HomeMy WebLinkAboutStaff Report 170-08CMR: 170:08 Page 1 of 6
TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER DEPARTMENT: UTILITIES
ATTENTION: FINANCE COMMITTEE
DATE: MARCH 18, 2008 CMR: 170:08
SUBJECT: UTILITIES ADVISORY COMMISSION RECOMMENDATION TO
ADOPT A RESOLUTION ADOPTING A NATURAL GAS RATE
INCREASE AND AMENDING UTILITY RATE SCHEDULES G-1,
G-2, G-6 AND G-10
RECOMMENDATION
Staff and the Utilities Advisory Commission (UAC) recommend that the City Council adopt the
attached resolution to:
(a) Approve a 7.1 percent increase to natural gas retail rates, for Fiscal Year (FY) 2008-09,
effective July 1, 2008, which will increase annual revenues by $3.4 million; and,
(b) Approve the changes to the Gas Utility Rate Schedules (G-1, G-2, G-6 and G-10), as
attached.
BACKGROUND
In June 2006, the City Council approved a 9.5 percent natural gas revenue increase for FY 2007-
08 and also approved in-concept a rate increase of 9.1% for FY 2008-09. The FY 2007-08 rate
increase was allocated entirely to the Gas Distribution Fund, while the FY 2008-09 approved in-
concept rate increase was planned for the Gas Supply Fund.
DISCUSSION
Wholesale natural gas prices have generally stabilized, and the laddering strategy used to
purchase gas has resulted in relatively stable wholesale gas costs. While the laddering purchase
strategy does not eliminate all supply cost uncertainties, it has had a favorable impact on the Gas
Supply Rate Stabilization Reserve (G-SRSR). Gas supply costs for the remainder of FY 2007-08
are projected to be stable and this trend is expected to continue through FY 2008-09.
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In recent years, gas sales in Palo Alto have declined or been flat due to reduced load growth, a
continued soft economy, commercial customers exiting the City, energy efficiency impacts and
warmer-than-forecasted weather patterns.
Table 1 below shows the estimated revenues and expenses for the Gas Fund for FY 2008-09 as
well as the actual revenues and expenses for FY 2006-07 and the adjusted budget revenues and
expenses for FY 2007-08.
TABLE 1 – Gas Fund Sources and Uses of Funds ($000)
Note that costs overall are projected to increase less than 4 percent between FY 2007-08 and FY
2008-09. However, as shown in the next section of this report, the rate increase is needed to fund
the G-SRSR, which is below the minimum guideline level.
Reserves and Risk Assessment
Table 2 below summarizes the end-of-year balances for the G-SRSR and the Gas Distribution
Rate Stabilization Reserve (G-DRSR), the risk assessment level and the Reserve Guidelines.
Staff presented the annual risk assessment of the Gas Fund to the UAC at its February 2008
meeting. Note that the risk assessment level is determined by assessing the short-term risks to
the Gas Fund. The Reserve Guidelines were established to manage risks over the longer term.
With the recommended revenue increase, the FY 2008-09 G-DRSR ending balance is forecast to
be over the risk assessment level and close to the minimum guideline level approved by the City
Council. The total $3.4 million revenue increase proposed for FY 2008-09, when applied to
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forecasted cost increases in natural gas wholesale supply, will bring the G-SRSR ending balance
for FY 2008-09 up to the risk assessment level, but below the long-term minimum guideline
level approved by the City Council.
TABLE 2: Gas Reserve Balance, Guideline Levels and Risk Assessment Level ($M)
FY 2006-07
(actual)
FY 2007-08
(estimated)
FY 2008-09
(forecast)
Gas Supply Rate Stabilization Reserve
End of Year Balance 6.7 5.6 6.5
Risk Assessment Level 3.7 6.5
Minimum Guideline Level 10.0 9.1 9.8
Maximum Guideline Level 20.0 19.6 20.9
Gas Distribution Rate Stabilization Reserve
End of Year Balance 1.7 2.7 4.0
Risk Assessment Level 3.3 3.4
Minimum Guideline Level 3.1 4.0 4.1
Maximum Guideline Level 6.3 10.0 10.2
Allocation of Proposed Revenue Increase
The proposed gas supply revenue increase of 7.1 percent, or $3.4 million, is to be applied to the
Gas Supply Fund to cover costs and to fund the G-SRSR. The allocation of the supply rate
increase is proposed to be applied equally to all customer classes and non-market based rate
schedules on an equal cents per therm basis.
In FY 2007-08, distribution revenues were increased so that each customer class would be
assessed its proper proportion of distribution charges. This was done partially through
volumetric (per therm) rates as well as the re-introduction of a fixed monthly customer charge.
However, introducing the customer charge at its fully allocated cost-of-service levels would have
created undue ‘rate shock’ to customers. It was planned to slowly transition the customer
charges to cost of service levels. In years where there are no distribution revenue changes
planned, this can be done through simultaneously increasing the customer charge and lowering
the per therm distribution rate component, so that revenues on a customer class basis do not
change. Individual customer’s bills may see different percentage increases, however, depending
on their monthly usage patterns. It is the intention of staff not to adjust the customer charges at
this time.
