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HomeMy WebLinkAboutStaff Report 5542 City of Palo Alto (ID # 5542) Finance Committee Staff Report Report Type: Action Items Meeting Date: 3/3/2015 City of Palo Alto Page 1 Summary Title: Preliminary Financial Forecasts and Utilities Rate Changes Title: Preliminary Financial Forecasts and Rate Changes for Electric, Gas, Wastewater Collection, and Water Utilities From: City Manager Lead Department: Utilities Recommendation This item is for discussion and no action is requested. Staff will use input from the Finance Committee on its preliminary rate projections for the Electric, Gas, Wastewater Collection, and Water utilities to finalize the Financial Plans and inform its formal recommendations on rates adjustments. Executive Summary The attached presentation describes staff’s preliminary forecasts for the Electric, Gas, Wastewater Collection, and Water Utilities. A similar presentation was provided to the Utilities Advisory Commission (UAC) at its February 4, 2015 meeting. It should be noted that staff has updated the preliminary forecasts for the Water Utility since the UAC’s February 4, 2015 meeting, and these updated forecasts are included in the attached presentation. They include changes to the water rate forecasts based on an updated wholesale rate forecast provided by the SFPUC subsequent to the UAC meeting. SFPUC’s wholesale rate is now forecasted to increase from $2.93/per hundred cubic feet (CCF) to $3.83/CCF (30.7%) instead of the previously projected $3.42/CCF. This results in the need for the City to propose a 12% rate increase for July 1, 2015 rather than the 7% preliminary rate change previously discussed with the UAC. Staff’s proposal also now assumes that drought restrictions will continue through 2015 and that consumption will not return to pre-drought levels, which is consistent with what has happened following previous droughts. These changes caused the projected rates to increase by 8% per year for FY 2017 through FY 2019 rather than the 7% per year in the preliminary forecast. To mitigate the customer bill impact of a larger water rate increase for FY 2016, staff also proposes to defer the gas rate increase that was in the preliminary forecast. City of Palo Alto Page 2 The retail rate increase trajectory for the preliminary financial forecasts over the next five fiscal years is shown in the table below. The rate changes shown are approximate based on the system average rate. Actual rate changes will be based on the cost of service methodologies established by the cost of service studies for each utility and may differ slightly from these projections. FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Electric Utility 0% 5% 5% 3% 2% Gas Utility* 0% 7% 4% 4% 4% Wastewater 9% 9% 9% 9% 6% Water Utility 12% 8% 8% 8% 3% Bill Change** (%) 6% 7% 7% 6% 4% ($/mo) $10.79 $14.10 $13.83 $13.80 $8.13 Refuse*** 9% 8% 8% 3% 3% Bill Change w/ Refuse** (%) 7% 8% 7% 6% 3% ($/mo) $14.51 $17.81 $17.55 $15.34 $9.72 * Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates will vary monthly with wholesale market fluctuations. ** Change in estimated median residential bill, $178.31 as of June 30, 2014 ($218.45 with Refuse ***No forecast available past FY 2018, inflationary increases assumed. . Staff would like to get input from the Finance Committee in advance of finalizing the Utilities Financial Plans and developing recommendations for rate changes that would be effective July 1, 2015. The proposed Financial Plans and rate adjustment recommendations are currently scheduled to be presented to the Finance Committee in April. Background Every year staff presents the UAC and Finance Committee with financial forecasts for the Electric, Gas, Water, and Wastewater Collection Utilities and recommends any rate adjustments required to maintain their financial health. These forecasts are memorialized in Financial Plans that comprehensively discuss the outlook for each utility. Commission Review The UAC reviewed the preliminary financial forecasts at its February 4, 2015 meeting. Council Member Scharff, the Council liaison to the UAC was also in attendance. No recommendation was requested at that meeting, but staff sought input from Commissioners before finalizing the Financial Plans and rate adjustment recommendations. One Commissioner requested that the UAC be briefed on the reasons for the increasing wastewater treatment costs, and staff intends to include a presentation on the Regional Water City of Palo Alto Page 3 Quality Control Plant’s Long Range Facility Plan at the UAC’s March 4, 2015 meeting when the Wastewater Collection Utility Financial Plan will be reveiwed. Discussion of the drought scenarios prompted one Commissioner to note that water consumption may not return to pre- drought levels once the drought is over. Staff has included some discussion of that phenomenon in the attached presentation. Commissioners asked whether it would be possible to have either: 1) no rate increase for the Gas or Wastewater Collection Utilities for FY 2016 (necessitating a higher incrase in FY 2017); or 2) a higher rate increase in FY 2016 followed by a lower, or no, rate increase in FY 2017. The Council liaison also expressed interest in this possiblity. In response to this input, staff included a slide in the attached presentation showing a possible scenario in which the gas rates could be delayed and a larger rate increase for FY 2016 for the Wastewater