redwood Transmission Pipeline is located.
MMBtu: Millions of British thermal units, a unit of gas measurement equal to ten therms.
Commonly used for high volume gas measurement. Wholesale purchases of gas from suppliers
are typically measured in MMBtu.
O&M: Operations and Maintenance
PE or HOPE: Polyethylene, a gas main material (more specifically, High-Density Polyethylene)
PG&E: Pacific Gas and Electric
PG&E Citygate, or Citygate: a delivery hub referred to in gas purchase contracts. Any gas delivered
to PG&E's distribution system (such as gas delivered at the southern end of PG&E's Redwood
Transmission Pipeline) is said to have been delivered at PG&E Citygate.
PVC: Polyvinyl chloride, a plastic gas main material
Summer: April 1 to October 31
Therms: The standard unit of measurement for natural gas sales to customers, equal to 100,000
British thermal units. Therms measure the heating value of the gas, rather than its volume.
Transmission: transportation of gas between major gas delivery hubs via a gas transmission
pipeline, such as PG&E's Redwood pipeline.
UAC: Utilities Advisory Commission, an appointed body that advises the City Council on CPAU
issues.
Winter: November 1 to March 31
March 2018 41 Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB 1 A-74843641F101
'
GAS UTILITY FINANCIAL PLAN
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City's Gas Utility for the next ten years. This
Financial-Plan provides revenues to cover the costs of operating the utility safely over that time
while adequately investing for the future. It also addresses the financial risks facing the utility
over the short term and long term, and includes measures to mitigate and manage those risks.
SECTION 2A: OVERVIEW OF FINANCIAL POSITION
This financial plan projects non-commodity costs to increase from FY 2019 through FY 2028 at
about 3.5% per year on average. In the short term, some of these cost increases are related to
the cross-bore inspection program, but capital improvement program (CIP) costs have also
increased as the economy has improved. The national and regional focus on infrastructure
improvement has created more demand, and the pool of skilled construction labor has not grown
at the same pace. While CPAU generally plans a new gas main replacement project every year,
recent larger than expected bids have required resizing and redesign of some existing planned
projects. Because of this (as well as the complexity of the project), Cl P costs for FY 2018 increased
for the University Avenue Business District project, which is scheduled to begin construction in
mid-2018. Due to the amount of planning required for this project, no new CIP work was
budgeted for FY 2017, and because of the complexity of the University Avenue project, no CIP
work is budgeted for FY 2019, resulting in one-time cost savings. The next new main replacement
project after the University Avenue project will take place in FY 2020. Table 1 shows the Gas
Utility expenses over the period of this financial plan.
Table 1: Gas Utility Expenses for FY 2017 to FY 2028 (Thousand $'s)
Expenses FY FY FY FY FY FY FY FY FY FY FY FY 2017 2018 {$000} (act.) (est.) 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Commodity costs 12,563 14,137 13,022 12,851 13,040 13,233 13,499 13,855 14,188 14,576 14,731 14,932
Operations 21,050 20,302 20,509 21,133 20,579 21,874 22,508 23,270 24,048 24,879 24,303 24,649
Capital Projects 2,214 7,804 5,197 10,217 12,080 9,815 9,892 9,970 10,050 10,131 10,214 10,299
TOTAL 35,827 42,243 38,728 44,202 45,698 44,922 45,898 47,095 48,286 49,587 49,248 49,880
To ensure that revenues cover projected rising costs, the financial plan includes the rate
trajectory shown in Table 2.
Table 2: Projected Gas Rate Trajectory for FY 2019 to FY 2028
Projection FY FY FY FY FY FY FY FY FY FY
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
Current Financial Plan 4% 8% 7% 7% 4% 4% 1% 1% 0% 2%
FY 2018 Financial Plan 4% 6% 6% 5% 3% 3% 2% 1% 0% N/A
FY 2017 Financial Plan 7% 4% 1% 1% 1% 1% 1% 1% N/A N/A
The Gas Utility has a Rate Stabilization Reserve, which can be used to smooth rate increases over
several years. This Financial Plan projects that these reserves will be exhausted by the end of FY
2020. The Gas Utility also has a CIP Reserve to help offset one-time and/or unanticipated, spikes
March 2018 5I Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB 1A-74843641F101
GAS UTILITY FINANCIAL PLAN
in CIP spending which do not merit separate bond financing. Table 3 shows the projected reserve
transfers over the forecast period.
Table 3: Transfers To/(From) Reserves for FY 2018 to FY 2028 ($000)
Reserve FY 2018 FY 2019 FY 2020 to FY 2028
Rate Stabilization (129) (2,006) (4,404)
CIP - -(3,820)
Operations 129 2,006 8,224
SECTION 28: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Gas Utility in FY 2018:
1. Amend the proposal of a $1.2 million transfer from the Rate Stabilization Reserve to the
Operations Reserve, as proposed in the FY 2018 Gas Financial Plan, to a transfer of
$129,000, based on projected ending Operations Reserve levels.
Staff proposes the following actions for the Gas Utility in FY 2019:
2. Increase distribution rates by 6% (a 4% overall increase) for FY 2019, primarily reflecting
increases to capital expenditures and also increased operations costs. See Section 38:
Current and Proposed Rates for more details.
3. Transfer $2 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 3D: Proposed Reserve Transfers for more details.
SECTION 3: DETAIL OF FY 2018 RATE AND RESERVE PROPOSALS
SECTION 3A: RATE DESIGN
The Gas Utility's rates are evaluated and implemented in compliance with cost of service
re·quirements. The Gas Utility's current rates are based on the methodology from the April 2012
Gas Utility Cost of Service Study completed by Utility Financial Solutions.1 In preparation for an
update to the study, staff discussed a proposed scope with the Utilities Advisory Commission in
October 2016, and the Council in November 2016 2 • The updated study is projected to be
completed by late FY 2018 or the early part of FY 2019, and will provide guidance for the next
proposed rate action.
SECTION 38: CURRENT AND PROPOSED RATES
On July 1, 2012 CPAU restructured its rates so that the commodity component varied monthly to
match changes in gas market prices.3 In addition, CPAU increased monthly service charges to
recover the cost of providing gas service to customers. In January 2015, the Council adopted a
1 Staff Report 2812, 5/17 I 2012 http://archive.cityofoaloalto.org/civica/filebank/blobdload.asp?BloblD=31395
2 Staff Report 7416 11/14/2016 http://www.citvofoaloalto.org/civicax/filebank/documents/54576
3 Staff Report 2812, 5/17 /2012: http://archive.cityofpaloalto.org/civica/filebank/blobdload.asp?BloblD=31395
March 2018 6I Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641 F101
GAS UTILITY FINANCIAL PLAN
new rate component to collect the costs of purchasing allowances for the purpose of compliance
with the State's cap-and-trade program.4 This component changes depending on the cost of
allowances and gas demand. In October 2016, the Council adopted a resolution changing the
Local Transportation rate (which had been collapsed into the Distribution rate in 2015 to
streamline bill presentation), to be a pass-through of PG&E's Gas Transportation Rate to
Wholesale/Resale Customers (G-WSL) charge to Palo Alto.5 This went into effect November 1,
2016. In December 2016, Council approved a carbon neutral gas plan, with a goal of achieving a
carbon neutral gas portfolio by FY 2018.6 The plan is for costs associated with the plan to be a
passed through directly to customers as well, although the rate impact is not to exceed $0.10 per
therm. Three years' worth of volumetric rate history can be found on Palo Alto's website.7
CPAU has four rate schedules: one for separately metered residential customers (G-1), one for
small commercial and master-metered multi-family residential customers (G-2), one for
customers using over 250,000 therms per year (G-3) and a specific schedule for the Compressed
Natural Gas station (G-10). All customers pay a monthly service charge, which represents meter
reading, billing, and other customer service costs, as well as a portion of operations and
maintenance cost. All customers are also charged for each therm of gas used. Separately metered
residential customers are charged on a tiered basis, differentiated by season. During the winter
months, the first 2 therms per day (60 therms for a 30 day billing period) are charged a base price
per CCF, and all additional units charged a higher price per therm. During the summer months,
the first tier level is 0.667 therms per day, or 20 therms for a 30 day billing period. Commercial
customers pay a uniform price for each therm used.
