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HomeMy WebLinkAboutStaff Report 2309-2080Item No. 2. Page 1 of 1 Utilities Advisory Commission Staff Report From: Dean Batchelor, Director Utilities Lead Department: Utilities Meeting Date: January 3, 2024 Staff Report : 2309-2080 TITLE Discussion and Update on the Fiscal Year 2025 Preliminary Utilities Financial Forecast and Rate Projections RECOMMENDATIONS This item is for discussion and no action is requested. Staff seeks input from the Utilities Advisory Commission (UAC) on its preliminary rate projections for the Electric, Gas, Water and Wastewater Collection utilities to guide and update its recommended FY 2025 Financial Plans and proposed rate changes. The attached presentation describes staff’s preliminary rate projections for the various utilities; staff will continue to update and refine these estimates in light of changing economic conditions and supply trends, in order to ensure continued cost-based rate offerings. Staff plans to return to the UAC with proposed Financial Plans, and rates in March of 2024. ATTACHMENT Attachment A: Presentation AUTHOR/TITLE: Dean Batchelor, Director of Utilities Staff, Lisa Bilir, Senior Resource Planner Staff, Micah Babbitt, Senior Resource Planner Staff, Eric Wong, Associate Resource Planner January 3, 2024 www.cityofpaloalto.org PRELIMINARY FY 2025 RATE CHANGES 2 PRELIMINARY SYSTEM AVERAGE RATE PROJECTIONS 1)-5% change includes a 21% increase to base electric rates and removal of the hydro rate adjuster 2)Based on general fund transfer of 11.9% of gross revenue in FY25; gas rate changes shown with commodity rates held constant; actual gas commodity rates vary monthly 3)Storm Drain fees increase by CPI index annually per approved 2017 ballot measure 4)Based on an FY 2023 monthly residential bill of $369 (1) 3 ONGOING COST CONTAINMENT •Consistent with the Utilities Strategic Plan, cost containment  is being instituted as an ongoing priority and annual cycle •Winter completion of preliminary out-year rate forecasts •Review by all Divisions for alignment of multiyear strategies •Ongoing management review of personnel actions •Review/revision of position classifications to match evolving needs •Addition/Deletion of positions to reflect organizational priorities •Review/approval to fill individual position vacancies in conjunction  with ASD Budget Office and Human Resources •Regular review of performance metrics and expenditures 4 RECENTLY IMPLEMENTED COST CONTAINMENT •Agreement with Valley Water: $250K to $1M/year + up to $16 million in funding for  reverse osmosis facility to improve recycled water quality •Selling surplus Resource Adequacy and RECs ($20+ million/year) •Negotiated improvements to Western hydroelectric contract ($2 million/year) •Established a cross-functional field crew to install water, gas, and sewer services  simultaneously at new construction sites, reducing hours spent in the field; staff  time freed up to be reallocated to sewer replacements •Implemented mobile workforce applications, reducing administrative data entry  time, freeing up staff for other work •Scheduled larger CIP projects every other year to achieve efficiencies in project  management and also better bids / lower construction costs •Expanding use of bank draft to reduce credit card fees, particularly for large accounts •BAWSCA water bond refunding to achieve lower debt service payments for  wholesale customers, including Palo Alto beginning in 2023 5 FUTURE POTENTIAL COST CONTAINMENT •Switch to new customer information system with reduced support costs •Explore prepay of renewable power purchase agreements to monetize municipal tax -exempt debt •Negotiating layoff of transmission asset to better monetize resource •Increased water and energy end use technical training for Customer Service  Representatives, reducing transferred phone calls and staff time •Working to cluster gas main replacements to reduce mobilization costs for  construction contractors •Evaluating in-house (rather than contractor) pipeline materials procurement to  reduce construction markups ELECTRIC UTILITY www.cityofpaloalto.org 7        FY 2025 proposal:  •5% overall increase •Reserves recovering from 2020-2022 drawdown  •Planned repayment to Hydroelectric Rate Stabilization and Electric Special Projects  Reserves will reduce Operations Reserves below minimum levels •Net supply costs forecast to decline from improved hydro conditions and lower natural gas  prices •Revenues from surplus system Resource Adequacy and Renewable Energy Certificates  further reducing supply costs Future years: •2-4% rate increase in FY 2026-FY 2029 •Issue debt for Grid Modernization by end of FY24 