HomeMy WebLinkAboutStaff Report 171-08CMR: 171:08 Page 1 of 6
TO: HONORABLE CITY COUNCIL
FROM: CITY MANAGER DEPARTMENT: UTILITIES
ATTENTION: FINANCE COMMITTEE
DATE: MARCH 18, 2008 CMR: 171:08
SUBJECT: UTILITIES ADVISORY COMMISSION RECOMMENDATION TO
ADOPT A RESOLUTION ADOPTING AN ELECTRIC RATE
INCREASE AND AMENDING UTILITY RATE SCHEDULES E-1,
E-1-G, E-2, E-2-G, E-4, E-4-G, E-4-TOU, E-7, E-7-G, E-7-TOU, E-14,
E-16, E-18 AND E-18-G
RECOMMENDATION
Staff and the Utilities Advisory Commission (UAC) recommend that the City Council adopt the
attached resolution to:
(a) Approve a 14 percent increase to electric retail rates, for Fiscal Year (FY) 2008-09,
effective July 1, 2008, which will increase annual revenues by $12.8 million; and
(b) Approve the changes to the Electric Utility Rate Schedules (E-1, E-1-G, E-2, E-2-G, E-
4, E-4-G, E-4-TOU, E-7, E-7-G, E-7-TOU, E-14, E-16, E-18 and E-18-G), as attached.
BACKGROUND
In June 2007, the City Council approved a 5 percent electric revenue increase for FY 2007-08.
The FY 2008-09 Budget that was approved in-concept included a 10 percent retail rate increase
for the Electric Fund.
During the FY 07-08 budget and retail rate development process in January 2007, average hydro-
electric production for 2007 and healthy Electric Supply Rate Stabilization Reserve (E-SRSR)
levels were projected, and as a result no supply rate increase was proposed for FY 2007-08 and
the E-SRSR was budgeted for an $11 million drawdown. The FY 2007-08 revenue increase was
allocated solely to the distribution portion of the electric rates in light of higher distribution costs
and a low balance in the Electric Distribution Rate Stabilization Reserve (E-DRSR).
CMR: 171:08 Page 2 of 6
During the winter and spring of 2007, drought conditions resulted in lower-than-projected
hydroelectric production for FY 2007-08 and FY 2008-09. This situation resulted in the
requirement to buy replacement energy from the market to meet City loads. To cover these
higher costs, Council approved a mid-year budget increase of $8 million for FY 07-08 on
February 19, 2008 [CMR:151:08]. Council also was advised of the increased electric supply
costs due to the drought in January 22, 2008 [CMR: 122:08] when staff and the UAC
recommended against a FY 07-08 mid-year rate increase, but warned that the rate increase
proposal for FY 08-09 would likely be higher than the 10 percent approved in concept rate
increase.
DISCUSSION
The proposed rate increase for FY 2008-09 represents a $12.8 million annual electric revenue
increase, the main driver of which is higher commodity purchase costs. Of this, $12.5 million is
to fund supply cost and the remaining $0.3 million will fund the State-mandated Electric Public
Benefits budget. Staff also proposes to transfer an additional $4.4 million from the Calaveras
reserve into the E-SRSR in order to meet the risk assessment level (see discussion below).
Table 1 below shows the estimated revenues and expenses for the Electric 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 – Electric Fund Sources and Uses of Funds ($000)
∗ Other revenues includes CVP O&M loan payments
CMR: 171:08 Page 3 of 6
Reserves and Risk Assessment
Table 2 below summarizes the end of year balances for the E-SRSR, the E-DRSR and the
Calaveras Reserve, the risk assessment level and the reserve guidelines. Staff presented the
annual risk assessment of the Electric 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 Electric Fund.
The reserve guidelines were established to manage risks over the longer term.
The $4.4 million additional transfer from the Calaveras Reserve will reduce this reserve from the
Council approved target level, but it will still remain above the Council-approved minimum
guideline level for FY 08-09. No change in the Calaveras Reserve guidelines needs to be made
to effect this change.
With the recommended revenue increase, the FY 2008-09 E-DRSR ending balance is forecast to
be above both the risk assessment level and the minimum guideline level approved by the City
Council. The total $12.8 million revenue increase proposed for FY 2008-09, when applied to
electric supply costs, will bring the E-SRSR ending balance for FY 2008-09 up to the risk
assessment level, but below the long-term minimum guideline level approved by the City
Council.
