HomeMy WebLinkAboutStaff Report 14837
City of Palo Alto (ID # 14837)
Utilities Advisory Commission Staff Report
Meeting Date: 11/2/2022 Report Type: VII. NEW BUSINESS
City of Palo Alto Page 1
Title: Staff Recommends the Utility Advisory Commission Recommend the
Finance Committee Recommend That the City Council Adopt a Resolution
Amending the E-HRA (Electric Hydro Rate Adjuster) Rate Schedule, Increasing
the Current E-HRA Rate to $0.026/kWh Effective January 1, 2023
From: Director of Utilities
Lead Department: Utilities
Recommended Motion
Staff recommends that the Utilities Advisory Commission (UAC) recommend the Finance
Committee recommend that Council adopt a resolution amending the Electric Hydro Rate
Adjuster (E-HRA), effective January 1, 2023, to reflect current hydrological conditions and
market purchase costs. This would double the existing E-HRA surcharges and discounts across
all levels, increasing the current E-HRA rate from $0.013/kwh to $0.026/kwh.
Executive Summary
Power available to the City of Palo Alto (City or Palo Alto) from hydroelectric resources
continues to be reduced due to the ongoing drought. Reduced hydro output has resulted in
increased demand for market power resources which is largely comprised of gas-fired
generation. The increase in demand combined with high fossil fuel prices caused by unstable
socio-political conditions has resulted in power prices that are nearly double the values used to
calculate the existing E-HRA surcharge. Hydro Stabilization (HS) Reserves have been exhausted,
and Operations Reserves are being negatively impacted by ongoing higher costs.
Staff recommends increasing the current E-HRA level from $0.013/kWh to $0.026/kWh in
response to increased market costs and continued drought conditions. This change will double
the existing E-HRA surcharges and discounts across all adjustment levels, and fund Operations
reserve levels above the minimum guidelines if market prices remain in the forecasted range
during the fiscal year.
Background
The City has access to a large amount of relatively low-cost, carbon free hydroelectric
generation to meet its electric supply needs. Whereas hydroelectric generation supplies about
10% of the overall electric supply for California, the City meets about 50% of its electric supply
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needs with hydro generation in an average year.
The drawback to maintaining such a heavy reliance on hydroelectric generation is that the
output of these resources is highly sensitive to weather conditions. Although the City receives
about 50% of its electric supplies from its hydroelectric resources in a “normal” weather year,
that amount can fall to as low as 20% in extremely dry years. And unlike many of the City’s
supply contracts, where the cost of the resource is proportional to the amount of generation
delivered, the City essentially pays a fixed amount every year for the output of its two
hydroelectric resources (the Federal Western Base Resource and the Calaveras project)
regardless of the amount of electricity they produce.
The City purchases additional supply resources (generic market power and, to comply with the
Carbon Neutral Plan, renewable energy certificates, or RECs) to make up for the reduced
hydroelectric output in these dry years. Market power prices are often higher in dry years,
when the City must purchase more, because the entire state is experiencing reduced hydro
supply conditions. Market prices are influenced by inflation, weather, alternative fuel costs, and
global supply and demand.
Figure 1 below illustrates this relationship between the City’s annual market purchase costs and
the amount of hydroelectric generation it receives.
Figure 1: Annual Hydro Generation vs. Market Purchase Costs (2012-2022)
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In 2005, when a new “Contract for Electric Service- Base Resource” with the Western Area
Power Administration (Wester or WAPA) increased the City’s exposure to hydro variability,
Council adopted a policy of maintaining reserves, combined with “laddered” market purchases,
to manage this variability1.
In 2018, Council adopted the E-HRA mechanism (CMR 89622) to manage the financial impacts
of the annual variability in production of the City’s hydroelectric resource. The E-HRA and the
HS Reserve are used to stabilize electric rates when hydrological conditions are either poor, as
is currently the case, or exceptionally good, and activation of the E-HRA is based on staff’s
evaluation of hydro generation availability and the HS Reserve level. When the HS Reserve falls
below 25% of its maximum ($11 million) and hydro generation is projected to be below normal
through the end of the current fiscal year, the E-HRA surcharge is applied. The resulting
revenues are used to fund the additional short-term costs of providing electric service. When
drought conditions subside and/or HS Reserves are within guideline ranges, the surcharge can
be de-activated and standard rates can resume.
