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HomeMy WebLinkAboutStaff Report 2303-1207Item No. . Page 1 of 2 Utilities Advisory Commission Staff Report From: Dean Batchelor, Director Utilities Lead Department: Utilities Meeting Date: May 3, 2023 Staff Report: 2303-1207 TITLE Approval of the Minutes of the Utilities Advisory Commission Meeting Held on March 01, 2023 RECOMMENDATION Staff recommends that the UAC consider the following motion: Commissioner ______ moved to approve the draft minutes of the March 01, 2023 meeting as submitted/amended. Commissioner ______ seconded the motion. ATTACHMENTS Attachment A: 03-01-2023 DRAFT UAC Minutes AUTHOR/TITLE: Jenelle Kamian, Program Assistant I Item No. . Page 2 of 2 Utilities Advisory Commission Minutes Approved on: Page 1 of 19 UTILITIES ADVISORY COMMISSION MEETING MINUTES OF MARCH 1, 2023 SPECIAL MEETING CALL TO ORDER Chair Segal called the meeting of the Utilities Advisory Commission (UAC) to order at 4:32 p.m. Present: Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Forssell, Metz, Scharff and Smith Absent: AGENDA REVIEW AND REVISIONS None ORAL COMMUNICATIONS None APPROVAL OF THE MINUTES Chair Segal invited comments on the February 1, 2023 UAC draft meeting minutes. Commissioner Forssell suggested changing the wording under Future Topics to read, “...simplifying the topic to not discuss what the process should be but simply have a quick report on how much undergrounding has happened in the last five years.” Vice Chair Johnston moved to approve the draft minutes of the February 1, 2023 meeting as amended. Commissioner Metz seconded the motion. The motion carried 7-0 with Chair Segal, Vice Chair Johnston and Commissioners Bowie, Forssell, Metz, Scharff, and Smith voting yes. UNFINISHED BUSINESS None UTILITIES DIRECTOR REPORT Dean Batchelor, Utilities Director, delivered the Director's Report. Power Outages During Wind Storm: In Palo Alto, crews managed six power outages from the afternoon of February 21 through 3 a.m. on February 22 caused by last week’s heavy winds. The outages were caused by downed trees or branches and affected approximately 4,200 customers. Utilities staff Utilities Advisory Commission Minutes Approved on: Page 2 of 19 provided continual communication via Twitter accounts, our outage management maps were updated and the website was live during this timeframe. Water Supply Update: The City’s water supplier, San Francisco Public Utilities Commission (SFPUC), projected a preliminary rate increase of 11.6% from the current wholesale water rate of $4.75/ccf. SFPUC will determine the final rate increase in May, which would be effective July 1, 2023. SFPUC provided an initial water supply estimate. Final numbers will be released in April. SFPUC is not making any changes to our reduction requests. SFPUC continues to monitor water supply conditions and State actions regarding its emergency drought declaration. Hydroelectric Update: As of February 27, precipitation totals are about 16% and 50% above average for this time of year in Northern California and Central California, respectively. Snowpack levels are about 45% and 85% above average in Northern and Central California, respectively, so we should see some late runoffs. The City’s hydro resources are projected to produce around 79% of the long-term average level of output this fiscal year and 96% of our long-term average level in FY 2024. Full-Service Heat Pump Water Heater Pilot Program: Residents have been completing interest forms to participate or receive more information on the program’s full-service installation once it fully launches. As of February 27, we have received almost 360 program sign-ups and completed five site assessments. A group of community volunteers coordinated by 350 Palo Alto recently began door-to-door canvassing to promote the program, so more sign-ups are expected. To drive further participation, the City is hiring a marketing consultant to work with staff, stakeholders, policymakers and community partners on an electrification marketing plan to launch later this year. Home Water Reports Launch: The City recently launched WaterSmart, an online water management tool open to all City of Palo Alto Utilities (CPAU) customers. WaterSmart provides access to water use charts and recommendations for water efficiency to help residents and businesses save water and money. Starting in March, the City will send Home Water Reports containing information on a customer’s water use and comparisons to similar-sized Palo Alto households. Water savings from those reports will be evaluated through efficiency studies. E-Bike and EV Discount Campaigns: CPAU is proud to offer two new campaigns in March offering discounts on electric bicycles (e-bikes) and electric vehicles (EVs). The e-bike program is available from March 1-22 in partnership with Palo Alto Bicycles and includes a discount on select models and free lifetime tune-ups for e-bikes purchased during the campaign. The EV discount campaign is available from March 6-31. Upcoming Events: Details and registration at cityofpaloalto.org/workshops •March 5: CPAU staff will host a booth at the Palo Alto Art Center Family Day event to talk with residents about the heat pump water heater offering and other programs. •March 8 and 28: “E-Bike 101” webinars. •March 15: CPAU hosts an “EVs for Backup Power” webinar. Ride and Drive Clean will talk about resiliency and bidirectional charging. •March 16: In-person community engagement sessions to talk with residents at Palo Alto Gardens about installing EV chargers at their property. This project is in partnership with MidPeninsula Housing Authority. •July 15: Open House at MSC from 9:30 to 2:30 is being planned. Utilities Advisory Commission Minutes Approved on: Page 3 of 19 Chair Segal inquired if the trees that caused power outages were in areas where we planned to or had done tree maintenance and if we need to increase tree maintenance. Mr. Batchelor replied that two outages were in areas where trees were trimmed last year, so there was clearance but the fallen trees took out some of the secondary portions. The large tree that broke the pole was a private tree, not on the list to be trimmed. It fell and snapped the primary and secondary wires. In response to Commissioner Bowie’s query if the hydro projections were the most recent, Mr. Batchelor responded that the numbers corresponded to the hydro report. NEW BUSINESS ITEM 1: ACTION: Staff Recommend the Utilities Advisory Commission Recommend the Finance Committee Recommend that the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Reserve Transfers and Increasing Wastewater Rates by Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) Commissioner Forssell asked which commissioners were on the Budget Subcommittee this year or if there was one. Commissioner Smith stated that we do not have a Budget Subcommittee, which was one of his concerns. Dean Batchelor, Utilities Director, replied that a Budget Subcommittee was set up. Staff did not have time to prepare this report for the committee because of changes in gas rates and electric. Jonathan Abendschein, Assistant Director, Utilities Resource Management, delivered a slide presentation on Overview for Utility Financial Projections. This winter’s energy prices were the highest on record. It cost Palo Alto five times as much to buy gas this January as it did last January, which was reflected in the February utility bills. This was due to the very cold weather, low amounts of gas in storage and constraints in supply across the west. The Governor has called for a federal investigation of these price spikes and the Mayor sent a letter. Investigations by regulatory agencies, the California Public Utilities Commission (CPUC) and California Independent System Operator (CAISO) are underway. Staff is looking at winter hedging program options to avoid similar price spikes. Gas and electric market prices have started to decline. March gas bills are expected to be less than half of February but significantly higher than last year. The commodity price for March is down 40% from February, which will reflect on April gas bills. This month, Council is discussing rebates to provide relief to customers but we do not know the amount or timing. Council asked staff to send a proposal for rebates equal to 20% of the highest winter gas bills. The City is arranging six- to eight-month payment plans and free consultations with the City’s Home Efficiency Advisor. For