with debt service starting in FY 2025 Electric Rate Proposal 8 Electric Utility Cost Structure Electric  Distribution costs  (in green): $84 million 44% Electric Supply: The cost  to buy electricity and  transport it to Palo Alto,  including operational  overhead (e.g. energy  scheduling) Electric Supply  costs (in blue): $107 million 56% Electric  Distribution: The  cost to distribute  electricity within  Palo Alto, including:  maintaining and  replacing electric  infrastructure,  customer service,  billing,  administration, etc. 9 LONG TERM COST TRENDS Annualized  Increase,  FY20-FY25 Annualized  Increase,  FY25-FY29 Supply: 0.7%/yr Distribution: 7.3%/yr Supply: 5%/yr Distribution: 6.6%/yr 10 LONG TERM COST TRENDS: SUPPLY Annualized Increase,  FY20-FY25 Annualized Increase,  FY25-FY29 Transmission: 6%/yr Generation: -3%/yr Transmission: 5%/yr Generation: 6%/yr Overhead: 6%/yr Overhead: 2%/yr 11 LONG TERM COST TRENDS: DISTRIBUTION Annualized  Increase,  FY20-FY25: Annualized  Increase,  FY25-FY29: Capital: 14%/yr Operations: 6%/yr Capital: 10%/yr Operations: 2.9%/yr Debt: 100%/yr Debt: 32%/yr 12 Supply Cost Drivers •Record high load costs in FY23, double prior 4-year average •Surplus Resource Adequacy reducing power supply costs by  $14.4 million in FY25 •Surplus Renewable Energy Credits reducing power supply  costs by $7.6 million in FY25 •Higher hydroelectric generation projections reduced  projected supply costs by nearly $4.7 million in FY24 •Transmission costs remain high – still waiting on transmission  rate case resolution, refund, and lower rates •Geothermal Power Purchase Agreement starting 2025,  Western Base Resource costs reduced slightly 13 Distribution Cost Drivers •Inflation •Medical/retirement benefit costs and associated overhead  costs continue to increase •Increased capital investment in the electric distribution  system needed due to system age •Grid Modernization, which is currently assumed to be bond  financed •Underground construction costs have increased substantially •Additional contract expense for line crew until internally  staffed 14 FY 2025 Preliminary: Electric Cost and Revenue Projections Co s t / R e v e n u e 15 Electric Supply Operating Reserve Projections 16 Electric Supply Operating Reserve Projections 17 Electric Distribution Operating Reserve Projections 18 Electric Distribution CIP Reserves GAS UTILITY www.cityofpaloalto.org 20 FY 2025 Projection •9% overall rate increase to customer bills, due to 16%  distribution rate increase •7% overall rate increase annually in FY 2026 and FY 2027,  6% in FY 2028 and 5% in FY 2029 •Feedback requested on FY 2025 Measure L transfer  (PAMC 2.28.185) •Supply costs expected to remain stable this winter Preliminary Gas Rate Projections 21 Preliminary Gas Projections •FY 2023 Year-end Ops Reserve above minimum guideline level        Compared with Forecast •+$5.6M – sales higher than forecasted; high gas consumption •+$2.1M – purchases lower than forecasted; lower Cap-and-Trade and Carbon offset costs •FY 2024 Year-end Ops Reserve Forecasted to be below risk assessment guideline level •-$2.3M – FY23 Cap-and-Trade auction sales revenue transfer to reserve deferred to FY24 •-$2.2M – FY23 Carbon offset costs deferred to FY24 •FY 2025 Year-end Ops Reserve forecasted to be at risk assessment guideline level and  expected to return near target guideline level by FY 2029 22 Gas Utility Basics City of Palo Alto gas distribution system: •20,000 meters •205 miles of mains •18,000 service lines 23 •About one-third to two-third of the rate is  “supply-related:” gas supply, transmission,  and environmental charges. These rates  vary monthly according to market-driven  costs that are passed directly to  customers •The remaining portion of the rate is set  based on the City’s costs for maintaining  its gas distribution system (gas mains,  services, related equipment). These rates are being discussed here tonight. Gas Rate Design Cost Structure: Average of FY 2021-2023 24 Gas Utility Cost Structure (FY 2023) Gas Distribution (in Green): The cost  to distribute gas within Palo Alto,  including: maintaining and replacing  gas infrastructure, customer service,  billing, administration, etc. Gas Supply, Transmission, and  Environmental (in Blue):  All pass-through 25 Long Term Cost Trends Annualized  Increase,  FY19-FY25 Annualized  Increase,  FY25-FY29 Supply,  Transmission,  Environmental: 11%/yr* Supply,  Transmission,  Environmental: 2%/yr* Operations: 8%/yr Operations: 2%/yr Capital: 8%/yr Capital ** 10%/yr * Forecast is uncertain and will vary with market prices ** FY25 and FY29 CIP are an average of two years due to staggered main replacement schedule. 