Collection Utility would be followed by no rate increase for FY 2017. One Commissioner also noted how important it was for staff to have a good communications plan to help customers understand the rate increases. Staff agrees with this assessment. Next Steps The UAC is scheduled to review the Financial Plans and proposed rate adjustments for the Water and Wastewater Collection utilities on March 4, 2015. The UAC will then review the Electric and Gas Utility Financial Plans and proposed Gas rate adjustments on April 1, 2015. The Finance Committee is tentatively scheduled to review the Financial Plans and proposed rate adjustments on April 7, 2015 (for the Water and Wastewater Collection Utilities) and on April 21, 2015 (for the Electric and Gas Utilities. In addition, as part of the development of the FY 2016 proposed budgets, staff is evaluating the CIP Reserve levels Once the Finance Committee has provided its recommendation, notification of any recommended Refuse, Water, and Wastewater Collection rate increases and the opportunity to protest the proposed changes will be sent to customers as required by Article XIIID of the State Constitution (added by Proposition 218). The Financial Plans and proposed rate schedules will then go to the City Council with the FY 2016 budget, at which time the public hearing required by Article XIIID of the State Constitution will be held. Environmental Impact The Finance Committee’s review of these Financial Plans 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: Presentation on the Preliminary Utilities Long-term Financial Forecasts (PDF)  Attachment B: Draft Minutes of the February 4, 2015 Utilities Advisory Commission Meeting (PDF) 1 Preliminary Financial Forecasts and Rate Changes for Electric, Gas, Wastewater Collection, and Water Utilities Finance Committee March 3, 2015 ATTACHMENT A 2 Financial Forecast Summary §Reviewing four funds: Electric, Gas, Water and Wastewater Collection §Refuse rate projections included for information §Staff intends to propose Water,and Wastewater Collection rate changes for FY 2016 §Gas commodity rates vary with market §Forecasting the need for higher FY 2016-2019 rate increases than forecasted last year §Financial Plans with detailed cost and revenue information will be provided to the UAC in March/April and Finance in April 3 Preliminary Rate Projections FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Electric Utility 0%5%5%3%2% Gas Utility*0%7%4%4%4% Wastewater 9%9%9%9%6% Water Utility 12%8%8%8%3% Bill Change**(%)6%7%7%6%4% ($/mo)$10.79 $14.10 $13.83 $13.80 $8.13 Refuse***9%8%8%3%3% Bill Change w/ Refuse ** (%)7%8%7%6%3% ($/mo)$14.51 $17.81 $17.55 $15.34 $9.72 *Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates will vary monthly with wholesale market fluctuations **Change in estimated median residential bill, $178.31 as of June 30, 2014 ($218.45 with Refuse) ***No forecast available past FY 2018, inflationary increases assumed. 4 Comparison to Last Year’s Projected Bill Changes 0% 1% 2% 3% 4% 5% 6% 7% 8% FY 2016 FY 2017 FY 2018 FY 2019 Current Previous 5 Change to CIP Reserve to be Proposed §Proposal to be included in all utility Financial Plans §Expand purpose of Capital Improvement Program (CIP) Reserve: §Current purpose: To be used to hold funds to support large future one-time projects when needed §Additional proposed purpose: To also be used as a cash flow and contingency reserve for CIP expenditures §Why: §City will no longer automatically reappropriate CIP funds after FY 2015. §Reappropriations reserve currently acts as cash flow reserve for CIP program. §When CIP reappropriations stop at the end of FY 2015, the funds in the Reappropriations reserve will be released. §The proposed reserves structure change would allow staff to move the released funds to the CIP reserve §Proposal will include minimum and maximum guidelines for the reserve 6 Electric Utility Financial Plan, FY 2016-FY 2023 7 FY 2016 –FY 2023 Projections §FY 2016: 0% rate increase –Obtain Council authorization fora transfer of $11M from the hydro reserve for year-end FY 2015 –Obtain Council authorization for$11.4M transfer from the Supply Rate Stabilization Reserve for year-end FY 2015 §FY 2017 –FY 2023 projected actions –Complete COSA, implement July 1, 2017 or earlier if necessary –Complete development of hydro rate adjuster along with COSA –Use hydro rate adjuster and hydro stabilization reserves in case of extended drought conditions –Forecast assumes Smart Grid rollout ($3M/yr starting in FY 2019), partially funded by Water/Gas Funds. Forecast assumes the remainder is funded by the Electric Special Projects Reserve. Electric Utility 8 FY 2016 –FY 2023 ProjectionsElectric Utility 9 FY 2016 –FY 2023 Supply Reserves Electric Utility 10 Supply Operations ReserveElectric Utility 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 40,000,000 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Reserve Maximum Reserve Target Reserve Minimum Reserve (Year-End) Risk Asssessment 11 Supply Reserve AdequacyElectric Utility 12 FY 2016 –FY 2023 Distribution Reserves Electric Utility 13 Distribution Operations ReserveElectric Utility 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 Reserve Maximum Reserve Target Reserve Minimum Reserve (Year-End) Risk Assessment 14 Projected Rate Increases Comparison to FY 2015 –FY 2019 Financial Plan Forecast Changes in assumptions: §Slightly lower inflation rate for expenses §More CIP projects planned ($1M -$1.5M per year) §Commodity costs up $1M-$1.5M per year (added Hayworth solar, small market energy price increases from last year as of the time of the forecast) Electric Utility 15 Uncertainties §How long will the drought last? §Will second transmission line (resulting in TAC savings) be built? §Cost of Smart Grid implementation, use of Electric Special Projects Reserve Electric Utility 16 Gas Utility Financial Plan, FY 2016-FY 2022 17 FY 2016 –FY 2022 Projections Gas Utility 18 FY 2016 –FY 2022 Reserves Gas Utility 19 Operations Reserve Gas Utility 20 FY 2016 –FY 2022 Projections §FY 2016: 0% non-commodity rate increase §FY 2017 –FY 2022 projected actions –7% non-commodity increase in FY 2017 –Ongoing 4% non-commodity increases thereafter §Reasons for increases: –Higher ongoing CIP costs, primarily for gas main replacement ($500K to $700K per year vs. last year’s forecast) –Water and Wastewater utilities experiencing similar increases –Inflationary increases to operational costs –Increase in PG&E Transportation Rate (doubling in FY 2016) Gas Utility 21 Projected Rate Changes Comparison to FY 2015 –FY 2021 Financial Plan Forecast Changes in assumptions: §PG&E Transportation Rate rising much faster than previously projected. This has a much larger impact on PG&E customers than on Palo Alto customers. §Higher costs for main replacement Gas Utility 22 Uncertainties §Prices for main replacement currently 50% higher than historical. Will that continue? –Base case assumes they return to normal. –Continued higher cost results in an additional $1.6 to $1.8 million per year. §Is current rate of main replacement optimal? –Gas System Master Planning Study underway Gas Utility 23 Rate Changes under Various Business Cases Gas Utility 24 What Potential Costs aren’t Included in the Forecast? §Potential Revenue Loss: Long term decrease in consumption due to fuel switching –Solution: This is a long-term policy issue requiring comprehensive analysis in the context of the Sustainability and Climate Action Plan policy making process. §Potential Cost: Changes in design of Cap-and-Trade Program allowance allocations after 2020. –Solution:Assume current design will continue, but if there are changes, pass through costs to customers. §Potential Cost: Additional cross-bore program costs. –Solution:Current forecast assumes $3M additional for cross-bore program in forecast period, actual costs could be higher. Staff to return to Council in 2015 to discuss. Gas Utility 25 Wa stewater Collection Utility Financial Plan, FY 2016-FY 2021 26 FY 2016 –FY 2021 Projections Wastewater Collection Utility 27 FY 2016 –FY 2021 Reserves Wastewater Collection Utility 28 Operations Reserve Wastewater Collection Utility 29 FY 2016 –FY 2021 Projections §FY 2016 proposal: 9% rate increase –$2.64 per month change on a residential bill –Capital project cost increases §FY 2017 –FY 2021 projected actions –Ongoing 9% increases, tapering down to 6% in FY 2020 –Assumes continuing increases in treatment costs, operational costs Wastewater Collection Utility 30 Projected Rate Changes Comparison to FY 2015 –FY 2019 Financial Plan Forecast Wastewater Collection Utility 31 Uncertainties §Higher main replacement costs seen in water and gas occur here as well. How long will it continue? –Base case assumes no changes as of yet. –Similar 50% increased cost case results in higher costs of $1.5 to $1.7 million per year. §Is current rate of main replacement optimal? –Wastewater System Master Planning Study planned. Wastewater Collection Utility 32 Rate Changes under High CIP Cost Scenario Wastewater Collection Utility 33 Water Utility Financial Plan, FY 2016-FY 2023 34 FY 2016 –FY 2023 ProjectionsWater Utility 35 FY 2016 –FY 2023 ProjectionsWater Utility 36 FY 2016 –FY 2023 ProjectionsWater Utility 37 FY 2016 –FY 2023 Projections §FY 2016 proposal: –12% rate increase due to increase in wholesale water supply rates (rate increasing from $2.93/CCF to $3.83/CCF) –Continue to work to develop drought surcharge rate sheet, but do not use drought rates unless SFPUC imposes restrictions above 10% in 2015 §FY 2017 –FY 2023 projected actions –8% increases through FY 2019 –Use drought rate surcharges if drought lasts beyond 2015 Water Utility 38 Projected Rate Changes Comparison to FY 2015 –FY 2021 Financial Plan Forecast Changes in assumptions: §Larger FY 2016 SFPUC wholesale rate increase §Assumes drought continues through 2015 §Load forecast methodology revised Water Utility 0% 2% 4% 6% 8% 10% 12% 14% FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2015 - FY 2021 Financial Plan Current Forecast 39 Change in Load ForecastWater Utility 40 Uncertainties Capital Improvement Program Uncertainty: 1.Prices for main replacement are currently 50% higher than historical. Will that continue? –Base case assumes they return to normal. –Continuing with infrastructure replacements in keeping with budget and any safety considerations. 