HomeMy WebLinkAboutStaff Report 5682
City of Palo Alto (ID # 5682)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/22/2015
City of Palo Alto Page 1
Summary Title: Gas Financial Plan
Title: Utilities Advisory Commission Recommendation that the City Council
Adopt a Resolution Approving the Fiscal Year 2016 Gas Financial Plan,
Including no Rate Changes for July 1, 2015, and Amending the Gas Utility
Reserve Management Practices
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) recommend that Council adopt a resolution
(Attachment A) amending the Gas Utility Reserve Management Practices (Attachment B) and
approving the fiscal year (FY) 2016 Gas Financial Plan (Attachment C).
Executive Summary
The FY 2016 Gas Utility Financial Plan includes projections of the utility’s costs and revenues
through FY 2022. Costs are projected to rise moderately for the next several years due
primarily to Capital Improvement Program (CIP) increases and costs related to transporting gas
on PG&E’s pipelines. As reserves are adequate, staff proposes no rate increase for FY 2016, but
the Financial Plan includes a projected rate increase of 7% for FY 2017 and 3% to 4% annual
increases after FY 2017, to adequately recover the costs of providing gas service.
Staff also recommends changes to the Gas Utility Reserves Management Practices to
accommodate a change in City budgeting practices for CIP projects.
Background
Every year staff presents the Council with Financial Plans for its Electric, Gas, Water, and
Wastewater Collection Utilities and recommends any rate adjustments required to maintain
their financial health. These Financial Plans include a comprehensive overview of the utility’s
operations, both retrospective and prospective, and are intended to be a reference for UAC and
Council members as they review the budget and staff’s rate recommendations.
City of Palo Alto Page 2
Each Financial Plan also contains a set of Reserves Management Practices describing the
reserves for each utility and the management practices for those reserves. Staff may propose
amendments to these reserves as part of the Financial Plans.
The UAC reviewed preliminary long-term financial forecasts for the Electric, Gas, Water, and
Wastewater Collection Utilities at its February 4, 2015 meeting. The Finance Committee
reviewed the preliminary long-term financial forecasts at its March 3, 2015 meeting. The UAC
reviewed the FY 2016 Gas Financial Plan at its April 1, 2015 meeting and voted unanimously to
approve Staff’s recommendation. Draft minutes of the UAC meeting are in Attachment D to
this report.
Discussion
Proposed Actions for FY 2016
This year’s Gas Utility Financial Plan proposes the following actions for FY 2016:
1. No proposed rate changes for July 1, 2015;
2. Transfer $3.4 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 3C of Attachment C for more details; and
3. Amend the CIP Reserve to accommodate a change in City capital budgeting practices.
These amendments are summarized below, but for a more in-depth description of the
reasons for these changes, see Section 3B of the Financial Plan:
a. Amend the Reserves Management Practices to modify the purpose of the CIP
Reserve to enable it to act as a cash flow and contingency reserve for capital
investment projects; and
b. Transfer the funds that are projected to be released from the Re-appropriations
Reserve at the end of FY 2015 to the CIP Reserve.
This proposal is described in more detail in the FY 2016 Gas Financial Plan (Attachment C).
Projected Rate Adjustments over the Financial Planning Period
Table 1 shows the projected rate adjustments included in the Gas Utility Financial Plan and their
impact on the median residential gas bill.
Table 1: Projected Gas Rate Adjustments and Residential Bill Impact, FY 2016 to FY 2022
FY
2016
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
Gas Utility 0% 7% 4% 4% 4% 4% 3%
Estimated Bill Impact for
Residential Customers ($/mo)* - $2.60 $1.77 $1.89 $2.01 $1.30 $1.24
* Bill impacts are presented holding commodity prices static, as these are a pass-through
cost and change monthly based on market conditions. Median bills based on 18 therms in
summer (April-October) and 54 therms winter (November-March).
City of Palo Alto Page 3
Table 2 shows the proposed and projected rate adjustments in the context of the other
proposed and projected utility rates.
Table 2: Rate Adjustments for All Utilities, FY 2016 Proposed, FY 2017 to FY 2020 Projected
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Electric Utility 0% 6% 6% 1% 1%
Gas Utility1 0% 7% 4% 4% 4%
Wastewater 9% 9% 9% 9% 6%
Water Utility 12% 8% 8% 8% 3%
Refuse2 9% 9% 8% 2% to 3% 2% to 3%
Storm Drain3 2.7% 2% to 3% 2% to 3% 2% to 3% 2% to 3%
Total Bill
Change4
(%) 6% 8% 7% 5% 3%
($/mo) $14.73 $18.91 $18.53 $14.39 $9.55
(1) Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates
will vary monthly with wholesale market fluctuations
(2) No forecast available past FY 2018, inflationary increases assumed.
(3) Storm Drain Rates increase annually by CPI; existing rates sunset in June 2017 unless
reauthorized by a majority vote of property owners.
(4) Change in estimated median residential bill, $230.76 as of June 30, 2014
Staff’s annual assessment of the financial position of the City’s utilities is completed to ensure
adequate revenue to fund operations. This includes making long-term projections of market
conditions, the physical condition of the system and other factors that could affect utility costs,
and projecting rates that are adequate to recover these costs. The current rates are also based
on the methodology from the April 2012 Gas Utility Cost of Service Study completed by Utility
Financial Solutions (Staff Report 2812). Staff reviews this study annually and plans to update
the cost of service analysis over the next two to three years.
The main drivers for the increase in the Gas Utility’s costs (and therefore rates) over the next
several years include:
The cost for transmission on the PG&E system, which is projected to nearly double in FY
2016 and increase by roughly 3% thereafter; and
Operating and CIP costs, which are projected to rise by roughly 2% to 4% annually.
There is uncertainty related to CIP costs for the Gas Utility in coming years. Gas main
replacement costs have risen substantially in recent years, and it is possible higher CIP
expenditures will be required in the future. The FY 2016 Gas Financial Plan includes rate
projections for a “High CIP Cost” scenario. Staff plans to complete an updated gas system
master plan later in 2015 and expects better information about future main replacement costs
when that plan to update the assessment of the system’s condition is completed.
City of Palo Alto Page 4
Commission Review
The UAC reviewed the attached Financial Plan and Reserves Management Practices at its April
1, 2015 meeting. In addition, Staff provided the February 2015 preliminary forecast changes of
3% in FY 2016 and 4% in FY 2017 as a possible alternative. Staff noted that reserves were
adequate enough to delay an FY 2016 increase. In addition, PG&E’s Gas Transmission and
Storage rate case would likely be resolved in FY 2016 and gas transmission costs to Palo Alto
better determined. Finally, as rates for water and wastewater will be increasing, a delay would
mitigate bill impacts to customers in the short term.
The UAC noted the merits of both rate trajectories, but seeing no apparent need for an FY 2016
increase at this time, unanimously approved Staff’s proposal as outlined in the Financial Plan.
Timeline
After receiving the Finance Committee’s recommendation, the City Council will consider
adoption of the FY 2016 Gas Financial Plan with the FY 2016 budget.
Resource Impact
Because no rate changes are proposed for FY 2016, there are no projected resource impacts
associated with the FY 2016 Gas Financial Plan.