income-qualified customers, we offer a rate assistance program and free energy efficiency improvements. Staff proposed significant electric and gas rate increases. Utility bills will decline over the next few months but increase in July, although not to the levels of winter 2022/2023. There are various factors driving the proposed July rate increases. Energy prices are expected to remain elevated. Gas and electric transmission costs are rising as are environmental charges. Rates were kept low during the pandemic. Our utilities revenues are currently below cost. The extreme winter gas prices were not passed through completely to customers and the difference was absorbed from reserves. Our electricity, gas and wastewater reserve levels will be at or below minimum by the end of FY 2023. Utilities Advisory Commission Minutes Approved on: Page 4 of 19 The drought has continued. In April, we will know the impacts on electric and water utilities. We have not reached average annual precipitation in the Northern Sierras where most of the state’s water and most of our hydropower comes from. The biggest reservoirs in the state are below historical average. Drought regulations and environmental regulations govern flows and allocation of water between water users and power users. An increase in capital investment is needed due to aging wastewater and electric system infrastructure. The treatment plant needs to be upgraded. We need to increase our rate of investment in the sewer system. We need to modernize the grid to accommodate community electrification. Construction inflation and other types of inflation continue to affect utility costs, including increases in general expenses, salary and benefit costs. A slide was shown depicting the FY 2024 proposed change in residential median bills. Our electric utility’s revenues now match costs. With the improved hydro situation and energy costs down, overall rates were not expected to increase on July 1. Decreasing the Hydroelectric Rate Adjuster (HRA) by 50% and increasing the base rate by 14% will match long-term costs to long-term revenues and short-term costs to short-term revenues. If the hydroelectric situation continues to improve, the HRA could further decrease and customers may see a decrease in their bills in FY 2025 or earlier. An 8% rate increase on the overall gas bill was proposed to match distribution revenues to distribution costs. A 9% wastewater increase was proposed for upgrades to the treatment plant and sewer system investments. A 7% increase in the water utility was primarily driven by increases in the SFPUC water rate. There is no change in refuse this year, although increases were expected to start in the next few years. There was a 5% CPI increase in storm drain fees because of higher inflation. The overall change in the median residential bill would be about 5%. With the gas price decreasing from FY 2023 to FY 2024 and if the HRA is decreased, the overall change in the median residential bill would be approximately 3%. The goal was to minimize rate increases as much as possible by ongoing cost containment efforts. Lisa Bilir, Sr. Resources Planner, provided a presentation on wastewater. A 9% overall rate increase was recommended in preparation for upcoming cost increases in the treatment plant and to accelerate the rate of main replacement. Many treatment plant facilities have been in service for over 40 years and certain components need to be replaced to continue to provide service safely and within regulatory requirements. In the last few years, the average rate of main replacement was 1 mile/year and this proposal increases it to 2.5 miles/year by 2026 to replace the remaining mains within the 100-year life expectancy as recommended by the UAC and Finance Committee. Mains with structural defects are prioritized because if a section collapses it could cause sewer overflows or sinkholes. A graph was displayed on Wastewater Cost and Revenue Projections. A 9% overall rate increase was recommended. A transfer of $3.178M from the CIP Reserve to the Operations Reserve was recommended for funding of infrastructure needs in FY 2023, as well as transferring the remaining $342,000 funds from the Rate Stabilization Reserve to the Operations Reserve in FY 2023. Commissioner Smith was concerned about drawing down our reserve to zero. Regarding Page 5 of the report regarding wastewater collection operations, he asked if the CIP cost increase of 3.7% annually included the 1.4% increase in operations cost or if it was 3.7% plus 1.4%. He suggested a 10% increase to match revenues to cost. Ms. Bilir explained that the sewer replacement had to move from 2024 into 2023 due to operational reasons. The CIP Reserve would go to zero temporarily in 2023 to accommodate moving the main replacement program from FY 2024 to FY 2023 but the plan brings the CIP Reserve within the guideline range during the five-year forecast period. The Operations Reserve was projected to remain within the guideline range of $3M and will not go below minimum. Utilities Advisory Commission Minutes Approved on: Page 5 of 19 Silvia Santos, Engineering Manager, Water Gas Wastewater, addressed Commissioner Smith’s query as to the reason for moving main replacement to FY 2023. The FY 2023 project was planned at a rate of 1 mile/year. The 2024 project had to move to 2023 to replace sewer mains on El Camino Real because our work has to coordinate with the Caltrans repaving project on El Camino. The bids came in 107% higher than the last sewer project, which is a couple million dollars more than our engineering estimate. Commissioner Smith remarked that if construction costs are increasing from 9.9% to 11.3% per year, we are not asking for enough money because we are bringing in less revenue than we need on a yearly basis. Mr. Batchelor explained that it cost an additional $2M because the mains were deep, about 15 to 17 feet at El Camino. When the engineering estimate was done, we did not realize how deep the mains were. Mains are usually found between 5 to 8 feet. Commissioner Forssell asked if the 6.2% and 3.7% cost increases should be added to total 9.9% or a weighted average of cost increases to determine the actual cost increase. Ms. Bilir responded that they are not additive because they are different components of costs going up at different rates (6.2%, 3.7% and 1.4%). It would be within that range, not as much as 9% or 11%. Commissioner Smith expressed his concern that we are not charging enough. Commissioner Smith requested the calculation be verified on Page 11 of 15 regarding the rate increase resulting in residential rates to be 26% lower than the current average neighboring community. Ms. Bilir confirmed Commissioner Smith’s understanding that the $3.2M transfer was primarily to bring FY 2024 into FY 2023 and the replenishment of the CIP Reserves between 2026 and beyond pays for the acceleration of wastewater pipe replacement to within 100 years. If the CIP Reserve goes down to zero, Commissioner Smith advised a 10% increase because money needs to accumulate before FY 2026. Regarding the alternative scenarios on Slide 7 for delaying implementation of the 2½ mile/year replacement, Vice Chair Johnston asked how to predict which pipes were most in need of replacement. Ms. Santos replied that the best way to evaluate conditions is by CCTV. Operations was asked to include a CCTV inspection when they do maintenance to capture the image and rate the defects to help prioritize the replacement program. Vice Chair Johnston stated that the replacement timeframe was beyond the projected useful life of the pipes. Unless there was a reliable way of assessing the condition of those pipes, he was reluctant to push replacement out any further and risk a catastrophic failure. He preferred starting main replacement at a rate of 2½ per year in FY 2026 or before. Commissioner Scharff supported Commissioner Johnston’s comments. He preferred staff’s recommendation of getting it done in 2026. Ms. Bilir remarked that the financial plan was written using staff’s recommendation. If the UAC and Finance Committee recommended an alternative, staff would rewrite the financial plan and update the tables and figures. In response to Commissioner Scharff’s understanding that revenues would match costs and we would have the right reserve amounts over a five-year period, Ms. Bilir confirmed that was correct and expressed staff’s confidence in their proposal. The overall average cost