2.Is current rate of main replacement optimal? –Results from Water System Master Planning Study expected to be available in May 2015 –Could result in increase or decrease to recommended rate of replacement Water Utility 41 Rate Changes, High CIP Scenario Water Utility 42 What Potential Costs aren’t Included in the Forecast? §Potential Cost: SFPUC doing condition assessments of some Hetch Hetchy system assets not included in WSIP –Impact:Could affect commodity rates in outer years (after 2020) §Potential Cost: Seismic rehabilitation work may be required on Foothills transmission line –Solution:Consultant investigating a solution in which the transmission line is not replaced, and CPAU installs a valve and hose system (under $2M cost) to bypass earthquake breaks to do repairs Water Utility 43 What Potential Costs aren’t Included in the Forecast? §Potential Revenue Loss: Extended drought, or 20% or higher mandatory reductions required by SFPUC –Solution: Impose drought rates §Potential Revenue Loss: Post-drought consumption does not return to pre-drought levels –Impact:Forecast assumes 50% rebound in consumption. If consumption recovers fully, rate increases would not be as high. If no recovery, rate increases could be even higher. §Potential Cost:Recycled water project –Impact: Rate impact to be analyzed in 2015 Water Utility 44 Conclusion 45 Preliminary Rate Projections FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Electric Utility 0%5%5%3%2% Gas Utility*0%7%4%4%4% Wastewater 9%9%9%9%6% Water Utility 12%8%8%8%3% Bill Change**(%)6%7%7%6%4% ($/mo)$10.79 $14.10 $13.83 $13.80 $8.13 Refuse***9%8%8%3%3% Bill Change w/ Refuse ** (%)7%8%7%6%3% ($/mo)$14.51 $17.81 $17.55 $15.34 $9.72 *Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates will vary monthly with wholesale market fluctuations **Change in estimated median residential bill, $178.31 as of June 30, 2014 ($218.45 with Refuse) ***No forecast available past FY 2018, inflationary increases assumed. 46 Preliminary Financial Forecasts and Rate Changes for Electric, Gas, Wastewater Collection, and Water Utilities Finance Committee March 3, 2015 47 Backup Slides 48 Estimated Rate Projections with Alternate Gas/Wastewater Plan FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Electric Utility 0%5%5%3%2% Gas Utility*0%9%4%4%4% Wastewater 17%0%9%9%6% Water Utility 8%7%7%7%3% Bill Change**(%)6%6%6%6%3% ($/mo)$10.65 $11.10 $12.82 $12.61 $7.97 Refuse 9%8%8%3%3% Bill Change w/ Refuse ** (%)7%6%7%5%3% ($/mo)$14.37 $14.81 $16.54 $14.15 $9.56 *Gas rate changes are shown with commodity rates held constant. Actual commodity rates will vary monthly with wholesale market fluctuations **Change in estimated median residential bill, $178.31 as of June 30, 2014 ($218.45 with Refuse) ***No forecast available past FY 2018, inflationary increases assumed. 49 Estimated Rate Projections with No Rate Increases in FY 2016 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Electric Utility 0%5%5%3%2% Gas Utility*0%9%4%4%4% Wastewater 0%20%7%2%3% Water Utility 0%12%10%10%6% Bill Change**(%)0%11%8%6%4% ($/mo)$0.00 $19.96 $15.00 $13.53 $6.04 Refuse 9%8%8%3%3% Bill Change w/ Refuse ** (%)2%10%8%6%4% ($/mo)$3.72 $23.67 $18.72 $15.07 $7.63 *Gas rate changes are shown with commodity rates held constant. Actual commodity rates will vary monthly with wholesale market fluctuations **Change in estimated median residential bill, $178.31 as of June 30, 2014 ($218.45 with Refuse) 50 Estimated Rate Projections with Staggered Rate Increases FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Electric Utility 0%10%0%4%2% Gas Utility*0%9%0%9%7% Wastewater 17%0%17%0%3% Water Utility 11%0%10%10%2% Bill Change**(%)7%4%7%7%4% ($/mo)$12.58 $8.00 $13.63 $14.21 $8.64 Refuse 9%8%8%3%3% Bill Change w/ Refuse ** (%)7%5%7%6%4% ($/mo)$16.30 $11.71 $17.35 $15.75 $10.23 *Gas rate changes are shown with commodity rates held constant. Actual commodity rates will vary monthly with wholesale market fluctuations **Change in estimated median residential bill, $178.31 as of June 30, 2014 ($218.45 with Refuse) 51 FY 2014 Results §FY 2014 Financial Forecast: $2.2 million deficit §FY2015–FY2019 Financial Plan forecast: $144,000 deficit §Actual Results for FY 2014: $230,000 deficit §Significant changes from original forecast: Net Cost/ (Benefit) Type of change Lower renewable energy costs (project cancelations)($6,093,000)Cost savings Higher market purchase costs due to renewable project cancelations and low hydro $9,669,000 Cost increase Lower than projected CAISO charges*($5,197,000)Cost savings Other commodity purchase cost savings ($1,401,000)Cost savings Funds released from capital budgets ($3,897,000)Cost savings Savings in operating budgets (2,042,000)Cost savings Sales revenue lower than projected $6,483,000 Revenue decrease Other $448,000 Various NET TOTAL $2,030,000 *lower than projected transmission costs, higher congestion revenue, and favorable timing of prior month bill adjustments Electric Utility 52 FY 2015 Projections §FY 2015 –FY 2019 Financial Plan: $5.8M deficit §Current projection for FY 2015: $16.6M deficit §Significant changes from last year’s forecast: Net Cost/ (Benefit) Type of change Decrease in projected sales $1,672,000 Revenue decrease Other revenue higher than projected ($403,000)Revenue increase Drought -Western Base Resource / Reclamation cost $2,765,000 Cost increase Renewables –Ameresco interconnection payment $795,000 Cost increase Increased market purchase costs / decreased surplus rev.