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HomeMy WebLinkAboutStaff Report 5174 City of Palo Alto (ID # 5174) Finance Committee Staff Report Report Type: Action Items Meeting Date: 12/16/2014 City of Palo Alto Page 1 Summary Title: Use of Cap -and-Trade Compliance Revenues Title: Utilities Advisory Recommendation that the Finance Committee Recommend that the City Council Approve a Resolution Amending the City’s Cap-and -Trade Revenue Utilization Policy to Cover the Use of Freely Allocated Allowances for the Gas and Electric Utilities, and a Resolution Amending Rate Schedules G 1, G -1-G, G 2, G -2-G, G 3, and G -3-G to Add a Rate Component for Cap-and -Trade Regulatory Compliance Costs and Combine the Administrative and Tran sportation Charges with the Distribution Charges From: City Manager Lead Department: Utilities Recommendation Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee recommend that Council adopt: 1. A Resolution (Attachment A) to amend the City of Palo Alto Policy on the Use of Freely Allocated Allowances Under the State’s Cap-and-Trade Program to include a policy for the City’s Natural Gas utility (Exhibit A to Attachment A); and 2. A Resolution (Attachment B) to amend Rate Schedules G-1, G-1-G, G-2, G-2-G, G-3, and G-3-G to add a rate component to collect the cost of compliance with the State’s cap - and-trade program (Exhibit A to Attachment B) and to combine the Administrative and Transportation charges with the Distribution charges. Executive Summary The Global Warming Solutions Act of 2006, also known as Assembly Bill (AB) 32 authorized the California Air Resources Board (CARB) to develop regulations to meet the goal to lower the state’s greenhouse gas (GHG) emissions to 1990 levels by 2020. CARB developed a cap-and- trade program as one of the strategies to achieve the 2020 goal. Under the cap-and-trade program, an overall limit on GHG emissions from capped sectors is established and facilities subject to the cap are able to trade permits (allowances) to emit GHGs. The cap-and-trade program started in 2012 and covered GHG emitting sources such as electricity generation, along with other stationary sources. The City of Palo Alto Utilities’ City of Palo Alto Page 2 (CPAU’s) electric utility does not own or operate fossil fuel-based electricity generation covered by the cap-and-trade regulations, and received free allowances from CARB to mitigate the costs of reducing its GHG emissions. Since the electric utility typically has no need to use the allowances for compliance, it must sell them into the cap -and-trade auction. In December 2012, Council adopted a policy on how to use the revenue from the sale of the allowances for the benefit of the City’s retail electric ratepayers. Starting January 2015, natural gas suppliers, including CPAU’s gas utility, will be covered entities with a compliance obligation in CARB’s cap-and-trade program. As with the electric utility, the gas utility will receive free allowances from CARB annually at least until 2020. However, unlike the electric utility, the gas utility will have a compliance obligation and can use some of the allowances directly for compliance, but must sell some into the cap-and-trade auction. Proceeds from these sales must be used to the benefit of t he City’s natural gas ratepayers and be consistent with the goals of AB 32. Consistent with the regulatory restrictions on the use of the allowances and allowance value, staff recommends that Council amend its current Cap-and-Trade Revenue Utilization Policy, which currently covers only the use of freely allocated allowances for the electric utility, to include a policy for the gas utility. The proposed amended policy adds a new section for gas allowances, including the following key points:  A portion of the allowances will be used to meet the City’s natural gas utility’s compliance obligations.  The remaining allocated allowances will be consigned to auction.  The following are the allowable uses of the auction proceeds: o Investment in energy efficiency programs for the City’s natural gas portfolio and retail customers; o Purchases or investment in cost effective renewable bio-gas resources for the City’s gas portfolio; o Investment in other carbon reduction activities for the City’s natural gas utility, including system maintenance or replacement to reduce fugitive gas emissions; and o Rebates to natural gas retail ratepayers provided on a non-volumetric basis. The UAC discussed staff’s proposal at its October 1, 2014 meeting and generally supported the proposed policy for how the auction proceeds could be used, but expressed a preference that the revenues be used for programs to reduce GHG emissions, rather than being returned to gas ratepayers in the form of a rebate. Staff revised the proposed policy to incorporate the recommendation from the UAC (Attachment A, Exhibit A). In addition to the amended policy, proposed changes to the City’s gas rates add a line item to recover the cost of purchasing compliance instruments (Attachment B, Exhibit A). This new variable rate component, similar to the existing gas commodity rate component, would be updated quarterly to reflect the actual cost of compliance with the cap -and-trade regulations. City of Palo Alto Page 3 The new rate component may vary between zero and $0.25 per therm over the period 2015- 2020, but is expected to be about $0.02 per therm in 2015 (a rate impact of about 2%) and less than $0.10 per therm in 2020. Background The Global Warming Solutions Act of 2006, also known as AB 32, requires that California’s GHG emissions in 2020 be at the same levels as that of year 1990, or an estimated 15% reduction compared to what emissions might otherwise have been in 2020. CARB was authorized to develop regulations to reach this goal, and the cap-and-trade program is one of several tools designed by CARB to achieve the desired GHG reduction goal. Cap-and-trade is a market based regulation that is designed to reduce GHG emissions from multiple sources. CARB’s cap-and- trade regulations set a firm limit (cap) on GHG emissions with the cap declining approximately 3 percent each year beginning in 2013. The trading mechanism is intended to create incentives to reduce GHG emissions below allowable levels through investments in clean technologies. Under CARB’s cap-and-trade program, an overall limit on GHG emissions from capped sectors of the state’s economy was set and covered facilities subject to the cap are able to trade permits, or allowances, to emit GHGs up to the capped amount. The program phased in covered entities’ participation over three ‘compliance periods’. The first period (calendar years 2013 and 2014) included electric distribution companies. CARB has freely allocated allowances to CPAU for its electric utility. CPAU utilizes the proceeds from the sale of its allowances in a manner consistent with the Council-approved policy on the use of electric utility allowance revenues -- exclusively for the benefit of retail electric ratepayers, and consistent with the goals of AB 32. (Staff Report 3342, Resolution 9307). The City’s gas utility cap-and-trade compliance obligations are distinct from those made for the electri c utility. Starting in 2015 when the second compliance period begins, the scope of the cap -and-trade program expands and natural gas suppliers become covered entities with a compliance obligation based on their retail gas sales. As was the case with t he electric utility, CPAU will be freely allocated allowances for the gas utility for the purpose of mitigating the cost impact of cap-and-trade compliance to retail customers. The volume of allowances provided by CARB, and available to be used directly to meet compliance obligations, is not anticipated to be enough to cover all of CPAU’s gas utility GHG emissions. Therefore, unless CPAU is able to reduce emissions through energy efficiency or through the purchase of green gas, CPAU may have to purchase allowances to cover the balance of its needs. Similar to the electric utility, allowances allocated to the gas utility can be used directly to meet compliance obligations or consigned for sale in CARB auctions. The proceeds from auction sales must be used f or the benefit of retail gas ratepayers and consistent with the goals of AB 32. To meet the regulatory requirements for use of the freely allocated allowances, staff has proposed a policy for the use of the allowances and auction proceeds that has been de signed to comply with the regulations while providing some flexibility to fund locally supported programs. City of Palo Alto Page 4 Discussion Title 17 of the California Code of Regulations Sections 95893(b) and (c) offer publicly -owned natural gas utilities, such as CPAU, two options for the use of the allocated allowances: 1. Place allowances in their compliance accounts to meet compliance obligations derived from their gas retail sales. 