HomeMy WebLinkAboutStaff Report 4475
City of Palo Alto (ID # 4475)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 3/4/2014
City of Palo Alto Page 1
Summary Title: Preliminary Financial Forecasts and Reserves Structure
Changes
Title: Preliminary Electric, Gas, Water, and Wastewater FY 2015 - FY 2019
Financial Forecasts and Financial Plans, Including Proposed Reserves
Structure Changes
From: City Manage r
Lead Department: Utilities
Recommendation
This informational report presents the preliminary five year financial forecasts for Fiscal Year
(FY) 2015 through FY 2019 for the Electric, Gas, Wastewater Collection, and Water Utilities. No
action is required. This report also discusses changes to the structure of utilities reserves that
are scheduled to be reviewed by the Finance Committee in April.
Executive Summary
Staff has prepared preliminary financial forecasts for the Electric, Gas, Wastewater Collection,
and Water Utilities that incorporate modifications to the structure of each utility’s reserves, and
presented these documents to the UAC earlier this year. This report is intended to provide the
Finance Committee a preview of this information, in advance of staff seeking a formal Finance
Committee recommendation on these items in April.
Staff’s proposal to restructure the reserves for these four utilities is designed to increase
transparency, to make contingency reserves easier to manage from year to year, and to
eliminate reserves that are no longer necessary. These changes are offered, in part, in response
to recommendations in the Utilities Reserves Audit completed by the City Auditor in December
2012. Staff has reviewed this proposal with the City Auditor.
The preliminary financial forecasts do not assume any adjustments to electric, gas, wastewater
collection, and water rates through FY 2015. Rate adjustments in the FY 2016 through FY 2019
City of Palo Alto Page 2
period are estimated to increase the median residential utility bill (electric, gas, wastewater,
and water) by 3-4% per year.
Background
Each year staff presents a forecast of the costs and revenues for the Electric, Gas, Wastewater
Collection, and Water Utilities. The UAC reviewed this year’s forecasts (Attachment A,
Preliminary 5 Year Financial Projections and Reserves Restructuring) on February 12, 2014. The
forecasts are based on a projection of capital investment needs over the following five years,
projected increases in operating costs, and a pro jection of wholesale gas, water, and electric
supply costs and wastewater treatment costs. Operating cost projections use assumptions that
match those used in the City’s FY 2015-2024 General Fund Long Range Financial Forecast.
Discussion
Table 1, below, summarizes the projected rate adjustments for FY 2015 through FY 2019. No
rate increases are proposed for FY 2015. The average impact to the median residential bill of
the rate increases projected for the FY 2016 through FY 2019 time frame is 3-4% per year.
Table 1: Projected Rate Increases
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
Electric Utility 0% 4% 3% 4% 0%
Gas Utility* 0% 3% 3% 4% 3%
Water Utility 0% 4% 4% 4% 4%
Wastewater 0% 6% 6% 6% 7%
Overall Bill Impact** 0% 4% 4% 4% 3%
* Gas rate changes are shown with commodity rates held constant. Actual commodity rates will
vary monthly with wholesale market fluctuations
** impact on median residential bill
The basis for these rate increases is summarized below:
Electric Utility: Renewable energy costs are projected to rise over the next several years
as staff continues to implement the City’s Renewable Portfolio Standard (RPS) and
Carbon Neutral Plan. Transmission costs are also expected to rise. Staff is projecting
roughly 2-3% annual increases in Operating and Capital Improvement Program (CIP)
costs over the forecast period.
City of Palo Alto Page 3
Gas Utility: Operating and CIP costs are projected to increase roughly 2-3% annually.
Revenues are also currently below costs, with the exception of FY 2014. In FY 2014
there was a temporary hiatus in new CIP budgeting so that staff could get caught up on
previous ongoing projects that were delayed due to vacancies, resulting in costs that
were below revenues. When CIP spending returns to its usual levels, revenues will be
below costs, requiring future rate increases.
Wastewater Collection Utility: Wastewater treatment costs are projected to rise 4-5%
per year over the forecast period as the Regional Water Quality Control Plant (RWQCP )
ramps up capital spending on a variety of projects to refurbish aging parts of the facility.
Operating and CIP costs for the sewer system are projected to increase roughly 2 -3%
annually. In addition, revenues are currently below costs for this utility. The utility has
accumulated reserves due to a temporary reduction in CIP spending in FY 2014, and will
draw these reserves down over the course of the forecast period to smooth the
transition to higher rates.
Water Utility: The main driver for the water utility’s expenses over the next several
years is the cost of wholesale water. Wholesale water costs are projected to rise 10%
per year, on average, through FY 2019, which is when the San Francisco Public Utilities
Commission (SFPUC) is projected to complete its Water System Improvement Project
(WSIP). Because of the length of this project, the water financial forecasts are for seven
years in order to show that wholesale water costs are projected to stabilize in FY 2020
and FY 2021. Operating and CIP costs are projected to rise roughly 2% annually over
that time. The Water Utility financial forecast also includes a loss of revenue associated
with the 10% voluntary reductions currently being requested by the SFPUC this year. If
deeper, mandatory reductions are required Staff will need to amend its forecast.
Staff also evaluated a three-year drought scenario for the Electric Utility to determine the
financial impact on the utility in the event of continuing low generation from its hydroelectric
resources. Because the cost of hydro resources is fixed, the increase in purchases of market
energy to replace the lost hydro output results in higher overall costs for the utility . In a multi-
year drought, the electric utility would draw down reserves and require slightly higher rate
increases to manage the additional costs. At the end of the drought, once hydro output
returned to normal, the City may be able to decrease rates to reflect the reduced costs.
Staff did not include a detailed multi-year drought scenario for the Water Utility in its financial
forecasts, since managing the water utility through a drought is more complex and requires a
more in-depth discussion.
In addition to the proposed and projected rate increases, staff also proposes to restructure the
financial reserves for these four utilities and change the way it prepares its financial forecasts.
Staff presented new Reserves Management Practices to the UAC on January 8, 2014. These
City of Palo Alto Page 4
Practices describe the reserves for each utility and how they are to be managed. The Reserves
Management Practices will be attached to formal Financial Plans, which will be provided to the
UAC and Finance Committee for recommendation, then included with the budget for Council
adoption. The Financial Plans will comprehensively describe the utility, its current financial
position, and its plan for the next five years. The January 8, 2014 staff report to the UAC
describing the Reserves Management Practices, the Financial Plans, and the changes to the
reserves structure is provided as Attachment B. The revised reserves structure is also shown in
the February 12, 2014 UAC presentation (Attachment A).
The main change in reserves structure is the division of each utility’s Rate Stabilization Reserve
into:
1. An Operations Reserve, which will hold funds for contingencies and will absorb normal
variations in annual revenues and costs;
2. A CIP reserve, for expenditure on CIPs in later years;
3. A true Rate Stabilization Reserve (RSR), used only for smoothing the transition to a
period of higher rates; and
4. An Unassigned Reserve, which will contain any funds not specifically designated for one
of the above purposes.
As described in the January 8, 2014 UAC staff report, the CIP reserve, the RSR, and the
Unassigned Reserve will ideally have a zero balance but when funds are needed for these
purposes, these reserves will allow segregation of those funds from the Operations Reserve.
This allows funds in the Operations Reserve to be managed within minimum, maximum, and
target guidelines. The proposed Reserves Management Practices set forth these guidelines and
clear actions to be taken when they are exceeded. To summarize, staff will propose Financial
Plans that return the Operations Reserve to the target level by the end of the forecast period
(normally five years). If the Operations Reserve is below the minimum level, staff must notify
Council and return with a plan to return the reserve to its minimum level. The Operations
Reserve may not exceed its maximum level, and any excess reserves beyond the maximum f or
the Operations Reserve must be placed in the Unassigned Reserve. Staff is required to propose
a plan to either designate those funds for a specific purpose or return them to ratepayers. Staff
has reviewed this proposal with the City Auditor.
Several other reserves changes are proposed, which are described in more detail in the January
8, 2014 UAC staff report, including:
1. Combining the Gas Utility’s Supply and Distribution Fund reserves;
City of Palo Alto Page 5
2. Merging the Emergency Plant Replacement Reserve for each utility into its Operations
Reserve;
3. Eliminating the Central Valley Project Reserve from the Electric Utility; and
4. Creating a Hydro Stabilization Reserve for the Electric Utility.
The establishment of a Hydro Stabilization Reserve is a precursor to a more in -depth proposal
for managing hydroelectric generation variability that staff will present to the UAC and the
Finance Committee later this year.
Commission Review
The UAC reviewed the preliminary financial forecasts on February 12, 2014, and the proposed
changes to the reserves structures on January 8, 2014.
The UAC was generally supportive of staff’s proposed reorganization of the reserves, with the
caveats that 1) the City Auditor should be comfortable with the recommendations, 2) the
changes should not significantly affect the rate trajectory over the next several years, and 3)
that any associated reduction in reserves levels should not affect the utility’s bond rating. Staff
has reviewed the proposals with the City Auditor, and the City’s Administrative Services
Department has reviewed the financial forecasts to ensure reserves are not projected to
decrease to levels that would raise concerns over the bond ratings. In addition, the preliminary
financial forecasts demonstrate that there are no significant impacts on rates due to the
proposed changes to the reserves structure. The minutes from the January 8, 2014 UAC
meeting are provided as Attachment C.
The UAC was also supportive of staff’s proposal for no rate increases in FY 2015, and of the rate
trajectory for future years. There was some discussion of staff’s proposal to fund the Electric
Utility’s Hydro Stabilization Reserve at $28 million, with one commissioner questioning whether
it would be enough to get the utility through an extended drought . Staff assured the UAC that
the reserve was not intended to be the only financial protection against a drought’s impact on
electric supply costs, and that in an extended drought CPAU would likely need to adjust rates to
cover the increased costs of purchasing power. The drought’s impact on the water utility was
also discussed. There was also some discussion of the current water supply situation and the
potential actions CPAU might take to reduce water consumption and maintain the financial
health of the Water Utility in response to various drought scenarios. The minutes from the
February 12, 2014 UAC meeting are provided as Attachment D.
City of Palo Alto Page 6
Timeline
After receiving comments from the Finance Committee, staff will complete the Financial Plans
for each utilty and present them for recommendations to the UAC on March 26, 2014, and to
the Finance Committee on April 15, 2014. They will then be included for adoption by the
Council along with the FY 2015 budget.
Environmental Review
The Finance Committee’s discussion of these financial forecasts and reserves structure changes
does not meet the definition of a project, pursuant to Section 21065 of the California
Environmental Quality Act, thus no environmental review is required.