In 2018, staff developed the E-HRA mechanism utilizing a 20-year simulation model, estimating
reserve needs under periods of both above average hydro generation as well as periods of
extended drought. The model estimated high market prices during periods of drought using
generation prices that were high at the time, about $47/MWh. As market costs have increased
above this level, staff recommends amending the HRA structure to update energy prices to
reflect current conditions. The model’s generation levels remain valid.
The E-HRA rate structure in effect now can result in either a 4% rate increase (at the
$0.0065/kWh level) or an 8% increase (at the $0.013/kWh level)3. The proposed E-HRA
increase to $0.026/kWh is approximately a $6.37 increase for a median electric residential
customer, resulting in an electric rate that is 45% below a comparable PG&E customer.
In March 2022, in response to rapidly worsening drought conditions in California, Council
adopted changes to the E-HRA surcharge (CMR 139054), broadening the conditions under which
the rate could be utilized and activating the rate effective April 1, 2022. This was done to avoid
increasing longer-term average rates, as well as help maintain general reserve health.
Discussion
1 As described in Palo Alto’s current Long-term Electric Acquisition Plan (LEAP) Objectives and Strategies:
https://www.cityofpaloalto.org/files/assets/public/environment-in-palo-alto/energy-compost-facility-
consideration/leap-objectives-and-strategies-april-2012.pdf
2 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/2018/final-staff-report-id-8962_hydroelectric-rate-adjustment-mechanism-adoption.pdf
3 For the median Palo Alto household, which consumes approximately 490 kWh/month, rate adjustments of 0.65
¢/kWh, 1.3 ¢/kWh, and 1.8 ¢/kWh equate to monthly bill impacts of $3.19, $6.37, and $8.82, respectively.
4 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220314/20220314pccsm-amended-final-revised-ppt.pdf
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The City receives power from two hydroelectric projects, the Calaveras project and the Western
Base Resource contract for Federal hydropower from the Central Valley Project.5 The
watershed for Western hydropower is primarily in the northern end of California, while the
watershed for the Calaveras project is in the Central Sierras.
Power from these sources is reduced under continued drought conditions. For water year 2020-
2021 (October 2020 to September 2021), total precipitation was just below 50% of average in
both watersheds. For water year 2021-2022, total precipitation was about 80% of average in
Northern California and about 63% of average in the Central Sierras. As shown in Table 1, total
actual hydropower generation for FY 2021 was 295 GWh, which is 183 GWh (38%) below the
long-term average, and total actual hydropower for FY 2022 was 230 GWh, which is 250 GWh
(52%) below the long-term average.6
Table 1: Hydro Generation FY 2021-22 Actuals (GWh)
Hydro Generation FY 2021 FY 2022
Calaveras Actuals 49 61
Western Actuals 246 169
Total Hydro Generation 295 230
Long-term Average Total (%) 61% 48%
Long-term Average Total Hydro 481 481
Reservoir levels remain very low across Northern and Central California. Most reservoirs are 30-
50% below their average levels for this time of year. As a result, Palo Alto’s hydroelectric
projections are approximately 275 GWh for this fiscal year, which is about 57% of the long-term
average level of hydro output, and 377 GWh for FY 2024, which is 78% of the long-term average
level.
When Council activated the E-HRA at the $0.013/kwh level effective April 1, 2022, projected
hydro output was about 310 GWh/year and HS Reserve funds were projected to be drawn
below $11 million7 by the end of FY 2022.
5 The Calaveras project is a hydropower project located in Calaveras County that is maintained and operated by the
Northern California Power Agency on behalf of the City and other project participants. The City is also one of
several public entities with contracts with the Western Area Power Administration for “Base Resource” electricity,
which is the hydroelectric power available from the Federal Government’s Central Valley Project (operated by the
Bureau of Reclamation) after accounting for power used for Central Valley Project operations and power delivered
to certain “preference” customers.
6The long-term average forecast levels for both Western and Calaveras have been revised downward (about 10%
each) in recent years to reflect the impact of climate change. These values may need to be revisited again in the
coming years.
7 When the HS Reserve level falls below 25% of its maximum, or $11 million, the E-HRA can be activated if
projected hydro generation is also below 480 GWh/yr.
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Market prices are now around $93/MWh, or roughly double the price used to estimate the
existing E-HRA rates. Actual power supply costs for FY 2022 were about $16 million more than
the adopted budget, and FY 2023 costs are also higher than expected. As a result, in June 2022,
staff requested a $15 million transfer of HS Reserve funds to the Operations Reserve to offset
costs in FY 2022. Council’s activation of the E-HRA rate offset $1.5 million of higher costs that
remained after the $15 million HS Reserve transfer. $400,000 remains in the Hydro
Stabilization Reserve.