Table 4 shows the current monthly service charges for all rate schedules. Table 95 shows the
consumption charges related to distribution charges. As mentioned earlier, commodity charges
change monthly, and transportation charges are tied to the PG&E G-WSL rate schedule. Some
recent commodity price history is discussed in Section 6A: Gas Purchase Costs.
4 Staff Report 5397, 1/26/2015: https://www.citvofoaloalto.org/civicax/filebank/documents/45537
5 Staff Report 7260 10/17 /2016 http://www.citvofoaloalto.org/civicax/filebank/documents/54165
6 Staff Report 7533 12/05/2016 http:ljwww.citvofoaloalto.org/civicax/filebank/documents/54882
7 Monthly Gas Commodity & Volumetric Rates http:ljwww.cityofpaloalto.org/civic_ax/filebank/documents/30399
March 2018 71 Page
DocuSigri Envelope ID: 654775C2-4891-48D9-881A-74843641F101
GAS UTILITY FINANCIAL PLAN
Table 4: Current and Proposed Monthly Service Charges
Monthly Service Charge Change
Rate Schedule ($/month)
Current (as of Proposed for ($) (%)
7/1/16) FY 2019
G-1 (Residential) $10.32 $10.94 $0.62 6%
G-2 (Small Commercial) 78.23 82.94 4.69 6%
G-3 (Large Commercial) 377.43 400.08 22.65 6%
G-10 (CNG) 52.93 56.11 3.18 6%
Table 5: Current and Proposed Gas Distribution Charges
Change
Current (as of Proposed ($) (%)
11/1/16) for FY 2019
G-1 (Residential)
Tier 1 Rates $0.3933 $0.4239 . $0.0306 7.8%
Tier 2 Rates 0.9319 0.9948 0.0629 6.7%
G-2 (Residential Master-Metered and Small Commercial)
Uniform Rate 0.5767 0.6183 0.0416 7.2%
G-3 (Large Commercial)
Uniform Rate 0.5687 0.6098 0.0411 7.2%
G-10 (Compressed Natural Gas)
Uniform Rate 0.0093 0.0100 0.0007 7.2%
SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES
Table 6 shows the impact of the proposed July 1, 2018 rate changes on the median residential
bill. The average increase is roughly 4% based on prices in February 2018, but some customers
may see slightly higher or lower increases due to slight changes in the composition of the utility's
costs, as well as prevailing market prices.
March 2018 8I Page
DocuSign Envelope ID: 654775C2-4891-4809-BB 1A-74843641F101
GAS UTILITY FINANCIAL PLAN
Table 6: Impact of Proposed Gas Rate Changes on Residential Bills .
Usage Bill under Bill under Change
(Therms/month) Current Rates Proposed Rates $/mo. %
Winter (Using February 2018 commodity prices)
30 $36.93 $ 38.47 $1.54 4%
54 (median) 58.21 60.49 2.28 4%
80 94.20 98.04 3.84 4%
150 193.98 202.23 8.25 4%
Summer (Using July 2017 commodity prices)
10 18.73 $19.90 $1.17 6%
18 (median) 25.45 27.08 1.63 6%
30 40.57 43.16 2.59 6%
45 61.26 65.17 3.91 6%
Table 7 shows the impact of the proposed July 1,.2018 rate changes on various representative
commercial customer bills.
Table 7: Impact of Proposed Gas Rate Changes on Commercial Bills
(Using February 2018 commodity prices)
Usage Bill under Current Bill under Change
(Therms/ month) Rates Proposed Rates %
500 613 639 4%
5,000 5,430 5,642 4%
10,000 10,781 11,202 4%
50,000 53,493 55,571 4%
SECTION 30: PROPOSED RESERVE TRANSFERS
The FY 2018 Financial Plan proposed a $1.2 million transfer from the Rate Stabilization Reserve
into the Operations Reserve in FY 2018. Lower actual expenses in FY 2017 resulted in higher
ending reserve balances than initially projected, so staff recommends revising the transfer down
to $129,000 at this time. A tentative transfer of $2 million in FY 2019, followed by $4.4 million in
FY 2020, is included in the financial projections in this Financial Plan. In addition, $3.8 million in
the CIP Reserve may need to be utilized in FY 2021. This will help mitigate additional, one-time
costs related to the replacement of gas meters for AMI deployment. The transfers in general will
enable CPAU to maintain adequate Operations Reserve levels while moderating the pace of
increase in gas rates. The impact of these transfers on reserves levels can be seen in Appendix A:
Gas Utility Financial Forecast Detail.
March 2018 9I Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information and to help readers better understand the forecasts in Section 5: Utility
Financial Projections and Section 6: Details and Assumptions.
SECTION 4A: GAS UTILITY HISTORY
On September 22, 1917, the City of Palo Alto issued a bond to purchase the property of Palo Alto
Gas Company and continue it as a municipal enterprise. At the time, the system was comprised
of 21 miles of mains, 1,900 meters, and was valued at $65,500. PG&E supplied the gas, which
was synthesized from coal at its Potrero gasification facility. Almost immediately the City faced
challenges. Losses were at nearly 25% according to PG&E's master meter, and PG&E had filed
with the Railroad Commission (the forerunner to today's CPUC) to increase rates by nearly 72.5%.
Despite these initial hurdles, Palo Alto's system grew tremendously, and by 1924 revenues had
exceeded those of the electric utility. Sales were such that the annual reports of the time noted
gas usage "appears to be greater than that of any other city in the state, showing that gas is a
very popular form of fuel in Palo Alto." Just prior to the acquisition of the neighboring town of
Mayfield's gas system (centered around today's California Avenue) in 1929, the miles of main in
service and customers connections had doubled.
Notable changes to the gas supply itself came in 1930, when PG&E ceased supplying purely
manufactured (or coal) gas from its Potrero Hill facility in San Francisco and instead switched to
natural gas. In 1935, a supplementary butane injection system (later retired) was purchased from
Standard Oil to mitigate large wintertime peaks. Gas sales were at 248,658 million cubic feet
(MCF) with 4,849 active services.