Attachments:
Attachment A: February 12, 2014 UAC Presentation (Preliminary Forecasts) (PDF)
Attachment B: January 8, 2014 UAC Report (Reserves Structure Changes) (PDF)
Attachment C: Excerpted Final UAC Minutes of January 8, 2014 meeting (PDF)
Attachment D: Excerpted Draft UAC Minutes of February 12, 2014 meeting (PDF)
Utilities Preliminary 5-Year
Financial Projections
and Reser ves Restructuring
(FY 2015 –FY 2019)
Utilities Advisory Commission
February 12, 2014
Financial Forecast Summary
§Reviewing four funds: Electric, Gas, Water and
Wastewater Collection
§Proposing no rate changes for FY 2015
§Gas commodity rates will vary with market
§Forecasted FY 2016-2019 rate increases slightly lower
than forecasted last year
§Projections use proposed revised reserves structure
§Financial Plans with detailed cost and revenue
information will be provided to the UAC in March
3
Preliminar y Rate Projections
FY 2015 FY 2016 FY 2017 FY 2018 FY 2019
Electric Utility 0%4%3%4%0%
Gas Utility*0%3%3%4%3%
Water Utility 0%4%4%4%4%
Wastewater 0%6%6%6%7%
Overall Bill
Impact**0%4%4%4%3%
*Gas rate changes are shown with commodity rates held constant. Actual
commodity rates will vary monthly with wholesale market fluctuations
**Median residential bill
Proposed Changes
to Reserves Structure
§Discussed with UAC Jan 8
§Splitting Rate Stabilization Reserves into four:
o Operations Reserve (for contingencies / variances)
o CIP reserve (for expenditure on CIP in later years)
o Rate Stabilization Reserve (for rate stabilization)
o Unassigned Reserve (excess funds to return)
§Merging Plant Replacement and Operations Reserves
§Other changes to Electric / Gas reserves
§Changes to be included in Financial Plans for adoption
Electric Utility Financial
Projections
(FY 2015 –FY 2019)
6
Financial Forecast Over view
§No rate change in FY 2015
§Supply Fund:
–Supply portfolio costs to increase from FY 2015 -
FY 2019 due to increasing costs for renewable
energy and transmission
–Increases in funding for solar rebates and energy
efficiency
–Plan draws down $14 million in reserves over the
forecast period
Electric Utility
7
Financial Forecast Over view
§Distribution Fund:
–Operations / CIP costs preliminarily forecast to
increase 2-3% per year over forecast period
–Spending on energy efficiency increasing, partially
funded by Supply Fund
§Additional reserves structure changes:
–Eliminate Central Valley Project reserve
–Add Hydro Stabilization Reserve , initial funding of
$28 million to mitigate risk of drought-related costs
–Future hydro balancing proposal may revise funding
Electric Utility
8
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
2013 2014 2015 2016 2017 2018 2019
Actual Projected
Electric Fund Revenue and Cost Projections
($million)
Purchases
CIP
Operations
Alternative
Energy & DSM
CVP O&M
Debt Service
GF Transfers
Revenue
0%0%4%3%4%0%0%
Electric Utility
Revenue and Cost Projections
9
Reserves Projections (Supply Fund)
Electric Utility
Reallocated per Proposed Reserves Structure
Projected FY 2014 Year-end Under Current Reserves Structure
$0
$20
$40
$60
$80
$100
$120
$140
6/30/13
6/30/14
6/30/14
6/30/15
6/30/16
6/30/17
6/30/18
6/30/19
Act Proj Proj
(Millions)
Central Valley Project
Rate Stabilization
Hydro Stabilization
Reserve
Operations Reserve
Electric Special
Projects
Reappropriations +
Commitments
10
Operations Reser ve (Supply)
Electric Utility
$0
$5
$10
$15
$20
$25
$30
$35
6/30/14 6/30/15 6/30/16 6/30/17 6/30/18 6/30/19
(Millions)
Projected Level
Min (60 Days)
Target (90 Days)
Max (120 Days)
11
Reserves Projections
(Distribution Fund)
Electric Utility
Reallocated per Proposed Reserves Structure
Projected FY 2014 Year-end Under Current Reserves Structure
$0
$5
$10
$15
$20
$25
$30
$35
6/30/13
6/30/14
6/30/14
6/30/15
6/30/16
6/30/17
6/30/18
6/30/19
Act Proj Proj
(Millions)
Rate Stabilization
Operations Reserve
Emergency Plant
Replacement
Public Benefits
Underground Loan
Reappropriations +
Commitments
12
Operations Reserve (Distribution)
Electric Utility
$0
$2
$4
$6
$8
$10
$12
$14
$16
6/30/14 6/30/15 6/30/16 6/30/17 6/30/18 6/30/19
(Millions)
Projected Level
Min (60 Days)
Target (90 Days)
Max (120 Days)
13
Impact of Drought
§Drought means lower hydro generation
§Despite lower generation, CPAU’s hydro-related
expenses do not decrease (costs are fixed)
§With lower hydro output, CPAU must buy more
market power than usual, increasing costs
§Therefore, total supply costs increase, which
can result in reserves drawdowns and/or rate
increases
Electric Utility
14
Three-Year Drought Scenario
§Staff modeled a three-year low hydro scenario
§Additional costs in a three year drought would
mean higher rate increases
§Hydro reserves would be drawn down to keep
rate increases modest
§Rate decrease in FY 2019 if hydro generation
returns to normal by then
Electric Utility
15
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
2013 2014 2015 2016 2017 2018 2019
Actual Projected
Electric Fund Revenue and Cost Projections
($million)
Addtl. Market
Power Costs
Purchases
CIP
Operations
Alternative Energy
& DSM
CVP O&M
Debt Service
GF Transfers
Revenue
0%0%6%6%7%0%-5%
Electric UtilityAlternative Electric Scenario:
Three Year Drought
16
$0
$20
$40
$60
$80
$100
$120
$140
6/30/13
6/30/14
6/30/14
6/30/15
6/30/16
6/30/17
6/30/18
6/30/19
Act Proj Proj
(Millions)
Central Valley
Project
Rate Stabilization
Hydro Stabilization
Reserve
Operations Reserve
Electric Special
Projects
Reappropriations +
Commitments
Electric Utility
Reallocated per Proposed Reserves Structure
Projected FY 2014 Year-end Under Current Reserves Structure
Alternative Electric Scenario:
Supply Reserves under Three Year Drought
17
Electric Utility
$0
$5
$10
$15
$20
$25
$30
$35
6/30/14 6/30/15 6/30/16 6/30/17 6/30/18 6/30/19
(Millions)
Projected Level
Min (60 Days)
Target (90 Days)
Max (120 Days)
Alternative Electric Scenario:
Supply Operations Reserve, Three Year Drought
18
Gas Utility Financial
Projections
(FY 2015 –FY 2019)
19
Financial Forecast Over view
§No change to non-commodity rates in FY 2015.
§2-3% overall rate increases through FY 2019 to
fund increased non-commodity costs.
§Gas market price forecast is higher than last
year ’s forecast for FY15, lower for later years.
§Operations / CIP costs preliminarily forecast to
increase 2-3% per year over forecast period
Gas Fund
20
Financial Forecast Over view
§Changes from last year ’s non-commodity
forecast:
–Additional funding included for cross-bore program
–Forecast is based on actual rather than budgeted
costs
–Switch to market-based commodity rate resulted in
excess reserves. Plan draws down these excess
reserves
§Additional Reserves Change: Combine
Supply/Distribution Rate Stabilization Reserves
Gas Fund
21
Revenue and Cost Projections
Gas Fund
Note: Rate changes are shown with commodity rates held constant. Actual
commodity rates will vary monthly with wholesale market fluctuations.
$0
$5
$10
$15
$20
$25
$30
$35
$40
$45
$50
2013 2014 2014 2015 2016 2017 2018 2019
Act.Adopt.Proj.Projected
$(Millions)Purchases
CIP
Operations
GF
Transfers
Debt Service
Revenue
0%0%3%3%4%3%0%
22
Market Price Forecast
Gas Fund
$4.00
$4.20
$4.40
$4.60
$4.80
$5.00
$5.20
$5.40
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Jan-17
FY 2013 Budget (Nov
2012)
Jan 2014 Forecast
23
$0
$5
$10
$15
$20
$25
$30
$35
6/30/13
6/30/14
6/30/14
6/30/15
6/30/16
6/30/17
6/30/18
6/30/19
Act Proj Proj
(Millions)
Rate Stabilization
Operations Reserve
Plant Replacement
Reappropriations +
Commitments
Reserves Projections
Gas Fund
Projected FY 2014 Year-end Under Current Reserves Structure
Reallocated per Proposed Reserves Structure
24
Operations Reserve Levels
Gas Fund
$0
$2
$4
$6
$8
$10
$12
$14
6/30/14 6/30/15 6/30/16 6/30/17 6/30/18 6/30/19
(Millions)
Projected Level
Min (60 Days)
Target (90 Days)
Max (120 Days)
25
Wastewater Collection Utility
Financial Projections
(FY 2015 –FY 2019)
26
Financial Forecast Over view
§No rate increase FY 2015.
§Treatment costs increasing 4-5% per year due to
increasing capital expenditures at treatment plant
§Other costs forecasted to increase 2-3% per year
§Change from Previous Forecast: Now forecasting
distribution costs based on historical actuals instead
of budgets
27
Revenue and Cost ProjectionsWastewater Fund
$0
$5
$10
$15
$20
$25
2013 2014 2015 2016 2017 2018 2019
Actual Proj Projected
$ (Millions)Treatment
CIP
Operations
Debt
Service
Revenue0.0%6.0%7.0%
5.0 0.0%6.0%6.0%
28
$0
$5
$10
$15
$20
$25
6/30/13
6/30/14
6/30/14
6/30/15
6/30/16
6/30/17
6/30/18
6/30/19
Act Proj Proj
(Millions)
Rate Stabilization
Operations Reserve
Plant Replacement
Reappropriations &
Commitments
Reserves ProjectionsWastewater Fund
Projected FY 2014 Year-end Under Current Reserves Structure
Reallocated per Proposed Reserves Structure
29
Operations Reserve Levels
Wastewater Fund
$0
$1
$2
$3
$4
$5
$6
$7
$8
(Millions)Projected Level
Min (60 Days)
Target (105 Days)
Max (150 Days)
30
Water Utility Financial
Projections
(FY 2015 –FY 2021)
31
Financial Forecast Over view
§No rate increase FY 2015 due to excess reserves that can be drawn down.
§Wholesale water costs up 10% per year through FY 2019
§Other costs forecasted to increase 2-3% per year
§Change from Previous Forecast
–Lower SFPUC wholesale rate projections (cost reductions about $1.2 million annually)
–Now forecasting distribution costs based on historical actuals instead of budgets
§Forecast incorporates 10% reduction in water sales in FY 2015 due to voluntary drought reductions
§Considering rate schedule restructuring for direct pass-through of SFPUC wholesale water rates.
Water Fund
32
$0
$10
$20
$30
$40
$50
$60
2013 2014 2014 2015 2016 2017 2018 2019 2020 2021
ActualAdopted Proj Proj Proj Proj Proj Proj Proj Proj
$ (Millions)
Water Supply
CIP - Non Bond
Operations
Debt Service
Revenue
4%4%4%1%
Revenue
15%7%0%4%4%
Water Fund
Revenue and Cost Projections
33
SFPUC Wholesale
Rate Forecast
$2.50
$3.00
$3.50
$4.00
$4.50
$5.00
FY
2015
FY
2016
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
Jan 2014
Jan 2013
Water Fund
34
$0
$5
$10
$15
$20
$25
$30
$35
$40
6/30/13
6/30/14
6/30/14
6/30/15
6/30/16
6/30/17
6/30/18
6/30/19
6/30/20
6/30/21
Act Proj Proj
(Millions)
Rate Stabilization
CIP Reserve
Operations Reserve
Plant Replacement
Reapp/Commit
Reserves Projections
Water Fund
Projected FY 2014 Year-end Under Current Reserves Structure
Reallocated per Proposed Reserves Structure
35
Operations Reserve Levels
Water Fund
$0
$2
$4
$6
$8
$10
$12
$14
$16
(Millions)
Projected Level
Min (60 Days)
Target (90 Days)
Max (120 Days)
36
Impact of Extended Drought
§Currently only voluntary cuts being requested –no drought rate schedules (Stage I Response under Urban Water Management Plan)
§Drought rate schedules only established in Stage II, III, and IV.