Policy Implications
The attached FY 2016 Gas Financial Plan includes amended Reserve Management Practices that
will modify Council policy with respect to the structure of the financial reserves of the Gas
Utility. These Reserve Management Practices replace the current Reserve Management
Practices, which were last adopted by Council in June 2014 (Resolution 9423).
Environmental Review
The Finance Committee’s review and recommendation to Council on the FY 2016 Gas Financial
Plan does not meet the California Environmental Quality Act’s definition of a project, pursuant
to Public Resources Code Section 21065, thus no environmental review is required.
Attachments:
Attachment A: Resolution Approving the FY 2016 Gas Financial Plan (PDF)
Attachment B: Proposed Amendments to the Gas Utility Reserves Management
Practices (PDF)
Attachment C: Proposed FY 2016 Gas Utility Financial Plan (PDF)
Attachment D: Excerpted Draft UAC Minutes of April 1, 2015 (PDF)
Attachment A
* NOT YET APPROVED *
150319 sdl 6053275
Resolution No. _________
Resolution of the Council of the City of Palo Alto Approving the
FY 2016 Gas Utility Financial Plan and Amending the Gas Utility
Reserves Management Practices
R E C I T A L S
A. Each year the City of Palo Alto (“City”) assesses the financial position of its
utilities with the goal of ensuring adequate revenue to fund operations. This includes making
long-term projections of market conditions, the physical condition of the system, and other
factors that could affect utility costs, and setting rates adequate to recover these costs. It does
this with the goal of providing safe, reliable, and sustainable utility services at competitive
rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and made a
part of the Financial Plans.
C. The City intends to make changes to its Gas Utility Reserves Management
Practices to amend the purpose and management practices of the Gas Utility’s Capital
Improvement Program (CIP) Reserve.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby approves the FY 2016 Gas Utility Financial Plan,
including the amended Gas Utility Reserves Management Practices. These Reserves
Management Practices replace the Reserves Management Practices previously approved for
the Gas Utility as part of the FY 2015 Gas Utility Financial Plan (Resolution 9423).
SECTION 2. The Council hereby approves the transfer of $3.4 million in FY 2015 from
the Rate Stabilization Reserve to the Operations Reserve, and the transfer of all funds released
in FY 2015 from the Reappropriations Reserve to the CIP Reserve, as described in the FY 2016
Gas Utility Financial Plan approved via this resolution.
/ /
//
Attachment A
* NOT YET APPROVED *
150319 sdl 6053275
SECTION 3. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act’s definition of a project under Public Resources Code
Section 21065, and therefore, no environmental assessment is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Senior Deputy City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
Proposed Amendments to Gas Utility Reserves Management Practices
APPENDIX C: GAS UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Gas Utility
Financial Plan:
Section 1. Definitions
a)“Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY
2015 to FY 2019 would be the Financial Planning Period.
b)“Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c)“Net Assets” - The Government Accounting Standards Board defines a Utility’s Net
Assets as the difference between its assets and liabilities.
d)“Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Supply Fund Reserves
The Gas Utility’s Supply Fund Balance is reserved for the following purposes:
a)For existing contracts, as described in Section 4 (Reserve for Commitments)
b)For operating and capital budgets re-appropriated from previous years, as described in
Section 5 (Reserve for Re-appropriations)
Section 3. Distribution Fund Reserves
a)For existing contracts, as described in Section 4 (Reserve for Commitments)
b)For operating and capital budgets re-appropriated from previous years, as described in
Section 5 (Reserve for Re-appropriations)
c)For future year expenditure on the Gas Utility’s cash flow management and
contingencies related to the Gas Utility’s Capital Improvement Program (CIP), as
described in Section 6 (CIP Reserve)
d)For rate stabilization, as described in Section 7 (Rate Stabilization Reserve)
e)For operating contingencies, as described in Section 8 (Operations Reserve)
f)Any funds not included in the other reserves will be considered Unassigned Reserves
and shall be returned to ratepayers or assigned a specific purpose as described in
Section 9 (Unassigned Reserves)
Section 4. Reserve for Commitments
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for
Commitments will be set to an amount equal to the total remaining spending authority for
all contracts in force for the Wastewater Collection Utility at that time.
ATTACHMENT B
Proposed Amendments to Gas Utility Reserves Management Practices
Section 5. Reserve for Reappropriations
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for
Reappropriations will be set to an amount equal to the amount of all remaining capital and
non-capital budgets, if any, that will be re-appropriated to the following fiscal year for each
fund in accordance with Palo Alto Municipal Code Section 2.28.090.
Section 6. CIP Reserve
Funds may be added to or withdrawn from the CIP Reserve by action of the City Council
and held for future year expenditure on the Gas Utility’s CIP Program. Withdrawal of
funds from the CIP Reserve requires Council action. If there are funds in the CIP Reserve
at the end of any fiscal year, any subsequent Gas Utility Financial Plan must result in the
withdrawal of all funds from this Reserve by the end of the Financial Planning Period.
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following
practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels
are calculated for each fiscal year of the Financial Planning Period based on the levels of
CIP expense budgeted for that year.
Minimum Level 12 months of budgeted CIP expense
Maximum Level 24 months of budgeted CIP expense
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added to or removed from the Reserve
for Commitments [BA1]as a result of a change in contractual commitments related to CIP
projects. Any other additions to or withdrawals from the CIP reserve require Council
action.
c) Minimum Level:
i) Funds held in the Reserve for Commitments may be counted as part of the CIP
Reserve for the purpose of determining compliance with the CIP Reserve minimum
guideline level.
ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve
reaching its minimum level by the end of the next fiscal year. For example, if the CIP
Reserve is below its minimum level at the end of FY 2017, staff must present a plan
by June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In
addition, staff may present, and the Council may adopt, an alternative plan that
takes longer than one year to replenish the reserve, or that does so in a shorter
period of time.
a)d) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no
funds may be added to this reserve. If there are funds in this reserve in excess of the
maximum level staff must propose to transfer these funds to another reserve or return
them to ratepayers in the next Financial Plan. Staff may also seek City Council approval
Proposed Amendments to Gas Utility Reserves Management Practices
to approve holding funds in this reserve in excess of the maximum level, if they are held
for a specific future purpose related to the CIP.
Section 7. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held
to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate
Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization
Reserve at the end of any fiscal year, any subsequent Gas Utility Financial Plan must result
in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period.
Section 8. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Gas Utility’s Fund Balance not included in the reserves
described in Section 4-Section 7 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 8 d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for
that year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months
of the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Gas Utility shall be designed to
return the Operations Reserve to its target level by the end of the forecast period.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Gas Utility’s Fund
Balance shall be automatically included in the Unassigned Reserve described in Section
9, below.
Proposed Amendments to Gas Utility Reserves Management Practices
Section 9. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Gas
Utility’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in the
Unassigned Reserve at the end of any fiscal year, the next Financial Plan presented to the
City Council must include a plan to assign them to a specific purpose or return them to the
Gas Utility ratepayers by the end of the first fiscal year of the next Financial Planning Period.
For example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the
next Financial Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a
plan to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff
may present an alternative plan that retains these funds or returns them over a longer
period of time.