Early gas mains in Palo Alto were made of steel, but in the 1950s, like many other utilities, CPAU
switched to ABS plastic. CPAU switched to PVC plastic in the early 1970s, but around 100 miles
of ABS mains had already been installed. A 1990 evaluation of the system found a steadily
increasing rate of gas leaks associated with those mains, something that other gas utilities had
also been experiencing. To reduce leaks, CPAU accelerated its main replacement program from
7,000 feet (1.3 miles) of replacements per year to 20,000 feet (3.8 miles) per year. This would
enable the utility to replace all of its ABS and its most vulnerable steel and PVC mains with
polyethylene (PE) mains over the course of the following 36 years.8 As of 2015 the Gas Utility
had replaced approximately 99 miles of ABS, as well as some sections of steel where cathodic
protection was not effective. Current main replacement projects will target the last ~goo feet of
remaining ABS main as well as tackling PVC replacement. A PVC risk analysis to determine the
appropriate footage of annual PVC replacement for future CIP projects is currently being
conducted. This is an example of how local control of its Gas Utility has provided Palo Alto
residents with substantial benefits. During the 1990s and 2000s, while CPAU was increasing its
8 Staff Report CMR:183:90. Infrastructure Review and Update, March 1, 1990
March 2018 10 I Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
main replacement rate to ensure a robust gas distribution system, PG&E was underspending on
safety-related infrastructure, according to a past audit.9
In the 1990s, while grappling with the issues surrounding its distribution system, CPAU was also
participating in major changes to the structure of the gas industry in California. Until 1988 CPAU
had a formal policy of setting its rates equal to PG&E's rates and successfully did so with the
exception of one year in the mid-1970s. At times this led to inadequate revenue (1974 to 1981)
as PG&E, the City's only gas supplier, regularly filed requests with the CPUC to increase the
wholesale gas supply rates charged to the Gas Utility. In the 1990s, as the CPUC began
deregulating the natural gas industry in California, the Gas Utility began purchasing gas from
suppliers other than PG&E. In 1997 the CPUC adopted the "Gas Accord,"10 which enabled the Gas
Utility (along with other local transportation-only customers) to obtain transmission rights on
PG&E's Redwood transmission pipeline running from Malin, Oregon into California.
In 2000/2001 the California energy crisis occurred, causing major disruptions to the Gas Utility's
supply costs. Wholesale gas prices rose over 500% between January 2000 and January 2001. The
Council approved drawing down reserves to provide ratepayer relief and, for two years following
the crisis, CPAU rates were above PG&E's as reserves were replenished. In April 2001 the Council
approved a hedging practice of buying fixed price gas one to three years into the future. After
reaching a low point in October 2001, prices continued to rise, and as a result the CPAU hedging
strategy frequently resulted in a wholesale supply cost advantage compared to PG&E until prices
began to decline steeply in mid-2008. At that point the Gas Utility's wholesale supply costs
became higher than market gas prices due to fixed price contracts entered into prior to 2008. As
a result the Gas Utility's wholesale supply costs were higher than PG&E's for several years. In
2012 Council approved a plan to formally cease the hedging strategy and purchase all gas on the
short-term ("spot") markets. As of July 1, 2012, the commodity portion of the gas rates changes
every month based on the spot market gas price.
SECTION 48: CUSTOMER BASE
CPAU's Gas Utility provides natural gas service to the residents, businesses, and other gas
customers in Palo Alto. Close to 23,600 customers are connected to the natural gas system,
approximately 22,000 (93%) of which are residential and 1,600 (7%) of which are non-residential.
Residential customers consume about 11 to 13 million therms of gas per year, roughly 45% of the
gas sold, while non-residential customers consume 55% (about 14 to 16 million therms).
Residential customers use gas primarily for space heating (46% of gas consumed) and water
heating (42%), with the remainder consumed for other purposes such as cooking, clothes drying,
9 Focused Financial Audit of The Pacific Gas & Electric Company's Gas Distribution Operations, Overland Consulting,
made available through a CPUC Administrative Law Judge's ruling on A12-11-009/113-03-007 on 5/31/2013
1° CPUC decision 97-08-055. Since then, the Gas Accord has been amended four times, with the most recent being
Gas Accord V, application A.09-09-013
March 2018 111 Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
and heating pools and spas.11 Non-residential customers use gas for space and water heating
(73% of gas consumed), cooking (20%), and industrial processes (6%).12
The Gas Utility receives gas at the four receiving stations within Palo Alto where CPAU's
distribution system connects with Pacific Gas and Electric's (PG&E's) system. These receiving
stations are jointly operated by CPAU and PG&E. CPAU purchases gas from various natural gas
marketers, with PG&E providing only local transportation service (transportation from the PG&E
City Gate gas delivery hub to Palo Alto). CPAU also has transmission rights on PG&E's transmission
pipeline from Malin, Oregon to PG&E City Gate, allowing it to purchase lower priced gas at that
location. CPAU does not produce or store any natural gas, and purchases gas in the monthly and
daily spot markets. The cost of the purchased gas is passed through directly to customers through
a rate adjuster that varies monthly with market prices. In a similar fashion, the cost for local
transportation is now tied to PG&E's G-WSL rate schedule, and varies when and if PG&E changes
its rate schedule. The cost of purchased gas and PG&E local transportation service usually
account for roughly one third of the utility's expenditures.
SECTION 4C: DISTRIBUTION SYSTEM
To deliver gas from the receiving stations to its customers, the utility owns 210 miles of gas mains
(which transport the gas to various parts of the city) and close to 23,600 gas services (which
connect the gas mains to the customers' gas lines). These mains and services, along with their
associated valves, regulators, and meters, represent the vast majority of the infrastructure used
to deliver gas in Palo Alto. CPAU has an ongoing CIP to repair and replace its infrastructure over
time, the expense of which normally accounts for around 15 to 20% of the utility's expenditures.
Costs for main replacements have been going up in recent years.
In addition to the CIP, the Gas Utility performs a variety of maintenance activities related to the
system, such as monitoring the system for leaks, testing and replacing meters, monitoring the
condition of steel pipe, and building and replacing gas services for buildings being built or
redeveloped throughout the city. The utility also shares the costs of other system-wide
operational activities (such as customer service, billing, meter reading, supply planning, energy
efficiency, equipment maintenance, and street restoration) with the City's other utilities. These
maintenance and operations expenses, as well as associated administration, debt service, rent,
and other costs, make up roughly half of the utility's expenses. In addition to these ongoing
activities, CPAU has conducted a program to find and replace cross-bores over the last several
years. Currently, $1 million is budgeted per year for the cross-bore program through FY 2021.
However, the ongoing cross-bore investigation may require additional funding, or extend for
longer into the future, as the remaining sewer lines are more difficult to examine than the
majority of the wastewater collection system that has been examined to date.
11 http://energyalmanac.ca.gov/naturalgas/overview.html
12 Source: Statewide Commercial End Use Study, California Energy Commission report, 2006. Statistics shown are for
end users in PG&E Climate Zone 4 (the Peninsula) where Palo Alto is located.
M a r c h 2 0 1 8 12 I P a g e
DocuSign Envelope ID: 654775C2-4891-4809-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
SECTION 40: COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 1, the Gas
Utility receives 95% of its revenue
from sales of gas and the
remainder from capacity and
connection fees, interest on
reserves, and other sources.
Appendix A: Gas Utility Financial
Forecast Detail shows more detail
on the utility's cost and revenue
structures.
As shown in Figure 2, in FY 2017,
gas purchase costs accounted for
roughly 31% of the Gas Utility's
costs. This percentage can vary
widely from year to year, as this
cost is based upon market
purchases, and now also includes
costs related to cap and trade.