§For the water utility, drought may bring:
–decreasing sales
–small changes in operational costs (outreach, enforcement, etc)
–increases in wholesale water costs until drought is over
§Rates must increase to account for lower sales and increased costs
Water Fund
37
Impact of Extended Drought
§Drought rate schedules recover costs through
higher rates and send a price signal
corresponding to requested reductions
§Rates rise, but bills should be similar for
customers who cut usage as requested
§Various methodologies possible
Water Fund
38
Next Steps
§March:
–Preliminary Financial Projections to Finance
Committee
–Financial Plans presented to UAC for
recommendation
§April:Financial Plans presented to Finance
Committee for recommendation
§May: UAC / Finance Budget Review
§June: Council receives Financial Plans with
Budget Document
Utilities Preliminary 5-Year
Financial Projections
and Reser ves Restructuring
(FY 2015 –FY 2019)
Utilities Advisory Commission
February 12, 2014
Page 1 of 9
1
MEMORANDUM
TO: UTILITIES ADVISORY COMMISSION
FROM: UTILITIES DEPARTMENT
DATE: January 8, 2014
SUBJECT: Proposed Utilities Reserves Management Practices and Financial Plan
Templates
Staff requests that the Utilities Advisory Commission (UAC) comment on the proposed Reserves
Management Practices (Reserves Practices) (Attachment A) and Financial Plan Template
(Attachment B).
EXECUTIVE SUMMARY
Staff proposes to create formal Financial Plans for the City’s Electric, Gas, Wastewater
Collection, and Water Utilities. The Financial Plans will be presented each year prior to the
annual adoption of the City’s Budget , serving the same role as the utility financial forecasts
have in the past, but the Financial Plans will be more comprehensive, particularly with respect
to reserves management. Each Financial Plan will contain all of the reserves descriptions and
management practices for their utility’s reserves. The Financial Plans will be adopted by the
City Council along with the budget each year
Staff proposes to include the Reserves Practices for each utility in an appendix to that utility’s
Financial Plan. This means that the Reserves Practices will be adopted along with the Financial
Plans each year, which gives the Council the opportunity to regularly review them . The
proposed Reserves Practices comprehensively document the reserves management practices
for each utility’s reserves. Staff is also proposing a variety of improvements to the structure of
each utility’s reserves, particularly the Rate Stabilization Reserves (RSRs). These are included in
the attached Reserves Practices. Many of the proposed improvements to the City’s utility
reserves management procedures are responsive to recommendations made by the City
Auditor in the December 2012 Utilities Reserves Audit.
Staff seeks UAC comment on the draft Financial Plan template and Reserves Practices, which
will be used for the FY 2015-2019 financial forecasting process this spring. The Reserves
Practices will return to the UAC and Finance Committee and be proposed for Council adoption
as part of the FY 2015 – FY 2019 Financial Plans.
If staff, the UAC, and the Council find these Financial Plans to be effective methods for
presenting utility-related financial information, staff will explore extending this reporting
Page 2 of 9
method to the Fiber Utility. Staff has not proposed creating a Fiber Utility Financial Plan this
spring due to the fact that the Fiber Utility is a competitive rather than a traditional utility
service, which may have implications for its associated Reserves Practices.
BACKGROUND
Each year staff presents a financial forecast for the Electric, Gas, Wastewater Collection, and
Water Utilities and proposes rate changes as needed. In addition the City maintains a variety of
reserves for its Electric, Gas, Wastewater Collection, and Water Utilities as shown in Table 1,
below. More details on these reserves is included in Attachment D.
Table 1: List of Reserves
Reserve Electric Gas
Wastewater
Collection Water
Year
Established Authority
Reappropriations x x x x N/A Accounting practice
Commitments x x x x N/A Accounting practice
Emergency Plant
Replacement x x x x 1950
City Charter, Article
VIII, Section 2
Rate Stabilization x x x x 1993 Resolutions 7207, 7769
Electric Special
Projects (formerly
Calaveras Reserve) x 2011 Resolution 9206
Underground Loan x N/A Accounting practice
Public Benefit
Program x 1998 Resolution 7769
Central Valley
Project x 1997 Ordinance 4413
The RSRs require active management and monitoring. Most of the other reserves are adjusted
at the end of each fiscal year according to simple formulas or procedures. For example, the
Public Benefit Program Reserve is adjusted each fiscal year to include any revenues generated
by the City’s Public Benefits rate adder that a re not expended on eligible Public Benefits
programs (e.g. energy efficiency program rebates), and funds are expended in later years as
eligible Public Benefits expenditures are made. The RSRs are different from the other reserves
because they have multiple purposes and are used to manage contingencies and year-to-year
variations in cost. This makes them more complex to manage.
Council established RSRs for the Electric, Gas, Wastewater Collection, and Water Utilities in
May 1993 (CMR:263:93) to serve the following purposes:
1. To plan for certain known future occurrences that are of a one-time nature,
2. To smooth the transition to higher rates if the expense is of an ongoing nature.
Page 3 of 9
3. To ensure funds are available to cover short-term situations when expenditures exceed
revenues; and
4. To provide a depository of excess funds when expenditures are less than revenues;
To provide some indication of whether RSR levels are at an appropriate level, the RSRs are
accompanied by a set of minimum and maximum guidelines. These guidelines, which were last
updated in 2009 (CMR: 281:09), are based on assessments of each utility’s finan cial risks in a
typical year. As part of each financial forecast, staff also performs a short-term risk assessment
based on the actual market and operating conditions at the time.
Staff recently reviewed its existing system of financial forecasting and reserves management to
identify possible improvements. This review was prompted in part by the Utilities Reserves
Audit delivered in December 2012 by the City Auditor. The report included two findings and
five recommendations focused on 1) more clearly articulating the criteria for setting RSR
targets, and 2) comprehensively reporting on all other reserves, especially those related to the
Capital Improvement Project (CIP) program. A summary of the City Auditor’s recommendations
is included in Attachment C1.
DISCUSSION
Staff recently completed its review of its financial planning and reserves management practices
and has developed several recommended improvements. These recommendations are as
follows:
1. Create a standard Financial Plan template. This Financial Plan will take the place of the
current financial forecast staff reports.
2. Following review of each utility’s Financial Plan by the UAC and Finance Committee,
provide it to the Council for formal adoption.
3. Include a set of Reserves Practices in each Financial Plan. The Reserves Practices should
include all reserves for that utility, their purposes, and the way they are to be managed.
4. The RSRs currently serve multiple purposes. Divide each RSR into the following four
separate reserves:
a. CIP reserve,
b. Rate Stabilization Reserve,
c. Operations Reserve, and
d. Unassigned Reserve.
5. If the utility accumulates excess reserves not designated for a specific purpose, these
will be held in a separate fund (the Unassigned Reserve). If there are funds in this
reserve, the next Financial Plan must include a plan for returning these excess re serves
to ratepayers or designating them for a specific pu rpose.
1 The full report can be found on the City Auditor’s web page at:
http://www.cityofpaloalto.org/gov/depts/aud/reports/performance.asp
Page 4 of 9
6. Eliminate the Emergency Plant Replacement Reserves. Fund any emergency plant
replacement costs not covered by the City’s insurance policies from the Operations
Reserve.
7. Add, combine, or remove several reserves specific to individual utilities:
a. In the Electric Supply Fund, eliminate the Central Valley Project Reserve and add
a Hydro Stabilization Reserve.
b. Combine the Gas Supply and Gas Distribution Reserves into a single set of
reserves. Consider combining the Gas Supply and Gas Distribution Funds into a
single fund.
8. Clarify the City’s policy with respect to transfers between the Supply and Distribution
Funds for the Gas and Electric Utilities.
These recommendations are described in more detail below. Staff requests that the UAC
comment on these proposals. Staff intends to propose these changes for UAC recommendation
and Council approval as part of the FY 2015 utility financial planning process.
Recommendations #1 and #2: Create a Financial Plan Template
The Financial Plan is intended to be a single document that will give policy makers the
information they need to understand the utility’s financial position . It will provide sufficient
information to allow them to make decisions about current and future rate increases, and will
give them a picture of the utility’s financial future to help them review the details of each
utility’s operating and capital budgets. The information provided in the Financial Plan will
include the current financial position of the utility and a forward projection of costs and
revenues. It will outline any rate adjustments necessary to fund operations over the forecast
period. Each Plan will also include the balance of all of the utility’s reserves, any st eps that staff
recommends to replenish or reduce them, and will set forth the pu rposes and management
practices of each reserve. The Financial Plans will include sections related to rate design,
competitiveness with neighboring agencies, a communications plan related to any proposed
rate changes, and an assessment of the utility’s compliance with the bond covenants for any
outstanding debt.
A draft Financial Plan template is included as Attachment B. Staff plans to use this Financial
Plan template for the financial planning and rate setting process associated with the FY 2015
Budget. The Financial Plan for each utility will be provided annually to the UAC and Finance
Committee for a recommendation, and will then be provided to Council for formal adoption.
Recommendation #3: Establish Reserves Management Practices (Reserves Practices)
Staff recommends creating Reserves Practices that set forth the purpose and management
practices for each utility reserve. These will be located in an appendix to each utility’s Financial
Plan and will create a single location for information on that utility’s reserves. Each utility’s
Reserves Practices will be adopted by the Council when it adopts that utility’s Financial Plan.
Combining the Reserves Practices with the Financial Plans will give the UAC, Finance
Committee, and Council the ability to review the Reserves Practices annually and will provide a
streamlined way for staff to recommend changes when necessary. The Reserves Practices in
Page 5 of 9
Attachment A, which will be proposed as part of the FY 2015 Financial Plans, include all of the
reserves changes outlined in Recommendations 4-8.
Recommendation #4: Divide the Rate Stabilization Reserves (RSRs)
Currently the RSRs are used for several purposes:
1. They serve as an operational reserve to fund utility operations in the event of a major
financial contingency, and they also absorb annual variances from the utility’s expense
and revenue budgets that result from factors like variations in load, changing market
conditions, or changes in the utility’s operations and maintenance costs.
2. They enable each utility to maintain a stable level of funding for its CIP program . In
years with lower budgeted CIP spending the RSR can accumulate funds to be expended
in later years with higher budgeted CIP spending.
3. They allow the utility to retain funds to smooth the utility’s rate trajectory. For
example, by relying on funding from the RSRs, a single 12% rate increase could be
replaced by multiple smaller rate increases over several years.
4. The RSRs also serve as a repository for excess funds not needed for a specific pu rpose.
Staff generally attempts to return these excess funds to ratepayers over the course of
the financial planning period.