2. Offer the allowances for sale at auction. At least 25% of the allocated allowances must be ma de available for auction in 2015. This amount increases by 5% each year, up to 50% in 2020. CPAU will place a portion of the allocated allowances in its compliance account and make the remainder available for auction, starting in February 2015. Assuming a $12/ton allowance auction price, CPAU’s allocated allowances are estimated to have a market value of $2 million per year in year 2015. Based on CARB’s historical auction price data1 and the design of the auction market, the value of the allocated allowances is expected to increase in value through year 2020, the last year of the regulatory period. While the governing board of each gas utility is given some flexibility in determining how to utilize the allocated allowances and their value, the cap-and-trade program regulation does impose limitations. Specifically, Section 95893(d)(3) includes the following statement regarding the utilization of allowance sale proceeds by natural gas suppliers: “Auction proceeds and allowance value obtained by a natural gas supplier shall be used exclusively for the benefit of retail ratepayers of each natural gas supplier, consistent with the goals of AB 32, and may not be used for the benefit of entities or persons other than such ratepayers. Any revenue returned to ratepayers must be done in a non-volumetric manner.” Starting in June 2016, CPAU will be required to report annually to CARB on the “disposition of any auction proceeds and allowance value from allowances from the previous budget year” (Sec. 95893(e)). The report must include the monetary value of auction proceeds received by CPAU and an explanation of how the use of auction proceeds complies with the requirements of the cap-and-trade regulation. Staff understands that CARB has the authority to revoke or revise the free allocations, if the regulations are not followed. Example of Gas Utility Compliance with Cap-and-Trade The following hypothetical example illustrates how cap-and-trade compliance obligations could be calculated based on a purchase of 25,000,000 therms of gas per year: 1 http://www.arb.ca.gov/cc/capandtrade/auction/auction.htm City of Palo Alto Page 5 Table 1: Hypothetical Example of Gas Utility Cap-and-Trade Allowance and Cost Accounting Allowances provided, sold and remaining for compliance 2015 2020 Estimated gas purchases (therms) 25,000,000 25,000,000 Carbon dioxide equivalent (metric ton of CO2e) 133,000 133,000 Free allowances provided by CARB 160,000 145,000 Minimum number of allowances that must be auctioned (25%) 40,000 (50%) 72,500 Allowances needed for compliance if minimum auctioned 13,000 60,500 Cost to buy allowances for compliance at auction floor price if minimum auctioned Estimated auction floor price (per metric ton CO2e) $12.08 $15.40 Estimated cost for compliance at floor price $157,000 $932,000 Estimated retail rate impact (per therm) $0.01 $0.03 Cost to buy allowances for compliance at cost containment reserve price if min. auctioned Estimated auction reserve price (per metric ton CO2e) $60.38 $77.02 Estimated cost for compliance at reserve price $785,000 $4,659,000 Rate impact at reserve price (per therm) $0.03 $0.15 Revenue from sale of allowances at auction if minimum number of allowances are auctioned Minimum number of allowances that must be auctioned 40,000 72,500 Estimated proceeds at auction floor price $483,000 $1,117,000 Estimated proceeds at auction reserve price $2,415,000 $5,584,000 As shown in the example, the number of free allowances provided declines over time and the number of allowances that must be auctioned increases over time. Historically, the auction price for allowances has been near the auction floor price, as shown in Table 2 below. If that trend continues, then the impact on gas rates from the purchase of allowances is estimated to be about $0.02 per therm in 2015 and $0.05/therm in 20 20. At the same time, the revenue from sale of the minimum number of allowances that must be sold into the auction is estimated to be about $483,000 in 2015 and $1.1 million in 2020. Table 2: Actual CARB Cap-and-Trade Auction Results Auction 1 2 3 4 5 Month Nov 2012 Feb 2013 May 2013 Aug 2013 Nov 2013 Auction of 2013 Vintage Allowances Allowances auctioned (millions) 23.126 12.925 14.522 13.865 16.615 Auction floor price ($/ton) 10.00 10.71 10.71 10.71 10.71 Auction clearing price ($/ton) 10.09 13.62 14.00 12.22 11.48 Auction 6 7 8 9 Month Feb 2014 May 2014 Aug 2014 Nov 2014 Auction of 2014 Vintage Allowances Allowances auctioned (millions) 19.539 16.947 22.473 Auction floor price ($/ton) 11.34 11.34 11.34 Auction clearing price ($/ton) 11.48 11.50 11.50 City of Palo Alto Page 6 Proposed Amendments to the Existing Cap and Trade Policy to Cover the Use of Freely Allocated Allowances for the Gas Utility Staff recommends the following amendments to the policy that comply with the regulation and minimizes any risk of future CARB action to rescind CPAU’s allowances or disallow funding of specific projects. The key points in the proposed policy include: 1. Abide by the regulatory requirement that auction proceeds be used exclusively for the benefit of retail ratepayers of the gas utility, consistent with the goals of AB 32, with allowable uses to include: a) Investment in energy efficiency programs for the City’s gas retail customers. Examples of such programs include appliance upgrades and weatherization; b) Purchasing or investment in cost effective renewable bio-gas resources for the City’s gas portfolio; c) Investment in other carbon reduction activities for the City’s gas utility, such as system maintenance activities which minimize fugitive gas emissions and/or improve the monitoring of natural gas usage and losses; and d) Rebates to the City’s gas retail ratepayers. Should credits to gas ratepayers be proposed, additional Council approval will be required. Such review would typically occur during the City’s annual budget adoption process. 2. Allow for the use of the allocated allowances to meet compliance obligations. 3. Show how the allowances and auction proceeds are being utilized to benefit the City’s gas utility ratepayers by: a) Reporting annually to Council on allowance revenues and expenditures; and b) Reporting annually to CARB on the use of allowances for compliance. Staff intends to use allowance revenues for existing efficiency and other programs to the extent possible, or for direct rebates. Staff recommends against adopting new programs solely because these revenues are projected to become available; rather new programs should be adopted only if they are deemed to benefit gas ratepayers, regardless of whether revenue from allowance auctions is available to fund them. This strategy protects rat epayers in the event CARB changes the rules regarding the number of allowances allocated to gas utilities or the way allowances and allowance value may be used. In accordance with CARB’s annual reporting requirements, staff will coordinate with the Administrative Services Department to set up a balancing or reserve account that will track the auction revenues received. CPAU will track the expenditures from the reserve account and ensure that they are consistent with the Cap-and-Trade Revenue Utilization Policy. Staff will continue to monitor state proceedings on the use of auction proceeds and provide recommendations on changes to the Policy if further guidance from CARB and the state legislature is provided. City of Palo Alto Page 7 Proposed Rate Changes to Effect Cap-and-Trade Cost Recovery and Regulatory Compliance Staff recommends introducing a variable rate component to the City’s gas rates to reflect the cost of acquiring cap-and-trade compliance instruments sufficient to cover the compliance obligation that will begin on January 1, 2015. The rate, to be effective January 