Section 10. Intra-Utility Transfers Between Supply and Distribution Funds
The Gas Utility records costs in two separate funds: the Gas Supply Fund and the Gas
Distribution Fund. At the end of each fiscal year staff is authorized to transfer an amount
equal to the difference between Gas Supply Fund costs and Gas Supply Fund Revenues from
the Gas Distribution Fund Operations Reserve to the Gas Supply Fund, or vice versa. Such
transfers shall be included in the ordinance closing the budget for the fiscal year.
GAS UTILITY FINANCIAL PLAN
FY 2016 TO FY 2022
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations................................................................................ 3
Section 2: Executive Summary and Recommendations ........................................................... 4
Section 2A: Executive Summary ................................................................................................... 4
Section 2B: Summary of Proposed Actions .................................................................................. 5
Section 3: Rate and Reserve Proposals ................................................................................... 5
Section 3A: Current and Proposed Rates ..................................................................................... 5
Section 3B. Reserves Management Practices, Proposed Change ................................................ 6
Section 3C. Proposed Reserve Transfers ...................................................................................... 7
Section 4: Current State of the Utility..................................................................................... 7
Section 4A. Utility Overview ........................................................................................................ 7
Section 4B. Current Rates and Competitiveness .......................................................................... 8
Section 4C. Current Utility Financial Status ................................................................................. 9
Section 4D. Status of Reserves ................................................................................................... 10
Section 4E. Debt Service ............................................................................................................. 11
Section 5. Looking Back ....................................................................................................... 11
Section 5A. Background ............................................................................................................. 11
Section 5B. Historical Gas Commodity Prices ........................................................................... 13
Section 5C. Historical Expenses and Revenues ......................................................................... 13
Section 6. Looking Forward .................................................................................................. 14
Section 6A. Seven Year Financial Forecast ................................................................................ 14
1.Overview ...................................................................................................................... 14
2.Commodity Supply Costs.............................................................................................. 15
3.Operations .................................................................................................................... 16
ATTACHMENT C
GAS UTILITY FINANCIAL PLAN
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4. Capital Improvement Program (CIP) ............................................................................ 17
5. Equity Transfer ............................................................................................................. 18
Section 6B. Revenue Requirement and Sources ........................................................................ 18
Section 6C. Risk Assessment and Reserve Adequacy ................................................................ 20
Section 6D. Alternate Scenarios ................................................................................................ 21
Section 6E. Historical and Projected Consumption ................................................................... 22
Section 6F. Long Term Outlook ................................................................................................. 23
Section 6G. Communications Plan ............................................................................................ 24
Appendices ......................................................................................................................... 26
Appendix A: Gas Utility Financial Forecast Detail ..................................................................... 27
Appendix B: Gas Utility Capital Improvement Program (CIP) Detail ......................................... 28
Appendix C: Gas Utility Reserves Management Practices ......................................................... 30
Appendix D: Gas Utility Debt Service Details ............................................................................. 31
Appendix E: Description of Gas Utility Cost Categories ............................................................. 33
Appendix F: Gas Utility Communications Samples .................................................................... 34
GAS UTILITY FINANCIAL PLAN
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SECTION 1: DEFINITIONS AND ABBREVIATIONS
ABS: Acrylonitirile butydene styrene, a plastic gas main material
CARB: California Air Resources Board
CIP: Capital Improvement Program
CNG: Compressed Natural Gas
CPAU: City of Palo Alto Utilities Department
CPUC: California Public Utilities Commission
Cross-bore: A cross-bore exists when one utility line has been drilled or “bored” through a
portion of another line. Gas cross-bores can occur in sewer lines as a result of “horizontal
boring” construction practices.
Distribution: transportation of gas to customers.
GMR Program: Gas Main Replacement Program
Local Transportation: transportation of gas to Palo Alto across PG&E’s distribution system from
PG&E City Gate.
Malin: a delivery hub referred to in gas purchase contracts and located in Malin, Oregon, where
the northern end of PG&E’s Redwood Transmission Pipeline is located.
MMBtu: Millions of British thermal units, a unit of gas measurement equal to ten therms.
Commonly used for high volume gas measurement. Wholesale purchases of gas from suppliers
are typically measured in MMBtu.
PE or HDPE: Polyethylene, a gas main material (more specifically, High-Density Polyethylene)
PG&E: Pacific Gas and Electric
PG&E City Gate, or City Gate: a delivery hub referred to in gas purchase contracts. Any gas
delivered to PG&E’s distribution system (such as gas delivered at the southern end of PG&E’s
Redwood Transmission Pipeline) is said to have been delivered at PG&E City Gate.
PVC: Polyvinyl chloride, a plastic gas main material
Therms: The standard unit of measurement for natural gas sales to customers, equal to 100,000
British thermal units. Therms measure the heating value of the gas, rather than its volume.
Transmission: transportation of gas between major gas delivery hubs via a gas transmission
pipeline, such as PG&E’s Redwood pipeline.
UAC: Utilities Advisory Commission, an appointed body that advises the City Council on CPAU
issues.
GAS UTILITY FINANCIAL PLAN
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SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
SECTION 2A: EXECUTIVE SUMMARY
This document presents a financial plan for the City of Palo Alto’s (CPAU’s) Gas Utility for the
next seven years. The plan provides revenues to cover the costs of operating the utility safely
over that time while adequately investing for the future. It also addresses the financial risks
facing the utility over the short term and long term, and includes measures to mitigate and
manage those risks.
Over the next seven fiscal years staff projects that the Gas Utility will see non-commodity costs
rising at roughly 3 to 4% per year. In the short term, some of these costs are related to the
cross-bore inspection program, as well as cap-and-trade allowance purchase costs. In addition,
capital improvement program (CIP) costs have increased as the economy has improved, and
CPAU is also planning for new gas main replacement projects after completing a large multi-
year gas main replacement project. The Gas Utility expenses over the period of this financial
plan are shown in Table 1 below.
Table 1: Gas Utility Expenses for FY 2014 to FY 2022
Expenses
($000)
FY 2014
(actual)
FY 2015
(est.)
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Commodity costs 14,325 12,438 13,429 14,962 16,294 16,999 17,364 17,680 18,127
Operations 17,869 19,479 21,581 22,486 23,297 23,285 24,386 25,359 26,313
Capital Projects 240 2341 5673 5214 5402 5550 5728 5728 5728
TOTAL 32,435 34,258 40,683 42,661 45,093 45,933 47,477 48,767 50,168
To ensure that revenues cover these rising costs, the financial plan includes the rate trajectory
shown in Table 2. There is no planned rate increase for FY 2016, a result that is made possible
due to accumulated rate stabilization reserves, which resulted when new gas main replacement
projects were not added in FY 2014 and FY 2015 in order to complete a multi-year project to
replace the last of the ABS plastic mains in Palo Alto. A 7% increase is projected for FY 2017,
followed by 3% and 4% increases for FY 2018 through FY 2022. A 7% increase in FY 2017 would
be equivalent to $2.60 per month for the median residential customer’s monthly gas bill, based
on commodity prices as of February 2015.
Table 2: Projected Gas Rate Trajectory for FY 2015 to FY 2022
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
0% 7% 4% 4% 4% 3% 3%
This financial plan includes an updated to the Gas Utility Reserves Management Practices,
amending the purpose of the CIP Reserve, as described below.