Staff recommends splitting the RSRs into four separate reserves to enhance transparency and
make them easier to manage. The four reserves will be titled 1) the Operations Reserve, 2) the
CIP Reserve, 3) the Rate Stabilization Reserve, and 4) the Unassigned Reserve. These reserves
correspond to the four purposes listed above. The RSRs will become true Rate Stabilization
Reserves whose only purpose is rate stabilization (Purpose 3), while funds associated with the
other three purposes will be transferred to the other three reserves.
The CIP Reserve and Rate Stabilization Reserve have no minimum levels, and will only hold
funds when the Financial Plan projections of future costs reveals the need for CIP balancing or
rate stabilization purposes (Purposes 2 and 3 in the list above). Adding or withdrawing funds
from these reserves will require action by the Council as part of the annual budget process or
through a budget amendment ordinance. In addition, to ensure that funds are being retained
for a specific projected purpose, the Financial Plans must show how any funds in these reserves
will be expended by the end of the Financial Plan forecast period.
The Operations Reserve will serve as a reserve for contingencies and is also intended to absorb
each utility’s annual net variances from budget. The Operations Reserve for each utility will
have a minimum level, a maximum level, and a target level. When evaluating appropriate levels
of contingency reserves the Government Finance Officers Association recommends using a
target level of 90 days of operating reserves as a rule of thumb, but also recommends
evaluating the individual needs of each fund to determine the proper target level of reserves .
The recommended target for each utility’s Operations Reserve is shown in Table 2, below, as
well as in the draft Reserves Practices (Attachment A). Each Operations Reserve target is 90
days or more, with the recommended amount depending on the circumstances of the
Page 6 of 9
individual utility. The target and maximum level for each utility is set based on an analysis of
historical variances from budget, and the band between the minimum and maximum level is
wide enough to enable each utility to absorb multiple years of normal surpluses or deficits
without exceeding the maximum level or sinking below the minimum level. Staff has set the
minimum level for each utility’s Operations Reserve at 60 days of operating expenses, which is
adequate to fund operations for two months in th e event of a total loss of revenue, and which
also exceeds staff’s assessment of potential adverse financial outcomes for each utility based
on loss of load, unplanned CIP needs, emergency plant replacement, and other utility -specific
risks.
Table 2: Proposed Operations Reserve Levels
Utility Fund
Reserve Levels (Days of Operating Expenses)
Minimum Target Maximum
Electric Supply 60 days 90 days 120 days
Electric Distribution 60 days 90 days 120 days
Gas* 60 days 90 days 120 days
Water 60 days 90 days 120 days
Wastewater Collection 60 days 105 days 150 days
*Staff is recommending combining the Gas Supply and Distribution Operations Reserves. See Recommendation 7.
For the purpose of the Operations Reserve, “operating expenses” includes only operations and
maintenance (O&M) expenses and commodity purchases, not CIP expenses. Due to the City’s
current budgeting and purchasing practices, there is normally a sizable amount of CIP funding
reappropriated from year to year, and the City sets aside funds equivalent to these
reappropriations in a “Reserve for Reappropriations.” This reserve is sufficient to sustain
multiple months of CIP spending in the event of a major loss of revenue . If, in the future, the
City changes its budgeting and accounting practices for CIP projects, staff will consider
proposing modifications to the Reserves Practices.
Due to normal variances from budget, t he Operations Reserve will fluctuate above or below its
target level. Each Financial Plan will return the Operations Reserve to its target level within
four years. Occasionally, however, the Operations Reserve may end up below its minimum
level or reach its maximum. If the Operations Reserve is below its minimum level at the end of
any fiscal year, the draft Reserves Practices require that staff present a plan to return them to
at least the minimum level by the end of the following fiscal year. The Financial Plan may
include any necessary rate changes or reassignment of other reserves. Staff may also present
additional alternative plans that take longer to return the reserves to their minimum levels, if
feasible and prudent.
Staff will monitor and report on the Operations Reserves quarterly just as it currently does with
the RSRs. In the event the review reveals any major financial issues like rapid increases in
commodity prices, major unplanned maintenance expenses, or decreases in revenue, staff will
propose corrective measures such as mid-year rate increases or transfers among reserves.
Page 7 of 9
Recommendation #5: Treatment of Excess Reserves
In the event the Operations Reserve reaches its maximum level, any additional net revenues
realized by the utility will be deposited in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve, the draft Reserves Practices require that the next Financial Plan include a
plan to assign those funds to a specific purpose or return them to ratepayers by the end of the
first fiscal year of the Financial Plan forecast period. In addition, staff may propose an
alternative plan that would retain the funds or return them over a longer period if, in staff’s
judgment, there is a reason to do so.
Recommendation #6: Eliminate the Emergency Plant Replacement Reserves
The City currently maintains insurance against catastrophic damage to utility assets. Each utility
currently maintains an “Emergency Plant Replacement Reserve” that holds an amount equal to
the City’s insurance deductible (currently $1 million). The Operations Reserves will be more
than adequate to fund that insurance deductible in the event of catastrop hic damage to utility
plant, and therefore the Emergency Plant Replacement Reserves are unnecessary.
Recommendation #7: Add, Modify, or Eliminate Other Utility Reserves
Staff recommends changing several reserves specific to the Gas and Electric Utilities. For the
Electric Utility, staff recommends eliminating the Central Valley Project (CVP) Reserve. This
small reserve was originally associated with the CVP O&M Program, in which customers of the
Western Area Power Administration provide up-front funding for various power plant and
transmission line maintenance activities in exchange for an equivalent bill credit the following
month. While this reserve served a purpose in the past, changes to invoicing practices and to
the O&M Program itself have made the reserve obsolete.
Staff has also incorporated the Electric Special Projects Reserve into the draft Electric Utility
Reserves Practices. To do that, Section (f) of the Electric Special Projects Reserve Guidelines
(Section 7(f) of the Electric Utility Reserves Practices) was amended to refer to the Operations
Reserve rather than the Electric Supply RSR.
In addition to the other changes for the Electric Utility, staff recommends adding a Hydro
Stabilization Reserve to help manage year-to-year variations in the Electric Utility’s expenses
associated with above and below average hydroelectric generation output. Hydro power is
roughly 50% of the City’s supply in an average year, but can vary from 35% to as much as 90%
of the City’s energy supply depending on the year’s hydrologic conditions. Costs for the Electric
Utility’s hydroelectric resources are nearly entirely fixed and do not vary based on the amount
of energy generated. In an above-average hydro generation year this means that the Electric
Utility’s supply costs decrease. This is because the Electric Utility is paying no more for its hydro
resources, but is receiving more energy from them. Conversely, the Electric Utility’s supply
costs rise when hydro generation is below average because the Electric Utility must buy
additional energy in the spot or forward market to replace the energy that would be generated
by its hydro resources in an average year. Staff is exploring various strategies for managing
these variances, including adopting a rate adjustment mechanism that would change the
electric retail rate based on the amount of hydro generation the E lectric Utility expects to
Page 8 of 9
receive, but in the short term, staff recommends establishing a Hydro Stabilization Reserve to
manage these variances separately from the Operations Reserve. The draft Electric Reserve
Practices require Council action for additions to this reserve or withdrawals from it, but in the
future staff may propose a formula for managing this reserve administratively .
For the Gas Utility, staff recommends combining the Gas Supply Fund reserves with the Gas
Distribution Fund reserves. There are two reasons for this recommendation. First, the Gas
Supply Fund has had very little need for contingency reserves since the Gas Utility began
passing commodity costs through to customers via a commodity rate component that changes
monthly based on wholesale gas market prices. Second, with the elimination of gas direct
access in Palo Alto, the Gas Utility will no longer need to separate its gas supply and gas
distribution costs, since customers will no longer have the option to purchase gas from a
different supplier. As a result of these changes, the City may ultimately decide to combine the
Gas Supply Fund from and the Gas Distribution Fund in its accounting system.
Recommendation #8: Intra-utility Transfers for the Gas and Electric Utilities
Both the Gas and Electric Utilities maintain separate Supply and Distribution Funds. For the Gas
Utility this practice is becoming obsolete, but as long as the two separate funds exist occasional
small inter-fund transfers may be necessary to fund small deficits in the Gas Supply Fund or to
transfer small amounts of net revenue from the Gas Supply Fund to t he Gas Distribution Fund.
While staff recommends maintaining the separation between the Electric Supply and
Distribution Funds at this time (in case the Electric Utility is required to provide wholesale
supplier choice to its customers as it was early last decade), it may still be necessary and
appropriate to occasionally make transfers between those funds. The draft Reserves Practices
for the Gas and Electric Utilities set forth the conditions under which inter-fund transfers may
be made. For both utilities, budget ordinances or budget amendment ordinances are required,
meaning that any transfers will be transparent to the Council and the community.
NEXT STEPS
After receiving comments from the UAC staff intends to return to the UAC in February with a
presentation showing how each utility’s reserves would look under the proposed reserves
structure, as well as a preliminary financial forecast for each utility. Staff will present the same
information to the Finance Committee. Finally, Staff will return to the UAC and Finance
Committee in March with the complete FY 2015-2019 Financial Plans based on the attached
template, along with an adopting resolution. The Financial Plans will include the Reserves
Practices. At that time staff will request that the UAC and Finance Committee recommend that
Council adopt the Financial Plans including the Reserves Practices
ENVIRONMENTAL REVIEW
The UAC’s discussion of these practices does not meet the definition of a project, pursuant to
Section 21065 of the California Environmental Quality Act, thus no environmental review is
required.
ATTACHMENTS
A. Electric, Gas, Wastewater Collection and Water Reserves Management Practices
B. Draft Proposed Financial Plan template
c. Utilities Reserves Audit (Excerpt)
D. List of Current and Proposed Reserves
PREPARED BY:
REVIEWED BY:
APPROVED BY:
'! ' fI"'l
JONATHAN ABENDSCHEIN, Senior Resource Planner (f
~NE RATCHYE, Assistant Director, Resource Management
Director 0
Page 90f9
Attachment A
1
ELECTRIC UTILITY RES ERVES MANAGEMENT PRA CTICES
The following reserves management practices are used when developing the Electric Utility
Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 – FY 2019,
FY 2015-FY 2019 would be the Financial Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Supply Fund Reserves
The Electric Supply Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 4 (Reserve for Commitments)
b) For operating and capital budgets reappropriated from previous years, as describe d in
Section 5 (Reserve for Reappropriations)
c) For special projects for the benefit of the Electric Utility ratepayers, as described in
Section 6 (Electric Special Projects Reserve)
d) For year to year balancing of costs associated with the Electric Utility’s hydroelectric
resources, as described in Section 7 (Hydro Stabilization Reserve)
e) For rate stabilization, as described in Section 11 (Rate Stabilization Reserves)
f) For operating contingencies, as described in Section 12 (Operations Reserves)
g) Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 13 (Unassigned Reserves).
Section 3. Distribution Fund Reserves
The Electric Distribution Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 4 (Reserves for Commitments)
b) For operating and capital budgets reappropriated from previous years, as described in
Section 5 (Reserves for Reappropriations)
Attachment A
2
c) As an offset to underground loan receivables, as described in Section 8 (Underground
Loan Reserve)
d) To hold Public Benefit Program funds collected but not yet spent, as described in Section
9 (Public Benefits Reserve)
e) For future year expenditure on the Electric Utility’s Capital Improvement Program (CIP),
as described in Section 10 (CIP Reserve)
f) For rate stabilization, as described in Section 11 (Rate Stabilization Reserves)
g) For operating contingencies, as described in Section 12 (Operations Reserves)
h) Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 14 (Unassigned Reserves).