1, 2015, will reflect the most recent compliance instrument purchase cost, divided by projected sales for the upcoming quarter. Differences between actual and projected sales will be trued -up in the subsequent quarter’s rate. The Cap and Trade Compliance Charge shown on the proposed amended G -1, G-1-G, G-2, G-2- G, G-3 and G-3-G rate schedules (Attachment B, Exhibit A) contains a range expected to be sufficient to cover the utility’s cost of compliance. Staff based the range of $0.00 to $0.25 per therm on historical auction prices provided by CARB and staff’s analysis of CPAU’s recent emissions levels. The auction market has a floor price (or auction reserve price) which increases annually by the consumer price index (CPI) plus 5%. Historically, allowances have been trading and settling near the floor level ($11.34 per metric ton in 2014). Proposed Rate Changes for Bill Presentation Purposes In addition, staff recommends combining the Administrati ve and Transportation rate components with the Distribution rate component. This cost -neutral change will simplify bill presentation. The Administrative rate component is currently $0.0074/therm and the Transportation rate component is currently $0.0435/therm, so these two rate components together comprise a small portion of the overall rate. The proposed changes remove those two rate component line items, adding those costs to the existing Distribution rate component. For example, for Rate Schedule G-1, the Distribution Charge is currently $0.3883/therm and $0.9037/therm for Tier 1 and Tier 2, respectively. After eliminating the Administration and Transportation rate components, the Distribution Charge for Rate Schedule G -1 would be increased to $0.4392/therm and $0.9546/therm for Tier 1 and Tier 2, respectively, an increase of $0.0509/therm (Administrative charge of $0.0074/therm plus Transportation charge of $0.0435/therm) for each tier. Commission Review and Recommendation The UAC reviewed staff’s recommendation at its October 1, 2014 meeting. The UAC discussed how the cap-and-trade system works, the intent of the regulations and what choices the proposed policy provides for use of the allowance revenue. Some commissioners asked if funding for “fuel switching” programs to provide incentives for customers to change from gas - using to electric-using appliances (e.g. water heaters and space heating equipment) could be added to the list of potential uses of the allowance revenue. Staff indicated that fuel switching programs were not precluded from the proposed policy, but reminded that any program funded from the revenue must be beneficial for gas ratepayers. Other commissioners did not want to include fuel switching explicitly as an option in the po licy and that fuel switching in general needed additional study and an updated analysis before determining if it was cost - effective and, therefore, appropriate for funding from these revenues. Additional analysis City of Palo Alto Page 8 would be done prior to implementing any fu nding for fuel switching, to determine whether fuel switching would be cost effective and consistent with all legal and regulatory requirements. The option of returning the allowance revenue to customers in the form of a rebate was also discussed by the UAC. In general, that option was not supported by the UAC and there was a clear preference for funding programs that would result in reduced gas use rather than returning the funds to ratepayers. A motion was made and seconded to add: “fuel switching and” so that the third proposed use in the policy would read: “Investment in other carbon reduction activities for the natural gas utility, including fuel switching and system maintenance or replacement to reduce fugitive gas emissions”. The motion failed (2-4 with Chair Foster and Vice Chair Waldfogel voting yes, Commissioners Chang, Eglash, Hall and Melton voting no, and Commissioner Cook absent). In the end, the UAC unanimously voted to recommend that the Council: 1. Amend the City of Palo Alto Policy on the Use of Freely Allocated Allowances Under the State’s Cap-and-Trade Program (Attachment A, Exhibit A to the Resolution) as proposed by staff with the following provisos: a. The policy should indicate a preference for programs that reduce GHG emission s from gas utilization; and b. The UAC does not support returning the funds to ratepayers in the form of a rebate; and 2. Amend Rate Schedules G-1, G-1-G, G 2, G-2-G, G 3, and G-3-G to add a rate component to collect the cost of compliance with the State’s cap-and-trade program (Attachment B, Exhibit A to the Resolution) and to combine the Administrative and Transportation charges with the Distribution charges. The motion passed unanimously (6-0 with Commissioner Cook absent). Draft minutes from the UAC’s October 1, 2014 meeting are provided as Attachment C. As a result of the UAC’s recommendation, staff adjusted the proposed policy to incorporate the UAC’s provisos. The revised policy is the one that is proposed for recommendation by the Finance Committee. Resource Impact The Fiscal Year (FY) 2015 budget includes projected allowance costs of approximately $233,000 and revenues of approximately $264,000. Since the program starts in January 2015 and only covers the second half of FY 2015, projections for FY 2016 are a pproximately double these amounts. Policy Impact The proposed recommendation supports the Council-approved Utilities Strategic Plan’s environmental sustainability and customer service objectives. City of Palo Alto Page 9 Environmental Impact The proposed recommendation to amend this City policy and amend the City’s natural gas rate schedules to cover the cost of regulatory compliance is exempt from the California Environmental Quality Act, pursuant to California Public Resources Code section 21080(b)(8). Attachments:  Attachment A: Resolution Approving Amendments to Policy on the Use of Freely Allocated Allowances under the State's Cap-and-Trade Program (PDF)  Attachment A: Exhibit A - Proposed Policy on the Use of Freely Allocated Allowances Under the State's Cap-and-Trade Program (PDF)  Attachment B: Resolution Approving Amendments to Utility Gas Rate Schedules (PDF)  Attachment B: Exhibit A - Utilities Rate Schedules G-1, G-1-G, G-2, G-2-G, G-3 and G-3-G in redline strikeout format (PDF)  Attachment C: Excerpted Draft UAC Minutes of October 1, 2014 (PDF) ATTACHMENT A * NOT YET APPROVED * 250113 sdl 6051942 0180057 jrm 09022014 Resolution No. _____ Resolution of the Council of the City of Palo Alto Amending the Cap- and-Trade Revenue Utilization Policy to Cover the Use of Freely Allocated Allowances for the Gas and Electric Utilities R E C I T A L S A. The Global Warming Solutions Act, also known as Assembly Bill 32 (AB 32), requires that California’s Greenhouse Gas (GHG) emissions by 2020 be at 1990 levels, and authorized the California Air Resources Board (CARB) to develop regulations to reach this goal . B. The GHG emission cap-and-trade program is one of several tools designed by CARB to achieve the state’s GHG reduction goal, and has been in operation since November 2012. C. As of January 2015 and in accordance with CARB’s cap-and-trade regulations, as a natural gas supplier, the City of Palo Alto will be GHG emission allowances (allowances) free of charge by CARB, to be utilized in a manner both consistent with the goals of AB 32 and exclusively for the benefit of retail gas ratepayers. D. Under the terms of CARB’s cap-and-trade regulations, including Title 17 California Code of Regulations Section 95893(d)(3)), the City is required to sell a portion of these allocated allowances in the auctions conducted by CARB and utilize the auction sale proceeds “exclusively for the benefit of retail ratepayers of each natural gas supplier” and “consistent with the goals of AB 32”. E. The Council of the City of Palo Alto supports the state’s AB 32 goals, and intends to implement the City’s Policy on the Use of Freely Allocated Allowances Under the State’s Cap - and-Trade Program (formerly titled the Cap-and-Trade Revenue Utilization Policy) in furtherance of these goals. The Council of the City of Palo Alto RESOLVES, as follows: SECTION 1. The City’s Policy on the Use of Freely Allocated Allowances Under the State’s Cap-and-Trade Program is amended as shown in Exhibit A. SECTION 2. The Council grants the City Manager or his designee the authority to