increase was 6.8%. With a 9% rate increase, revenues would match costs. Commissioner Scharff supported staff’s recommendation. Commissioner Forssell thinks we need to replenish our reserves, cover our costs and replace our sewer mains to prevent future incidents. She supported staff’s recommended proposal. Utilities Advisory Commission Minutes Approved on: Page 6 of 19 Chair Segal pointed out that the difference between 9% and 6% was 50 cents/month. She supported staff’s recommendation. She wondered whether we were paying the proper share to maintain the plant, how the allocation was determined, when it was last determined and whether it was time to reconsider if our cost allocation was correct. Karin North, Assistant Director Public Works, responded that the cost allocation for the facility was discussed during meetings with the Finance Committee and Council when we looked at upgrading our secondary treatment plant. The long-range facility plan needed to be updated as well as looking at cost allocation across the partners. An RFP is being crafted to go out to bid for a consultant but it is anticipated it will take a few years to get that completed. James Allen, Manager, Water Quality Control Plant Manager, said they will look at the cost allocation methodology for fixed allocated capacity in the treatment plant, how that was determined in the past and whether it was worthy of being changed. The annual operating cost fluctuates based on flow and strength of wastewater measured with various instruments and billed annually. Chair Segal asked that if our allocations were greater than they should be, if there was an opportunity to pay less for upgrade expenses. Mr. Allen replied that potentially there could be negotiations with Mountain View and amendments made. Future capacity allocations for flow and strength need to be determined for each community. Chair Segal inquired if there was an opportunity to dig once and do gas replacement work during sewer replacement if gas was on the same side as sewer. Mr. Batchelor did not know if they were on the same side. Ms. Santos responded it was typically on the same side of the street; however, it was not practical because the expertise was different. Sewer contractors cannot replace gas because gas contractors are experienced and qualified. Water and gas was done together on the Upgrade Downtown project and they found some contractors capable of doing both. Chair Segal advised to dig once if possible, even if it was two teams working side by side, because digging is disruptive and expensive. Think creatively and look for synergies to hold down costs. Ms. Santos remarked that although they are on the same side, they are typically not in the same trench. Sewer uses the pipe-bursting method to minimize excavation. Sewer is in the middle of the street to be equal distance to both sides of the properties because sewer is on gravity. For gas, typically a new alignment is found because service is maintained while building a new gas main and testing it before it is activated. The alignment of the mains on each street is different. ACTION: Commissioner Forssell moved Staff request the Utilities Advisory Commission (UAC) recommend the Finance Committee recommend the City Council: 1. Adopt a resolution (Attachment A): a. Approving the Fiscal Year (FY) 2024 Wastewater Collection Financial Plan (Linked Document); and b. Approving a transfer of up to $3.178 million from the Capital Improvement Program Reserve to the Operations Reserve in FY 2023; and c. Approving a transfer of up to $342,000 from the Rate Stabilization Reserve to the Operations Reserve in FY 2023; and d. Increasing Wastewater Collection Utility Rates Via the Amendment of Rate Schedules S- 1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) (Attachment B). Seconded by Vice Chair Johnston. Utilities Advisory Commission Minutes Approved on: Page 7 of 19 Motion carried 7-0 with Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Forssell, Metz, Scharff, and Smith voting yes. ITEM 2: ACTION: Staff Recommend the Utilities Advisory Commission Recommend the Finance Committee Recommend that City Council Adopt a Resolution Approving the Fiscal Year 2024 Water Utility Financial Plan, Including Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service From Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service) Lisa Bilir, Sr. Resources Planner, delivered a slide presentation. A 7% overall rate increase is proposed for the water utility in FY 2024. A 3% distribution rate increase is needed to pay for needed infrastructure, water main replacement and seismic upgrades to remaining reservoirs. The Operations Reserve was at the maximum at the end of FY 2022 with about $14M. The CIP Reserve and Rate Stabilization Reserve have funds available. Staff is proposing to move $3M from the Rate Stabilization Reserve in FY 2023 to mitigate the need for further rate increases as well as $3.7M from the Capital Improvement Projects (CIP) Reserve to the Operations Reserve to pay for needed infrastructure in 2023. The overall increase is 3% to 5% each year from 2025 through 2028. There was a proposed 11.6% increase in the commodity rate from our supplier, the San Francisco Public Utilities Commission (SFPUC), for capital investment, funds owed to wholesale customers (including Palo Alto) will be exhausted by the end of this fiscal year and regionally there were lower sales volumes because of the ongoing projected drought. In May, we will know the final rate increase that SFPUC adopts, which would be passed through to our customers by the commodity rate. A chart was displayed showing the projected costs and revenues for the water utility. Costs have been above revenues, which were projected to continue this year. The reserves were projected to remain within the guideline range throughout the forecast period. Commissioner Smith requested clarification on operational costs and distribution rates. Ms. Bilir explained that the operational cost for the water utility was separate from the water purchase cost in the main tables but they could be considered together. They were presented together on some tables but separate on others. The water purchase cost is an operational cost of the utility. Regarding the distribution rate in Table 11 on Page 15, there was a 6% annual increase from 2025 to 2028 but a historical operational cost of 4.8% on Page 3. Commissioner Smith queried if the 4.8% yearly operational cost was going to 6%. Ms. Bilir replied that the distribution rates included operational and capital costs. Commissioner Smith remarked on the forecasted 3% growth in FY 2024, then 6% from 2025 onwards. Ms. Bilir commented that was the rate increase. Commissioner Smith inquired if that rate included our historical operation plus distribution plus CapEx. Ms. Bilir replied yes, that included all the distribution cost but Commissioner Smith was talking about a forecasted rate that was going to pay for the forecasted cost. Commissioner Smith questioned if historically our operations cost was 4.8%, why forecast 3% in FY 2024. Ms. Bilir explained that the forecast was not based on the historical average cost increases. They projected for each cost category their best estimates of the forecasted costs. Commissioner Smith noticed a proposed increase of 3% for non-residential irrigation although we are in a drought. He believed we should discourage irrigation. Ms. Bilir responded that rates for each customer class were based on our cost-of-service study conducted in FY 2020 by an outside consultant. Utilities Advisory Commission Minutes Approved on: Page 8 of 19 In reply to Commissioner Smith’s query if they considered in their financial model an alternative of flat- line increases of 4.8 to 5, Ms. Bilir answered yes but it led to a higher rate increase in FY 2024, so one of the benefits of taking this approach was reducing the overall impact on customers. Commissioner Smith wondered if it was necessary to transfer money to cover all the CapEx now. In FY 2025, we are well above the median between low and high. Perhaps less could be transferred since the reserves were okay. Karla Dailey, Acting Assistant Director, Utilities Resource Management, agreed it was not necessary but it was felt that using some of the reserves was a prudent strategy when they took into account the full impact on the bill and the customer. Commissioner Smith agreed with being prudent but significant rate increases were proposed