Section 4. Reserves for Commitments
At the end of each fiscal year the Electric Supply Fund and Electric Distribution Fund
Reserves for Commitments will be set to an amount equal to the total remaining spending
authority for all contracts in force for the Electric Supply Fund and Electric Distribution
Fund, respectively, at that time.
Section 5. Reserves for Reappropriations
At the end of each fiscal year the Electric Supply Fund and Electric Distribution Fund
Reserves for Reappropriations will be set to an amount equal to the amount of all remaining
capital and non-capital budgets that will be reappropriated to the following fiscal year for
each Fund in accordance with Palo Alto Municipal Code Section 2.28.090.
Section 6. Electric Special Projects Reserve
The Electric Special Projects Reserve (ESP Reserve) will be managed in accordance with the
policies and timelines set forth in Resolution 9206 (Resolution of the Council of the City of
Palo Alto Approving Renaming the Calaveras Reserve to the Electric Special Project Reserve
and Adoption of Electric Special Project Reserve Guidelines). These policies and timelines
are included below as amended to refer to the reserves structure set forth in these
Reserves Management Practices:
a) The purpose of the ESP Reserve is to fund projects that benefit electric ratepayers;
b) The ESP Reserve funds must be used for projects of significant impact;
c) Projects proposed for funding must demonstrate a need and value to electric
ratepayers. The projects must have verifiable value and must not be speculative, or he
high-risk in nature;
Attachment A
3
d) Projects proposed for funding must be substantial in size, requiring funding of at least
$1 million;
e) The preferred projects to be funded by the ESP Reserve must be identified by end of
FY 2015;
f) Any uncommitted funds remaining at the end of FY 2020 will be transferred to the
Electric Supply Operations Reserve and the ESP Reserve will be closed; and
g) Funds may be used for analysis and pilot projects which would be the basis for planned
large projects.
Section 7. Hydro Stabilization Reserve
Supply cost savings and surplus energy sales revenue associated with higher than average
generation from hydroelectric resources may be added to the Electric Supply Fund’s Hydro
Stabilization Reserve by action of the City Council and held to offset higher commodity
supply costs during years of lower than average generation. Withdrawal of funds from the
Hydro Stabilization Reserve requires action by the City Council.
Section 8. Underground Loan Reserve
At the end of each fiscal year, the Underground Loan Reserve will be adjusted by the
principal payments made against outstanding underground loans.
Section 9. Public Benefits Reserve
The Public Benefits Reserve will be increased by the amount of unspent Public Benefits
Revenues remaining at the end of each fiscal year. Expenditure of these funds requires
action by the City Council.
Section 10. CIP Reserve
Funds may be added to the Electric Distribution Fund CIP Reserve by action of the City
Council and held for future year expenditure on the Electric Utility’s CIP Program.
Withdrawal of funds from the CIP Reserve requires City Council action. If there are funds in
the CIP Reserve at the end of any fiscal year, any subsequent Electric Utility Financial Plan
must result in the withdrawal of all funds from this Reserve by the end of the Financial
Planning Period.
Section 11. Rate Stabilization Reserves
Funds may be added to the Electric Supply or Distribution Fund’s Rate Stabilization Reserves
by action of the City Council and held to manage the trajectory of future year rate increases.
Withdrawal of funds from either Rate Stabilization Reserve requires action by the City
Attachment A
4
Council. If there are funds in either Rate Stabilization Reserve at the end of any fiscal year,
any subsequent Electric Utility Financial Plan must result in the withdrawal of all funds from
this Reserve by the end of the Financial Planning Period.
Section 12. Operations Reserves
The Electric Supply Fund and Electric Distribution Fund Operations Reserves are used to
manage normal variations in the costs of providing electric service and as a reserve for
contingencies. Any portion of the Electric Utility’s Fund Balance not included in the reserves
described in Section 4-Section 11 above will be included in the appropriate Operations
Reserve unless the reserve has reached its maximum level as set forth in Section 12 (e)
below. Staff will manage the Operations Reserves according to the following practices:
a) The following guideline levels are set forth for the Electric Supply Fund Operations
Reserve. These guideline levels are calculated for each fiscal year of the Financial
Planning Period based on the levels of O&M and commodity expense forecasted for that
year in the Financial Plan.
Minimum Level 60 days of Supply Fund O&M* and commodity expense
Target Level 90 days of Supply Fund O&M* and commodity expense
Maximum Level 120 days of Supply Fund O&M* and commodity expense
*Operations and Maintenance
b) The following guideline levels are set forth for the Electric Distribution Fund Operations
Reserve. These guideline levels are calculated for each fiscal year of the Financial
Planning Period based on the levels of O&M and commodity expense commodity
expense forecasted for that year in the Financial Plan.
Minimum Level 60 days of Distribution Fund O&M* Expense
Target Level 90 days of Distribution Fund O&M* Expense
Maximum Level 120 days of Distribution Fund O&M* Expense
*Operations and Maintenance
c) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Supply Fund
or Distribution Fund’s Operations Reserve are lower than the minimum level set forth
above, staff shall present a plan to the City Council to replenish the reserve. The plan
shall be delivered within six months of the end of the fiscal ye ar, and shall, at a
minimum, result in the reserve reaching its minimum level by the end of the following
fiscal year. For example, if the Operations Reserve is below its minimum level at the end
of FY 2014, staff must present a plan by December 31, 2014 to return the reserve to its
minimum level by June 30, 2015. In addition, staff may present an alternative plan that
takes longer than one year to replenish the reserve.
Attachment A
5
d) Target Level: If, at the end of any fiscal year, either Operations Reserve is higher or
lower than the target level, any Financial Plan created for the Electric Utility shall be
designed to return both Operations Reserves to their target levels within four years.
e) Maximum Level: If, at any time, either Operations Reserve reaches its maximum level,
no funds may be added to this Reserve. Any further increase in that Fund’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section
13, below.
Section 13. Unassigned Reserves
If the Operations Reserve in either the Electric Supply Fund or the Electric Distribution Fund
reaches its maximum level, any further additions to that Fund’s Fund Balance will be held in
the Unassigned Reserve. If there are any funds in either Unassigned Reserve at the end of
any fiscal year, the next Financial Plan presented to the City Council must include a plan to
assign them to a specific purpose or return them to the Electric Utility ratepayers by the end
of the first fiscal year of the Financial Planning Period. For example, if the Financial Planning
Period is FY 2015 through FY 2019, the Financial Plan shall include a plan to return or assign
the funds in the Unassigned Reserve by the end of FY 2015. Staff may present an
alternative plan that retains these funds or returns them over a longer period of time.
Section 14. Intra-Utility Transfers between Supply and Distribution Funds
Transfers between Electric Distribution Fund Reserves and Electric Supply Fund Reserves are
permitted if consistent with the purposes of the two reserves involved in the transfer. Such
transfers require a budget ordinance of the City Council.
Attachment A
6
GAS UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Gas Utility
Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 – FY 2019,
FY 2015-FY 2019 would be the Financial Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Supply Fund Reserves
The Gas Utility’s Supply Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 4 (Reserves for Commitments)
b) For operating and capital budgets reappropriated from previous years, as described in
Section 5 (Reserves for Reappropriations)
Section 3. Distribution Fund Reserves
The Gas Utility’s Distribution Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 4 (Reserves for Commitments)
b) For operating and capital budgets reappropriated from previous years, as described in
Section 5 (Reserves for Reappropriations)
c) For future year expenditure on the Gas Utility’s Capital Improvement Program (CIP), as
described in Section 6 (CIP Reserve)
d) For rate stabilization, as described in Section 7 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 8 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as desc ribed in
Section 9 (Unassigned Reserves).
Section 4. Reserves for Commitments
Attachment A
7
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserves for
Commitments will be set to an amount equal to the total remaining spending authority for
all contracts in force for the Gas Supply Fund and Gas Distribution Fund, respectively, at
that time.
Section 5. Reserves for Reappropriations
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserves for
Reappropriations will be set to an amount equal to the amount of all remaining capital and
non-capital budgets that will be reappropriated to the following fiscal year for each fund in
accordance with Palo Alto Municipal Code Section 2.28.090.
Section 6. CIP Reserve
Funds may be added to the CIP Reserve by action of the City Council and held for future
year expenditure on the Gas Utility’s CIP Program. Withdrawal of funds from the CIP
Reserve requires an ordinance of the City Council. If there are funds in the CIP Reserve at
the end of any fiscal year, any subsequent Gas Utility Financial Plan must result in the
withdrawal of all funds from this Reserve by the end of the Financial Planning Period.
Section 7. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held
to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate
Stabilization Reserve requires an ordinance of the City Council. If there are funds in the
Rate Stabilization Reserve at the end of any fiscal year, any subsequent Gas Utility Financial
Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial
Planning Period.
Section 8. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Gas Utility’s Fund Balance not included in the reserves
described in Section 4-Section 7 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 8 (d)below. Staff will manage
the Operations Reserve according to the following practices:
Attachment A
8
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated in for each fiscal year of the Financial Planning Period based on the
levels of O&M and commodity expense forecasted for that year in the Financial Plan.
Minimum Level 60 days of O&M* and commodity expense
Target Level 90 days of O&M* and commodity expense
Maximum Level 120 days of O&M* and commodity expense
*Operations and Maintenance
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Gas Utility shall be designed to
return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this Reserve. Any further increase in the Gas Utility’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section
9, below.
Section 9. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Gas
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the
City Council must include a plan to assign them to a specific purpose or return them to the
Gas Utility ratepayers by the end of the first fiscal year of the Financial Planning Period. For
example, if the Financial Planning Period is FY 2015 through FY 2019, the Financial Plan shall
include a plan to return or assign any funds in the Unassigned Reserve by the end of FY
2015. Staff may present an alternative plan that retains these funds or returns them over a
longer period of time.
Section 10. Intra-Transfers between Supply and Distribution Funds
The Gas Utility records costs in two separate funds: the Gas Supply Fund and the Gas
Distribution Fund. At the end of each fiscal year staff is authorized to transfer an amount
Attachment A
9
equal to the difference between Gas Supply Fund costs and Gas Supply Fund Revenues
from the Gas Distribution Fund Operations Reserve to the Gas Supply Fund or vice versa .
Such transfers shall be included in the ordinance closing the budget for the fiscal year.
Attachment A
10
WASTEWATER COLLECTION UTILITY RESERVES MA NAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Wastewater
Collection Utility Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 – FY 2019,
FY 2015-FY 2019 would be the Financial Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Reserves
The Wastewater Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets reappropriated from previous years, as described in
Section 4 (Reserve for Reappropriations)
c) For future year expenditure on the Wastewater Utility’s Capital Improvement Program
(CIP), as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 8 (Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all cont racts in force for the Wastewater
Utility at that time.
Section 4. Reserve for Reappropriations
Attachment A
11
At the end of each fiscal year the Reserve for Reappropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets that will be
reappropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
Section 5. CIP Reserve
Funds may be added to the CIP Reserve by action of the City Council and held for future
year expenditure on the Wastewater Utility’s CIP Program. Withdrawal of funds from the
CIP Reserve requires an ordinance of the City Council. If there are funds in the CIP Reserve
at the end of any fiscal year, any subsequent Wastewater Utility Financial Plan must result
in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period.