implement the Policy on the Use of Freely Allocated Allowances Under the State’s Cap-and- Trade Program and to use allowances and allocate auction revenues to projects or expenditures as defined in Exhibit A. SECTION 3. Should California’s cap-and-trade program and/or the CARB regulations implementing that program be suspended, discontinued or materially altered such that the City ATTACHMENT A * NOT YET APPROVED * 250113 sdl 6051942 0180057 jrm 09022014 of Palo Alto Utilities no longer receives allocated allowances of significant monetary value, the Council reserves the right to terminate the Policy on the Use of Freely Allocated Allowances Under the State’s Cap-and-Trade Program and discontinue any programs funded from the City’s allocated allowance revenues. SECTION 4. The Council finds that the implementation of this Policy, including the use of revenue derived from it, and the expenditures of funds necessary to implement it, represent the City’s cost of regulatory compliance with the state’s cap-and-trade program and are consistent with the goals of AB 32. Such costs therefore represent the reasonable costs of providing service to CPAUS’s gas customers. SECTION 5. The Council finds that the amendment of this policy does not meet the definition of a “project” under the California Environmental Quality Act, as defined by California Public Resource Code Section 21065. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: ___________________________ ___________________________ City Clerk Mayor APPROVED AS TO FORM: APPROVED: ___________________________ ___________________________ Sr. Deputy City Attorney City Manager ___________________________ Director of Utilities ___________________________ Director of Administrative Services ATTACHMENT A, Exhibit A EXHIBIT A TO RESOLUTION NO.______ ADOPTED BY COUNCIL ON: _______ CITY OF PALO ALTO POLICY ON THE USE OF FREELY ALLOCATED ALLOWANCES UNDER THE STATE’S CAP-AND-TRADE PROGRAM This Policy applies to freely allocated greenhouse gas (GHG) emission allowances from the California Air Resources Board (CARB) to the City of Palo Alto’s electric and natural gas distribution utilities (“Allocated Allowances”). The City Manager or his designee is authorized to use Allocated Allowances and any resulting revenue in any lawful manner consistent with this policy. The City’s Policy on the Use of Freely Allocated Allowances for the Electric Utility is as follows: 1.The City shall abide by CARB’s regulations by using the auction proceeds and allowance value obtained from the City’s allocated allowances for the exclusive benefit of the City’s electric retail ratepayers, consistent with the goals of the Global Warming Solutions Act, also known as Assembly Bill 32 (AB 32), and not for the benefit of entities or persons other than such ratepayers. 2.The following uses of the City’s auction proceeds are permitted: a)Purchases or investment in renewable resources (outside Palo Alto or locally) for the electric portfolio; b)Investment in energy efficiency programs for the electric portfolio and retail customers; c)Investment in other carbon reduction activities, including those required to achieve a carbon-neutral electric portfolio; and d)Rebates to electric retail ratepayers. 3.Allocated allowances may also be used to meet the City’s electric utility’s compliance obligations for electricity scheduled into the California Independent System Operator Markets, should state law eventually permit this action. 4.Council will receive annual reports on the allowance revenues and expenditures associated with complying with CARB regulations and this policy. 5.Additional Council approval will be required for any rebates to electric ratepayers proposed under this Policy. The City’s Policy on the Use of Freely Allocated Allowances for the Gas Utility is as follows: 1.The City shall abide by CARB’s regulations by using the auction proceeds for the exclusive benefit of the City’s natural gas retail ratepayers, consistent with the goals of EXHIBIT A EXHIBIT A TO RESOLUTION NO.______ ADOPTED BY COUNCIL ON: _______ CITY OF PALO ALTO POLICY ON THE USE OF FREELY ALLOCATED ALLOWANCES UNDER THE STATE’S CAP-AND-TRADE PROGRAM the Global Warming Solutions Act, also known as Assembly Bill 32 (AB32), and not for the benefit of entities or persons other than such ratepayers. 2. A portion of the Allocated Allowances can be used to meet the City’s natural gas utility’s compliance obligations, and the remaining Allocated Allowances will be consigned to auction. 3. The following uses of the City’s auction proceeds from the sale of Allocated Allowances are permitted, with a preference that measures that reduce greenhouse gas emissions be pursued before providing rebates: a. Investment in energy efficiency programs for the natural gas portfolio and retail customers; b. Purchases or investment in cost effective renewable bio-gas resources for the gas portfolio; c. Investment in other carbon reduction activities for the natural gas utility, including system maintenance or replacement to reduce fugitive gas emissions; d. Rebates to natural gas retail ratepayers. Rebates, if provided, must be allocated on a non-volumetric basis as stated in Title 17 CCR Section 95893 (d)(3). 4. Council will receive annual reports on the use of Allocated Allowances, including the use of auction revenues and expenditures associated with complying with CARB regulations and this policy. 5. Additional Council approval will be required for any rebates to natural gas ratepayers proposed under this policy. ATTACHMENT B * NOT YET APPROVED * 250113 sdl 6051942 0180057 jrm 09022014 Resolution No. _____ Resolution of the Council of the City of Palo Alto Amending Utility Gas Rate Schedules G-1 (Residential Gas Service), G-1-G (Residential Green Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-2-G (Residential Master-Metered and Commercial Green Gas Service), G-3 (Large Commercial Gas Service and G-3-G (Large Commercial Green Gas Service) R E C I T A L S A. Effective January 1, 2015, natural gas suppliers such as Palo Alto are covered entities under the California Air Resources Boards (CARB’s) cap and trade program regulations, with a compliance obligation based on their retail gas sales. B. Greenhouse Gas Allowances, which may be freely allocated by CARB, or purchased from the CARB-sponsored Cap-and-Trade auctions or via the secondary market, may be used to fulfill these compliance obligations. C. The proposed rate schedule amendments reflect this new, additional regulatory compliance cost as a revenue-neutral, pass-through component and do not otherwise modify the rate schedules. The Council of the City of Palo Alto RESOLVES, as follows: SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-1 (Residential Gas Service) is hereby amended as attached and incorporated. Utility Rate Schedule G- 1, as amended, shall become effective February 1, 2015. SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-1-G (Residential Green Gas Service) is hereby amended as attached and incorporated. Utility Rate Schedule G-1-G, as amended, shall become effective February 1, 2015. SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-2 (Residential Master-Metered and Commercial Gas Service) is hereby amended as attached and incorporated. Utility Rate Schedule G-2, as amended, shall become effective February 1, 2015. SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-2-G (Residential Master-Metered and Commercial Green Gas Service) is hereby amended as attached and incorporated. Utility Rate Schedule G-2-G, as amended, shall become effective February 1, 2015. SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-3 (Large Commercial Gas Service) is hereby amended as attached and incorporated. Utility Rate Schedule G-3, as amended, shall become effective February 1, 2015. SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-3-G (Large Commercial Green Gas Service) is hereby amended as attached and incorporated. Utility Rate Schedule G-3-G, as amended, shall become effective February 1, 2015. ATTACHMENT B * NOT YET APPROVED * 250113 sdl 6051942 0180057 jrm 09022014 SECTION 7. The Council finds that the revenue derived from the authorized adoption of the Rate Schedules enumerated herein shall be used only for the purposes set forth in Article VII, Section 2, of the Charter of the City of Palo. SECTION 8. The Council finds that the authorized