GAS UTILITY FINANCIAL PLAN
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SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Gas Utility in FY 2016:
1. Amend the Reserves Management Practices to modify the purpose of the CIP Reserve,
enabling it to act as a cash flow contingency reserve for capital investment projects as
outlined in Section 3B.
2. Transfer all funds released from the Reappropriations Reserve at the end of FY 2015 to
the CIP Reserve, as outlined in Section 3B.
3. Transfer $3.4 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 3C for more details.
SECTION 3: RATE AND RESERVE PROPOSALS
SECTION 3A: CURRENT AND PROPOSED RATES
On July 1, 2012 CPAU restructured its rates so that the commodity component varied monthly
to match changes in gas market prices1. In addition, monthly service charges were increased to
recover the cost providing gas service to customers. In January 2015 the PaloAltoGreen Gas
program was launched, which allowed customers to reduce or eliminate the greenhouse gas
(GHG) emissions associated with their gas usage for an additional charge. The voluntary
program is backed by high quality environmental offsets that CPAU will purchase on behalf of
participants.2
Also in January 2015, the Council adopted a new rate component to collect the costs of
purchasing allowances for the purpose of compliance with the State’s cap-and-trade program3.
This component will change depending on the cost of allowances and gas demand. In addition,
two bill components (Local transportation and Administration) were collapsed into the
Distribution rate to streamline bill presentation. Table 3, below, summarizes the current rates
for all customer classes.
1 Staff Report 2812, 5/17/2012: http://archive.cityofpaloalto.org/civica/filebank/blobdload.asp?BlobID=31395
2 Staff Report 4596, 4/21/2014: https://www.cityofpaloalto.org/civicax/filebank/documents/39983
3 Staff Report 5397, 1/26/2015: https://www.cityofpaloalto.org/civicax/filebank/documents/45537
GAS UTILITY FINANCIAL PLAN
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Table 3: Current Gas Rates
Rate Component Units
G-1
(Residential)
G-2 (Small
Commercial)
G-3 (Large
Commercial)
G-10
(CNG)
Last
Changed
Service Charge $/month 9.88 74.86 361.18 50.65 7/1/2012
Distribution (Tier 1) $/therm 0.4392 0.6147 0.6071 0.0509 2/1/2015
Distribution (Tier 2) $/therm 0.9546 N/A N/A N/A 2/1/2015
PaloAltoGreen Gas
(optional)
$/therm
additional
$0.12 $0.12 $0.12 $0.12 7/1/2014
(new rate)
Commodity $/therm 0.3281
(Feb. 2015)
0.3281
(Feb. 2015)
0.3281
(Feb. 2015)
0.3281
(Feb. 2015)
(varies
monthly)4
Tier 1 amount (for G-1, residential customers):
Winter Therms/day 2 N/A N/A N/A 7/1/2012
Summer Therms/day 0.667 N/A N/A N/A 7/1/2012
The Gas Utility’s current rates are based on the methodology from the April 2012 Gas Utility
Cost of Service Study completed by Utility Financial Solutions.5 Staff tentatively plans to review
this cost of service study in two to three years unless any major changes occur to the utility’s
operations or customer base that would necessitate an earlier study. Before any such update,
staff will review current rates and the scope of the study with the UAC and Council to
determine UAC and Council policy priorities.
SECTION 3B. RESERVES MANAGEMENT PRACTICES, PROPOSED CHANGE
Staff proposes one change to the Gas Utility Reserves Management Practices (Appendix C) in
this Financial Plan. Staff recommends changing the CIP Reserve definition and management
practices so that it becomes a cash flow and contingency reserve for CIP projects. Currently
these purposes are served by a combination of the Operations and Reappropriations Reserves,
while the CIP Reserve acts as a sinking fund to accumulate funds for large one-time future CIP
expenditures (which are rare). The City is changing its budgeting practices starting with FY 2016,
and will no longer reappropriate CIP budgets each year. Instead, CIP budgets for long-term or
ongoing projects will be renewed each year through the annual budget process. This means
that the funds in the Reappropriations Reserve ($1.5 million as of June 30, 2014) will be
released after June 30, 2015. These funds acted as a cash flow reserve for CIP projects, and
some or all of it should be retained for that purpose. Staff proposes to retain these funds in the
CIP reserve, and the proposed changes to the Reserves Management Practices will enable CPAU
to do that.
Staff proposes to initially set a minimum and maximum guideline for the CIP reserve that will
enable it to hold similar amounts to what has typically been held within the Reappropriations
Reserve. Staff intends to review the capital management practices at other agencies and revisit
these guideline levels, but initially, staff proposes a minimum guideline level of 12 to 24 months
of CIP expenditure. CIP-related funds in the Commitments Reserve would be allowed to count
toward that guideline. The CIP-related funds in the Commitments Reserve are equal to the total
4 For historic commodity rates, see: http://www.cityofpaloalto.org/civicax/filebank/documents/30399
5 Staff Report ID#2812, 5/17/ 2012 http://archive.cityofpaloalto.org/civica/filebank/blobdload.asp?BlobID=31395
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remaining balance of all CIP contracts currently in progress, and these funds should be taken
into account when determining whether CIP cash flow and contingency reserves are adequate.
The initial maximum guideline level would be 24 months of CIP expenditures, but the maximum
guideline could be exceeded with Council approval.
Figure 1 shows the Reappropriations Reserve level as of June 30, 2014, as well as the CIP
portion of the Reserve for Commitments.
Figure 1: Gas Utility Capital Reserve
SECTION 3C. PROPOSED RESERVE TRANSFERS
For FY 2016, staff proposes a $3.4 million transfer from the Rate Stabilization Reserve. This
transfer is included in the financial projections in this Financial Plan. It will enable CPAU to
maintain adequate Operations Reserve levels while moderating the pace of increase in Gas
rates. In addition, staff proposes transfers from the Reappropriations Reserve to the CIP
Reserve as described in the previous section. The impact of these transfers on reserves levels
can be seen in Appendix A.
SECTION 4: CURRENT STATE OF THE UTILITY
SECTION 4A. UTILITY OVERVIEW
The CPAU’s Gas Utility provides natural gas service to the residents, businesses, and other gas
customers in Palo Alto. Close to 23,500 customers are connected to the natural gas system,
approximately 21,800 (93%) of which are residential and 1,700 (7%) of which are non-
residential. Residential customers consume about 11 to 12 million therms of gas per year,
roughly 45% of the gas sold, while non-residential customers consume 55% (about 15 million
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therms). Residential customers use gas primarily for space heating (46% of gas consumed) and
water heating (42%), with the remainder consumed for other purposes such as cooking, clothes
drying, and heating pools and spas6. Non-residential customers use gas for space and water
heating (73% of gas consumed), cooking (20%), and industrial processes (6%).7
The Gas Utility receives gas at the four receiving stations within Palo Alto where CPAU’s
distribution system connects with Pacific Gas and Electric’s (PG&E’s) system. These receiving
stations are jointly operated by CPAU and PG&E. CPAU purchases gas from a various natural
gas marketers, with PG&E providing only local transportation service (transportation from the
PG&E City Gate gas delivery hub to Palo Alto). CPAU also has transmission rights on PG&E’s
transmission pipeline from Malin, Oregon to PG&E City Gate, allowing it to purchase lower
priced gas at that location. CPAU does not produce or store any natural gas, and purchases gas
in the monthly and daily spot markets. The cost of the purchased gas is passed through directly
to customers through a rate adjuster that varies monthly with market prices. The cost of
purchased gas and PG&E local transportation service accounts for roughly one third of the
utility’s expenditures.