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held
to manage the trajectory of future year rate increases. Withdrawal of f unds from the Rate
Stabilization Reserve requires an ordinance of the City Council. If there are funds in the
Rate Stabilization Reserve at the end of any fiscal year, any subsequent Wastewater Utility
Financial Plan must result in the withdrawal of all f unds from this Reserve by the end of the
Financial Planning Period.
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Wastewater Utility’s Fund Balance not include d in the
reserves described in Section 3-Section 6 above will be included in the Operations Reserve
unless this reserve has reached its maximum level as set forth in Section 7(d) below. Staff
will manage the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated in for each fiscal year of the Financial Planning Period based on the
levels of O&M and commodity expense forecasted for that year in the Financial Plan.
Minimum Level 60 days of O&M* and commodity expense
Target Level 105 days of O&M* and commodity expense
Maximum Level 150 days of O&M* and commodity expense
*Operations and Maintenance
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
Attachment A
12
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Wastewater Utility shall be
designed to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this Reserve. Any further increase in the Wastewater Utility’s
Fund Balance shall be automatically included in the Unassigned Reserve described in
Section 8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the
Wastewater Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any
funds in the Unassigned Reserve at the end of any fiscal year, the next Financial Plan
presented to the City Council must include a plan to assign them to a specific purpose or
return them to the Wastewater Utility ratepayers by the end of the first fiscal year of the
Financial Planning Period. For example, if the Financial Planning Period is FY 2015 through
FY 2019, the Financial Plan shall include a plan to return or assign any funds in the
Unassigned Reserve by the end of FY 2015. Staff may present an alternative plan that
retains these funds or returns them over a longer period of time.
Attachment A
13
WATER UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices are used when developing the Water Utility
Financial Plan:
Section 1. Definitions
a) “Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 – FY 2019,
FY 2015-FY 2019 would be the Financial Planning Period.
b) “Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c) “Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d) “Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted pu rposes.
Section 2. Reserves
The Water Utility’s Fund Balance is reserved for the following purposes:
a) For existing contracts, as described in Section 3 (Reserve for Commitments)
b) For operating and capital budgets reappropriated from previous years, as described in
Section 4 (Reserve for Reappropriations)
c) For future year expenditure on the Water Utility’s Capital Improvement Program (CIP),
as described in Section 5 (CIP Reserve)
d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve)
e) For operating contingencies, as described in Section 7 (Operations Reserve)
f) Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 8 (Unassigned Reserves).
Section 3. Reserve for Commitments
At the end of each fiscal year the Reserve for Commitments will be set to an amount equal
to the total remaining spending authority for all contracts in force for the Water Utility at
that time.
Section 4. Reserve for Reappropriations
Attachment A
14
At the end of each fiscal year the Reserve for Reappropriations will be set to an amount
equal to the amount of all remaining capital and non-capital budgets that will be
reappropriated to the following fiscal year in accordance with Palo Alto Municipal Code
Section 2.28.090.
Section 5. CIP Reserve
Funds may be added to the CIP Reserve by action of the City Council and held for future
year expenditure on the Water Utility’s CIP Program. Withdrawal of funds from the CIP
Reserve requires an ordinance of the City Council. If there are funds in the CIP Reserve at
the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the
withdrawal of all funds from this Reserve by the end of the Financial Planning Period .
Section 6. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held
to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate
Stabilization Reserve requires an ordinance of the City Council. If there are funds in the
Rate Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility
Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the
Financial Planning Period.
Section 7. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves
described in Section 3-Section 6 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 7(d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated in for each fiscal year of the Financial Planning Period based on the
levels of O&M and commodity expense forecasted for that year in the Financial Plan.
Minimum Level 60 days of O&M* and commodity expense
Target Level 90 days of O&M* and commodity expense
Maximum Level 120 days of O&M* and commodity expense
*Operations and Maintenance
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
Attachment A
15
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Water Utility shall be designed
to return the Operations Reserve to its target level within four years.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this Reserve. Any further increase in the Water Utility’s F und
Balance shall be automatically included in the Unassigned Reserve described in Section
8, below.
Section 8. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Water
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the
City Council must include a plan to assign them to a specific purpose or return them to the
Water Utility ratepayers by the end of the first fiscal year of the Financial Planning Period.
For example, if the Financial Planning Period is FY 2015 through FY 2019, the Financ ial Plan
shall include a plan to return or assign any funds in the Unassigned Reserve by the end of FY
2015. Staff may present an alternative plan that retains these funds or returns them over a
longer period of time.
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UTILITY FINANCIAL PL AN
This document presents a financial plan for the City of Palo Alto’s _____ Utility for the next five years. It is
intended to be an assessment of the costs associated with operating the utility safely over that time while
adequately investing for the future. It includes an assessment of the financial risks facing the utility over the short
term and in the long term as well as measures to mitigate and manage those risks.
TABLE OF CONTENTS
Executive Summary ............................................................................................................................................... 2
Current State of the Utility .................................................................................................................................... 2
Section I. Utility Overview ......................................................................................................................................... 2
Section II. Current Rates and Competitiveness ......................................................................................................... 2
Section III. Status of Reserves ................................................................................................................................... 2
1. Operations Reserve ....................................................................................................................................... 2
2. Unassigned Reserve ....................................................................................................................................... 2
3. Other Reserves .............................................................................................................................................. 2
Section IV. Rate Design ............................................................................................................................................. 2
Section V. Status of Bond Covenants ........................................................................................................................ 3
Looking Back .......................................................................................................................................................... 3
Section VI. Background ............................................................................................................................................. 3
Section VII. Current and Previous Fiscal Year Results ................................................................................................ 3
Looking Forward .................................................................................................................................................... 3
Section VIII. Long-term Outlook ................................................................................................................................ 3
Section IX. Five Year Financial Forecast .................................................................................................................... 3
1. Overview ........................................................................................................................................................ 4
2. Commodity Supply Costs ............................................................................................................................... 4
3. Customer Service, Operations, and Maintenance Costs ............................................................................... 4
4. Capital Improvement Projects (CIP) ............................................................................................................... 4
Section X. Revenue Requirement and Revenue Sources ........................................................................................... 4
Section XI. Projected Consumption ........................................................................................................................... 4
Section XII. Proposed Rate Trajectory ....................................................................................................................... 4
Section XIII. Risk Assessment..................................................................................................................................... 4
Section XIV. Communications Plan ........................................................................................................................... 4
Appendices ............................................................................................................................................................ 5
Appendix A: Financial Forecast Detail ....................................................................................................................... 5
Appendix B: Capital Improvement Project (CIP) Detail .............................................................................................. 5
Appendix C: Reserves Management Practices ........................................................................................................... 5
Appendix D: Bond Covenant Details .......................................................................................................................... 5
2 | P a g e
EXECUTIVE SUMMARY
This section will summarize the rest of the report.
CURRENT STATE OF THE UTILITY
SECTION I. UTILITY OVERVIEW
This section will provide an overview of the current major activities related to the utility, any notable legislative or
regulatory developments, and any notable changes in the utility’s business environment , its cost structure, or its
revenue sources.
SECTION II. CURRENT RATES AND CO MPETITIVENESS
This section will show the utility’s rates compared to nearby utilities and may include some explanation of the
underlying causes for any differences.
SECTION III. STATUS OF RESERVES
This section describes the status of various reserves. The Reserves Management Practices are provided in
Appendix C.
1. OPERATIONS RESERVE
This section will show the current Operations Reserve levels. If the Operations Reserve is below its minimum level,
this section will outline a plan for returning the reserve above its minimum levels. This section may also include a
review of the minimum, maximum, and target reserve levels to determine if they should be adjusted.
2. UNASSIGNED R ESERVE
The Unassigned Reserve holds excess funds when the Operations Reserve reaches its maximum level . There will
not normally be funds in this reserve, but if there are, this section will outline a plan for assigning the funds to a
specific purpose or returning them to ratepayers.
3. OTHER RESERVES
This section (or sections) will describe the status of other reserves for the utility.
SECTION IV. RATE DESIGN
This section provides a high level overview of the current rate design for the utility, any legislative or regulatory
activity that could affect rates, a reference to the current cost of service study, and staff’s projection for when the
next cost of service study will be undertaken.
3 | P a g e
SECTION V. STATUS OF BOND COVEN ANTS
This section will provide a brief overview of any applicable bond covenants and the utility’s compliance with those
covenants. Additional detail will be provided in Appendix D.
LOOKING BACK
SECTION VI. BACKGROUND
This section will include some historical background on the utility for the last 20-30 years, with more in-depth
discussion of the last 5-10 years:
o Trends in sales over time
o Major infrastructure measures undertaken, such as levels of infrastructure investment, infrastructure
replacement objectives, and the timing of the last major infrastructure plan
o Changes in the legislative and regulatory landscape
o Council-adopted policies with financial impacts
o Trends in supply cost over time
o Trends in operations and maintenance costs over time.
SECTION VII. CURRENT AND PREVIOUS FISCAL YEAR RESULTS
This section will show the financial results of the current and previous fiscal years. The results will be shown in the
same format as the City’s budget document for comparability, and may include a reconciliation to the City’s
Comprehensive Annual Financial Report (CAFR).
LOOKING FORWARD
SECTION VIII. LONG -TERM OUTLOOK
This section will include a forward looking discussion of factors likely to influence the financial position of the
utility, such as:
o Industry trends that may affect supply costs
o Short-term and long-term infrastructure needs
o Regulatory and legislative trends
o Major City policy impacts
o Climate policy impacts
SECTION IX. F IVE YEAR FINANCIAL F ORECAST
This section will show the utility’s current costs and how those costs are projected to increase over the next five
fiscal years. It will include an overview and additional detail on planned supply, operations, and capital expenses.
More detail will be provided in Appendix A.
4 | P a g e
1. OVERVIEW
This section will provide an overview of all costs. The overview will be provided in the same format as the City’s
budget document for comparability.
2. COMMODITY SUPPLY COS TS
This section will provide additional detail on the utility’s supply cost projections (or treatment cost projections in
the case of the Wastewater Collection Utility).
3. CUST OMER SERVICE, OPERAT IONS, AND MA INTENANCE COSTS
This section will provide additional detail on the utility’s customer service and O&M cost projections.
4. CAPITAL IMPROVEMENT PROJECTS (CIP)
This section will provide additional detail on the utility’s planned CIP investment cost projections. More detail will
be provided in Appendix B.
SECTION X. REVENUE REQUIREMENT AND REVENUE SOURCES
Based on the five year forecast shown in the previous section, this section will describe the projected revenue
requirement for the utility and the revenue sources proposed to fund operations over the next five years, such as
sales revenue, fee revenue, other revenue, or funding from reserves.
SECTION XI. PROJECTED CONSUMPTIO N
This section will show the projected consumption for the utility, and may include a breakdown by rate class.
SECTION XII. PROPOSED RATE TRAJECTORY
This section will show any rate adjustments required for each customer class to generate the sales revenues
required to meet the utility’s revenue requirement. It will also include the projected system average rate for the
utility.