adoption of the Utility Gas Rates enumerated herein, including the use of revenue derived from them, and the expenditures of funds necessary to implement them, represents the City’s cost of regulatory compliance with the state’s cap-and-trade program and is consistent with the goals of AB 32. As such, such costs represent the reasonable costs of providing service to CPAU’s gas customers. SECTION 9. The Council finds that the Utility Gas Rates enumerated herein are adopted for the purposes of ensuring the City’s compliance with the state’s cap-and-trade program and such action is statutorily exempt from CEQA review pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. l5273(a). After reviewing the staff reports presented to Council, the Finance Committee and the Utilities Advisory Commission, the Council incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: ___________________________ ___________________________ City Clerk Mayor APPROVED AS TO FORM: APPROVED: ___________________________ ___________________________ Sr. Deputy City Attorney City Manager ___________________________ Director of Utilities ___________________________ Director of Administrative Services RESIDENTIAL GAS SERVICE UTILITY RATE SCHEDULE G-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-1-1 Effective 1x-1-20135 dated 71-1-20123 Sheet No G-1-1 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from City of Palo Alto Utilities: 1. sSeparately-metered single-family residential Customers.dwellings receiving natural gas service from the City of Palo Alto Utilities. 1.2. This schedule also applies to individuallySeparately-metered multi-family residential Customersdwellings in a multi-family residential facilitiescomplex. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides natural gGas Sservice. C. UNBUNDLED RATES: Per Service Monthly Service Charge: ..........................................................................................................$9.88 Tier 1 Rates: Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .......................................... $0.10-$2.00 2.Cap and Trade AdministrativeCompliance Charge ..........................$0.00- $0.250074 3. Transportation ................................................................................... $0.0435 Distribution Charge: .............................................................................................$0.38834392 Tier 2 Rates: (All usage over 100% of Tier 1) Supply Charges: 1. Commodity (Monthly Market Based) .......................................... $0.10-2.00 2.Cap and Trade AdministrativeCompliance Charge ...........................$0.00- $0.250074 3. Transportation .................................................................................... $0.0435 Distribution Charge: .............................................................................................$0.90379546 ATTACHMENT B, Exhibit A RESIDENTIAL GAS SERVICE UTILITY RATE SCHEDULE G-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-1-2 Effective 1x-1-20135 dated 71-1-20123 Sheet No G-1-2 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Ttaxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Ccharge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Mmeter. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Commodity and Cap and Trade Compliance Ccharges will fall within the minimum/maximum ranges set forth in Section C. 2. Seasonal Rate Changes: The Summer period is effective April 1 to October 31 and the Winter period is effective from November 1 to March 31. When the billing period includes use in both the Summer and the Winter periods, the usage will be prorated based on the number of days in each seasonal period, and the charges based on the applicable rates for each period. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Calculation of Usage Tiers Tier 1 natural gas usage shall be calculated and billed based upon a level of 0.667 therms per day during the Summer period and 2.0 therms per day during the Winter period, rounded to the nearest whole therm, based on meter reading days of service. As an example, for a 30 day bill, the Tier 1 level would be 20 therms during the Summer period and 60 therms during the Winter period months. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. {End} RESIDENTIAL GREEN GAS SERVICE UTILITY RATE SCHEDULE G-1-G CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 71-1-20145 New Sheet No G-1-G-1 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto Utilities under the PaloAltoGreen Gas Program: 1. Separately-metered single-family residential Customers. 2. Separately-metered multi-family residential Customers in multi-family residential facilities. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides Gas Service. C. UNBUNDLED RATES: Per Service Monthly Service Charge: ..........................................................................................................$9.88 Tier 1 Rates: Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .......................................... $0.10-$2.00 2. Administrative Cap and Trade Compliance Charges ........................$0.00-$0.25$0.0074 3. Transportation ................................................................................... $0.0435 Distribution Charge:.............................................................................................$0.38834392 PaloAltoGreen Gas Charge .................................................................................. $0.1200 Tier 2 Rates: (All usage over 100% of Tier 1) Supply Charges: 1. Commodity (Monthly Market Based) .......................................... $0.10-2.00 2. AdministrativeCap and Trade Compliance Charges..........................$0.00-$0.25$0.0074 3. Transportation .................................................................................... $0.0435 Distribution Charge:.............................................................................................$0.90379546 PaloAltoGreen Gas Charge .................................................................................. $0.1200 D. SPECIAL NOTES: RESIDENTIAL GREEN GAS SERVICE UTILITY RATE SCHEDULE G-1-G CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 71-1-20145 New Sheet No G-1-G-2 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Ttaxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity cCharge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Mmeter. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Commodity and Cap and Trade Compliance Ccharges will fall within the minimum/maximum ranges set forth in Section C. 2. Seasonal Rate Changes: The Summer period is effective April 1 to October 31 and the Winter period is effective from November 1 to March 31. When the billing period includes use in both the Summer and the Winter periods, the usage will be prorated based on the number of days in each seasonal period, and the charges based on the applicable rates for each period. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Calculation of Usage Tiers Tier 1 natural gas usage shall be calculated and billed based upon a level of 0.667 therms per day during the Summer period and 2.0 therms per day during the Winter period, rounded to the nearest whole therm, based on meter reading days of service. As an example, for a 30 day bill, the Tier 1 level would be 20 therms during the Summer period and 60 therms during the Winter period months. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 4. PaloAltoGreen Gas Program Description and Participation PaloAltoGreen Gas provides for the reduction of green-house gas (GHG) emissions associated with a Customer’s Gas usage, through the purchase of certified environmental offsets, with a preference to projects located in California. Purchases are made to match RESIDENTIAL GREEN GAS SERVICE UTILITY RATE SCHEDULE G-1-G CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 71-1-20145 New Sheet No G-1-G-3 100% of the therm usage at the Customer’s premises every month. Customers choosing to participate shall fill out a PaloAltoGreen Gas Program application provided by the Customer Service Center. {End} RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE UTILITY RATE SCHEDULE G-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-2-1 Effective 1-1-20135 dated 7-1-2012 Sheet No G-2-1 A. APPLICABILITY: This schedule applies to the followingnon-residential Customers receiving Gas Service from the City of Palo Alto Utilities: 1. Commercial Customers who use less than 250,000 therms per year at one site. 1.2. a single address. This schedule also applies to Mmaster-metered residential Customersservices in multi-family residential facilities. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides natural gGas sService. C. UNBUNDLED RATES: Per Service Monthly Service Charge: ........................................................................................................$74.86 Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .................................... $0.10-$2.00 2. Administrative Cap and Trade Compliance Charges ........................$0.00740.00- 0.25 3. Transportation .................................................................................... $0.0435 Distribution Charge: ........................................................................................................$0.56386147 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Ttaxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity cCharge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Mmeter. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE UTILITY RATE SCHEDULE G-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-2-2 Effective 1-1-20135 dated 7-1-2012 Sheet No G-2-2 sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Commodity and Cap and Trade Compliance Ccharges will fall within the minimum/maximum ranges set forth in Section C. {End} RESIDENTIAL MASTER-METERED AND COMMERCIAL GREEN GAS SERVICE UTILITY RATE SCHEDULE G-2-G CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 17-1-20154 New Sheet No G-2-G-1 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto Utilities under the PaloAltoGreen Gas Program: 1. Master-metered residential Customers in multi-family residential facilities. 2. Commercial Customers who use less than 250,000 therms per year at one site. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides Gas Service. C. UNBUNDLED RATES: 1. 100% Renewable/Full Green option: Per Service Monthly Service Charge: ............................................................................................$74.86 Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .......................................... $0.10-$2.00 2. Administrative Cap and Trade Compliance Charges ..............................$0.00-0.250.0074 3. Transportation .......................................................................................... $0.0435 Distribution Charge: ............................................................................................$0.56386147 PaloAltoGreen Gas Charge .................................................................................. $0.1200 2. 100 Therm block option: Per Service Monthly Service Charge: ............................................................................................$74.86 Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .......................................... $0.10-$2.00 2. Cap and Trade Compliance ChargesAdministrative ...............................$0.00-0.250.0074 3. Transportation .......................................................................................... $0.0435 Distribution Charge: ............................................................................................$0.56386147 RESIDENTIAL MASTER-METERED AND COMMERCIAL GREEN GAS SERVICE UTILITY RATE SCHEDULE G-2-G CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 17-1-20154 New Sheet No G-2-G-2 PaloAltoGreen Gas Charge (per 100 therm block) .............................................. $12.00 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or tTaxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity cCharge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer’s mMeter. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Commodity and Cap and Trade Compliance Ccharges will fall within the minimum/maximum ranges set forth in Section C. 2. Request for Service A qualifying Customer may request service under this schedule for more than one account or meter if the accounts are located on one. A site consists of one or more contiguous parcels of land with no intervening public right-of-ways (e.g. streets). 3. PaloAltoGreen Gas Program Description and Participation PaloAltoGreen Gas provides for the reduction of green-house gas (GHG) emissions associated with a Customer’s gas usage, through the purchase of certified environmental offsets, with a preference to projects located in California. Purchases are made to match 100% of the therm usage at the Customer’s facility every month (the 100% Renewable/Full Green option), or in 100 therm blocks. Customers choosing to participate shall fill out a PaloAltoGreen Gas Program application provided by the Customer Service Center. RESIDENTIAL MASTER-METERED AND COMMERCIAL GREEN GAS SERVICE UTILITY RATE SCHEDULE G-2-G CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 17-1-20154 New Sheet No G-2-G-3 {End} LARGE COMMERCIAL GAS SERVICE UTILITY RATE SCHEDULE G-3 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-3-1 Effective 1-1-20153 dated 7-1-2012 Sheet No G-3-1 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto Utilities: 1. large cCommercial Customers who use at least 250,000 therms per year at one site. 1.2. Customers and toat City-owned generation facilities. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides natural gas service. C. UNBUNDLED RATES: Per Service Monthly Service Charge: $361.18 Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .................................................... $0.10-$2.00 2. Administrative Cap and Trade Compliance Charges ................. $0.00740.00-0.25 3. Transportation ...............................................................................................$0.0435 Distribution Charge: .....................................................................................................$0.55626071 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or tTaxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Ccharge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer’s mMeter. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade LARGE COMMERCIAL GAS SERVICE UTILITY RATE SCHEDULE G-3 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No G-3-2 Effective 1-1-20153 dated 7-1-2012 Sheet No G-3-2 Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Commodity and Cap and Trade Compliance Ccharges will fall within the minimum/maximum ranges set forth in Section C. 2. Request for Service A qualifying Customer may request service under this schedule for more than one account or meter if the accounts are located on one site. A site consists of one or more contiguous parcels of land with no intervening public right-of- ways (e.g. streets). 3. Changing Rate Schedules Customers may request a rate schedule change at any time to any applicable City of Palo Alto full-service rate schedule. Customers served under this rate schedule may elect Gas Direct Access at any time. {End} LARGE COMMERCIAL GREEN GAS SERVICE UTILITY RATE SCHEDULE G-3-G CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 17-1-20154 New Sheet No G-3-G-1 A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto Utilities under the PaloAltoGreen Gas Program: 1. Commercial Customers who use at least 250,000 therms per year at one site. 2. Customers at City-owned generation facilities. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides Gas Service. C. UNBUNDLED RATES: 1. 100% Renewable/Full Green option: Per Service Monthly Service Charge: $361.18 Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .......................................................... $0.10-$2.00 2. Cap and Trade Compliance Charges Administrative ....................... $0.00740.00-0.25 3. Transportation .....................................................................................................$0.0435 Distribution Charge: .........................................................................................$0.55626071 PaloAltoGreen Gas Charge: ......................................................................................$0.1200 2. 