Operational costs in FY 2017
represented roughly 51%, of
expenses and capital investment
was responsible for the remaining
18%. CIP is normally about 20% of
expenses, but this may be lower in
times when new budgeting for
projects is deferred, as happened in FY 2017.
SECTION 4E: RESERVES STRUCTURE
Figure 1: Revenue Structure (FY 2017)
• Sales of Gas
•Other Revenue
Figure 2: Cost Structure (FY 2017)
• Operations
•Gas Purchases
Capital
CPAU maintains six reserves for its Gas Utility to manage various types of contingencies. The
summary below describes each of these briefly. See Appendix C: Gas Utility Reserves
Management Practices for more detailed definitions and guidelines for reserve management:
• Reserve for Commitments: A reserve equal to the utility's outstanding contract liabilities
for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
• Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including the
General Fund, have a Reappropriations Reserve.
• Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate
funds for future expenditure on CIP projects and is anticipated to be empty unless a major
one-time CIP expenditure is expected in future years. This CIP can also act as a
March 2018 Bl Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
contingency reserve for the CIP. This type of reserve is used in other utility funds (Electric,
Water, and Wastewater Collection) as well.
• Rate Stabilization Reserve: This reserve is intended to be empty unless one or more large
rate increases are anticipated in the forecast period. In that case, funds can be
accumulated to spread the impact of those future rate increases across multiple years.
This type of reserve is used in other utility funds (Electric, Water, and Wastewater
Collection) as well.
• Operations Reserve: This is the primary contingency reserve for the Gas Utility, and is
used to manage yearly variances from budget for operational gas costs. This type of
reserve is used in other utility funds (Electric, Water, and Wastewater Collection) as well.
• Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and
is normally empty.
SECTION 4F: COMPETITIVENESS
Table 8 presents winter and summer residential bills for Palo Alto and PG&E at several usage
levels for commodity rates in effect as of July 2017 (to illustrate a summer month bill) and
February 2018 (to illustrate a winter month bill). The annual gas bill for the median residential
customer for calendar year 2017 was $469.05, about 14% lower than the annual bill for a_PG&E
customer with the same consumption. PG&E's distribution rates for gas have increased
substantially to collect for needed system improvements for pipeline safety and maintenance.
The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which
includes the surrounding communities.
Table 8: Residential Monthly Natural Gas Bill Comparison ($/month)
Usage %
Season (therms) Palo Alto PG&EZoneX Difference
30 36.93 42.39 -12.9%
Winter (Median) 54 58.21 76.31 -23.7%
(February 2018) 80 94.20 126.58 -25.6%
150 193.98 264.07 -26.5%
10 18.73 13.01 44.0%
Summer (Median) 18 25.45 23.41 8.7%
(July 2017) 30 40.57 45.24 -10.3%
45 61.26 72.72 -15.8%
Table 9 shows the monthly gas bills for commercial customers for various usage levels for rates in
effect as of February 2018. Bills for CPAU customers at the usage levels shown are around 2% to
27% higher for commercial customers than for PG&E customers. This is a substantial
improvement over the calendar year 2013 bill comparison, when commercial gas bills for CPAU
customers were 27% to 44% higher than for PG&E customers. This is primarily attributable to
PG&E's higher distribution rates as the commodity rates for CPAU and PG&E are very similar, both
being based on spot market gas prices.
March 2018 14 I Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
to projections of $36.9 million in the FY 2018 Financial Plan. Table 10 summarizes the variances
from forecast.
Table 10: FY 2017, Actual Results vs. Financial Plan Forecast ($000)
Net Cost/(Benefit) Type of change
Purchase costs lower than forecast (479) Cost savings
Operations cost savings (3,774) Cost savings
Decreased interest income and other Revenue decrease
non-sales revenues 1,753
Increased sales revenues (867) Revenue increase
Net Cost I (Benefit) of Variances (3,368)
SECTION SC: FY 2018 PROJECTIONS
Current projections indicate that sales revenues will be slightly higher than last year's forecast,
but other revenues have been revised downwards based on prior year actuals. While gas
purchase costs are not projected to increase appreciably during the forecast period, the current
financial plan anticipates CIP costs will be substantially higher in FY 2018 than projected in the
prior financial plan. Table 11 summarizes the current and projected variances from the FY 2018
Financial Plan.
Table 11: FY 2018 Projected Results vs. Current Financial Plan Forecast ($000)
Net Cost/ (Benefit) Type of change
Sales revenues higher than forecast (160) Revenue increase
Other revenues and interest lower than forecast 1,272 Revenue decrease
Purchase cost decrease (2,108) Cost decrease
Operations & maintenance and customer service (1,477) Cost decrease
cost decreases
Capital Improvement Cost increases 5,730 Cost increase
Net Cost I (Benefit) of Variances 3,2S9
SECTION SD: FY 2019-FY 2028 PROJECTIONS
Figure 6 above shows that staff projects costs for the Gas Utility to rise substantially in FY 2018,
and then to increase at around 2.9% per year on average through FY 2028. In Operations, there
is a short run addition of $1 million, starting in FY 2019, for cross-bore inspections (this expense
is projected to continue for at least three years), as well as general inflationary increases of
around 2 to 3% per year. Salaries and benefits expenses are projected to rise at 3 to 4% per year,
per the City's Long Range Financial Plan. Construction costs continue to increase, which resulted
in increased costs in FY 2018 for the University Avenue Business District project, which is
scheduled to begin construction in mid-2018. Due to the amount of planning required for this
project, no new CIP work was budgeted for FY 2017, and because of its complexity, no CIP work
is budgeted for FY 2019, resulting in one-time cost savings. The next new main replacement
project after the University Avenue project will take place in FY 2020, and ongoing main
replacement is expected to be more expensive. In addition to these trends, additional costs
related to AMI deployment are projected in FY 2020 and 2021. Gas commodity costs are the most
M a r c h 2 0 1 8 19 I P a g e
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641 F101
GAS UTILITY FINANCIAL PLAN
SECTION SF: LONG-TERM OUTLOOK
In the longer term (5 to 35 years out) it is very difficult to predict the Gas Utility's commodity
costs. A variety of long-term trends could affect commodity costs either positively or negatively.
Continuing improvement in gas extraction technology, such as tracking, could continue to create
generous supplies of gas, but these technologies are also under greater scrutiny with respect to
their environmental impacts. On the demand side, a continued shift from coal to natural gas for
electricity generation, an expansion of export capabilities, or an increase in manufacturing in the
U.S. might drive up natural gas prices, but other factors, such as generally more mild winters,
might drive gas demand lower. It is also difficult to predict the magnitude of the additional cost
impacts associated with the State's cap-and-trade program over the long term. In the face of this
uncertainty, CPAU is able to protect the financial position of the Gas Utility by continuing its
current strategy of passing these costs directly to its customers via month-varying rate
adjustment mechanisms. The City pursues a policy of purchasing offsets to make gas usage in
Palo Alto carbon neutral. The cost is not to exceed $0.10/therm.
Future CIP investment needs for the Gas Utility may be lower than in the past, although costs per
foot for main replacement have been increasing substantially. The Gas Utility has replaced nearly
all of its ABS gas mains and its most problematic steel and PVC mains as well. The PE pipe being
used now is expected to have at least a fifty-year lifetime, and there is growing evidence that it
may last much longer than that. This would result in lower CIP investment over the long term.
CPAU is considering performing a study in the near future to develop its future main
replacements priorities and strategy.