SECTION XIII. RISK ASSESSMENT
This section will discuss the uncertainties in the financial forecast and provide an assessment of risks the utility
faces and the plans to mitigate those risks.
SECTION XIV. COMMUNICATIONS PLAN
This section will describe the communications and outreach plan for the utility, focusing primarily on
communication of rate changes and the reasons for those changes.
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APPENDICES
APPENDIX A : FINANCIAL FORECAST D ETAIL
This Appendix will show the entire financial position for the utility for the previous fiscal year, current fiscal year,
and the following five fiscal years. It will include all costs and revenues and the status of all reserves. It will be
formatted similarly to the City’s budget document to for easy comparison.
APPENDIX B : CAPITAL IMPROVEMENT PROJECT (CIP) DETAIL
This Appendix will show the utility’s entire CIP program, including all future projects and all projects budgeted in
previous years that still have funds remaining.
APPENDIX C : RESERVES MANAGEMENT PRACTICES
This Appendix will show the Reserves Management Practices for the utility.
APPENDIX D : BOND COVENANT DETA ILS
This Apendix will show the details of any applicable bond covenants and the utility’s compliance with them.
1
December2012
SUMMARYOFRESULTS
REPORTHIGHLIGHTS
Opportunitiesforimprovingandstrengtheningofinternal
controlsareprovidedinthefollowingfindings:
RECOMMENDATIONS
TheOfficeoftheCityAuditor(OCA)recommends
thefollowingactions:
FINDING1:RateStabilizationReservesarenotconsistently
maintained within Councilapproved guidelines. The City
doesnotcurrentlyhaveaformal,comprehensivereserve
policy for its utility funds. Key City documents show
inconsistencyincommunicationoftheCity’sreservepolicy
decisions. Rate Stabilization Reserve balances were often
outside of Councilapproved guideline ranges. Reserve
balances are inconsistently reported and do not always
reconcile, primarily due to the exclusion of Capital
ImprovementProgram(CIP)carryforwardreserves.
Establishing a more comprehensive reserve policy, with
effective supporting procedures, the City Council and the
UtilitiesDepartmentcouldbenefitfromhavingclearcriteria
tocommunicate,manage,andmonitorutilityreserves.
FINDING2:CapitalImprovementProgramreservesarenot
consistently and clearly reported to Council.The reports
issued regarding CIP are not sufficient to adequately
support effective financial and project planning.
Improvements to the consistency and completeness of
reporting CIP carryforward reserve balances could better
supporttheCityCouncil’soperatingbudget,capitalbudget,
andreservesprocesses.
TheUtilitiesDepartmentshouldestablishformal
andcomprehensivepoliciesandproceduresfor
itsUtilityReserves.
TheUtilitiesDepartmentshouldreevaluateand
determinetheuseofreservebalanceguidelines,
updatingtheCity’sresolutionandthelanguage
inkeyCitydocumentsaccordingly.
TheUtilitiesDepartmentshouldrevisititsannual
risk assessment model to determine, establish,
anddocumentappropriatelevelsofutilityfund
workingcapitalheldinunrestrictedreserves.
The Utilities Department should revisit and
update the 5year financial projection rate
making worksheets to completely state all
reserve balances consistent with the City’s key
financialdocumentsandimprovevisibilityover
allunrestrictedreserves.
The Utilities Department should develop a
mechanism to consistently and clearly report
Capital Improvement Program carryforward
reservestotheoversightbodies.
Thisdocumentrepresentsalimitedsummaryoftheauditreportanddoesnotincludealloftheinformationavailableinthefullreport.
ThefullreportcanbefoundontheOfficeoftheCityAuditorwebsiteat:http://www.cityofpaloalto.org/depts/aud/audit_reports.asp
OfficeoftheCityAuditor
EXECUTIVESUMMARY–UTILITIESRESERVESAUDIT
Summary of Audit Objectives: To assess the appropriateness and adequacy of utilities reserves,
reservepolicies,reserveguidelines,andusageofreserves.
Attachment A
Attachment D
1 | P a g e
Overview of Existing and Proposed Reserves
1) Summary of Existing and Proposed Reserves
Existing Reserves Utility Proposed Reserves
Rate Stabilization Reserves (RSRs) Electric, Gas, Wastewater
Collection, Water
Capital Improvement Project (CIP) Reserve
Rate Stabilization Reserve
Operations Reserve
Unassigned Reserve
Emergency Plant Replacement Reserves Electric, Gas, Wastewater
Collection, Water
(Eliminate this reserve)
Reserve for Reappropriations Electric, Gas, Wastewater
Collection, Water
Reserve for Reappropriations
Reserve for Commitments Electric, Gas, Wastewater
Collection, Water
Reserve for Commitments
Electric Special Projects Reserve Electric Supply Electric Special Projects Reserve
Central Valley Project Reserve Electric Supply (Eliminate this reserve)
(New reserve) Electric Supply Hydro Stabilization Reserve
Underground Loan Reserve Electric Distribution Underground Loan Reserve
Public Benefits Reserve Electric Distribution Public Benefits Reserve
Attachment D
2 | P a g e
2) Existing Reserves Detail
Existing Reserve
Name Utility Establishment Purpose Amount Held in Reserve Proposed Disposition
Rate
Stabilization
Reserves (RSRs)
Electric
Gas
Wastewater
Collection
Water
Resolution 7207
established a Rate
Stabilization
Reserve (RSR) for
each utility on June
21, 1993. It was
amended by
resolution 7769 on
June 22, 1998 to
establish separate
RSRs for the gas
and electric supply
and distribution
funds
The purpose of the RSRs
is to stabilize rates by 1)
planning for certain
known future
occurrences that are of a
one-time nature, 2) to
ramp up if the expense is
of an ongoing nature, 3)
to ensure funds are
available to cover short-
term situations when
expenditures exceed
revenues, and 4) to
provide a depository of
excess funds when
expenditures are less
than projected or
revenues are higher than
budgeted.
Any funds not held in
other reserves are
currently held in the RSRs.
Each RSR has a long-term
minimum and maximum
guideline, and staff also
performs a forward-
looking assessment of
risks to determine
whether each RSR has
adequate funds.
Divide each RSR into four
separate reserves: 1) a CIP
reserve, 2) a Rate
Stabilization Reserve, 3) an
Operations Reserve, and 4)
an Unassigned Reserve.
These reserves will
correspond to the four
purposes for the RSRs.
Emergency Plant
Replacement
Reserves
Electric
Gas
Wastewater
Collection
Water
The Emergency
Plant Replacement
Reserve is
established in
Section 2 (Public
Utilities Revenue)
of Article VII
(Miscellaneous) of
the City Charter
The Charter refers to a
reserve that will be used
“only for replacements
or emergency repairs
and after special
appropriation by the City
Council.”
The City currently insures
its utility property against
catastrophe, and so this
reserve only contains an
amount equal to the
insurance deductible.
Eliminate these reserves.
Sufficient funds to meet
charter requirements and
cover the insurance
deductible and
contingencies will be
available in the Operations
Reserve for each utility.
Attachment D
3 | P a g e
Existing Reserve
Name Utility Establishment Purpose Amount Held in Reserve Proposed Disposition
Reserve for
Commitments
Electric
Gas
Wastewater
Collection
Water
Generally Accepted
Accounting
Principles
The encumbrance
reserve represents funds
reserved to fulfill the Gas
Utility’s commitments
associated with executed
contracts.
An amount equal to all
outstanding contract
balances.
Continue existing practices
Underground
Loan Reserve
Electric Distribution In tandem with the
City’s Underground
Loan Program.
This reserve is associated
with the City’s
Underground Loan
Program.
At the end of each fiscal
year, the Underground
Loan Reserve is adjusted
by the principal payments
made against outstanding
underground loans.
Continue existing practices,
but investigate the purpose
of this reserve further.
Public Benefits
Reserve
Electric Distribution Resolution 7769,
1998
AB 1890 required the
utility to assess a Public
Benefits Charge on all
electricity sales starting
in 1998, and required
that the funds be
expended for specific
purposes (like Energy
Efficiency).
The Public Benefits
Reserve contains any
unspent Public Benefits
Revenues remaining at
the end of each fiscal
year.
Continue existing practices
Electric Special
Projects Reserve
Electric Supply Resolution 9206,
2011
This reserve was
previously called the
Calaveras Reserve.
Funds in this reserve are
intended for large
projects for the benefit
of the electric
ratepayers.
No funds are added to this
reserve. Funds in this
reserve must be
designated for specific
projects by June 30, 2016.
Funds uncommitted as of
June 30, 2020 will be
returned to the
Operations Reserve.
Continue existing practices
Attachment D
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3) Proposed Reserves Detail
Existing Reserve
Name Utility Establishment Purpose Amount Held in Reserve Proposed Disposition
Central Valley
Project (CVP)
Reserve
Electric Supply Ordinance 4413,
1997
The CVP Reserve was
created when the City
collaborated with the
Western Area Power
Administration (WAPA)
and other WAPA
customers to create the
CVP O&M program.
When the CVP O&M
program was established
this fund was used to hold
the startup funding for
the program until those
funds were sent to WAPA.
It was also used to offset
the effects of the timing
of invoices and bill credits
associated with the
program. Due to
acceleration in settlement
processing this reserve is
no longer needed.
Eliminate this reserve
Proposed
Reserve Name Utility Purpose Amount Held in Reserve
Hydro
Stabilization
Reserve
Electric Supply To hold savings associated with higher
than average hydroelectric generation
and to fund expenses associated with
lower than average hydroelectric
generation.
At the end of each fiscal year staff will evaluate the impact of
hydroelectric generation on market purchases. If generation is
higher than average, staff will propose depositing associated
commodity cost savings and surplus energy revenues into this
reserve in the year-end ordinance. If generation is lower than
average, staff will propose withdrawing funds from this reserve to
offset the additional expenses associated with purchasing
replacement energy.
EXCERPTED FINAL MINUTES OF THE JANUARY 8, 2014
UTILITIES ADVISORY COMMISSION MEETING
ITEM 1: DISCUSSION: Proposed Utilities Reserves Management Practices and Financial Plan
Templates
Senior Resource Planner Jon Abendschein provided a presentation summarizing the written
report. He explained that the first three recommendations in the report related to creating
formal financial plans for each utility, adopting them by resolution, and including the reserves
policies in those plans. The other major part of the proposal was to split the current Rate
Stabilization Reserves (RSRs) into four separate reserves, each with a separate function. These
include an Operations Reserve, a CIP Reserve, a Rate Stabilization Reserve, and an Unassigned
Reserve. The last three of those reserves would normally have zero balances unless needed for
a specific purpose. The other recommendations related to several additions, deletions, and
modifications of other miscellaneous reserves. The Emergency Plant Replacement re serve
would be merged into the Operations Reserve. For the electric utility, an additional new
reserve is a Hydro Stabilization Reserve, which would help to smooth out the costs that change
when hydroelectric generation changes. This proposal was the first part of a more
comprehensive hydro balancing proposal that staff planned to bring to the UAC. Lastly, staff’s
proposal would clarify that intra-utility, inter-fund transfers were allowable between the supply
and distribution funds for the electric and gas utilities.
Commissioner Melton said that when he reviewed this proposal as part of the UAC Budget
Subcommittee they had asked whether the City’s $1 million insurance deductible was for each
utility or across all utilities.