across all utilities. If it was anticipated that we need more money for future projects, he suggested setting rates appropriately to ask for one increase. Coming back every six months or every year and continually increasing rates 10% would become frustrating for everybody. Commissioner Forssell noted that staff always breaks down the percentage of the commodity consumed by different customer classes in gas and electric. The report had number of water customers as 81% residential single family and 19% other, which included multifamily residential and commercial but not a breakdown of water usage for residential versus commercial. Ms. Bilir responded that residential was about 63% of total water usage. Commissioner Forssell was surprised to see on the Financial Plan on Page 6 it said that Palo Alto’s capital costs were lower than budgeted in FY 2022 when we are in an environment where capital costs are always going up, so she asked if staff could provide an explanation. Ms. Bilir explained that the five-year capital budget has not fluctuated much in the water utility but in that year there were deferrals for work that had not been completed. In response to Commissioner Forssell’s query as to the cause for work being deferred, Ms. Bilir thought it was work that needed more than one year to complete but she will see if she can find more specifics about the deferred project. Since the Operations Reserve was for contingencies, Commissioner Forssell wanted to know why Part C of the recommended resolution was to approve a transfer of up to $3M from the Rate Stabilization Reserve to the Operations Reserve. Ms. Bilir replied that there was $9M in the Rate Stabilization Reserve, so using $3M/year for three years would mitigate the need to increase rates to cover costs. In reply to Vice Chair Johnston’s understanding that the chart on Slide 8 showed expenses would exceed revenues until at least FY 2027, Ms. Bilir confirmed that was correct. At the end of FY 2022, there was $9M in the Rate Stabilization Reserve and $14M in the Operations Reserve, so those funds were available to manage the rate increase. Vice Chair Johnston asked if that was what made up the difference between our costs and revenues. Ms. Bilir answered yes, together with funds in the CIP Reserve. Vice Chair Johnston thought it was a good plan to use reserves to keep customer bills down. Chair Segal agreed with using reserves to keep bills down but was nervous about FY 2026, although there was a lot of time before then to decide what to do about rates. Chair Segal wondered if there was a way to better align cost savings for customers who conserve water because customers who have put more effort into conservation are not getting as much of a benefit in rate changes as those who use more water. Ms. Bilir responded that customers who conserve would save money on their bill and Chair Segal’s idea is something that staff can think about when they do their next cost-of-service update to the rates and when designing a drought surcharge. Utilities Advisory Commission Minutes Approved on: Page 9 of 19 ACTION: Vice Chair Johnston moved Staff request that the Utilities Advisory Commission (UAC) recommend the Finance Committee recommend the City Council: 1. Adopt a resolution (Attachment A): a. Approving the Fiscal Year (FY) 2024 Water Utility Financial Plan (Linked Document); and b. Approving a transfer of up to $3.746 million from the Capital Improvement Program (CIP) Reserve to the Operations Reserve in FY 2023; and c. Approving a transfer of up to $3.0 million from the Rate Stabilization Reserve to the Operations Reserve in FY 2023; and d. Increasing Water Utility Rates Via the Amendment of Rate Schedules W-1 (General Residential Water service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service). Seconded by Commissioner Smith. Motion carried 7-0 with Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Forssell, Metz, Scharff, and Smith voting yes. The UAC took a break from 6:08 p.m. to 6:17 p.m. ITEM 3: ACTION: Staff Recommends That the Utilities Advisory Commission Recommend that the Finance Committee recommend that the City Council Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including the Proposed Reserve and General Fund Transfers, and Amendment to the Gas Utility Reserve Management Practices, and Increasing Gas Rates by Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) Jonathan Abendschein, Assistant Director, Utilities Resource Management, delivered a slide presentation on the Gas Utility Financial Plan and Proposed Rate Changes for FY 2024. We had extreme gas prices this winter but prices were coming down over the next few months, which would reflect in the March utility bills. Distribution revenues are currently below costs, so rates need to be increased in July. Gas supply rates are composed of commodity (the cost of gas purchased at market prices), transmission (the cost to transport gas to Palo Alto), the Cap and Trade program (mandated participation in the State program) and our City of Palo Alto Carbon Neutral Gas Portfolio charge for buying offsets. These rates pass through the actual costs the utility incurs for these components. Distribution rates represent the costs for the City to maintain its gas distribution system to transport gas to customers and to run our customer service center. Distribution rates are 20% below cost. Reserves are very low. Staff requests a 21% distribution rate increase on July 1, which results in an approximately 8% increase in the overall bill. Overall gas supply costs were projected to be about 36% lower in FY 2024, so the net effect is customers would pay about 13% less in utility bills in FY 2024 than FY 2023. Measure L changed the methodology for General Fund transfers to a percentage of revenues, transfers are 18% of the gas utility gross revenues but Council can choose to transfer less. A chart was displayed demonstrating the amount of General Fund transfers if 18% of revenues was transferred each year. The significant increases in gas market prices and gas supply costs could lead to significant increases in the transfer amounts over the next few years. Alternative 2 was to transfer 15.5% for FY 2024. If the City continued to transfer less than 18% over the future years, it would yield a growth in the General Fund transfer that matched CPI (Consumer Price Index), similar to the growth Utilities Advisory Commission Minutes Approved on: Page 10 of 19 rate prior to the passage of Measure L. Staff is requesting the UAC and Finance Committee to make a recommendation to Council on which alternative to pursue. The rate increases in the financial plan shown on the chart for FY 2024 Gas Cost and Revenue Projections were based on Alternative 2, assuming transfers less than 18%. By the end of FY 2023, reserves were expected to be significantly below risk assessment levels. In this rate proposal, staff requests that Council approve a rate plan that maintained reserves below minimum until FY 2027. To do otherwise would require double-digit rate increases. The condition of the reserves was due to the spike in energy prices and not all costs were passed through to customers. In response to Chair Segal’s query as to which transfer rate was assumed in the reserve projection, Mr. Abendschein responded that Alternative 2 was assumed but staff modeled the rate increases for Alternative 1 in the chart on Page 13 of the staff report, Alternative Gas Rate Projections. Chair Segal asked if the transfer affected the Operations Reserve Projections. Mr. Abendschein replied that the chart on Page 12 of the staff report, Gas Operating Reserve Projections, was based on Alternative 2 but the two reserve projections were very similar. Commissioner Smith wanted to know staff’s confidence level rated on a scale of 1 to 5 that the projected gas supply costs were going to decrease by 36%. Mr. Abendschein responded that there was a lot of volatility in the markets and a lot of uncertainty, so would not give an answer on a 1 to 5 rating. Projections could change, either worse or better. Based on market indications, forward prices and quotes that staff is receiving from marketers, they do not see indications in the market of a similar winter as last year. In addition, staff is looking at hedging alternatives for next year. Commissioner Smith expressed his concern about dipping below risk assessment. Mr. Abendschein remarked that if there was an emergency demand for cash that exceeded our