100 Therm block option: Per Service Monthly Service Charge: $361.18 Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .......................................................... $0.10-$2.00 2. Cap and Trade Compliance Charges Administrative ....................... $0.00-0.250.0074 3. Transportation .....................................................................................................$0.0435 Distribution Charge: .........................................................................................$0.55626071 PaloAltoGreen Gas Charge (per 100 therm block): ....................................................$12.00 LARGE COMMERCIAL GREEN GAS SERVICE UTILITY RATE SCHEDULE G-3-G CITY OF PALO ALTO UTILITIES Issued by the City Council Effective 17-1-20154 New Sheet No G-3-G-2 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or tTaxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity cCharge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer’s mMeter. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required. The Commodity and Cap and Trade Compliance Ccharges will fall within the minimum/maximum ranges set forth in Section C. 2. Request for Service A qualifying Customer may request service under this schedule for more than one account or meter if the accounts are located on one site. A site consists of one or more contiguous parcels of land with no intervening public right-of-ways (e.g. streets). 3. PaloAltoGreen Gas Program Description and Participation PaloAltoGreen Gas provides for the reduction of green-house gas (GHG) emissions associated with a Customer’s gas usage, through the purchase of certified environmental offsets, with a preference to projects located in California. Purchases are made to match 100% of the therm usage at the Customer’s facility every month, (the 100% Renewable/Full Green option), or in 100 therm blocks. Customers choosing to participate shall fill out a PaloAltoGreen Gas Program application provided by the Customer Service Center. {End} EXCERPTED DRAFT MINUTES OF THE OCTOBER 1, 2014 UTILITIES ADVISORY COMMISSION MEETING ITEM 2: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend Council Amend the City’s Cap-and-Trade Revenue Utilization Policy to Cover the Use of Freely Allocated Allowances for the Gas and Electric Utilities, and Amend Rate Schedules G-1, G-1-G, G-2, G-2-G, G-3 and G-3-G to Add a Rate Component for Cap-and-Trade Regulatory Compliance Costs and Combine the Administrative and Transportation Charges with the Distribution Charges Resource Planner Eric Keniston stated that California Air Resources Board (CARB) established the cap-and-trade program as part of the implementation of the Global Warming Solutions Act (AB32). He described the proposed amendments to the City's policy on the use of cap-and- trade allowance revenue to include the Gas Utility that will be included in CARB's cap-and-trade program starting in January 2015. He stated that the compliance obligation for electricity lie s with generators and importers. The City of Palo Alto Utilities’ (CPAU’s) Electric Utility is allocated free allowances from CARB to be used for compliance or for sale into the cap-and- trade auction. CPAU typically has no compliance obligation for its Electric Utility. Keniston said that in January 2015, gas utilities are added to the cap-and-trade program, and the compliance obligation is based on gas sales to end users so CPAU’s Gas utility will have a compliance obligation. CPAU will be allocated free allowances for its Gas Utility, but they may not be enough to meet total compliance obligation. In addition, a portion of the freely allocated allowances must be sold into the cap-and-trade auction. Commissioner Melton asked why allowances have to be sold into the auction and then must be bought back in the auction instead of being netted out. Compliance Manager Debbie Lloyd said that CARB wanted the cost of the allowances to be passed through to customers so it designed the program to require gas utilities to buy part of its compliance obligation in the auction and for those costs to be passed on to the end use customers. She added that even for the electric utility, the costs are passed to consumers since the electricity costs containinclude the cost of other GHG reducing programs such as the renewable portfolio standard and the allowance costs paid by the generators for compliance that they pass through in the market prices. Keniston illustrated how the program would work with the use of a numerical example. He said that the impact on gas rates for the first year of the program is expected to be about 2 cents per therm, or less than a 2% rate impact, if the allowance prices are at the auction's floor price, which has been where the allowances have traded since the start of the cap-and-trade auction ATTACHMENT C in 2012. If there was a shortage of allowances in the auction, prices of the allowances could rise to the auction cost containment reserve price. In that case, the rate impact for the first year of the program would be about 9 cents per therm. In the fifth year of the program, the rate impact could range from 5 cents per therm (if the allowances were trading at the floor price in the auction) up to about 23 cents per therm (if the allowances were tra ding at the reserve price). The revenue from the allowances that must be sold into the auction could range from about $500,000 in the first year to over $1 million in the fifth year if the allowances were trading at the floor price in the auction. Keniston said that per the proposed policy, CPAU must use allowance revenues for four proposed uses. The four proposed uses are: a. Investment in energy efficiency programs for the natural gas portfolio and retail customers; b. Purchases or investment in cost effective renewable bio-gas resources for the gas portfolio; c. Investment in other carbon reduction activities for the natural gas utility, including system maintenance or replacement to reduce fugitive gas emissions; and d. Rebates to natural gas retail ratepayers. Rebates, if provided, must be allocated on a non-volumetric basis as stated in Title 17 CCR Section 95893 (d)(3). Noticing that one of the options for using the revenue is for rebates to customers on a non - volumetric basis, Commissioner Melton asked how the rebate would be implemented, especially for commercial customers. Lloyd said that the language in the regulation says “non- volumetric” so how any rebate would have to be designed to be non -volumetric. Vice Chair Waldfogel asked what the intent of the regulation is. Lloyd indicated that the goal is to reach the emission reductions outlined in AB 32 and the cap part of the cap -and-trade program will reduce the number of allowances provided each year and the trade part is used so that those who can economically reduce emissions at a cost below the allowance price will have an incentive to do that since there is a cost for carbon emissions. Vice Chair Waldfogel asked whether staff has modeled what it takes to reduce gas use commensurate with the declining allowance cap. Senior Resource Planner and Rates Manager Jon Abendschein said that he has used the financial models to evaluate that and determined that the utility can handle the decline in use and, therefore, sales and that the plan can accommodate those costs. Chair Foster asked if fuel switching can be included in the uses of the funds. Keniston indicated that the policy does not preclude fuel switching programs. Senior Deputy City Attorney Jessica Mullan indicated that the threshold question of ensuring that the use proposed met the overarching guideline that the benefits of allowance sales go to gas rate payers so fuel switching must, then, be cost-effective. Chair Foster stated that fuel switching would meet the policy objectives and financial incentives would increase as the number of free allowances decrease. He said that if the City decreases the use of natural gas, costs will decrease because the City doesn’t have to buy allowances. Chair Foster again stated that he would support adding a fifth allowable use for fuel switching programs to the policy. Mullan said that this could be problematic if the threshold question is not addressed. She indicated that the policy points are very broad and that the City would want to do additiona l legal analysis if it included a very specific policy around fuel switching. Commissioner Eglash said that the issues go far beyond legal issues and that adding fuel switching is not consistent with the legislature's intent and