Abendschein said it was a total across all utilities, so if multiple utilities suffered losses related
to an insurable event, the cost of the deductible would be spread across multiple utilities.
Chair Cook stated that if there are several bad hydro years in a row, then the balance of a Hydro
Stabilization Reserve would be zero and it then wouldn't be available to cover higher costs due
to lower hydro availability.
Abendschein said that was true. One of the things staff would evaluate as part of the upcoming
hydro balancing proposal was how much from the current reserves would be used as initial
funding for the hydro stabilization reserve.
Commissioner Eglash said there was scenario under which there could be a sustained period of
dry years that could wipe out a hydro reserve.
Abendschein said that a hydro stabilization reserve would help with normal year to year
variation, but under a sustained drought it would likely be exhausted and the City would have
to raise rates to compensate.
Commissioner Melton said he understood that the hydro balancing proposal would also include
a rate adjuster that would increase or decrease as hydro generation varied.
Abendschein said that would be part of the proposal, but it also would not be a perfect
solution. The rate adjuster would help with year to year balancing, but it also might not be
sufficient in the event of a sustained drought. This was where the annual evaluation of rates
was important, since they might need to be adjusted in such a scenario.
Commissioner Hall recommended also evaluating the use of financial instruments to mitigate
the cost risk of hydro variations.
Commissioner Waldfogel said that he is not in favor of intra -year hydro rate changes since they
can't be planned for and customers have no time to alter behavior to avoid the charges.
Commissioner Eglash stated that the proposed changes added clarity, increased transparency,
and increased consistency. He supported staff’s recommendations.
Commissioner Waldfogel recommended that staff ensure that the City Auditor approves of the
proposed approach. If so, and if it does not have material effects on rates or rate structures, he
predicted that there would not be any opposition.
Commissioner Hall commented that the proposal results in a large number of reserves and that
managing all of them could be an issue.
Commissioner Eglash said the number of reserves raised the question of whether the total
amount of all the reserves in aggregate was too much.
Commissioner Melton responded that the UAC subcommittee asked about that and stated that
the overall size of the reserves should maintained at a high enough level to maintain the City's
AAA credit rating.
Commissioner Hall stated that he will be looking to see if these changes wi ll lead to an increase
in the overall total funds in reserves.
EXCERPTED DRAFT MINUTES OF THE FEBRUARY 12, 2014
UTILITIES ADVISORY COMMISSION – SPECIAL MEETING
ITEM 3: DISCUSSION: Staff Presentation on Utilities Preliminary 5-Year Financial Projections
and Reserves Restructuring (FY 2015 – FY 2019)
Senior Resource Planner Jon Abendschein provided a presentation of the long-term financial
forecasts for the Electric, Gas, Wastewater Collection, and Water Utilities. He said that no rate
changes are proposed for FY 2015 in any utility. He said that the projections incorporate the
proposed reserves structure discussed with the UAC in January 2014. He said that this
presentation provides a preview of the Financial Plans that will be presented to the UAC at its
next (March 2014) meeting. Abendschein stated that after FY 2015, the overall bill impact of
the rate adjustments for all funds combined is about 4% per year. The reserves structure
changes had been reviewed with the City Auditory and Administrative Services Department.
Electric Utility
For the Electric Utility, Abendschein said that supply costs were expected to increase over the
next several years. The forecasted increases were lower than the previous year’s forecast due
to the cancelation of two renewable projects and their replacement with lower cost
alternatives. Increases in distribution costs were expected to be in line with inflation. There
were two reserves changes particular to the Electric Utility: first, eliminating the Central Valley
Project Reserve, which was a very small reserve, and adding a Hydroelectric Stabilization
Reserve. The Hydroelectric Stabilization Reserve would be funded at $28 million with $10-12
million for the minimum funding for hydroelectric risk management, and the remainder for
drought protection and managing year to year variations in hydro generation. The funding
recommendation could change when staff returns with a hydro balancing proposal .
Commissioner Hall asked why there appears to be a dip in costs in FY 2014 and rising costs
beyond. Abendschein stated that there were different factors for each utility, and he would
discuss them as he discussed each utility’s forecast. For water, gas, and wastewater, there had
been some slowdown in CIP spending due to staffing limitations. For the Electric Utility, he
believed it was related to the delay in th e online date for a renewable project.
Commissioner Melton noted that in the three-year drought scenario later in the presentation
the Hydro Stabilization Reserve was nearly exhausted. He asked if $28 million is enough in the
hydro stabilization reserve for a long term drought.
Abendschein answered that a 3 year drought was in line with the longest droughts seen in past
40 or so years. If there were a longer drought CPAU would need to raise rates until revenues
matched costs under the long-term drought conditions and replenish reserves. He also noted
that rate increase requests can always occur mid-year. He said reserves were only one of the
tools available for financial management during a drought . Abendschein said that the selection
of $28 million was a balance between holding lots of money in reserve versus being able to
manage through a long-term drought without increasing rates an inordinate amount.
Abendschein stated that staff developed a scenario for a three-year drought to determine the
impact on the costs and rates over the financial forecast period. He said that, since Palo Alto
has significant hydroelectric resources and the costs are fixed for those resources, costs
increase when hydro generation is low. In the three-year drought scenario, the rates would
have to increase more than in the base scenario, but then the rates could fall in the final year
after the drought ends. During the drought in this scenario, the hydro stabilization reserve
would decrease, and then be replenished after the drought ends.
Commissioner Melton asked whether staff was still investigating a hydro rate adjustment
mechanism. Abendschein said that staff was only just starting to analyze such a mechanism.
The adjuster would change rate rates automatically for the next year based on water supply
conditions. Staff would likely return with revisions to its Hydroelectric Stabilization Reserve
funding levels at the same time as its hydro rate adjustment proposal.
Commissioner Hall suggested that staff review the East Bay Municipal Utilities District’s rate
adjustment mechanism for its Freeport project.
Gas Fund
Regarding the Gas Fund, Abendschein said that the costs (and rates) will rise primarily due to
inflation. The only changes to non-commodity costs has to do with additional funding for
continuing the cross-bore program. The assumption for the financial forecast is that gas
commodity costs and rates are constant over the financial forecast period , since that more
clearly shows the changes in distribution costs. In reality, commodity costs would fluctuate
from month to month, and the commodity rates would be adjusted to match .
Commissioner Eglash asked why the operating costs increased so much in FY 2015.
Abendschein replied that it had to do with th e cross-bore program.
Commissioner Eglash asked if CIP spending is lower in FY 2015 to compensate for the higher
operational costs. Abendschein said that CIP spending was not lowered due to the cross-bore
program. It was a fortunate coincidence. The decrease in CIP spending was related both to
staffing constraints and the fact that staff had combined two large gas main replacement
projects into a single extra-large project to complete the replacement of ABS pipe in Palo Alto.
Work on that project is still ongoing.
Commissioner Eglash observed that gas commodity prices are at historic low levels and are
expected to remain low for many years. Abendschein agreed, but noted that prices are volatile
and the market’s expectations frequently change.
Wastewater Collection Fund
Resource Planner Eric Keniston presented the Wastewater Collection Fund projections. He
stated that the major cost driver for this fund is the cost of treatment, which is expected to rise
by 4-5% per year. Other costs increase at inflation rates. Overall rates increase at about 6% per
year for the forecast horizon. Part of the reason that no rate increase is needed in FY 2015 is
that reserves are planned to be drawn down.
Commissioner Melton noted that the CIP showed a decrease in the current fiscal year, then
returned to its previous level. He asked what the $4 million per year of CIP spending is for.
Keniston said that it is primarily for sewer pipe rehabilitation and replacement with about
$500,000 for new or replacement sewer laterals.
Commissioner Hall said that the previous year’s forecast had anticipated the need for a rate
increase. He asked if the lower CIP spending was what allowed the City to hold the line on
sewer rates. Keniston said that it was due to increased reserves related to the lower CIP
spending, reducing costs over the 5-year financial forecast period and allowing for a scenario
with no rate increase for FY 2015.
Water Fund
With respect to the Water Fund, Keniston indicated that no rate increase is forecast for FY 2015
due to excess reserves that can be drawn down. Wholesale water rates from the San Francisco
Public Utilities Commission (SFPUC) are expected to increase 10% per year over the forecast
period. He noted that in April the SFPUC would announce any planned requests for further
water use reductions for FY 2015.
Commissioner Melton asked if there is there any more talk from SFPUC on a change to
structure the wholesale water rates with a larger fixed cost component . Assistant Director
Ratchye said that there are no current discussions, but that staff was always vigilant on that
issue.
Commissioner Melton asked if there were any upcoming structural changes in the rates.
Keniston indicated that the rates are based on the latest cost of service s tudy and that if
circumstances changed, staff may complete a new cost of service study.
Commissioner Hall asked if the revenue dip in FY 2015 for the Water Fund is due to the
anticipation that usage will fall in response to the call for water use cutbacks . Keniston
confirmed that understanding and expressed the hope that customers will respond to the call
to reduce water use.
Keniston continued the presentation, stating that for the Water Fund, a seven-year forecast
period was used since the SFPUC's Water System Improvement Program will be complete and
the large annual wholesale water price increases are forecasted to level off. He also explained
that there is a large surplus in the Water Rate Stabilization Reserve that allowed for no rate
increase in FY 2015 as long as SFPUC’s request for water use reductions stays at 10%. He said
that in an extended drought, or in the case of a call for greater reductions in water use, rates
would need to change. The Water Utility was currently in Stage I of the four stages in the
drought response plan in the Urban Water Management Plan.
Commissioner Melton asked what the stages of a water shortage are. He asked what we would
do in the event of a more serious drought. Abendschein stated that we are currently in Stage I
and that higher stages mean more mandatory water uses restrictions and more enforcement of
those restrictions. Ratchye said that Stage I is for 5% to 10% reductions, Stage II is for 10% to
20%, Stage III is for 20% to 35% reductions and Stage IV is for reductions of greater than 35%.
She said that there were 20% mandatory reductions requested in the 1987-92 drought, and at
one point, the SFPUC was poised to move to a 40% reduction, but then the “miracle March”
storm event occurred, which ended that five-year drought. Ratchye stated that staff would go
in to more depth on the impact of hydro conditions at the March 3rd Council Study session.
She mentioned that since the last drought, the SFPUC manages the regional water system every
year as if the next three years are going to be drought years. There is much more water in
storage at this time than in 1987. The SFPUC now has a “water-first” operational plan for the
regional water system, which means that electricity is not generated if there is a place to put
more water in storage.
Commissioner Hall noted that staff was not proposing rate increases at this time, but asked
what would happen if the SFPUC called for higher cutbacks. Keniston indicated that in that
event, staff would bring drought rate schedules to the UAC. Since staff would not get a final
announcement from the SFPUC until April, this would happen in the May/June timeframe and
the rate would not be implemented until the fall due to the time required for Proposition 218
notification. He also stated that any rate change for drought would need to also consider
impacts to the community and billing system limitations. He indicated that various
methodologies are possible.
Abendschein stated that staff would present this information to the Finance Committee on
March 4, and would then return to the UAC, Finance Committee, and Council with the full
Financial Plans. He noted the assistance of the UAC budget subcommittee, Commissioners
Melton and Waldfogel.