Table 3 shows the impact of the proposed rate increase on customer bills.
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TABLE 3: Impact of Proposed Rate Increase on Customer Bills
Customer
Usage
Therms per
Month
Monthly
Bill ($)
Amount of
Monthly
Increase ($)
Percent
Increase/
(Decrease)
Residential/Winter 100 $ 163.32 $ 13.35 8.9
Residential/Summer 30 58.09 4.01 7.4
Commercial G-2 500 792.75 66.75 9.2
Industrial G-2 10,000 15,190.00 1,335.00 9.6
Contract /Market rate
Customers 60,000 74,009.00 - -
Bill Comparison
A recent bill comparison with PG&E showed that, during the first four months of the winter of
FY 2007-08, Palo Alto’s average residential customer (using 100 therms per month) had gas
costs 12.8 percent above PG&E’s average customer’s gas costs for the same period ($599.90 vs.
$531.70 total, a $68.19 difference). The largest difference this past winter occurred in January
2008, when Palo Alto’s average residential customer paid $149.97, while a comparable PG&E
customer paid $127.52. In prior years, however, average winter residential bills for Palo Alto
customers have been between 26.9 to 31.5 percent lower than for PG&E customers, and annual
residential bills have been lower by roughly 25 percent.
As noted earlier, the Palo Alto laddered purchasing strategy provides stable rates to Palo Alto
customers. In contrast, the PG&E strategy, based mostly on shorter term market purchases,
results in rates which fluctuate monthly. As a result, it is impossible to determine with any
certainty whether Palo Alto’s bills will be above or below PG&E’s at any given date. However,
over time, the Palo Alto purchasing strategy compares positively against the PG&E purchasing
strategy to the benefit of Palo Alto gas customers. Table 4 shows residential customer gas bills
using Palo Alto’s and PG&E’s rates since FY 2003-04.
TABLE 4: Palo Alto Customer Gas Bill Comparison with PG&E
Historical
Residential Gas Bills
FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08*
Winter Usage (100 therms/month)
Palo Alto average $ 67.07 $ 83.27 $ 103.54 $ 135.78 $ 149.97
PG&E average $ 94.79 $ 113.88 $ 151.07 $128.17 $127.52
Summer Usage (30 therms/month)
Palo Alto average $ 23.80 $ 27.59 $ 35.98 $ 46.16 $54.09
PG&E average $ 28.14 $ 30.97 $ 38.91 $ 37.12 $40.42
PA Annual bills $ 545.23 $ 665.16 $ 837.10 $ 1,091.64 $ 816.25
PG&E Annual bills $ 737.63 $ 869.06 $ 1,139.84 $ 991.71 $ 693.37
* FY 07-08 data taken through February 2008
For large customers, distribution rates in Palo Alto are higher than the distribution rates in
PG&E’s territories due to a different customer mix and differences in budgeting and accounting
for funding of capital improvement programs.
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UTILITIES ADVISORY COMMISSION REVIEW AND RECOMMENDATIONS
On March 5, 2008, the UAC voted unanimously (4-0 with one Commissioner absent), to
recommend that the City Council:
(a) Approve a 7.1 percent increase to natural gas retail rates for Fiscal Year (FY) 2008-09,
effective July 1, 2008, which will increase annual revenues by $3.4 million; and,
(b) Approve the changes to the Gas Utility Rate Schedules, as attached.
In its discussions, the UAC noted that the 5-year projections presented at the February 2008
meeting showed a 7.1 percent rate increase in FY 2008-09 and no increases in the subsequent
four years. Given these projections, the UAC discussed whether it was advisable to spread the
proposed rate increase over two years by lowering the rate increase for FY 2008-09 and plan
another rate increase for FY 2009-10. Staff and other commissioners, however, noted that gas
costs could increase over the 5-year planning horizon and that a rate increase lower than the
proposed 7.1 percent increase for FY 2008-09 would result in the Rate Stabilization Reserves
falling below the risk assessment value.
RESOURCE IMPACT
Approval of these recommended rate increases will raise Gas Fund sales revenues by $3.4
million for FY 2008-09.
POLICY IMPLICATIONS
This recommendation is consistent with current City policies.
ENVIRONMENTAL REVIEW
An increase in rates to meet operating expenses and 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 Regulations Sec. 15273(a)(1) and (3).
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ATTACHMENTS
A. Resolution
B. Gas Rate Schedules: G-1, G-2, G-6 and G-10
C. Draft Minutes of the UAC meeting of March 5, 2008
PREPARED BY: Eric Keniston, Utilities Rate Analyst
Ipek Connolly, Senior Resource Planner
REVIEWED BY: Jane Ratchye, Assistant Director of Utilities, Resource Management
DEPARTMENT HEAD: _________________________________
VALERIE O. FONG
Director of Utilities
CITY MANAGER APPROVAL: _________________________________
EMILY HARRISON
Assistant City Manager