would not necessarily bene fit gas ratepayers. Commissioner Eglash stated that there is a whole slew of issues around fuel switching and the City would not be doing gas or electric ratepayers any favors by using allowance revenue funds for fuel switching. He added that adding fuel switching to the proposed uses of the funds is a perversion of the intent of the policy and the proper use of allowance revenue. Vice Chair Waldfogel said that the previous presentation on the Sustainability/Climate Action Plan showed that the use of natural gas must decline to meet the GHG emissions reduction goals and asked how fuel switching could be called a perversion of the legislature's intent. He indicated that he has trouble seeing what intent there might be other than moving away from natural gas as a fuel. Commissioner Eglash said that the electric utility system is very complicated and although by some measures Palo Alto’s electric supplies are carbon neutral, the electric grid is far from carbon neutral as a large system. He said the thinking behind the cap-and-trade program is to put a price on carbon so that market forces can put rational thinking into actions to take and that if the commission wants to debate the merits of fuel switching, we should have that discussion, but it's a separate discussion from this decision on how to spend allowance revenue from the cap-and-trade auction. Keniston stated that another part of the recommendation is to add a new rate component that’s a pass-through of the cost for allowances, which could be up dated quarterly based on market conditions, sales volumes; and quantity of compliance instruments required. Commissioner Chang said that the policy proposed by staff makes sense. She asked how a rebate would be presented on the bill. Keniston said tha t it would show up as a credit on the bill. Commissioner Chang said that not very many people study their utility bills and asked if there were any best practices for billing and number of lines to be shown on a bill. Director Fong said that there are no real benchmarks and CPAU is unique in that it bills for 7 different utilities on one bill. Commissioner Hall asked if there is any alternative in the recommendation, which basically says that the City will incur additional costs and must pass those costs as a separate line item on the bill. Keniston indicated that the cost must be passed through to customers and the proposed new line item would appear as a supply charge with the commodity charge. Commissioner Hall stated that the proposed policy is broad enough. He said that the revenues should be used for programs that support the big picture effort to reduce GHG emissions and not be returned ratepayers. He said that he hoped that staff would narrow down what it recommends spending the revenues on when the item comes back to the UAC. Lloyd stated that the basis for providing the utility the free allowances is to mitigate cost impact to customers. She said that the free allowances are not a gift to utilities, but that the utility is acting as the steward for the ratepayers and that the revenues must be used for the sole benefit of ratepayers. Lloyd said that CPAU must report annually to CARB on how it used the allowance revenues. Lloyd explained that the default for the investor -owned utilities (IOUs) regulated by the California Public Utilities Commission (CPUCU) is to give ratepayers a rebate— the “climate dividend”—and that this is the only option for the IOUs. Staff’s recommendation is to expand the uses to more than a rebate, and to have programs that reduce GHG emissions and have a benefit to ratepayers. Commissioner Chang said she preferred that the funds be spent on gas use efficiency programs. Commissioner Eglash agreed and said that the policy is so broad that it doesn't provide much policy guidance. Director Fong stated that the policy is broad since staff doesn’t know how much revenue will be received and whether certain programs that could be funded under the policy will be cost-effective. ACTION: Motion: Commissioner Hall made a motion to accept the staff recommendation but indicate that the UAC wants to see how the revenues are spent and that it doesn't support the rebate. Commissioner Eglash seconded the motion. Proposed Amendment to the Motion: Commissioner Eglash offered a friendly amendment to indicate a preference for programs that reduce GHG emissions from gas utilization. Commissioner Hall accepted the amendment. Chair Foster said that the proposed policy can accommodate fuel switching. Director Fong stated that the amount of revenues that may be available may not be large. She reminded that the program revenues in the first year are expected to be under $500,000. Second Proposed Amendment to the Motion: Chair Foster proposed an amendment to add: “fuel switching and” so that the third proposed use in the policy would read: “Investment in other carbon reduction activities for the natural gas utility, including fuel switching and system maintenance or replacement to reduce fugitive gas emissions”. Vice Chair Waldfogel seconded the amendment. Commissioner Hall declined to accept the amendment. Substitute Motion: Chair Foster proposed a substitute motion to add: “fuel switching and” so that the third proposed use in the policy would read: “Investment in other carbon redu ction activities for the natural gas utility, including fuel switching and system maintenance or replacement to reduce fugitive gas emissions”. Vice Chair Waldfogel seconded the motion. Commissioner Eglash indicated that fuel switching is not necessarily a good thing for the environment given the additional use of electricity. He said that there is a risk of going from a more efficient use of natural gas to a less efficient use of electricity. In addition, the capital cost of new equipment is high, especially for those who are replacing appliances before the end of their life. He added that it warrants more study before explicitly adding it to the policy. He added that it is far from harmless to add to the policy as that would indicate that the potenti al use is legitimate and has some form of endorsement. Chair Foster says that adding fuel switching programs as a possible use does not mandate that fuel switching programs be funded, but simply lists it as an option for the future. Vice Chair Waldfogel agreed that it does not suggest that a decision has been made as to the value of fuel switching. It does not suggest that any decisions have been made, but it allows it to be considered and to catalyze some discussions. Vice Chair Waldfogel noted that me aningful GHG reductions tools are all on the table and that whether it’s good or bad to do fuel switching, the fact remains that burning gas causes GHG emissions. He added that it is not harmful at this point to add fuel switching to the policy and he not ed that other things are included in the proposed policy such as biogas, which is not cost-effective at this time. Commissioner Melton agreed with Commissioner Eglash and indicated that fuel switching merits more discussion. He said that the UAC should t alk about fuel switching on a future agenda, but that for, now, it should be left out of the policy. Commissioner Melton stated that staff should probably have an opportunity to talk to CARB staff about the idea of fuel switching as an acceptable use and asked if that language was approved by CARB. Lloyd indicated that the language in the policy is not CARB language, but it is similar to the language in the electric policy that CARB did not indicate it had a problem with. Commissioner Hall indicated that one reason he did not support the substitute motion is that there is not a huge amount of money and there are enough good choices on the list already. Vote on the Substitute Motion: The substitute motion failed (2-4 with Chair Foster and Vice Chair Waldfogel voting yes and Commissioners Chang, Eglash, Hall and Melton voting no. Commissioner Cook was absent). Vote on the Original Amended Motion: The original amended motion (to recommend Council approve staff’s recommendation policy as presented with a statement to prefer funding for programs that reduce GHG emissions from gas utilization) passed unanimously (6-0 with Commissioner Cook absent). Commissioner Hall indicated that the memo was confusing and recommended staff revise the executive summary to add clarity about the proposal.