To deliver gas from the receiving stations to its customers, the utility owns 210 miles of gas
mains (which transport the gas to various parts of the city) and 23,500 gas services (which
connect the gas mains to the customers’ gas lines). These mains and services, along with their
associated valves, regulators, and meters, represent the vast majority of the infrastructure used
to deliver gas in Palo Alto. CPAU has an ongoing CIP to repair and replace its infrastructure over
time, the expense of which accounts for around 15 to 20% of the utility’s expenditures. Costs
for main replacements have been going up, however, and those uncertainties are discussed in
Section 6A(4) below.
In addition to the CIP, the Gas Utility performs a variety of maintenance activities related to the
system, such as monitoring the system for leaks, testing and replacing meters, monitoring the
condition of steel pipe, and building and replacing gas services for buildings being built or
redeveloped throughout the city. The utility also shares the costs of other system-wide
operational activities (such as customer service, billing, meter reading, supply planning, energy
efficiency, equipment maintenance, and street restoration) with the City’s other utilities. These
maintenance and operations expenses, as well as associated administration, debt service, rent,
and other costs, make up roughly half of the utility’s expenses. In addition to these ongoing
activities, CPAU has conducted a program to find and replace cross-bores over the last several
years.
SECTION 4B. CURRENT RATES AND COMPETITIVENESS
Table 4 presents winter and summer residential bills for Palo Alto and PG&E for several usage
levels for rates in effect as of and July 2014 (to illustrate a summer month bill) and January 2015
(to illustrate a winter month bill). The annual gas bill for the median residential customer for
calendar year 2014 was $489.94, about 1% lower than the annual bill for a PG&E customer with
6 http://energyalmanac.ca.gov/naturalgas/overview.html
7 Source: Statewide Commercial End Use Study, California Energy Commission report, 2006. Statistics shown are
for end users in PG&E Climate Zone 4 (the Peninsula) where Palo Alto is located.
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the same consumption. In January 2015, PG&E’s distribution rates for gas increased
substantially to collect for needed system improvements for pipeline safety and maintenance,
and their rates are expected to continue to increase in the future.
The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which
includes the surrounding communities.
Table 4: Residential Monthly Natural Gas Bill Comparison ($/month)
Season
Usage
(therms) Palo Alto PG&E Zone X
%
Difference
Winter
(Jan 2015)
30 33.82 40.29 -16%
(Median) 54 52.97 72.52 -27%
80 84.03 116.15 -28%
150 175.97 2412 -27%
Summer
(Jul 2014)
10 19.55 12.36 58%
(Median) 18 27.28 22.34 22%
30 44.04 41.01 7%
45 66.28 64.35 3%
Table 5 shows the monthly gas bills for commercial customers for various usage levels for rates
in effect as of January 1, 2015. Bills for CPAU customers at the usage levels shown are 5 to 6%
lower for smaller commercial customers and 8 to 21% higher for larger commercial customers
than for PG&E customers. This is a substantial improvement over the calendar year 2013 bill
comparison, when commercial gas bills for CPAU customers were 27-44% higher than for PG&E
customers. This is primarily attributable to PG&E’s increased distribution rates as the
commodity rates for CPAU and PG&E are very similar, both being based on spot market gas
prices.
Table 5: Commercial Monthly Average Gas Bill Comparison (for Rates in Effect Jan. 1, 2015)
Usage (therms/mo)
Gas Bill ($/month) %
Difference Palo Alto PG&E
500 562 600 -6%
5,000 4,942 5,205 -5%
10,000 10,020 9,284 8%
50,000 48,656 40,242 21%
SECTION 4C. CURRENT UTILITY FINANCIAL STATUS
In FY 2014, gas purchases represented 44% of Gas Utility’s costs, with CIP and Operations
together representing another 22%. The remaining costs were for administration, overhead,
and other costs (34%) as shown in Figure 3. The percentages for FY 2014 are skewed by the
fact that CIP, which is normally about 20% of expenses, was reduced in FY 2014 to allow for a
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backlog of projects to be completed. The utility’s revenue in FY 2014 came almost entirely from
gas sales (95%), with the remainder coming from capacity and connection fees (2%), and other
sources (3%), as shown in Figure 2.
As shown in Table 6, for FY 2015, net
revenues are expected to be $334,000, or $3.4 million lower than the $3.8 million in the
adopted budget. Net sales are projected to be $4.8 million lower than the adopted budget,
mainly due to an accounting error.
Table 6: Projected Gas Utility Net Revenue, FY 2015
Gas - Operating Activity All figures in thousands $ (000’s)
Adopted
Budget
FY 2015
Projected
FY 2015
Activity
Variance to
Budget
Net Sales * 37,343 32,586 (4,757)
Other revenues 1,849 2,005 156
Purchase costs (13,732) (12,438) (1,294)
Other expenses ** (21,686) (21,820) 124
Total 3,764 334 (3,430)
* Includes misc. sales, adjustments, discounts, and bad debt
** Includes reserve transfers, salaries, allocated charges, other misc. expenses and
encumbrances
SECTION 4D. STATUS OF RESERVES
Table 7 shows the projected balance of each of the Gas Utility reserves for the period covered
by this Financial Plan. The projected balances are also provided in Appendix A. Total reserves
at the end of FY 2015 (6/30/2015) are projected to be $28.6 million, with $8.9 million remaining
in the Rate Stabilization Reserve for future years and $8.4 million in the Operations Reserve,
which is at the Reserve Target level. As detailed in Appendix C (Gas Utility Reserves
Figure 3: FY 2014 Costs by Activity
Gas
Purchases,
44%
CIP, 1%
Operations,
21%
Admin/
Overhead,
34%
Figure 2: FY 2014 Revenue Structure
Sales of
Gas, 95%
Capacity/
Connection
, 2%
Other, 3%
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Management Practices) and in Section 3B, this plan includes a change to the structure of the
utility’s CIP Reserve to make it a cash flow and contingency reserve for CIP projects.
Table 7: Projected End of Fiscal Year Gas Utility Reserve Balances for FY 2015 to FY 2022
Ending Reserve
Balance ($000) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Reappropriations
and Commitments 9,817 9,817 9,817 9,817 9,817 9,817 9,817 9,817
Capital 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488
Rate Stabilization 8,884 3,913 545 0 0 0 0 0
Operations 8,429 8,711 9,279 7,721 7,529 8,159 9,216 10,807
Unassigned 0 0 0 0 0 0 0 0
TOTAL 28,619 23,929 21,129 19,026 18,834 19,464 20,521 22,112
SECTION 4E. DEBT SERVICE
The Gas Utility’s annual debt service is roughly $800,000 per year. This is related to one bond
issuance that will require payments through 2026. This issuance, the 2011 Series A Utility
Revenue Refunding Bonds, was a joint issuance between the Gas and Water Utilities refinancing
the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital
improvements for both systems. The City is in compliance with all covenants on the bond.
Additional detail is provided in Appendix D.