reserves, staff expected to manage that within the organization, which is why staff was comfortable with this recommendation. In reply to Commissioner Smith’s query if Measure L capped transfers at 18%, Mr. Abendschein answered that Measure L specified that transfers would be 18% unless Council chose a lower transfer amount but you could not transfer more than 18%. Vice Chair Johnston requested further explanation on how a hedging strategy could be used to lock in lower gas prices for the future. Mr. Abendschein explained that hedging locked in gas prices, although it may not lock in lower gas prices. The risk you take when you hedge is you may miss out on lower gas prices than when you purchased. The current strategy is to hedge one month in advance. Staff will evaluate a few different options and bring those to Council in the coming months. Vice Chair Johnston commented that the community was concerned about seeing a repeat of what happened this winter and anything we could do to provide certainty on that was very important. On Page 12 of the Staff Report, Palo Alto gas bills were compared with PG&E’s gas bills in January 2023. He wondered why PG&E was so much lower whereas normally we were lower. Mr. Abendschein responded that staff had the same question and was looking into it. PG&E had a winter hedging program but so did SDG&E and SoCalGas and both of them experienced the same spikes as Palo Alto. It was expected that when western gas prices are investigated, we would learn what PG&E’s experience was during that time. Vice Chair Johnston advised notifying the community why we were higher than PG&E when we were normally lower once we have that explanation. Utilities Advisory Commission Minutes Approved on: Page 11 of 19 Vice Chair Johnston commented on the various alternatives. With Alternative 2, he would support having increases equal to CPI. Commissioner Scharff supported transfers closer to CPI. He does not think it was the intent of the voters to provide windfalls when commodity price spike. He recommended that the UAC choose 15.5%. Commissioner Scharff asked if staff would come to the UAC with the hedging strategy before going to Council. Mr. Abendschein responded yes, that would be a UAC discussion item. Commissioner Scharff remembered there was a three-year hedging strategy that Council voted to get rid of it because our prices were higher over the long term. You can buy less volatility but pay more for gas. We are not energy traders, so it takes luck to hedge in a way that beats the market. We have to be careful that we do not lock in high prices. His recollection on laddering was we were consistently higher than PG&E over the long run because they did not use our same hedging strategy. Mr. Abendschein remarked that PG&E was underinvesting in their system at the time and as they started to ramp up investment it was more competitive because we were ahead on system investment. However, they also did not have a laddering strategy so when gas prices dropped around 2008, PG&E passed those savings through to customers. Palo Alto prices were higher than PG&E’s for several years because of the long-term hedges. Mr. Abendschein showed a chart on Page 20 of the staff report, Winter 2022/2023 Price Spike. Prices for the last few years were between 30 cents to 50 cents/therm up until 2022 when they started to rise, reaching $5/therm in January 2023. The chart is in $/MMBTU, which is the price per therm multiplied by 10. Commissioner Forssell stated that a concerned customer asked her about the relationship between an individual customer’s billing cycle and the variability of gas rates. Mr. Abendschein explained that people were billed for their usage at the price for that month. If somebody has a billing cycle with half of it in January and half in February, half of their consumption would be billed at the January rate and half at the February rate. How much you pay for gas was based on when your meter was read and the consumption was split between the two months. Commissioner Forssell commented that the Utility does not know whether consumption was largely weighted toward January or February for that hypothetical customer and Mr. Abendschein confirmed that was true. In reply to Commissioner Forssell’s question if the transfer amounts to the General Fund prior to Measure L were about 18% of gas revenue at the time. Mr. Abendschein replied yes. Looking back five or six years, the transfer amount varied but it was roughly 18%. Commissioner Forssell supported staff’s recommendation of 15.5%, as she did not think it was the intent of voters to create a windfall when commodity prices increased. Commissioner Forssell asked about the timeline for the Miriam Green settlement to return funds to customers from the General Fund. Dean Batchelor, Utilities Director, replied that he was waiting to hear back from City Attorney Molly Stump on when those funds (about $15M) would be released. Commissioner Forssell requested further explanation on the Cap and Trade program and its effect on the financial state of the Utility. The City received allowances but she did not know if we were required by law to sell them on the marketplace and buy allowances back to cover our usage. She wondered if we bought and sold at the same price, if it was a net cost, net revenue or if it varied. Mr. Abendschein stated he could not talk about our bidding or consignment strategies because of regulations to prevent market manipulation. The money we receive from auctioning off allowances has to be held aside for the specific Utilities Advisory Commission Minutes Approved on: Page 12 of 19 purposes in the regulation; we cannot net it against our purchases. We have to purchase a certain amount and pass that cost directly through to customers to provide a price signal related to the price of carbon in the capturing program. The regulation allows revenues to be used for carbon-reducing activities or returned to customers in the form of a climate credit but they cannot be tied to consumption. Local policies adopted by Council in 2014 for the gas utility specified the uses, which include emissions-reducing activities and gas efficiency. Staff spoke with Council last fall about amending the list to include building electrification. Another policy stated these funds have to be used for the benefit of gas ratepayers. Our local regulations state that climate credits require Council approval. Commissioner Forssell noted that the plan calls for our reserves to go below the risk assessment. Not having reserves, we were vulnerable to the actual costs going above our new cap of $4/therm if there was another price spike. Commissioner Forssell suggested considering a cap of $6/therm. Mr. Abendschein commented that a price cap could complement a hedging strategy. Commissioner Bowie remarked that we were implementing a variety of electrification programs. Large customers could decide to electrify because of gas price spikes. He wondered if customers could fully disconnect and no longer be subject to a distribution rate. If so, there could be a significant number of customer defections in 2026. Mr. Abendschein said that an objective of Council policy is to have people reduce their emissions, which could eventually result in them disconnecting from the gas system over the long term and staff was working on a financial strategy to deal with this. Preliminary analysis was done a few years ago. The disconnections have to be planned carefully to enable the careful pruning back of the gas system. Gas price spikes will probably drive more interest in electrification but that was built into the expectations for the gas utility over the long term. Staff was working on a plan to manage the gradual decline in sales while still being able to run the gas utility reliably, safely and cost effectively for the remaining customers. Commissioner Bowie was concerned about the effect on customers that may not have the ability to defect, such as multi-metered residential tenants. Mr. Abendschein agreed that was a concern of staff as well. He was less concerned about a sales decline when considering reserves because we were not able to protect against that with reserves. The risk of another price spike was a more likely issue to affect the reserves. A few years back, a preliminary analysis showed it was possible to prune back residential portions of the system and run a multifamily and nonresidential smaller gas utility at prices comparable to