TABLE 2: Electric Reserve Balance, Guideline Levels and Risk Assessment Level ($M)
FY 2006-07
(actual)
FY 2007-08
(estimated)
FY 2008-09
(forecast)
Electric Supply Rate Stabilization Reserve
End of Year Balance 60.6 41.6 33.8
Risk Assessment Level 44.2 33.8
Minimum Guideline Level 28.5 29.3 35.4
Maximum Guideline Level 56.9 58.5 70.9
Electric Distribution Rate Stabilization Reserve
End of Year Balance 7.8 6.3 7.2
Risk Assessment Level 4.0 4.6
Minimum Guideline Level 5.4 6.6 6.7
Maximum Guideline Level 10.9 16.6 16.7
Calaveras Reserve
End of Year Balance 71.8 70.4 64.6
Minimum Guideline Level 64.6 63.3 62.0
Maximum Guideline Level 89.8 87.9 86.1
An updated risk assessment will be performed as part of the budget process for FY 2009-10, and
staff will evaluate the revenues, expenses and risks during the FY 2009-10 budget process to
ensure that the Electric Utility remains financially sound. This assessment will include
examination of potential modifications to the Calaveras Reserve guidelines.
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Allocation of Proposed Revenue Increase
The proposed electric supply revenue increase of 14 percent, or $12.8 million, is to be applied
evenly to both residential and non-residential customers. The average customer’s bill will
increase 14 percent, and bills for higher users will increase more than 14 percent.
Table 3 below shows the impact of this rate proposal on a typical monthly bill for various
customer classes and consumption levels. The bill impact table does not include the bills for
those who participate in the PaloAltoGreen program.
TABLE 3: Effect of Proposed Electric Rate Increase on Customer Bills
Customer Type
Monthly
kWh Usage
Proposed
Monthly
Bill ($)
Monthly
Bill Increase
($)
% Bill
Increase
% PA
Below
PG&E
Residential Small 300 $ 25.98 $ 2.29 12.0 (25.1)
Residential Average 650 69.36 8.53 14.0 (27.1)
Residential Large 1200 156.40 20.23 14.9 (39.9)
Commercial Small 500 60.68 7.47 14.0 (30.2)
Commercial Medium 200,000 21,894 2,697 14.0 (8.4)
Commercial Large 5,500,000 501,260 61,705 14.0 (10.1)
Bill Comparison
Table 4 below compares Palo Alto’s monthly electric bills for residential customers with those of
PG&E and several other municipal electric utilities. The comparisons are for rates in effect on
January 1, 2008. Staff does not know the rate increase plans for PG&E, but is aware that many
of the municipal utilities have plans for electric rate increases this year. However, those
increases are still being developed or are not yet approved and cannot be used for comparisons.
TABLE 4 – Monthly Residential Electric Bill Comparison (rates as of January 1, 2008)
Electric
Bill ($)
Usage
(kWh)
Palo
Alto PG&E Alameda Roseville Santa
Clara
Average
Benchmark
Delta
(%)
Small 300 23.19 39.26 31.15 25.23 25.75 30.35 -30.9%
Average 650 60.83 96.02 90.49 66.90 56.90 77.58 -27.5%
Large 1200 136.17 250.04 191.09 128.66 105.85 168.91 -24.0%
Delta from Palo Alto for
average residential use -57.8% -48.8% -10.0% 6.5% -27.5%
Palo Alto’s January 2008 rates for the average residential customers are significantly below
PG&E’s rates. However, the difference was less for other municipal utilities and, in the case of
Santa Clara, Palo Alto’s rates were higher.
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ALTERNATIVES
Staff evaluated several rate increase options. One option was to increase electric rates enough to
raise the E-SRSR to the risk assessment level without any additional transfers from the Calaveras
Reserve. This option would have required a 19% rate increase, which was deemed unacceptably
steep. Another option was to maintain the 10% approved in concept rate increase that was
projected last year. The 10% rate increase projection assumed average hydroelectric generation,
but drought conditions increased costs significantly above projections. A 10% rate increase
would have resulted in an ending year balance in the E-SRSR of much less than the risk
assessment level even with the maximum transfer from the Calaveras Reserve allowed under the
current Council-approved guidelines for the Calaveras Reserve. Instead of either of these two
alternatives, staff recommends an intermediary option, the proposed 14% rate increase.
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 14 percent increase to electric retail rates, for FY 2008-09, effective July 1,
2008, which will increase annual revenues by $12.8 million; and
(b) Approve the changes to the Electric Utility Rate Schedules, as attached.
The UAC supported staff’s recommendation and noted that the recommendation was what the
UAC had preferred of the three scenarios presented at the February UAC meeting. One
Commissioner questioned staff’s recommendation to propose a higher increase in the residential
rate for consumption in the higher usage tiers. Staff reiterated that the proposed rate structure
was designed to encourage energy conservation.
RESOURCE IMPACT
Approval of this rate proposal will increase the Electric Fund retail sales revenues in FY 2008-09
by approximately $12.8 million. With this infusion of revenue, the balance in the E-SRSR is
projected to be at the risk assessment reserve level in 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 of Regulations Sec. 15273(a)(1) and (3).
CMR: 171:08 Page 6 of 6
ATTACHMENTS
A. Resolution
B. Electric Rate Schedules: E-1, E-1-G, E-2, E-2-G, E-4, E-4 TOU, E-4-G, E-7, E-7-TOU, E-7-
G, E-14, E-16, E-18, E-18-G
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