$8,499,000 Cost increase Transmission cost savings ($2,391,000)Cost savings Other ($137,000)Various TOTAL $10,800,000 Electric Utility 53 FY 2014 Results §FY 2014 Financial Projection: $3.09M surplus (CMR3595) §FY2015–FY2021 Financial Plan forecast: $3.92M surplus (CMR4799) §Actual Results for FY 2014: $4.7 million surplus §Significant changes from forecast: Net Cost/ (Benefit) Type of change Savings on Operations budgets ($1,210,000)Cost savings Savings in Capital project costs (midyear)($1,185,000)Cost savings Lower purchases ($845,000)Cost savings Other revenues (interest, capacity fees) were higher ($189,000)Revenue increase Sales volumes were 6% lower than forecasted $2,329,000 Revenue decrease Other ($600,000)Various TOTAL (NET)($1,700,000) Gas Utility 54 FY 2015 Projections §FY 2015 –FY 2021 Financial Plan forecast: $1.18 million surplus (CMR4799) §Current projections for FY 2015: $334,000 surplus §Significant changes from last year’s forecast: Net Cost/ (Benefit) Type of change Lower revenues (due to lower sales/commodity prices)$2,356,000 Revenue decrease Cap and Trade related allowance sales ($272,000)Revenue increase* Projected other revenue increases (PaloAltoGreen Gas, Interest Income, Connection fees, etc.) ($643,000)Revenue increase Capital project costs higher than expected $525,000 Cost increase Lower commodity costs due to lower load and prices ($1,293,000)Cost decrease Other $33,000 Various TOTAL $846,000 * Cap and Trade revenues may only be used for AB32 compliant programs for the benefit of gas ratepayers Gas Utility 55 FY 2014 Results §FY 2014 Financial Projection: $1.2M surplus (CMR 3567) §FY2015–FY2021 Financial Plan forecast: $3.3M surplus (CMR 4799) §Actual Results for FY 2014: $3.2 million surplus §Significant changes from forecast: Net Cost/ (Benefit) Type of change One year savings in treatment costs ($2,278,000)Cost savings Higher connection and capacity fees ($941,000)Revenue increase Higher operations costs $663,000 Cost increase Sales volumes were lower than forecasted $853,000 Revenue decrease Other ($297,000)Various TOTAL (NET)($2,000,000) Wastewater Collection Utility 56 FY 2015 Projections §FY 2015 –FY 2021 Financial Plan forecast: $1.55 million deficit (CMR 4799) §Current projections for FY 2015: $1.66 million deficit §Very little change from last year’s forecast. Wastewater Collection Utility 57 FY 2014 Results §FY 2014 Financial Forecast: $810K deficit §FY2015–FY2021 Financial Plan forecast: $236K deficit §Actual Results for FY 2014: $3.3 million surplus §Significant changes from forecast: Net Cost/ (Benefit) Type of change Savings in Operations budgets ($1,576,000)Cost savings Sales volumes were 5% higher than forecasted ($2,227,000)Revenue increase SFPUC rate was 9% lower than projected (partially offset by purchase volumes that were 5% higher) ($648,000)Cost savings Other revenues (interest income, capacity fees) were higher ($1,590,000)Revenue increase Transfers out lower than forecasted ($1,219,000)Cost savings Capital project costs higher than projected $3,135,000 Cost increase TOTAL (NET)($4,125,000) Water Utility 58 FY 2015 Projections §FY 2015 –FY 2021 Financial Plan forecast: $3.1 million deficit, assumed drought restrictions entire fiscal year §Current projections for FY 2015: –If drought restrictions are lifted in March: no surplus/deficit –If drought restrictions continue: $500,000 deficit §Significant changes from last year’s forecast: Net Cost/ (Benefit) Type of change Savings in Operations budgets ($1,000,000)Cost savings SFPUC rate 5% lower than projected ($670,000)Revenue increase Other revenues (interest income, capacity fees) are higher ($450,000)Revenue increase Sales revenue projections higher ($740,000)Revenue increase TOTAL ($2,860,000) Water Utility 59 Preliminary Average Residential Bill Projections FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 Electric Utility 0%3%4%3%2% Gas Utility*4%4%4%4%5% Wastewater 9%9%9%9%7% Water Utility 5%6%4%3%4% Refuse 9%8%8%3%3% Overall Bill Impact**5%6%5%4%4% *Gas rate changes are shown with commodity rates held constant. Actual commodity rates will vary monthly with wholesale market fluctuations **Average residential bill 60 Rate Changes, Various Business Cases Water Utility EXCERPTED DRAFT MINUTES OF THE FEBRUARY 4, 2015 UTILITIES ADVISORY COMMISSION MEETING ITEM 2: DISCUSSION: Preliminary Financial Forecasts and Rate Changes for Electric, Gas, Wastewater Collection, and Water Utilities Senior Resource Planner Jon Abendschein stated that this is an informational item, but that the comments from the UAC are very helpful for staff while finalizing the Financial Plans. He said the presentation would include information on the Electric, Gas, Wastewater Collection, and Water Utilities, but some information on Refuse rates was also included for context. He said the City had been able to hold rates steady last year, and the year before that there were no increases except to water rates. Future projected cost increases were such that holding rates steady would begin to require cuts in things like infrastructure investment. That meant that the next few years will require rate increases for the Electric, Gas, Water, and Wastewater utilities. Next year staff is proposing 3% increases for the Gas Utility, 9% for Wastewater, and 7% for Water. After that, the median residential bill is projected to increase 5-6% each year through FY 2019, a bit above inflation, and higher than that if Refuse is included. The main driver for the Electric, Gas, Water, and Wastewater increases was infrastructure investment, mainly in the City’s suppliers’ systems. Wholesale water costs were going up due to investment in the Hetch Hetchy water system, improvements to the wastewater treatment plant were underway, and our costs to transport gas across PG&E’s system were going up as they overhaul their system to make it safer. In the past, in the face of cost increases like these, the City has been exemplary about not cutting back on infrastructure