While the FY 2022 Annual Comprehensive Financial Report is still being reviewed by auditors,
the current ending balance for the Supply Operations Reserve is approximately $22.2 million.
This is about $3.3 million above the Council-adopted minimum guideline levels for FY 20238.
Current projections are that purchase costs will be $9 million higher than projected in the FY
2023 Financial Plan, which will bring the Operations Reserve well below minimum by the end of
FY 2023. Amending the E-HRA rate as proposed within is projected to generate an additional $5
million in E-HRA revenues and keep the Supply Operations Reserve above minimum, as shown
in Table 1 below:
Table 1: Projected FY 2023 Supply Operations Reserve Balances (Million $’s)
FY 2023 Financial Plan
($00)
Current Projections
($00)
Beginning Supply Operations Reserve Balance 33,046 22,197
Net Fund Revenues/(Expenses) 927 927
Additional Purchase Cost N/A (9,000)
Proposed Additional E-HRA Revenue N/A 5,000
Ending Supply Operations Reserve Balance 34,973 19,124
Supply Operations Reserve Minimum Guideline 18,843 18,843
Based on the current sales trends for FY 2023, staff estimates the existing $0.013/kwh adjuster
will generate $10.25 million in the Electric Fund in FY 2023, as projected in the FY 2023
Financial Plan. Doubling the E-HRA rate as shown in Table 3 is projected to bring the Electric
Fund approximately $5 million in additional revenues in FY 2023 assuming an effective date of
January 1, 2023. If purchase power costs increase further, however, Supply Operations
Reserves may still drop below minimum guideline levels.
Table 2: Current Hydro Rate Adjustments ($/kWh)
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
8 FY 2023 Electric Financial Plan, adopted June 13, 2022, CMR 13661:
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220613/20220613pccsm-final-amended-linked.pdf
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Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.0065) $(0.0065) $(0.018)
75% to 100%
($27 to $35 million)
$- $- $(0.0065) $(0.013)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.013 $0.0065 $- $-
Table 3: Proposed Hydro Rate Adjustments ($/kWh)
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.013) $(0.013) $(0.036)
75% to 100%
($27 to $35 million)
$- $- $(0.013) $(0.026)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.026 $0.013 $- $-
The alternative to increasing the E-HRA surcharge is implementing a general electric rate
increase. Utilizing the E-HRA is a targeted way to mitigate the impacts of hydro generation and
supply cost fluctuations. When conditions stabilize, the E-HRA can be quickly be amended,
leaving the base rates intact. If higher market prices persist or appear to be a ‘new normal’, or
larger long-term reserves are needed, general rates can be increased at the next fiscal year and
the E-HRA brought to zero as additional revenue recovery is not needed.
Next Steps
The Finance Committee is tentatively scheduled to consider staff’s recommended amendments
to the E-HRA rate in late November 2022, with Council scheduled to consider those
amendments in December 2022.
Environmental Review
The UAC’s recommendation that Council amend the E-HRA rate does not meet the California
Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section
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21065 and CEQA Guidelines Section 15378(b)(4) and (5), because it is a governmental fiscal and
administrative activity which will not cause a direct or indirect physical change in the
environment.
Resource Impact
Based on the current sales trends for FY 2023, staff estimates the existing $0.013/kwh adjuster
will generate an additional $10.25 million in the Electric Fund in FY 2023. If Council adopts
staff’s recommendation, the annual revenues would double to $20.5 million, or an additional
$5.12 million for the latter half of FY 2023. The City is a utility customer so rate increases will
also result in City expense increases. Resource impacts to City departments and funds of the
recommended rate adjustments will be reflected in the midyear budget process.
Attachments:
• Attachment A: Resolution
• Attachment B: Proposed E-HRA
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Attachment A
6056681 1
Reference Document: Utility Rate Schedule E-HRA
Resolution No.___
Resolution of the Council of the City of Palo Alto Amending Electric
Rate Schedule E-HRA (Electric Hydro Rate Adjuster), Increasing the
Current E-HRA Rate to $0.026/kWh Effective January 1, 2023
R E C I T A L S
A. Hydroelectric Rate Adjustment mechanisms are designed to modify customer
rates, either up or down, such that overall sales revenue is aligned with supply costs for the
electric utility.
B. Hydroelectric Rate Adjustment mechanisms are intended to enable the electric
utility to maintain a reasonably stable level of financial reserves, and maintain base electric
rates at lower levels over the long term.