SECTION 5. LOOKING BACK
SECTION 5A. BACKGROUND
On September 22, 1917, the City of Palo Alto issued a bond to purchase the property of Palo
Alto Gas Company and continue it as a municipal enterprise. At the time, the system comprised
21 miles of mains, 1,900 meters, and was valued at $65,500. PG&E supplied the gas, which was
synthesized from coal at its Potrero facility. Almost immediately the City faced challenges.
Losses were at nearly 25% according to PG&E’s master meter, and PG&E had filed with the
Railroad Commission (the forerunner to today’s Public Utilities Commission) to increase rates
by nearly 72.5%. Despite these initial hurdles, Palo Alto’s system grew tremendously, and by
1924 revenues had exceeded those of the electric utility. Sales were such that the annual
reports of the time noted gas usage “appears to be greater than that of any other city in the
state, showing that gas is a very popular form of fuel in Palo Alto.” Just prior to the acquisition
of the neighboring town of Mayfield’s gas system (centered around today’s California Avenue)
in 1929, the miles of main in service and customers connections had doubled.
Notable changes to the gas supply itself came in 1930, when PG&E ceased supplying purely
manufactured (or coal) gas from its Potrero Hill facility in San Francisco and instead switched to
natural gas. In 1935, a supplementary butane injection system (later retired) was purchased
from Standard Oil to mitigate large wintertime peaks. Gas sales were at 248,658 million cubic
feet (MCF) with 4,849 active services.
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Early gas mains in Palo Alto were made of steel, but in the 1950s, like many other utilities, CPAU
switched to ABS plastic. CPAU switched to PVC plastic in the early 1970s, but over 45 miles of
ABS mains had already been installed. A 1990 evaluation of the system found a steadily
increasing rate of gas leaks associated with those mains, something that other gas utilities had
also been experiencing. To reduce leaks, CPAU accelerated its main replacement program from
7,000 feet (1.3 miles) of replacements per year to 20,000 feet (3.8 miles) per year. This would
enable the utility to replace all of its ABS and its most vulnerable steel and PVC mains with
polyethylene (PE) mains over the course of the following 36 years.8 As of 2014 the Gas Utility
had replaced approximately 99 miles of ABS, as well as some sections of steel where cathodic
protection is not effective. Current main replacement projects will target the last ~800 feet of
remaining ABS main as well as tackling PVC replacement. A PVC risk analysis to determine the
footage of annual PVC replacement for future CIP projects is currently being conducted. This
was an example of how local control of its Gas Utility has provided Palo Alto residents with
substantial benefits. During the 1990s and 2000s, while CPAU was increasing its main
replacement rate to ensure a robust gas distribution system, PG&E was underspending on
safety-related infrastructure, according to a recent audit.9
In the 1990s, while grappling with the issues surrounding its distribution system, CPAU was also
participating in major changes to the structure of the gas industry in California. Until 1988
CPAU had a formal policy of setting its rates equal to PG&E’s rates and successfully did so with
the exception of one year in the mid-1970s. At times this led to inadequate revenue (1974 to
1981) as PG&E, the City’s only gas supplier, regularly filed requests with the CPUC to increase
the wholesale gas supply rates charged to the Gas Utility. In the 1990s, as the CPUC began
deregulating the natural gas industry in California, the Gas Utility began purchasing gas from
suppliers other than PG&E. In 1997 the CPUC adopted the “Gas Accord,”10 which enabled the
Gas Utility (along with other local transportation-only customers) to obtain transmission rights
on PG&E’s Redwood transmission pipeline running from Malin, Oregon into California.
In 2000/2001 the California energy crisis occurred, causing major disruptions to the Gas Utility’s
supply costs. Wholesale gas prices rose over 500% between January 2000 and January 2001.
The Council approved drawing down reserves to provide ratepayer relief and, for two years
following the crisis, CPAU rates were above PG&E’s as reserves were replenished. In April 2001
the Council approved a hedging practice of buying fixed price gas one to three years into the
future. After reaching a low point in October 2001, prices continued to rise, and as a result the
CPAU hedging strategy frequently resulted in a wholesale supply cost advantage compared to
PG&E until prices began to decline steeply in mid-2008. At that point the Gas Utility’s
wholesale supply costs became higher than market gas prices due to fixed price contracts
entered into prior to 2008. As a result the Gas Utility’s wholesale supply costs were higher than
PG&E’s for several years. In 2012 Council approved a plan to formally cease the hedging
strategy and purchase all gas on the short-term (“spot”) markets. As of July 1, 2012, the
commodity portion of the gas rates changes every month based on the spot market gas price.
8 Staff Report CMR:183:90. Infrastructure Review and Update, March 1, 1990
9 Focused Financial Audit of The Pacific Gas & Electric Company’s Gas Distribution Operations, Overland Consulting,
made available through a CPUC Administrative Law Judge’s ruling on A12-11-009/I13-03-007 on 5/31/2013
10 CPUC decision 97-08-055. Since then, the Gas Accord has been amended four times, with the most recent being
Gas Accord V, application A.09-09-013
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SECTION 5B. HISTORICAL GAS COMMODITY PRICES
Gas commodity prices have suffered periods of very high volatility. As shown in Figure 4, gas
commodity prices spiked up—and then plunged down—dramatically in the 2000/2001
California energy crisis. Prices also rose quickly from late 2007 to a peak in July 2008, followed
by a steep fall as the gas extraction process of hydraulic fracturing (“fracking”) resulted in
increased supplies. Gas prices, though still subject to volatility, have been moderate since
2009.
Figure 4: Gas Market Prices at PG&E Citygate
SECTION 5C. HISTORICAL EXPENSES AND REVENUES
Table 8 shows the Gas Utility’s expenses and revenues for the past five years. Total costs for
this utility have decreased 20% since 2010, primarily since commodity costs decreased 36%
with reduced gas market prices. Distribution operations costs11 were 5% higher in 2014 than
they were in 2010. Sales revenues decreased in FY 2013 as the utility began to pass through
the monthly gas commodity prices to customers. FY 2013 sales volumes were also lower than
normal due to warmer than average weather. Budgeted CIP expenses were notably low in FY
2014 because no new main replacement project was budgeted. This was to allow work to be
11 Administration, Demand Side Management, Engineering, O&M, and Resource Management categories.
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completed on a large multi-year main replacement project that commenced in a prior year.
Budgeting for ongoing gas main replacements resumed in FY 2015.
Table 8: Gas Utility Historical Expenses
SECTION 6. LOOKING FORWARD
SECTION 6A. SEVEN YEAR FINANCIAL FORECAST
1. OVERVIEW
Staff has prepared a forecast of costs and revenues through FY 2022. As shown in Table 9 (and
Appendix A), total costs for the Gas Utility are projected to rise steadily through FY 2022.
Operations costs are projected to increase at 3% per year, though costs are projected to be
temporarily higher in FY 2016 through FY 2018 while the cross-bore program is being
completed (see Section 6A(3) below for more discussion). In addition, future ongoing CIP
spending is assumed to increase with inflation. Some uncertainty exists in the projection for CIP
costs due to high main replacement costs, as discussed in Section 6A(4).
Although costs are increasing, lower CIP budgets in FY 2014 and FY 2015 have resulted in
healthy reserves and only moderate non-commodity rate increases are needed in upcoming
years.