investment, and has continued to make the capital investments needed to keep the system running safely and to avoid pushing a large capital investment need on to future ratepayers. This forecast assumes that practice continues. He stated that this year’s bill projections were slightly higher than last year’s, which was mainly related to higher infrastructure projections. Abendschein said staff was also planning to propose one change to the Reserves Management Practices that would apply to all four utilities. The change would not have any short term impact on the financial forecasts, but it would help staff manage a change in City capital improvement project (CIP) budgeting practices. That change was expected to result in a release of funds from the Reappropriations Reserve. The purpose of the CIP Reserve would be changed for each utility to make it a cash flow and contingency reserve, and funds released from the Reappropriations Reserve would be added to the CIP Reserve. Staff was also planning to propose adding minimum and maximum guidelines to the CIP Reserve. ATTACHMENT B Commissioner Hall asked if the CIP reserve would have a specific plan for CIP reserve replenishment. Abendschein stated that staff would make an initial reserves management practices proposal with the upcoming Financial Plans, but plans to review those practices and may propose changes next year. Electric Utility Abendschein stated that for July 1, 2015 staff was proposing no rate increase for the electric utility. Reserves were adequate to avoid a rate increase until FY 2017, even with the drought. Delaying the rate increase would allow the City time to do a thorough job with an electric cost of service study before rates were changed again. He said that the drought had resulted in additional costs that staff planned to propose to fund from reserves. Staff had originally planned to draw down the Rate Stabilization Reserve by $5.8 million, but now planned to propose to transfer $11 million from the hydro stabilization reserve and $11.4 million drawdown of the rate stabilization reserve. Even with the transfer, reserves were adequate to manage the utility’s financial position even if the drought continued through FY 2016. Abendschein showed the utility’s financial projections. He said 5% rate increases were projected in FY 2017 and FY 2018, and subsequently rates were projected to be stable over the long term. The increase in costs was mostly associated with renewable energy projects coming online. The ratepayers were still getting a great value from their electric utility. Rates were lower than most other utilities in the state, and substantially lower than PG&E. PG&E had increased their rates 8% in 2011, 3-4% since then, and they had future 3-4% rate increases planned. By contrast, the City had not changed electric rates since July 1, 2009. Abendschein showed the reserves levels over the forecast period. The drought had an impact on supply reserves due to low hydroelectric generation, but there were still ample reserves remaining to protect against continuing drought. Both supply and distribution reserve levels were projected to stay within the reserve guidelines through the forecast period, and well above the level of staff’s risk assessments. Abendschein showed the current rate projections compared to the previous year’s projections, noting that the lack of a rate increase for FY 2016 meant slightly higher rate increases in the following year, but that the current rate change trajectory would result in roughly the same customer bill in FY 2020 as projected the previous year. He noted some uncertainties in the forecast, including the length of the drought (and its effect on hydroelectric generation) and the timeline for the new transmission line the City had been investigating. The forecast also assumed the use of the Electric Special Projects Reserve (previously known as the Calaveras Reserve) for the cost of Smart Grid implementation. That was not a formally adopted policy yet, and if a different policy was adopted, and the smart grid rollout was funded by rates, it could result in higher rates in the short term. Commissioner Hall asked if the chart showing the drawdown in reserves in FY 2015 and FY 2016 assumed a 0% electric rate change. Abendschein confirmed that this was correct. Commissioner Hall asked what the risk assessment level for reserve adequacy included. Abendschein stated that the risk assessment included a list of scenarios that had a negative impact on the utility’s financial position, such as increases in market prices, a decrease in hydroelectric generation, or supplier default. The utility wanted to keep the reserves above the risk assessment level. Commissioner Hall asked whether there were other contexts in which the reserve levels were reviewed. Director Fong said that the reserves were reviewed in the context of the budget annually. She added that an internal staff risk oversight committee reviews the reserve levels. Commissioner Hall asked when the levels of the reserves were reviewed outside the budget process throughout the year. Director Fong stated that the reserve levels are reported to the UAC and Council in the quarterly informational reports. Commissioner Hall recommended that staff provide detail of the reserves and their management practices in the future. Director Fong said staff would provide that with the Financial Plans and the quarterly reports. Commissioner Cook noted that the