C. In 2018, staff developed the E-HRA rate mechanism utilizing a 20-year
simulation model, estimating reserve needs under periods of both above average hydro
generation as well as periods of extended drought. The model estimated high market prices
during periods of drought using generation prices that were high at the time, about $47/MWh.
Since then, multi-year drought conditions, rising inflation, increased market costs for
alternative fuels and uncertainty in natural gas markets have nearly doubled the market costs
for electricity. The existing E-HRA rate is no longer collecting enough revenue to adequately
offset required market purchases.
D. Section D(2)(a) of the Council-adopted E-HRA Rate Schedule directs staff to
calculate the Hydro Rate Adjustment annually in May. E-HRA activation may also occur at other
times throughout the year, such as when hydrologic conditions are poor and Hydroelectric
Stabilization Reserve levels are projected to fall below the 25% level within the current fiscal
year.
E. Therefore, staff recommends the Council modify the E-HRA rate schedule to
reflect updated market supply costs and hydrologic conditions, and mitigate Operations
Reserve impacts.
F. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of
the City of Palo Alto may by resolution adopt rules and regulations governing utility services,
fees and charges.
The Council of the City of Palo Alto hereby RESOLVES as follows:
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Attachment A
6056681 2
Reference Document: Utility Rate Schedule E-HRA
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule E-HRA (Electric Hydro Rate Adjuster) is added as attached and incorporated.
Utility Rate Schedule E-HRA, as amended, shall become effective January 1, 2023.
SECTION 2. As a result, on January 1, 2023 the $0.013/kWh E-HRA rate activated by
Council on March 14, 2022, and effective April 1, 2022, will increase to $0.026/kWh.
SECTION 3. The Council finds that the revenue derived from the adoption of this
resolution shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of
the City of Palo Alto.
SECTION 4. The Council finds that the fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
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Attachment A
6056681 3
Reference Document: Utility Rate Schedule E-HRA
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SECTION 5. The Council finds that the adoption of this resolution changing electric
rates to meet operating expenses and meet financial reserve needs is not subject to the
California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec.
21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing
the staff report and all attachments presented to Council, the Council incorporates these
documents herein and finds that sufficient evidence has been presented setting forth with
specificity the basis for this claim of CEQA exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Assistant City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
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ELECTRIC HYDRO RATE ADJUSTER
UTILITY RATE SCHEDULE E-HRA
CITY OF PALO ALTO UTILITIES Issued by the City Council
Supersedes Sheet No EHRA-1 Sheet No E-HRA-1
dated 47-1-20221 Effective 14-1-20232
A. APPLICABILITY: This schedule applies to all Customers receiving Electric Service from the City of Palo Alto Utilities.
B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Electric Service. C. RATES: Per kWh Hydro Rate Adjustment: ...............................................................................($0.03618) - $0.02613 D. SPECIAL NOTES: 1. Hydro Rate Adjustment a. The Hydro Rate Adjustment is a surcharge or discount applied to Electric rates based on the strength of the City’s hydrological generation portfolio, applied to manage
volatility in energy costs and generation and the impact of that volatility on customer rates. b. The Hydro Rate Adjustment is determined based on the level of funding in the Hydro Stabilization Reserve, including transfers or withdrawals projected to be made in the
current fiscal year according to the City’s Electric Utility Reserve Management
Practices, and on the forecasted amount of annual generation the City of Palo Alto Utilities will receive from its hydroelectric generation resources through the end of the current fiscal year.
2. Calculation of Hydro Rate Adjustment
a. Staff calculates the Hydro Rate Adjustment surcharge or discount annually in May, or whenever hydrologic conditions are poor and Hydro Stabilization Reserves are projected to fall below the 25% level within the current fiscal year.
b. The Hydro Rate Adjustment will be applied to all Customers’ Electric rate schedules
upon Council approval, and re-evaluated annually. c. The Hydro Rate Adjustment surcharge or discount will fall within the minimum/maximum range set forth in Section C, and will be applied as follows:
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ELECTRIC HYDRO RATE ADJUSTER
UTILITY RATE SCHEDULE E-HRA
CITY OF PALO ALTO UTILITIES Issued by the City Council
Supersedes Sheet No EHRA-2 Sheet No E-HRA-2
dated 47-1-20221 Effective 14-1-20232
Hydro Rate Adjustment ($/kWh)
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation (GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum $- $(0.013065) $(0.013065) $(0.03618)
75% to 100% $- $- $(0.013065) $(0.02613)
25% to 75% $- $- $- $-
25% and below $0.02613 $0.013065 $- $-
{End}
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