2010 2011 2012 2013 2014
1
2 Utilities Retail Sales 43,244 42,855 41,034 33,759 34,843
3 Service Connection & Capacity Fees 451 516 592 731 654
4 Other Revenues & Transfers In 1,713 203 103 830 313
5 Interest plus Gain or Loss on Investment 1,342 821 1,119 (239)706
6 Total Sources of Funds 46,750 44,396 42,847 35,081 36,517
7
8 Purchases of Utilities:
9 Supply Commodity 21,846 20,732 15,356 12,461 12,992
10 Supply Transportation 620 706 879 994 1,333
11 Total Purchases 22,466 21,438 16,235 13,455 14,325
12
13 Administration (CIP + Operating)2,494 2,895 3,473 4,273 3,988
14 Customer Service 1,134 1,230 1,270 1,358 1,338
15 Demand Side Management 428 563 614 630 438
16 Engineering (Operating)266 280 333 340 352
17 Operations and Maintenance 3,942 3,297 5,032 4,940 4,119
18 Resource Management 696 1,039 729 506 516
19 Debt Service Payments 505 488 406 296 282
20 Rent 320 230 230 219 419
21 Transfers to General Fund 5,300 5,304 6,006 5,971 5,811
22 Other Transfers Out 407 614 170 207 606
23 Capital Improvement Programs 2,389 8,325 7,821 7,620 240
24 Total Uses of Funds 40,348 45,704 42,320 39,814 32,435
25
26 Into/ (Out of) Reserves 6,402 (1,308)528 (4,733)4,082
Fiscal Year
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Table 9: Seven Year Gas Financial Forecast Summary
*The rate change line shows the combined effect of commodity and non-commodity rate changes for FY 2013. For current and
future years, only non-commodity rate changes are shown. Commodity rates will vary monthly with market prices.
2. COMMODITY SUPPLY COSTS
The Gas Utility purchases much of its gas for delivery at Malin, Oregon which is almost always
cheaper than delivery at PG&E City Gate, even including the costs of transmission from Malin to
City Gate. Gas is purchased on a month-ahead and day-ahead basis in the spot market.
Commodity costs are expected to stay steady or decline slightly over the next several years.
Figure 5 shows the projected gas prices used to generate this forecast. Projections for
transmission costs associated with transporting gas over PG&E’s Redwood transmission
pipeline are based on rates adopted in the most recent update to the Gas Accord.
Local transportation costs decreased on January 1, 2015 due to the expiration of a temporary
adder to PG&E’s local transportation rate,12 but in December 2014 PG&E applied to the CPUC
to more than double local transportation costs. Staff is tracking PG&E’s application, and based
on discussions to date, expects that nearly all of the proposed increase in local transportation
costs will be approved. Staff projects these costs to escalate at 3% per year in subsequent
years. As these charges are dictated by PG&E and are outside of Palo Alto’s control, staff may
propose making these costs a pass-through charge, similar to the commodity charge, in FY 2016
or FY 2017.
12 California Public Utilities Commission Advice Letter 3430-G, effective January 1, 2014. Also see CPUC Decision
12-12-30 regarding the Pipeline Safety Enhancement Plan Adder.
Actual Adopted Proj.Proj.Proj.Proj.Proj.Proj.Proj.Proj.
2014 2015 2015 2016 2017 2018 2019 2020 2021 2022
1 RATE CHANGE (%)*0%0%0%0%7%4%4%4%3%3%
2 SALES IN THOUSAND THERMS 28,117 28,881 27,895 28,939 28,995 29,060 29,110 29,160 29,200 29,243
3
4 Utilities Retail Sales 34,843 37,343 32,586 33,327 36,957 39,789 42,197 44,168 45,499 47,036
5 Service Connection & Capacity Fees 654 580 602 640 662 686 707 728 728 728
6 Other Revenues & Transfers In 313 554 1,022 1,620 1,919 2,255 2,623 2,999 3,355 3,689
7 Interest plus Gain or Loss on Investment 706 715 381 407 323 260 213 213 242 306
8 Total Sources of Funds 36,517 39,192 34,592 35,993 39,861 42,990 45,740 48,108 49,824 51,759
9
10 Purchases of Utilities:
11 Supply Commodity 12,992 12,484 10,385 10,723 11,980 13,108 13,778 14,139 14,436 14,848
12 Supply Transportation 1,333 1,248 2,053 2,706 2,982 3,186 3,221 3,225 3,245 3,279
13 Total Purchases 14,325 13,732 12,438 13,429 14,962 16,294 16,999 17,364 17,680 18,127
14
15 Administration (CIP + Operating)3,988 3,331 4,238 4,350 4,473 4,600 4,731 4,865 4,994 5,120
16 Customer Service 1,338 1,629 1,486 1,532 1,590 1,650 1,712 1,777 1,831 1,879
17 Demand Side Management 438 1,284 625 641 657 674 691 709 727 745
18 Engineering (Operating)352 450 367 378 392 406 421 436 449 461
19 Operations and Maintenance 4,119 4,250 4,366 5,497 5,686 5,884 5,086 5,272 5,430 5,571
20 Resource Management 516 976 947 1,276 1,464 1,678 1,914 2,146 2,369 2,586
21 Debt Service Payments 282 802 802 803 803 802 800 800 802 803
22 Rent 419 431 431 443 457 470 485 499 514 530
23 Transfers to General Fund 5,811 5,730 5,730 6,162 6,454 6,709 7,008 7,332 7,679 8,040
24 Other Transfers Out 606 472 486 499 511 524 537 550 564 578
25 Capital Improvement Programs 240 2,341 2,341 5,673 5,214 5,402 5,550 5,728 5,728 5,728
26 Total Uses of Funds 32,435 35,428 34,258 40,683 42,661 45,093 45,933 47,477 48,767 50,168
27
28 Into/ (Out of) Reserves 4,082 3,764 334 (4,690)(2,800)(2,102)(193)630 1,057 1,591
Fiscal Year
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Figure 5: Wholesale Gas Price Projections
3. OPERATIONS
Operations costs include the Customer Service, Demand Side Management, Operations and
Maintenance, Engineering, Resource Management, and Administration categories in Table 9,
above. Debt service, rent, and transfers are also included in Operations costs (excluding the
General Fund equity transfer). Appendix E includes detailed descriptions of the activities
associated with these cost categories. Operations costs are projected to increase by 3 to 4%
per year. Salary and benefits, inflation, and other assumptions match those used in the City’s
long-range financial forecast.
Operations costs for FY 2016 to FY 2018 include funding for the cross-bore program. In the
1970s CPAU, like many other utilities, adopted horizontal drilling as an alternative to trenching
when installing new gas services. This created the possibility of cross-bores, which can happen
when a gas service is bored through a sewer lateral. Though cross-bores are very rare, they can
create a dangerous situation when a contractor attempts to clear a blocked sewer line, because
if the cross-bored gas service is damaged during the line clearing it can result in a gas leak.
CPAU has been inspecting new gas services since 2001, and in 2011 began video inspections of
the sewer laterals at the location of horizontally-drilled gas services installed before 2001. This
inspection program has cost roughly $1 million per year since FY 2012. While a majority of
sewer laterals have been inspected, staff has come across several services which are not able to
be scoped, either due to infiltration by roots or broken/collapsed pipe segments. Staff has
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included $3 million in additional funding over the forecast period for this program, but the
program will likely require additional funding in future years to complete.