Long-term state or local climate goals could also have a major impact on the Gas Utility. The
Global Warming Solutions Act, Assembly Bill 32 (AB32), set a goal of reducing greenhouse gas
(GHG) emissions to 1990 levels by 2020. In its December 2007 Climate Protection Plan, the City
set a goal of lowering emissions to 15% below 2005 levels by 2020. As a community Palo Alto
achieved these goals in 2012 even with continued use of natural gas for heating, cooking, and
industrial processes. However, to achieve the recently adopted Sustainability and Climate Action
Plan (S/CAP) goal of an 80% reduction in carbon emissions by 2030, or the State's adopted goal
of an 80% reduction in emissions by 2050, extensive electrification of gas-using appliances is
necessary. If significant amounts of electrification occurred, stranded investment and higher
rates could be required as the costs of the distribution system are recovered over a lower sales
base. It is instructional that, in the recent discussion draft of its scoping plan update, CARB says,
to meet those goals, natural gas use would have to be "mostly phased out."13 Staff intends to
begin evaluating how to manage potential impacts of these trends over the next few years.
13 Climate Change Scoping Plan, First Update, Discussion Draft for Public Review and Comment, California Air
Resources Board, October 2013, pg 88.
M a r c h 2 0 1 8 22 I P a g e
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
Table 13 shows the current status of these project categories and future projected spending.
Table 13: Budgeted Gas CIP Spending ($000)
Current Spending, Remain.
Proiect Category Budget• Curr. Yr Budget•• Committed FY 2019 FY 2020
One Time Projects 129 (1) 128 42 1,680 S30
Gas Main Replacement 10,913 (22S) 10,688 311 600 7,lSO
Tools And Equipment 89 (S) 84 lS 370 120
Ongoing Projects l,4SS (164) 1,291 134 1,044 1,07S
Customer Connections 1,414 (418) 997 99 1,303 1,342
TOTAL 14,001 (812) 13,189 600 4,997 10,218
•includes unspent funds from previous years carried forward or reappropriated into the current fiscal year
.. Equal to CIP Reserves (Reserve for Reappropriations +Reserve for Commitments).
FY 2021 FY 2022 FY 2023
2,320 --
7,lSO 7,lSO 7,lSO
120 100 100
1,107 1,141 l,17S
1,383 1,424 1,467
12,080 9,81S 9,892
The Gas Main Replacement (GMR) Program is in the final stages of completing a major milestone
with the replacement of gas mains made from Acrylonitrile-Butadiene-Styrene (ABS) plastic. The
program to replace ABS and other low-performing materials within the gas system started in the
1990s (see Section 4A: Gas Utility History for more detail). CPAU temporarily slowed down its FY
2014 and 2015 CIP appropriations in this category in order to finalize the last major ABS main
replacement project and to catch up on projects that had accumulated due to staffing issues.
With the replacement of all ABS mains with Polyethylene (PE) plastic near completion, the
material most at risk for failure is the remaining Polyvinyl chloride (PVC) plastic and steel
(wrapped, with cathodic protection). The next focus of the GMR program will be the replacement
of all PVC mains with PE mains. CPAU is considering updating the Gas System Master Plan to
determine which sections of pipeline to prioritize and assist in determining the pace of main
replacement (approximately three miles of main each year, or 1.5% of the system).
The current budget for the gas main replacement progra~ takes into account the recent rise in
construction costs. Several factors are contributing to the increase in construction costs and
include economic recovery in the Bay Area, a greater focus on infrastructure improvement by
many municipal agencies, and the higher demand for utility contractors within these fields. CPAU
has seen the replacement cost per linear foot increase by 25% to 50% over the last couple of
years. The Gas Utility posted the most recent project for competitive bid (the Upgrade Downtown
Project) and this resulted in very few contractor bids and an eventual contract price that was
much higher than estimated (staff has requested $6.7 million additional funding in FY 2018
related to this project). Staff is beginning to include the higher construction cost in future project
estimates in order to maximize the amount of pipe replaced, as well as insuring the overall
integrity of the gas system. Currently, CPAU plans to replace as many aging mains as possible
within its current budget. However, if this trend of higher construction cost continues, the Gas
Utility may require larger CIP budgets and as a result, an increase in rates.
Staff has also included projections for costs related to AMI deployment, primarily centered
around meter replacement costs in FY 2021.
Staff projects ongoing projects, tools and equipment, and customer connections to cost
approximately $2. 7 million in FY 2019 and remain relatively flat through the end of the forecast
period. In practice, these projects can fluctuate dramatically depending on prices of material,
system conditions and the pace of development and redevelopment in the city. It is worth noting
March 2018 26 I Page
DocuSign Envelope ID: 654775C2-4891-48D9-881A-74843641 F101
GAS UTILITY FINANCIAL PLAN
that fee revenue pays for the Customer Connections program, so when costs go up fees will be
adjusted as well. .
Aside from customer connections and transfers from other funds, the CIP plan for FY 2019 to FY
2023 is funded by utility rates. Appendix B: Gas Utility Capital Improvement Program {CIP} Detail
shows the details of the plan.
SECTION 60: DEBT SERVICE
The Gas Utility currently makes debt service payments on one bond issuance, the 2011 Series A
Utility Revenue Refunding Bonds. This bond issuance was to refinance the $18 million principal
remaining on the Utility Revenue Bonds, 2002 Series A issued for the Gas and Water Utilities to
finance various improvements to the distribution systems. $9.4 million of this issuance was
secured by the net revenues of the Gas Utility. Table 14 shows debt service for this bond for the
financial forecast period. Debt service on this bond will continue through 2026.
Table 14: Gas Utility Debt Service
FY FY FY FY FY FY FY FY FY FY
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
2011 Utility Revenue 802 801 801 803 804 805 803 800 803 1
Refunding Bonds, Series A
The 2011 bonds include two covenants stating that 1) the Gas Utility will ma intain a debt
coverage ratio of 125% of debt service, and 2) that the City will maintain "Available Reserves"15
equal to five times the annual debt service. The current financial plan complies with these
covenants throughout the forecast period, as shown in Table 15 and
Table 16.
Table 15: Debt Service Coverage Ratio ($000)
FY FY FY FY FY FY FY FY FY FY
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Revenues 37,112 36,361 38,526 41,445 44,381 46,250 47,956 48,837 49,742 49,505
Expenses (26,079) (25,309) (25,572) (25,192) (25,765) (26,408) (27,104) (27,763) (28,489) (28,865)
(Excluding CIP and
Debt Service)
Net Revenues 11,033 11,052 12,954 16,253 18,616 19,842 20,852 21,074 21,253 20,639
Debt Service 802 801 801 803 804 805 803 800 803 1
Coverage Ratio 1375% 1381% 1618% 2023% 2315% 2464% 2596% 2633% 2648% N/A
15 Available Reserves as defined in the 2011 bonds include the reserves for the Water, Electric, and Gas Utilities
M a r c h 2 0 1 8 27 I P a g e
DocuSign Envelope ID: 654775C2-4891-48D9-881A-74843641F101
GAS UTILITY FINANCIAL PLAN
Table 16: Debt Service Minimum Reserves {$000)
FY FY FY FY FY FY FY FY FY FY
2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Gas Utilitya 22,986 20,619 14,943 10,690 10,149 10,501 11,362 11,913 12,882 13,140
Debt Serviceb 802 801 801 803 804 805 803 800 803 1
Reserves Ratioc 29x 26x 19x 13x 13x 13x 14x 15x 16x N/A
a) CIP, Rate Stabilization, Operations, and Unassigned Reserves
b) Gas Utility's share of the debt service on the 2011 bonds.
c) Calculated using only Gas Utility reserves. The actual reserves ratio for the 2011 bonds is calculated based on the
combined Electric, Gas, and Water Utility reserves and total debt service and is higher than shown here.