City has done a remarkable job holding the line on electric rates over many years as the supply portfolio has become greener and greener and, ultimately carbon neutral. Gas Utility Resource Planner Eric Keniston stated that there would 3 to 4% increases over the planning horizon. Rate increases were presented holding commodity costs ‘steady’ as they vary monthly and are passed-through directly to customers. Referring to cost components, capital improvement budgeting would resume after a two year hiatus to complete outstanding projects, and all other costs were rising steadily. He noted that the Rate Stabilization reserve was being drawn down by FY 2018 to moderate rate increases, with the Operations reserve staying above the minimum and risk assessment guideline levels through the forecast period. Keniston stated that the 3% increase in FY 2016 was primarily due to increases in the PG&E transportation cost to Palo Alto, and in outer years, higher capital improvement costs, with rate increases starting two years earlier than what last year’s financial plans projected. Regarding capital improvement costs, Keniston stated that costs for main replacement in water, gas and wastewater have increased by 25 to 50 percent from prior projections. Where possible and can be done safely, projects have been reduced in size to keep budgets stable. He stated that staff is completing a Gas System Master Plan to determine the appropriate rate of future pipeline replacement, but future costs remain an uncertainty. He stated that the forecasts do not include the impact of fuel switching, which could lead to reduced load. Keniston added that the cap-and-trade program is currently only planned through 2020 and it is unclear what will happen after that time. The cross-bore program also is costing more than originally expected, and may go even higher. Commissioner Eglash stated that he was happy to see the continued focus on infrastructure investment by the Utilities. He asked if the labor shortages that were experienced a few years ago have been solved. Assistant Director Tomm Marshall stated that they are caught up now on projects, but labor shortages for engineers still exist. Commissioner Eglash noted that in the Electric Utility, we are not proposing a rate increase even though there are also CIP increases. Abendschein stated that the size of the electric utility was much larger than the other funds and that the CIP expenses were a smaller portion of the total expenses for electric. Chair Foster asked if we could either not increase rates in 2015 and have higher rate increases next year, or, alternatively, we could have higher increases this year to avoid increases in 2016. He noted that the 3% and 4% rate increases could be replaced with no change followed by a subsequent year higher rate change, or the other way around. Abendschein stated that bill increases may be larger in those scenarios. Director Fong said that the proposal is to spread out the rate increases and total bill impact. Council Member Scharff stated that he may prefer an earlier larger increase with no increase the following year. Abendschein stated that proposals would have to be weighed against having reserves too high. Commissioner Hall said that his memory is that the commission has supported smoothing out the rate changes and not having pre-emptive rate increases that are higher than justified. Chair Foster mentioned it would be interesting to see what increase in FY 2016 could generate no increase in FY 2017. Wastewater Collection Utility Keniston said that the wastewater rate projections are driven by substantial treatment cost increases (about 5% per year) causing the need for 4 years of 9% per year rate increases starting in 2016. Prior year projections were for 7%. The Rate Stabilization reserve is projected to be drawn down by the end of FY 2016, with the Operations reserve dropping closer to the minimum and risk assessment guideline levels. Commissioner Hall inquired as to whether this drawdown was being done to prevent even larger increases. Keniston responded that that was the case. Keniston showed that a 9% increase amounted to a $2.64 per month increase in residential customer bills, and that at the end of the forecast period, with the rate changes shown, average residential bills in FY 2021 would be slightly under $45 per month. As a point of comparison, surrounding community average bills are currently about $44.50, so Palo Alto is well under the average. Keniston stated that sewer main replacement and rehabilitation costs are higher than anticipated, and that, similar to water and gas, a wastewater collection master planning study is planned in future years. Commissioner Hall noted that the treatment cost is a black box to this commission since it does not have jurisdiction over wastewater treatment. He stated that the Council does not get the benefit of UAC review of that large part of the costs. Director Fong said that she would ask the Manager of the Regional Water Quality Control Plant to attend the UAC’s March meeting when the UAC reviews the Wastewater Financial Plan and rate proposals. At this point in the meeting, Commissioner Hall left the meeting due to a self-identified conflict of interest on water issues. Water Utility Abendschein presented the water financial projections, which show that 7%/year rate increases will be required due to the rising cost of water supplies from the San Francisco Public Utilities Commission (SFPUC) as well as increases in CIP costs. He stated that staff will propose separating out of the commodity cost on the bill so that the wholesale water cost would be passed directly on to the customers. This would enhance transparency so that customers would be able to see the water cost. In addition, the cost of noticing water rate changes would be reduced. Reserves were projected to stay within reserve management guidelines over the forecast period. Staff anticipated keeping additional funds in the CIP reserve through the end of FY 2017 in case of unanticipated costs in CIP projects, particularly seismic upgrades to various reservoirs. Staff was still working on preparing a drought surcharge, which was not expected to be needed in 2015 unless water use restrictions increase. Commissioner Eglash asked staff to confirm that a drought surcharge would be needed because the water utility’s costs were largely fixed, and when usage decreased, revenue had to increase to cover those costs. Abendschein confirmed that was the case. Abendschein explained that rate increases in later years were increasing from the previous year’s forecast due to a change in the load forecast methodology. Water consumption had decreased since the recession, and in previous years staff had projected that consumption would return to normal once the economy recovered. The Bay Area economy had largely recovered, however, and there had been no increase in water consumption, so staff was now projecting that water consumption would not increase in the future. Abendschein said staff had analyzed two major uncertainties in our forecast, a higher CIP cost scenario just like the one that had been done for the Gas and Wastewater Collection Utilities, and two extended drought scenarios. An extended drought would reduce reserves meaning that some of the rate increases in the outer years would have to be moved forward to FY 2020. Higher CIP costs would result in higher near-term rate increases, 9-10% for three years instead of the 7% under the normal CIP scenario. Abendschein said that several potential costs are not included in the forecast. These include extended (or more severe) drought, the impact of which would be managed through drought surcharges. It also included the need for seismic work on the Foothills water transmission line, though staff had a consultant investigating a possible lower cost approach to that project involving a system that could be used to bypass breaks. The SFPUC was also doing condition assessments of some Hetch Hetchy assets that were not included in their Water System Improvement Plan, and if those revealed the need for additional work, it could increase wholesale water costs. Lastly, the rate impact of a potential recycled water project had not yet been analyzed. Commissioner Eglash complimented staff on the complex analysis. He stated that staff may be much too optimistic regarding the drought’s impact on water rates and that he thought that there a return to pre-drought use levels may not be a good assumption to make. He said that it will take many years to replenish the state’s water reservoirs. There could be extended periods with reduced precipitation and less snowfall and more rain in the Sierra as well. He asked if staff has given enough consideration of a "new normal" of lower water availability. Abendschein said it was worth considering, and that there had not been a return to pre- drought usage levels after prior droughts. He said it was a good argument for not putting the water rate increase off another year. He added that although there is the potential for a “new normal” level of water consumption, it would be premature to adjust rates preemptively. Director Fong added that if there was a real need, staff would return to Council with a mid-year rate increase request. Commissioner Chang asked if the forecasts took into account efficiency savings. Abendschein confirmed they did. Commissioner Chang asked if staff considered the bill impact on business customers. Abendschein said rates were based on a cost of service model, but that staff considered the bill impact to all customer groups when setting rates. Commissioner Chang asked about the outreach strategy for the rate increases. The projections showed large cumulative rate increases, 30% over 5 years. There were good reasons for the increases, but it was important to explain them to people in easily understandable terms. Director Fong explained that staff had focused on carefully communicating rate changes in prior years and would continue to do so. Council Member Scharff asked what would happen if customers conserved and the SFPUC was able to sell the water they saved to other agencies. Would it have a beneficial impact to customers bills? Abendschein said that if Palo Altans reduced their per-capita water consumption and more water was available to other agencies, as those agencies grew they might use more water, meaning more of the costs of the Hetch Hetchy system would be allocated to other agencies. That would have a beneficial impact on Palo Alto customers’ bills. Chair Foster asked staff to confirm that customers in Palo Alto had paid substantially for improvements to the Hetch Hetchy system. Abendschein said they had, just like other customers of the Hetch Hetchy system. Chair Foster asked whether the Santa Clara Valley Water District had paid anything for those improvements. Abendschein said that to his knowledge, they had not.