26 Gas Distribution Cost Trends Annualized  Increase,  FY19-FY25 Gas Capital: 8%/yr* Gas  Operations: 8%/yr  Annualized  Increase,  FY25-FY29 Gas Capital: 10%/yr* Gas  Operations: 4%/yr * FY25 and FY 20 CIP is an average of two years due to staggered main replacement schedule. 27 Gas Supply Cost Drivers* •PG&E gas transmission rates  continue to rise steadily to fund  safety investments  •Insurance purchased in response  to winter 22/23 natural gas  market volatility •Cap and Trade costs continue to  rise (as intended by design) •Carbon Neutral Gas Plan; carbon  offset purchases * All of the above costs are pass-through and not included in rate increase 28 Gas Distribution Cost Drivers •Health, retirement, and associated  overhead costs continue to increase •Underground construction costs have  increased substantially as well •Continued funding for crossbore  investigations •Increases in overhead transfers 29 Current Gas Bill Comparisons ($/Mo. or Yr.) Commercial Staff is in the process of doing a more extensive review  of commercial competitiveness and will provide  updates in the future Residential Palo Alto median residential bill is  projected to be 1% below PG&E’s  median bill in FY 2024, based on  current PG&E rates 30 Preliminary - Gas General Fund Transfer •Measure L: 18% of gas utility gross revenues from two fiscal years  prior; Council may elect to transfer less •Council approved transferring up to 15.5% of FY 2022 gas utility gross  revenues to the general fund in FY 2024 •Seeking feedback on proposed FY 2025 General Fund transfer •Transfer 11.9% (staff recommendation) •Transfer 18%       31 FY 2025 General Fund Transfer Alternatives and Preliminary Gas Rate Projections Note: Revenues can fluctuate depending on gas commodity market prices Percent of Gross Gas Utility Revenue to Transfer 32 Preliminary Gas Cost and Revenue Projections Transfer 11.9% *Revenue excludes Cap-and-Trade auction sales revenue, which goes directly to the Cap -and-Trade reserve **FY23 Commitments and Reappropriations reserves balances for Operations and Capital Investment are anticipated to be utilized in FY24 and FY25 33 Preliminary Gas Cost and Revenue Projections Transfer 18% *Revenue excludes Cap-and-Trade auction sales revenue, which goes directly to the Cap -and-Trade reserve **FY23 Commitments and Reappropriations reserves balances for Operations and Capital Investment are anticipated to be utilized in FY24 and FY25 34 Gas Operations Reserve Projections Transfer 11.9% 35 Gas Reserve Projections Note: Excludes Cap & Trade Reserve WATER UTILITY www.cityofpaloalto.org 37 Preliminary Water Rate Projections •Proposal FY 2025 - 9% Distribution Rate Increase •FY 2023 year-end Operations Reserve near minimum guideline due to drought  •Projected Water Distribution Rate Changes •Projected Total Water Rate Changes •Commodity rate pass-through projected to remain flat based on latest SFPUC projection (April 2023); highly  uncertain and subject to change due to uncertain regional drought usage rebound and weather •Water main replacement acceleration not included  •One Water supply alternatives not included 38 Preliminary Water Rate Projections FY 2023 Year End Ops Reserve below target  Water sales (net of supply cost savings) $2.4M lower than forecasted Expenses $1.6M higher than forecasted (including transfers out, accounting  adjustment to beginning balance, CIP) •Ops Reserve projected to be close to minimum guideline range for 4 years and return to  target guideline levels in FY 2029;  •Sales forecast updated to reflect drought rebound by FY 2026 and 2-5% lower water sales  annually during the forecast period 39 WATER UTILITY BASICS 40 WATER UTILITY COST STRUCTURE Cost to bring the  water to Palo Alto Cost to distribute water  within Palo Alto, including:  maintaining and replacing  water infrastructure,  customer service, billing,  administration, etc. 41 LONG TERM COST TRENDS Annualized  Increase,  FY19-FY25: Annualized  Increase,  FY25-FY29: Supply: 2.8%/yr Distribution: 1.3%/yr Supply: 2.4%/yr Distribution: 2.5%/yr 42 WATER DISTRIBUTION COSTS 43 WATER DISTRIBUTION COST TRENDS Annualized  Increase,  FY19-FY25: Capital*: 0.4%/yr Operations: 6.4%/yr Debt  Service: 0.0%/yr Annualized  Increase,  FY25-FY29: Capital: 3.3%/yr Operations: 3.3%/yr Debt  Service: -5.5%/yr •Capital in 2019 includes an average of 2019 and 2020 and includes capital contribution  to the CIP Reserve in 2025 and 2029  44 WATER OPERATIONS & CAPITAL COST DRIVERS Operating •Drought-related water sales reductions •Health, retirement, and associated overhead costs  continue to increase •Planned increase in costs for rental of generator backup  at pumping stations and for emergencies Capital •Construction costs have not declined •Large one-time costs for reservoir  rehabilitation/replacement 45 WATER SUPPLY COST DRIVERS •Water System Improvement Program (WSIP) •2002: advocacy by wholesale customers results in AB  1823 requiring SFPUC to adopt and implement the  WSIP •In 2010 construction began - $4.8B, one of the largest  water projects in the nation •Level of service goal: return to service in 24 hours after  an earthquake 46 WATER SUPPLY COST DRIVERS •WSIP spending 98.9% complete as of September 2021 •“Upcountry” system in the Sierra still needs work. •Wholesale customers (via BAWSCA) advocating for  improvements in long-term capital planning •Necessary and improves reliability, but supply costs will  increase in the future as a result 47 Preliminary Water Projections Cost/Revenue * Includes changes due to commitments/reappropriations and funds transferred to the CIP Reserve 48 WATER OPERATIONS RESERVE PROJECTIONS 49 WATER CIP RESERVE PROJECTIONS 50 WATER RESERVE PROJECTIONS 51 WATER SUPPLY RATES FORECAST 52 MONTHLY WATER BILL COMPARISON Single-Family Residential Palo Alto is 16% above comparison city average 53 MONTHLY WATER BILL COMPARISON Commercial Palo Alto is 6% above comparison city average WASTEWATER COLLECTION www.cityofpaloalto.org 55 Preliminary Wastewater Rate Projections FY 2025 Projection •9% rate increase 56 Wastewater Projections •FY 2023 Year End Ops Reserve below minimum guideline and below zero ($0.7M) due to  o $3M – higher CIP-related (including admin costs) o $0.5M – revenue lower than forecasted o $0.3M – higher transfers out to capital projects •Sanitary Sewer Replacement 31 moved up a year from FY 2024 to FY 2023 due to coordination with  CalTrans; $9.3M in the reappropriations reserve for this project •Reductions are temporary as the fund increases revenues to sustainable level •Defer construction in FY 25 and FY 26 of planned sewer replacement and pump station retrofit;  57 Wastewater Utility Basics •Five partners: Stanford, East Palo Alto, Los Altos Hills, Los Altos, and  Mountain View •Wastewater drains from partner systems through the City of Palo  Alto Collection System, and into the City of Palo Alto Regional Water  Quality Control Plant (RWQCP) for treatment •City of Palo Alto Utilities Department manages collection system,  Public Works manages the RWQCP 58 Wastewater Utility Cost Structure Palo Alto’s share of the cost  to treat sewage at Palo Alto’s  Regional Water Quality  Control Plant Cost to collect sewage within  Palo Alto, including: maintaining  and replacing sewer  infrastructure, customer service,  billing, administration, etc. 59 Long Term Cost Trends Annualized  Increase  FY 19-25 Treatment: 5.0%/yr Collection: 7.1%/yr Annualized  Increase  FY 25-29 Treatment: 7.5%/yr Collection: 6.1%/yr Note: Collection  Capital reflects  Two-Year  Average 60 Treatment Cost Drivers •Regional Water Quality Control Plant needs rehabilitation •Long Range Facilities Plan completed in 2012, currently being  updated including partner cost-share re-evaluation  •Near Term Major Projects: •Sedimentation Tank ($19.4M) •Outfall Pipeline ($17.8M) •Laboratory/Operations Center ($48.5M) •Secondary Treatment Upgrades ($193M) •Applying for grant funding from Valley Water (estimated  $11.2M available to Palo Alto from 2024 through 2033) 61 Wastewater Collection Costs 62 Wastewater Collection Cost Trends Annualized  Increase FY19 -25 Annualized  Increase  FY25-29 Collection  Capital: 13.1%/yr Operations: 4.1%/yr Collection  Capital: 11.7%/yr Operations: 1.7%/yr Reflects Deferred  Planned Sewer  Replacement in FY  2025 and FY 2026  Note: Capital & Debt Service reflects two-year average 63 OPERATIONS/CAPITAL COST DRIVERS Operational Costs •Salary and benefit costs for existing staff •2-3% annual inflation for other operating costs •One-time revenue reduction due to COVID-19 $900K in FY  2022, estimated full recovery by FY 2026 •Lower connection, capacity fees and interest income Capital Costs •Underground construction cost increases •Allocated cost increases •Sanitary Sewer Replacements at the rate of 2.5 miles per  year after fund recovers  64 Wastewater Reserve Projections 65 Preliminary Wastewater Cost and Revenue Projections * Includes changes due to  commitments/reappropriations  and funds transferred to the CIP  Reserve 66 Wastewater Operations Reserve Projections Defer Planned Sewer Replacement in FY 2025 and 2026  67 WASTEWATER MONTHLY RESIDENTIAL BILL ($) NOVEMBER 2023 Palo Alto is 26% below  comparison city average 68 WASTEWATER MONTHLY NON-RESIDENTIAL BILL ($) NOVEMBER 2023 Commercial: Palo Alto is 10% higher than  comparison city average Restaurant: Palo Alto is 7% below  comparison city average