The Gas Utility's reserves and net revenue are also pledged as security for the bond issuances
listed in Table 17, even though the Gas Utility is not responsible for the debt service payments.
The Gas Utility's reserves or net revenues would only be called upon if the responsible utilities
are unable to make their debt service payments. Staff does not currently foresee this occurring.
Table 17: Other Issuances Secured by Gas Utility's Revenues or Reserves
Bond Issuance Responsible Utilities Annual Debt Secured by Gas Utility's:
Service {$000) Net Revenues Reserves
1995 Series A Utility Storm Drain $680 Yes No Revenue Bonds
1999 Utility Revenue Wastewater Collection
Bonds, Series A Wastewater Treatment $1,207 No Yes
Storm Drain
2009 Water Revenue
Bonds (Build America Water $1,977* No Yes
Bonds)
*Net of Federal interest subsidy
SECTION 6E: EQUITY TRANSFER
The City calculates the equity transfer from its Gas Utility based on a methodology adopted by
Council in 2009 that has remained unchanged since.16 Each year it is calculated according to the
2009 Council-adopted methodology, and does not require additional Council action.
SECTION 6F: REVENUES
The Gas Fund receives most of its revenues from sales of gas, but about 5% comes from other
sources. The largest of these comes from service connection and capacity fees, followed closely
by sales of allowances related to California's cap-and-trade program. Another revenue item
related to the cap-and-trade program is collected in customers' bills. While the State provides
CPAU with a certain number of free allowances each year, the Gas Utility is required to sell a
portion of those in accordance with the regulations. In order to have enough allowances to cover
16 For more detail on the ordinance adopting the 2009 transfer methodology, see CMR 280:09, Budget Adoption
Ordinance for Fiscal Years 2009 and 2010; and CMR 260:09, Finance Committee Report explaining proposed changes
to equity transfer methodology.
M a r c h 2 0 1 8 28 I P a g e
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
customers' natural gas emissions, CPAU must buy allowances at market, and subsequently passes
through the cost of those allowances to customers. The regulations do not allow the revenue
derived from the sale of the free allowances to offset allowance purchases, thus the pass-through
rate component.
This financial plan bases sales revenue projections on the load forecast in Section 5A: Load
Forecast. Except where stated otherwise, these load forecasts are based on normal weather.
Weather can vary substantially, however, and this can affect revenues substantially. Also,
changes in customer behavior, as well as changes to more efficient gas appliances, or switching
to electric appliances, will modify these forecasts. Staff continually evaluate forecasts to see
when new trends emerge.
SECTION 6G: COMMUNICATIONS PLAN
The FY 2019 communications strategy covers four primary areas: operations, infrastructure,
safety, efficiency, renewables and rates. Since moving to market pricing for commodity rates, the
City's website posts changes to the commodity rates monthly. The City promotes gas use
efficiency incentives year-round, but most heavily during winter months to impact heating
activities. Promotional methods include community outreach events, print ads in local
publications, utility bill inserts, messaging on the bills and envelopes, website pages, email blasts,
videos for the web and use of social media.
To keep customers apprised of the status and accomplishments of capital improvement projects,
the City maintains a network of project web pages. Print and digital ads, social media and email
blasts drive traffic to the website. CPAU emphasizes safety topics year-round. CPAU is engaging
in several campaigns and programs in FY 2019 to promote gas utility efficiency and awareness of
the City's carbon neutral natural gas utility. Programs such as the Home Efficiency Genie and
commercial energy efficiency programs help residents and businesses better understand energy
usage, activities and/or upgrades they can implement to improve efficiency and reduce utility
costs. CPAU will be launching an upgraded version of its online utility account services portal
(www.cityofoaloalto.org/myutilitiesaccount) this year, which can provide customers with direct
access and more information about utility account and consumption data.
Stepping up efforts to promote gas safety education, staff is focusing outreach among
stakeholders to increase awareness of the need to call USA (811) before digging for anyone who
may excavate in and around Palo Alto, such as plumbers and contractors. Staff is also focusing
outreach on the importance of contacting CPAU to check for potential sewer and gas line cross-
bores prior to clearing a sewer line. Additional outreach messaging includes keeping fats, oils and
greases out of drains, and ensuring clear access to meters. CPAU has developed a number of
safety outreach materials to distribute to customers at community outreach events, emergency
preparedness fairs, school and business meetings. The use of materials featuring photos of some
unusual ways people obstruct access to their meters, including using them as bike racks and
building storage sheds around them, highlights meter access awareness.
CPAU will continue to promote safety, infrastructure, operations, efficiency and rate adjustment
messages through a variety of marketing and media channels. Every year, CPAU publishes an
updated gas safety awareness brochure and mails it to all customers in Palo Alto, as well as to
M a r c h 2 0 1 8 29 I P a g e
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
plumbers, contractors and excavators that may work in and around the area. Staff talk with
business customers at special facilities meetings, attend neighborhood safety and emergency
preparedness fairs and offer presentations to school and community groups. While print
materials and website pages still feature prominently, CPAU is increasing emphasis on outreach
through email newsletters, direct mail, newspaper inserts, social media and online videos. The
Gas Safety Public Awareness Plan contains saved copies of all outreach· materials and logs of
activities; the Department of Transportation reviews this Plan at least once per year.