the prices we would have seen without gas sales decline. We may need to provide funding for people to transition who cannot afford it themselves. Another long-term possibility might be transfers from the electric utility to the gas utility as one increased and the other decreased. Staff will study these possibilities over the next year. Vice Chair Johnston noticed on Page 9 of the Staff Report that we were building up very significant amounts in the Cap and Trade Reserve. He wondered if the reserves were being used. Mr. Abendschein responded that they have started to use them. They were spending $1.5M on the heat pump water heater program. As more climate action plan programs are rolled out, he expected we would be running the reserve down quickly. Commissioner Metz commented on the Gas Operations Reserve. He urged staff to reexamine how to get the reserve above the minimum in a shorter period than three years. As a housekeeping item, he advised separating the components of the Operations Reserve instead of combining the Gas Distribution Fund Operations Reserve and Gas Supply Fund Rate Stabilization Reserve. Separating the distribution cost and commodity gas cost makes it easier to understand. Utilities Advisory Commission Minutes Approved on: Page 13 of 19 Regarding the commodity price spike, Commissioner Metz commented that City Council and ratepayers were very concerned and it required a visible and transparent analysis to address what happened and what we were doing to improve it. Commissioner Metz wondered why we were depleting the distribution reserve to pay for commodity costs. He questioned whether that was wise because it masked the true drivers of costs and impeded our ability to make decisions on cost control and price structure. A 21% distribution rate increase was proposed. According to Page 7, 49% of the proposed distribution rate increase was to replenish the distribution reserve that was depleted to pay for high gas commodity costs. Commissioner Metz thought it was a bad business practice to move money between reserve funds that were not related, such as CIP to Operations or Commodities. Mr. Abendschein stated that Commissioner Metz’s ideas were worth investigating, especially as they assess what can be done differently to more accurately and closely track the drivers of our different costs over the next year. But also, practically, when you have separate reserves for different purposes and one of them is wiped out, you need to tap into other reserves to keep your utility healthy. Commissioner Metz expressed his concern that transfers between supply and distribution reserves misrepresents where our costs are coming from and could be subject to challenge. Mr. Abendschein responded that he could not speak to it being subject to challenge but said staff made a conscious effort to minimize transfers this year. Council Member Lauing asked what staff’s plan was if Finance did not think that citizens should tolerate an 8% increase and he requested that the Commission discuss this topic. Mr. Abendschein commented that alternatives were limited in the gas utility, which is one of the utilities with the highest regulatory obligations, best-practice safety obligations and moral obligations. There were opportunities to cut costs but that would require cutting back on safety-related capital investment in the gas utility, slowing down projects such as the cross-bore program or significant cuts to operational staff. Mr. Batchelor reiterated that the City would have to cut out or reduce the CIP program. There was about $800,000 in the four-year cross-bore program, for example. Staff would have to explain to Council what the safety factors were and see if Council was willing to take on those risks. Other options would be to look at other sources, perhaps cut some O&M expenses, but there was not many opportunities in those areas. Commissioner Forssell remarked she would tread very carefully on trying to cut utility costs. Council could take a different direction and cut the carbon offset program, although she does not think it would save a lot of money. Cutting the General Fund transfer could reduce the rate increase and would not hurt the gas utility’s ability to operate safely and reliably, though she did not want to set a precedent of having Measure L but not utilizing it. Chair Segal worried that Council would focus on percentage numbers, so she thought it was important to speak of the increase in terms of dollar amounts. It was important for the community to understand that they benefitted from rate increases being held down for two years during COVID, and the utilities were catching up from operating at a deficit. It was important to emphasize the programs to help people who are struggling. The utilities are below the risk assessment in our reserves. She advised staff to look for ways to combine projects or give a contractor multiple projects, being more creative on how to save on projects. She suggested more creativity in compensating staff besides raising comp every year, maybe providing housing stipends, to alleviate some of the costs that go up every year. Utilities Advisory Commission Minutes Approved on: Page 14 of 19 Commissioner Smith echoed the comments of his fellow commissioners. COVID put us on hold. The REC exchange program was approved because we were in need of money. It was recently agreed that money from the REC exchange would go to decarbonization efforts. He thinks we need to be more creative with how we spend that revenue. We put rates below our cost for two years but we need to pay for it. We need to bring things up to code and we have an old system. The conversation about replacing our old infrastructure will continue into the next several years. We need to turn to electrification. We have an older electrical grid. These will cost massive amounts of money. He cautioned that we are not in a position to offer rate discounts. Council Member Lauing commented that Palo Alto is going to grow in residents in the next 10 years, so we need infrastructure that factors in that growth. Regarding the reserve graph, Chair Segal wondered why the reserve requirement amount spikes up in 2023. Mr. Abendschein explained that the guidelines were defined as a percentage of revenues for the year. The spike in gas costs drove an increase in the guideline levels. Chair Segal questioned if having the reserves below the risk assessment amount for multiple years affected our bond rating and our ability to borrow in the future. Mr. Abendschein responded that he would have to talk to our Administrative Services Department before responding. Reserves were factored into bond ratings. The gas utility has one outstanding debt issuance due to expire in three years. They were not looking to issue debt in the gas utility. Chair Segal thought that utilities sometimes were collateral for other utilities, so the gas utility might not issue a bond but it was used as added collateral if a bond was issued by the electric utility. Mr. Abendschein confirmed it could be. When staff does the financial plans, they look at every debt issuance and make sure we have enough reserves across all the utilities to meet the guidelines. Chair Segal was okay with the proposal but next year she would like to revisit being below the reserve risk assessment. ACTION: Commissioner Scharff moved Staff request that the Utilities Advisory Commission (UAC) recommend the Finance Committee recommend the City Council adopt a resolution (Attachment A): a. Approving the fiscal year (FY) 2024 Gas Utility Financial Plan (Linked Document); and b. Amending the Gas Utility Reserve Management Practices (Attachment B) c. Transferring up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund in FY 2023; d. Transferring up to 15.5% of gas utility gross revenues received during fiscal year 2022 to the general fund in FY 2024; e. Transferring up to $3.82 million from the CIP Reserve to the Operations Reserve in FY 2023; and f. Increasing gas rates by amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) (Attachment C). Seconded by Commissioner Metz. Commissioner Scharff noted that tonight’s motions have been for the UAC to recommend that the Finance Committee recommend to City Council. He believed it should be the UAC recommending to Council. The Finance Committee is advisory to Council. If the Finance Committee disagrees with the UAC, he wanted to know whether staff would still bring it forward to Council as the