March 2018 30 I Page
DocuSign Envelope ID: 654775C2-4891 -4809-881A-74843641 F101
APPENDICES
Appendix A: Gas Financial Forecast Detail
Appendix B: Gas Utility Capital Improvement Program (CIP) Detail
Appendix C: Gas Utility Reserves Management Practices
Appendix D: Description of Gas Utility Cost Categories
Appendix E: Gas Utility Communications Samples
March 2018
GAS UTILITY FINANCIAL PLAN
31 I Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
APPENDIX A: GAS FINANCIAL FORECAST DETAIL
City of Palo Alto
' Gas Utility
IS'OOOI IS'OOOI
I i I Fiscal Year 2013 2014 2015 2016 2017 2018 I 2019 2020 2021 2022 2023 2024 ! 2025 2026 2027 2028
1 RATECHANGE(%r 12% 0% 0% 0% 8% 0%1 4% 8% 7% 8% 4% 4%1 1% 1% 0% 1%
2 SALES N THOUSANO THERMS 28,901 28,117 28,881 26,719 27,829 27 ,434 27 ,289 26,752 26,847 26,547 26,245 25,939 I 25,726 25,501·1 25.095 I 25,011
3 I I I
" Utllitles Retail Seles 33,759 34,843 29,515 1 28,065 34,110 34,012 33,096 34,849 I 37,506 40,126 41 ,690 43,082 43,663 44,218 43,971 44,693
5 Service Connection & Cap•city Fees 731 654 748 961 940 1,048 1,079 1,111 1,145 1,179 1,179 1,179 1,179 1,179 1,179 1,179
8 Other Revenues & Transfers In 830 313 414 2,346 694 1,508 1,818 2,261 2,599 2,895 3,185 3,467 3,740 4,074 4,079 4,205
7 Interest plus Gain or Loss on lnvesbnent (239) 706 450 ~ 730 13 545 368 304 196 181 196 228 255 272 276 284
a Total Sources of Funds 35,081 36,517 31,127 1 32,102 35,758 37,112 36,361 38,526 41,445 44,381 46,250 47,956 48,837 49,742 49,505 50,361
9
10 Purchases of Utilities:
9,537 1 11 Supply Commodity 12,461 12,992 6,648 9,720 9,998 8,587 8,226 8,205 8,200 8,268 8,429 8,569 8,708 8,855 9,001
12 Supply Tronsportallon 994 1,333 982 (1,051) 2,843 3,331 3,507 3,473 3,482 3,490 3,497 3,504 3,510 3,515 3,520 3,524
13 Total Purchases 13,455 14,325 10,519 1 5,597 12,563 13,329 12,094 11,699 11 ,687 11,690 11,765 11,933 12,079 12,223 12,375 12,525
14
15 Administration (CIP + Operating) 4,273 3,988 4,007 3,337 2,450 2,519 2,577 2,640 2,707 2,775 2,845 2,906 2,968 3,051 3,106 3,178
18 Customer Service 1,358 1,338 1,195 1,097 1,581 1,643 1,700 1,781 1,858 1,925 1,992 2,051 2,107 2,155 2,184 2,237
17 Demand Side Management 630 438 632 566 855 879 900 922 945 969 993 1,015 1,036 1,065 1,084 1,110
18 Engineering (Ope roting I 340 352 369 426 355 367 377 390 404 416 428 439 450 461 469 480
19 Operations •nd Maklten•nce 4,940 4,119 4,403 4,153 4,321 5,482 5,651 5,871 5,087 5,261 5,433 5,586 5,732 5,868 5,953 6,094
20 Resource Management 506 516 556 3,002 566 1,393 1,530 1,777 1,999 2,210 2,420 2,626 2,830 3,093 3,107 3,176
21 Debt Service Payments 296 805 804 249 227 802 801 801 803 804 805 803 800 803 1 1
22 Rent 219 419 431 443 455 467 480 492 1 505 519 532 546 561 574 587 601
23 Transfers to General Fund 5,971 5,811 5,730 6,194 6,594 7,035 6,888 7,069 7,069 7,972 8,214 8,629 9,072 9,547 9,539 9,538
24 Other Transfers out 207 606 151 303 510 523 533 543 554 566 579 590 601 617 628 642
25 Capital Improvement Programs 7,620 1,026 1,832 6,889 2,214 7,804 5,197 10,217 12,080 9,815 9,892 9,970 10,050 10,131 10,214 10,299
28 Total Uses of Funds 39,814 33,743 30,629 32,256 32,690 42,243 38,728 44,202 45,698 44,922 45,898 47,095 ' 48,286 49,587 49,248 49,880
27
(5,131 )1 12,367\ 28 Into/ /Out on Reserves 14,7331 2,773 498 1154) 3,067 (5,676l 14,2531 15411 352 861 551 155 257 481
29 I
30 Reappropriations + Commitments 19,363 11,305 6,491 6,255 4,209 4,209 I 4,209 4,209 4,209 4,209 4,209 4,209 4,209 4,209 4,209 4,209
31 Plant Replacement 1,000 0 0 0 0 oi 0 0 0 0 0 0 0 0 0 0
32 CIPReserve 0 0 1,591 I 3,820 3,820 3,820 I 3,820 3,820 0 0 0 0 0 0 0 0
33 Rate Stabilization 11,318 15,981 7,215 6,018 6,539 6,411 i 4,291 0 0 0 0 0 0 0 0 0
34 Operations Reserve 0 0 10,847 10,296 13,549 8,547 i 8,300 6,915 6,482 5,941 6,293 7,153 7,705 8,673 8,930 9,411
35 Unassigned 0 0 0 0 0 22,98~ I 20,61 ~ 0 0 0 0 0 0 0 1 1
36 Total Reserves 31,681 27,286 26,144 I 26,389 28,117 14,943 10,690 10,149 10,501 11,362 11 ,913 12,882 13,140 13,621
I I 37
1.226 I i 38 Short Term Risk Assessment Value 3,753 3,516 3,928 i 3,830 4,612 1 5,214 5,400 5,642 5,843 5,919 5,991 5,935 6,034
39 ! 40 Operations Reserve Guidelines
41 Min (60 Days Commodity+ O&M) 5,620 5,000 5,690 5,698 1 5,533 5,576 1 5,488 5,706 5,828 5,986 6,142 6,308 6,242 6,328
42 Terget (90 Oeys Commodity+ O&M) 8,429 7,500 8,535 8,547 8,300 8,364 8,232 8,560 8,742 8,978 9,213 9,462 9,362 9,492
43 Max (120 Days Commodity+ O&M) 11,239 10,000 11 ,380 11 ,396 11,067 11,152 110,976 11,413 11,656 11,971 12,284 12,616 12,483 12,656
« i
March 2018 32 I Page
DocuSign Envelope ID: 654775C2-4891-4809-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
This Page intentionally left blank.
March 2018 34!Page
DocuSign Envelope ID: 654775C2-4891-48D9-881A-74843641 F101
GAS UTILITY FINANCIAL PLAN
APPENDIX C: GAS UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Gas Utility
Financial Plan:
Section 1. Definitions
a) "Financial Planning Period" -The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015
to FY 2019 would be the Financial Planning Period.
b) "Fund Balance" -As used in these Reserves Management Practices, Fund Balance refers
to the Utility's Unrestricted Net Assets.
c) "Net Assets" -The Government Accounting Standards Board defines a Utility's Net Assets
as the difference between its assets and liabilities.
d) "Unrestricted Net Assets" -The portion of the Utility's Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Supply Fund Reserves
The Gas Utility's Supply Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 4 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 5 (Reserve for Re-appropriations)
Section 3. Distribution Fund Reserves
a) For existing contracts, as described in Section 4 (Reserve for Commitments)
b) For operating and capital budgets re-appropriated from previous years, as described in
Section 5 (Reserve for Re-appropriations)
c) For cash flow management and contingencies related to the Gas Utility's Capital
Improvement Program (CIP), as described in Section 6 (CIP Reserve)
d) For rate stabilization, as described in Section 7 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 8 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves and
shall be returned to ratepayers or assigned a specific purpose as described in Section 9
(Unassigned Reserves)
Section 4. Reserve for Commitments
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for
Commitments will be set to an amount equal to the total remaining spending authority for
all contracts in force for the Wastewater Collection Utility at that time.
Section 5. Reserve for Reappropriations
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for
Reappropriations will be set to an amount equal to the amount of all remaining capital and
March 2018 35 I Page
DocuSign Envelope ID: 654775C2-4891-4809-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
non-capital budgets, if any, that will be re-appropriated to the following fiscal year for each
fund in accordance with Palo Alto Municipal Code Section 2.28.090.
Section 6. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period based on the levels of CIP
expense budgeted for that year.
Minimum Level 12 months of budgeted CIP expense
Maximum Level 24 months of budgeted CIP expense
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added to or removed from the Reserve for
Commitments as a result of a change in contractual commitments relat~d to CIP projects.
Any other additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level:
i) Funds held in the Reserve for Commitments may be counted as part of the CIP Reserve
for the purpose of determining compliance with the CIP Reserve minimum guideline
level.
ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve reaching
its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is
below its minimum level at the end of FY 2017, staff must present a plan by June 30,
2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff
may present, and the Council may adopt, an alternative plan that takes longer than
one year to replenish the reserve, or that does so in a shorter period of time.
d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds may
be added to this reserve. If there are funds in this reserve in excess of the maximum level
staff must propose to transfer these funds to another reserve or return them to
ratepayers in the next Financial Plan. Staff may also seek Council approval to hold funds
in this reserve in excess of the maximum level, if they are held for a specific future purpose
related to the CIP.
Section 7. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held
to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate
Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization
Reserve at the end of any fiscal year, any subsequent Gas Utility Financial Plan must result in
the withdrawal of all funds from this Reserve by the end of the Financial Planning Period.
Section 8. Operations Reserve
March 2018 36 I Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Gas Utility's Fund Balance not included in the reserves
described in Section 4-Section 7 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 8 d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for that
year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months of
the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Gas Utility shall be designed to
return the Operations Reserve to its target level by the end of the forecast period.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Gas Utility's Fund Balance
shall be automatically included in the Unassigned Reserve described in Section 9, below.
Section 9. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Gas Utility's
Fund Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned
Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council
must include a plan to assign them to a specific purpose or return them to the Gas Utility
ratepayers by the end of the first fiscal year of the next Financial Planning Period. For
example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next
Financial Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a plan
to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may
present an alternative plan that retains these funds or returns them over a longer period of
time.
Section 10. Intra-Utility Transfers Between Supply and Distribution Funds
March 2018 37 I Page
DocuSign Envelope ID: 654775C2-4891-48D9-881A-74843641F101
GAS UTILITY FINANCIAL PLAN
The Gas Utility records costs in two separate funds: the Gas Supply Fund and the Gas
Distribution Fund. At the end of each fiscal year staff is authorized to transfer an amount
equal to the difference between Gas Supply Fund costs and Gas Supply Fund Revenues from
the Gas Distribution Fund Operations Reserve to the Gas Supply Fund, or vice versa. Such
transfers shall be included in the ordinance closing the budget for the fiscal year.
March 2018 38 I Page
DocuSign Envelope ID: 654775C2-4891-48D9-BB1A-74843641F101
GAS UTILITY FINANCIAL PLAN
APPENDIX D·: DESCRIPTION OF GAS UTILITY COST CATEGORIES
This appendix describes the activities associated with the various cost categories referred to in
this Financial Plan.
Customer Service: This category includes the Gas Utility's share of the call center, meter reading,
collections, and billing support functions. Billing support encompasses staff time associated with
bill investigations and quality control on certain aspects of the billing process. It does not include
maintenance of the billing system itself, which is included in Administration. This category also
includes CPAU's key account representatives, who work with large commercial customers who
have more complex requirements for their gas services.
Resource Management: This category includes gas procurement, contract management, rate
setting, and tracking of legislation and regulation related to the gas industry.
Operations and Maintenance: This category includes the costs of a variety of distribution system
maintenance activities, including:
• surveying the gas system (50% of the system each year) and repairing any leaks found;
• investigating reports of damaged mains or services and perform emergency repairs;
• building and replacing gas services for new or redeveloped buildings; and
• testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including: ·
• the Field Services team (which does field research of various customer service issues);
• the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal pipes and reservoirs); and
• the General Services team (which manages and maintains equipment, paves and restores
streets after gas, water, or sewer main replacements, and provides welding services,
including certified gas line welding services)
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City's General Fund staff, as well as shared communications services and Utilities Department
administrative overhead and billing system maintenance costs.
Demand Side Management: Includes the cost of administering gas efficiency programs and the
direct cost of rebates paid.
Engineering (Operating): The Gas Utility's engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
March 2018 39 I Page
Do~
lil s1CURID
Certificate Of Completion
Envelope Id: 654775C2489148D9BB1A74843641F101 Status: Sent
Subject: Please DocuSign: RESO 9764 Approving FY 2019 Gas Financial Plan.docx, RESO 9764 -Attachment A ...
Source Envelope:
Document Pages: 42
Certificate Pages: 5
AutoNav: Enabled
Envelopeld Stamping: Enabled
Signatures: 4
Initials: O
Time Zone: (UTC-08:00) Pacific Time (US & Canada)
Record Tracking
Status: Original
6/26/2018 11 :24:37 AM
Signer Events
Amy Bartell
Amy.Bartell@CityofPaloAlto.org
Senior Deputy City Attorney
City of Palo Alto
Security Level: Email, Account Authentication
(None)
Electronic Record and Signature Disclosure:
Accepted: 7/16/2015 5:52:40 AM
ID: d8ecb53d-ef81-4016-8886-1560c48de42a
Kiely Nose
kiely.nose@cityofpaioalto.org
Director OMB
City of Palo Alto
Security Level: Email, Account Authentication
(None)
Electronic Record and Signature Disclosure:
Not Offered via DocuSign
Ed Shikada
ed.shikada@cityofpaloalto.org
Assistant City Manager
City of Palo Alto
Security Level: Email, Account Authentication
(None)
Electronic Record and Signature Disclosure:
Not Offered via DocuSign
Ed Shikada for James Keene
ed.shikada@cityofpaloalto.org
Assistant City Manager
City of Palo Alto
Security Level: Email, Account Authentication
(None)
Electronic Record and Signature Disclosure:
Not Offered via DocuSign
Liz Kniss
Liz.Kniss@CityofPaloAito.org
Security Level: Email, Account Authentication
(None)
Electronic Record and Signature Disclosure:
Not Offered via DocuSign
Holder: Kim Lunt
kimberiy.lunt@cityofpaloalto.org
Signature
ltDocuSlgnOd by: L::~!:::!.
Using IP Address: 12.220.157.20
~DocuSlgned by:
~6.J 1ki,
0513042E3e8«00
Using IP Address: 12.220.157.20
GDocuSlgned by•
£',/ ~->. • .I.
F20CA19CCC804F9
Using IP Address: 12.220.157.20
GDocuSlgn9d by-
£',/ s,,,->. • .1. .&:.~ ~_,, ~""'
F2DCA19CCCB04FQ
Using IP Address: 12.220.157.20
Envelope Originator:
Kim Lunt
250 Hamilton Ave
Palo Alto , CA 94301
kimberly.lunt@cityofpaloalto.org
IP Address: 12.220.157.20
Location: DocuSign
Timestamp
Sent: 6/26/2018 11 :27:28 AM
Viewed: 6/26/2018 11 :42:49 AM
Signed: 6/26/2018 11 :43:04 AM
Sent: 6/26/2018 11 :43:05 AM
Resent: 6/27/2018 3:51 :57 PM
Resent: 6/27/2018 3:52:16 PM
Viewed: 6/27/2018 5:29:12 PM
Signed: 6/27/2018 5:29:43 PM
Sent: 6/27/2018 5:29:44 PM
Viewed: 6/28/2018 10:44:44 AM
Signed: 6/28/2018 10:44:55 AM
Sent: 6/28/2018 10:44:57 AM
Viewed: 6/28/2018 11 :45:34 AM
Signed: 6/28/2018 11 :45:40 AM
Sent: 6/28/2018 11 :45:41 AM