UAC’s recommendation even though the motion was to recommend to the Finance Committee. Mr. Abendschein replied they would reflect the UAC’s separate recommendation to Council. Utilities Advisory Commission Minutes Approved on: Page 15 of 19 Commissioner Metz believed the issues of transfers between supply and distribution reserves needed to be addressed before he could support the proposal. The motion carried 6-1 with Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Forssell, Scharff, and Smith voting yes, Commissioner Metz voting no. The UAC took at break at 7:27 p.m. and resumed at 7:48 p.m. ITEM 4: ACTION: Staff Recommends the Utilities Advisory Commission Recommend that the Finance Committee Recommend that the City Council Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E-HRA (Hydro Rate Adjuster), E-1 (Residential Electric Service), E-2 (Residential Master-Metered and Small Non-Residential Electric Service), E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service), E-4 (Medium Non-Residential Electric Service), E-4-G (Medium Non-Residential Green Power Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E-7 (Large Non- Residential Electric Service), E-7-G (Large Non-Residential Green Power Electric Service), E-7 TOU (Large Non-Residential Time of Use Electric Service), E-NSE (Net Metering Net Surplus Electricity Compensation), and E-EEC (Export Electricity Compensation) Micah Babbitt, Resource Planner, delivered a slide presentation on the Electric Utility Financial Plan and Proposed Rate Changes for FY 2024. Staff’s proposal resulted in no change to average system rates. Staff recommended reducing the Hydroelectric Rate Adjuster (HRA) by 50% and increasing base rates by 14%, so on net this should have little change to customer bills. Rates were kept flat during the pandemic. In April 2022, the HRA was activated. On July 1, 2022, the base rates were increased by 5%. Council voted to increase the HRA effective January 1, 2023. Costs have exceeded revenues since FY 2021. Costs were projected to be above revenues for FY 2023. The Operations Reserve was about $20M lower than projected. It will drop slightly below the minimum guidelines but will be above the risk assessment level. There were multiple contributing factors driving our costs higher. We have had multiple years of drought. Hydro projections were reduced by 20% to be more conservative with the hope that we will not have to activate the HRA as frequently. The current level of precipitation was about 43.5 inches including the Northern Sierra Watershed, the main watershed that drives a lot of our hydro. The watershed’s average yearly precipitation is about 53 inches. Reservoirs started from a very low point, so we likely will not start realizing some of this value for the next 12 to 24 months. There have been significantly higher electric prices, which have increased 300% from 2020 to 2022. The financial plan included about $200M of grid modernization investments that start as soon as this fiscal year and those debt service costs start showing up in FY 2025 and grow to about $9.5M in FY 2028. Regarding the HRA that was recently increased and was now being proposed to be cut in half, Commissioner Metz asked if there was a plan to have something that more accurately reflected our actual cost of electricity supply in real time without requiring City Council input when there was a big change in energy prices. Mr. Babbitt responded that increasing the base rates was an attempt to bring our revenues in line with costs. The primary reason for the proposed change in the HRA rate was a change in the cost of replacement power we have to buy. Staff is working on a cost-of-service study for the electric utility. One of staff’s work tasks is to look at transitioning the rate to a Power Cost Adjustor indexed to the market prices we pay and adjusted on a quarterly or monthly basis. Utilities Advisory Commission Minutes Approved on: Page 16 of 19 In reply to Commissioner Metz’s query as to why the NEM-2 solar payment had an approximately 60% increase, Mr. Babbitt replied it was tied to our weighted cost of electricity. Chair Segal and Commissioner Forssell had the same question about NEM-1 and NEM-2 because the methodology for both was a weighted cost but one was about 14 cents and the other was 15 cents. Mr. Babbitt explained that one was backward looking at what our actual costs were and one was forward looking at what costs were expected to be. Jonathan Abendschein, Assistant Director, Utilities Resource Management, added that these two Net Energy Metering (NEM) programs were different ways of compensating for solar. NEM-2 was current. NEM-1 was looking back over a year and balancing surpluses against deficits. NEM-1 was governed by a set of regulations while NEM-2 was not. Commissioner Metz urged staff to stop the practice of shifting money from reserve account to reserve account because it masks when our revenues and costs are out of alignment. Mr. Babbitt noted Commissioner Metz’ comment and stated it was something that staff would work to address. Regarding Table 1 on Page 6 of the Staff Report, a 14% increase was proposed in FY 2024, 8% in 2025 and 5% thereafter but the percentage change in the total system average rate dipped down by 3%. Commissioner Smith wondered if there was any benefit to dipping down instead of trying to keep it at zero. Mr. Babbitt replied that the assumption was that they would completely remove the HRA but it might be more prudent to keep it at zero. For a system average rate of 0%, base rates need to be increased by an offsetting amount. Commissioner Smith remarked that the sooner we get revenues equal to costs it would be better for everything, including the reserves. Mr. Babbitt stated that the cost-of-service analysis would be completed this year. Some additional rate changes would be recommended in October 2023 and one of those would be to restructure the HRA into a Power Cost Adjustor, which would change the projection for FY 2025. Vice Chair Johnston commented that Slide 10 illustrates the effect of having held the electric rate for two years during the pandemic and using reserves to match expenses. It would be interesting to know if rates had increased 5% during those two years, what increase would be needed now. He guessed it would be much lower than 14%, which explains why we have these large increases to pay back the deficit incurred during the pandemic. It is important for people to understand they had a benefit in the past and now we are catching up. Commissioner Forssell was glad that staff was lowering the hydroelectric forecast to represent a new normal. She asked what percentage of the City’s electric load was predicted to be met with hydro in a new average year. Mr. Babbitt responded that hydro contributed 40% to 50% of our load. Calculating a 20% reduction, 30% of our load was now projected to be met from hydro. In response to Commissioner Forssell’s question if the discussion of the geothermal PPA opportunity took into account the lower forecast for hydroelectric, Mr. Babbitt replied it did not but it was debated internally how long the geothermal deal would make us, whether we should sign the geothermal PPA and simultaneously sell energy because it would make us long. There was no plan to make energy sales in addition to buying more geo. David Yuan, Utilities Strategic Business Manager, addressed Commissioner Forssell’s questions regarding the Cost of Service Study and AMI deployment, if the AMI pilot customers were on a time-varying rate or the E-1 Residential Electric Service, and what was the timetable for evolving our rates in conjunction with AMI. Approximately a thousand AMI meters have been deployed combining water, gas and electric with another couple thousand coming in the next couple months. They are trying to find a consultant to help Utilities Advisory Commission Minutes Approved on: Page 17 of 19 design time-of-use rates. By 2024, they are targeting to have pilot rates for AMI customers as well as an electric-only rate for those who have electrified so they are not penalized with a higher tier. As we are still waiting for the consultant to report on the electric grid upgrades, Chair Segal wanted to know if those added costs were factored into the proposed rates. Mr. Babbitt responded that $300M for grid modernization investments were in the financial plan that goes past FY 2028. This plan looks at the future five years, so the chart showed $200M of the $300M. Staff is working with the consultant to finalize those values but staff is being conservative in the expectation of debt service costs. Chair Segal was curious about the planned expansion of CAISO to a larger regional grid control area that could further increase our transmission cost. Mr. Babbitt replied it was part of the general trend in the power market of increasing regionalization and building more transmission to connect generation in various parts across the west and utilities and customers were paying for that transmission buildout, so our transmission costs continue to increase and were projected to increase more in the future. Chair Segal heard from a few customers who were electrifying but were concerned about being asked to bear the entire burden of transformer upgrades. Chair Segal understands it required a change in Council rules but it was a wrong message and unfair that customers are paying to upgrade transformers that are benefitting everyone else on the transformer. They are very expensive, tens of thousands dollars for the transformer. She does not know how to get this in front of Council quicker but she was told it could take over a year. Mr. Abendschein responded that this was in their work plan. They agree that waiting over a year is too long but staffing issues are getting in the way to making progress faster. They were aiming for end of year and ideally significantly sooner. They are balancing this issue against similar competing issues such as the electric cost-of-service study and power cost adjustor, which were being worked on by the same staff. Staff will do everything they can to expedite it. Director Batchelor, Utilities Director, added that it was in their rules and regs, so they control that portion of it. They have been talking with the S/CAP Committee. They need to change the language, which can be done quickly. Staff will come back to the UAC with the proposed change and take it to Council for input. Staff will work with S/CAP to get it through quicker. Commissioner Scharff has heard many complaints in the community about the transformer cost. As we ask the community to move toward electrification, staff needs to think about what issues will come up that will frustrate community members and turn them against electrification. You will ask yourself why you electrified if you receive a bill for $14,000 or $15,000 for your transformer. There may be issues such as electrical panel upgrades where the City controls the cost and does not allocate fairly. There might be costs that the fire department imposes. He suggested that staff reach out to the Planning Department and Building to discuss how to lower costs for people when they electrify. ACTION: Commissioner Smith moved Staff request that the Utilities Advisory Commission (UAC) recommend the Finance Committee recommend the City Council adopt a Resolution (Attachment A): 1. Approving the Fiscal Year (FY) 2024 Electric Financial Plan (Linked Document); 2. Approving the following transfers at the end of FY 2023: a. Up to $15 million from the Supply Operations Reserve to the Distribution Operations Reserve; b. Up to $8 million from the Electric Special Projects (ESP) reserve to the Supply Operations Reserve; and c. Up to $4.5 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and Utilities Advisory Commission Minutes Approved on: Page 18 of 19 3. Approving the following transfers at the end of FY 2024: a. Up to $3 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and 4. Approving the following rate actions for FY 2024: a. A decrease to the retail electric rate schedule E-HRA (Hydroelectric Rate Adjuster) of 50% effective July 1, 2023; b. An increase to retail electric rates E-1 (Residential Electric Service), E-2 (Small Non- Residential Electric Service), E-4 (Medium Non-Residential Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E-7 (Large Non-Residential Electric Service), and E-7 TOU (Large Non-Residential Time of Use Electric Service) of 14% effective July 1, 2023; c. An increase to the Export Electricity Compensation (E-EEC-1) rate to reflect 2022 avoided cost, effective July 1, 2023; d. An increase to the Net Surplus Electricity Compensation (E-NSE-1) rate to reflect current projections of FY 2023 avoided cost, effective July 1, 2023; and e. An update to the Residential Master-Metered and Small Non-Residential Green Power Electric Service (E-2-G), the Medium Non-Residential Green Power Electric Service (E-4-G), and the Large Non-Residential Green Power Electric Service (E-7-G) rate schedules (Linked Document) to reflect modified distribution and commodity components, effective July 1, 2023. Seconded by Commissioner Forssell. The motion carried 7-0 with Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Forssell, Metz, Scharff, and Smith voting yes. COMMISSIONER COMMENTS and REPORTS from MEETINGS/EVENTS Commissioner Smith stated this was his last meeting. He had a delightful three years on the UAC. He has loved working with staff. He thanked his fellow UAC commissioners. Vice Chair Johnston remarked this was his last meeting also. He enjoyed the seven years he spent on the UAC. He appreciated how fortunate Palo Alto was to have a Utility staff that was hard working, knowledgeable, creative and did a great job. It was Commissioner Bowie’s last meeting as well. He thanked staff for the hard work that goes into keeping the lights on and everything running and for allowing citizens to participate in the Utility. He thanked Council for the opportunity to sit on the UAC as well as thanks to the people of Palo Alto. Chair Segal thanked Commissioners Smith, Bowie and Vice Chair Johnston and wished them luck on their next endeavors. We are all volunteers and it takes a lot of time and effort. They were prepared and brought thoughtful comments and passion. She enjoyed working with them. Commissioner Scharff commented it was a loss for the UAC to lose Vice Chair Johnston and Commissioners Smith and Bowie at the same time. He enjoyed working with them. FUTURE TOPICS FOR UPCOMING MEETINGS Utilities Advisory Commission Minutes Approved on: Page 19 of 19 Commissioner Metz noted the 12-month rolling calendar was four months long. He suggested adding dates going out 12 months to the items that need to be scheduled. It does not have to be next month but he proposed discussing staffing problems. Discussion ensued. Dean Batchelor, Utilities Director, stated that HR gave some of their recruitment authority to the departments to do all the advertisement, set up interviews, do follow-throughs and make offer letters. Previously, it would take four or five months to get a job posted and two months to get back to a candidate. Staff was planning on going to some of the colleges for engineers. They have been successful going to Sac State and San Luis Obispo. Three new engineers came to us straight out of school and have been with us for about eight months. Staff has worked with the union on improving retention. Associates can test for positions and move up to a higher wage. The biggest struggle is linemen. Oroville Lineman School has job fairs. We hired four individuals from that school but only one stayed. They go through our apprenticeship and then go to PG&E or their home state. There are three schools, Oroville, Texas and Idaho. We give them $100,000 worth of training for four years, not including their salary. We have three apprentices in their second year. Two graduated about six or eight months ago; one left to PG&E and the other stayed with us. We have stipulations in the contract that they owe the City a proration of the $100,000 if they leave before their seventh year, which PG&E paid when they hired our apprentice n because they are desperate for linemen. Mr. Batchelor remarked that staff would provide an informational report that showed the percentage of openings on a quarterly basis, identify which were the difficult ones and how long they had been open but the Commission does not have any authority to set aside extra dollars or new programs. Commissioner Forssell congratulated and thanked Commissioners Smith, Johnston and Bowie. She appreciated their service and enjoyed serving alongside them. NEXT SCHEDULED MEETING: April 5, 2023 Vice Chair Johnston moved to adjourn. Commissioner Bowie seconded the motion. The motion carried 7-0 with Chair Segal, Vice Chair Johnston, and Commissioners Bowie, Forssell, Metz, Scharff and Smith voting yes. Meeting adjourned at 8:36 p.m.