4. CAPITAL IMPROVEMENT PROGRAM (CIP)
The Gas Utility’s CIP program consists of the following programs and budgets:
The Gas Main Replacement Program, under which the Gas Utility replaces aging gas
mains
Customer Connections, which covers the cost when the Gas Utility installs new services
or upgrades existing services at a customer’s request in response to development or
redevelopment. The Gas Utility charges a fee to these customers to cover the cost of
these projects.
Ongoing Projects, which covers the cost of routine meter, regulator, and service
replacement, minor projects to improve reliability or increase capacity, and other
general improvements.
Tools and Equipment, which covers the cost of capitalized equipment, such as
directional boring equipment.
One-time Projects, which represents occasional large projects that do not fall into any
other category.
Table 10 shows the current status of these project categories and future projected spending.
Table 10: Budgeted Gas CIP Spending
The Gas Main Replacement (GMR) Program is in the process of reaching a major milestone, the
replacement of the last gas mains made from ABS plastic. The program to replace ABS and
other low-performing materials in the system started in the 1990s (see Section 5a (Background)
for more detail). CPAU has temporarily slowed down its new CIP appropriations in this category
in order to finish the last major ABS main replacement project and to catch up on a backlog of
projects that has accumulated due to staffing issues. With the replacement of all ABS mains
with PE plastic, the material most at risk for failure is removed leaving only PVC plastic, steel
(wrapped, with cathodic protection), and PE mains. The next focus of the GMR program will be
PVC mains. CPAU plans to complete a Gas System Master Plan in 2015 to determine which
areas of the system to prioritize. The plan will help CPAU determine whether the pace of main
replacement (approximately three miles of main each year, or 1.5% of the system) needs to be
increased, decreased, or whether it needs to remain the same.
Project Category
Current
Budget*
Spending,
Curr. Yr
Remain.
Budget**Committed FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
One Time Projects 192 (30) 162 - - - - - -
Gas Main Replacement 8,892 (3,099) 5,793 5,532 4,161 3,650 3,785 3,878 4,000
Tools And Equipment 407 (18) 389 64 100 100 100 100 100
Ongoing Projects 1,594 (205) 1,389 223 763 786 809 834 858
Customer Connections 752 (415) 337 3 950 979 1,008 1,038 1,069
TOTAL 11,837 (3,767) 8,070 5,822 5,974 5,514 5,702 5,850 6,028
*Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year
**Equal to CIP Reserves (Reserve for Reappropriations + Reserve for Commitments).
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The current budget for gas main replacement assumes the current pace of main replacement,
but does not take into account the recent rise in costs for main replacement, which have
increased from the levels seen during the recent recession. Several factors may be contributing
to this. Economic recovery in the Bay Area, as well as a greater focus on infrastructure
improvement by many municipal agencies and utilities could be creating high demand for
contractors in these fields. Newer, more leak resistant pipe materials may have ongoing
greater costs. CPAU has seen the replacement cost per linear foot increase by 25 to 50% over
the last couple of years. Currently CPAU plans to complete as much main replacement as
possible within its current budget, provided there are no safety concerns. However, if this
trend of higher cost continues, the Gas Utility may require larger CIP budgets, and as a result,
larger rate increases.
Ongoing Projects, Tools and Equipment, and Customer Connections are projected to cost
approximately $1.8 million in FY 2016 and increase by 3% per year through the end of the
forecast period. In practice, these projects can fluctuate dramatically depending on system
conditions and the pace of development and redevelopment in the city. It is worth noting that
the Customer Connections program is paid for through fee revenue, so when costs go up, so
does fee revenue.
Aside from customer connections and some transfers from other funds, the CIP plan for
FY 2016 to FY 2020 is funded by utility rates. The details of the plan are shown in Appendix B:
Gas Utility Capital Improvement Program (CIP) Detail.
5. EQUITY TRANSFER
The City calculates the equity transfer from its Gas Utility based on a rate of return on the net
book value of the utility’s capital assets[1]. The Council adopted this methodology in 2009 and it
has remained unchanged since. Each year it is calculated according to the 2009 Council-
adopted methodology, and does not require additional Council action.
SECTION 6B. REVENUE REQUIREMENT AND SOURCES
The Gas Fund’s costs and revenues from FY 2010 through FY 2022 are shown in Figure 6 below.
Rate changes in future years assume that the gas commodity prices remain at 2015 levels. This
is done to better highlight those rate component changes which the utility controls rather than
gas commodity costs, which are subject to market price variation and passed through directly
to customers monthly based on market prices. Revenues are projected to be lower than
expenses through FY 2018, with the utility drawing down the Rate Stabilization Reserve during
that time. In general, rates will need to increase 3% to 4% per year to match revenues to costs
and bring the Operations Reserve to Target levels by the end of the forecast period.
[1] For more detail on the ordinance adopting the 2009 transfer methodology, see CMR 280:09, Budget Adoption
Ordinance for Fiscal Years 2009 and 2010; and CMR 260:09, Finance Committee Report explaining proposed
changes to equity transfer methodology.
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Reserves are adequate to avoid increasing gas rates until FY 2017, when a 7% increase is
projected. A 7% increase is equivalent to an additional $1.75 to $3.88 per month (summer and
winter) for the median residential customer’s monthly gas bill, based on commodity prices as of
February 2015. Future increases would be roughly half of these levels.
Figure 6: Gas Utility Revenue and Cost Projections
The proposed rate trajectory draws the Rate Stabilization Reserve down to zero by FY 2018, as
shown in Figure 7.
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Figure 7: Gas Utility Revenue and Cost Projections
SECTION 6C. RISK ASSESSMENT AND RESERVE ADEQUACY
Staff performs an annual assessment of financial risks for the Gas Utility. For this evaluation,
staff estimates using the following criteria:
1. The maximum observed one-year distribution revenue variance over the past five years;
and
2. An increase of 10% of planned system improvement CIP expenditures for the budget year.
Commodity price risk is not included in the risk assessment because these costs are passed
directly to customers each month. Table 11 summarizes the risk assessment calculation for the
Gas Utility. The Operations Reserve is projected to be adequate to manage these levels of risk
over the entire forecast period.
Table 11: Gas Utility Risk Assessment ($000)
FY
2016
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
Total Revenue 21,314 22,253 23,564 24,991 23,373 26,340 28,010
Max. Historical Revenue Variance 5% 5% 5% 5% 5% 5% 5%
Budget-to-Actual Risk 1,079 1,127 1,193 1,107 1,266 1,334 1,418
System Rehabilitation CIP Budget 4,723 4,235 4,394 4,822 4,511 4,658 4,65
CIP Contingency @10% 472 424 439 482 451 466 466
Total Risk Assessment Value 1,552 1,550 1,633 1,589 1,717 1,800 1,884
Projected Operations Reserve Level 8,711 9,279 7,721 7,529 8,159 9,216 10,807
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The Gas Utility currently has one contingency reserve (the Operations Reserve), and this
Financial Plan maintains reserves within their approved guideline levels throughout the forecast
period, as shown in Figure 8 below. Reserve levels also exceed the short-term risk assessment
value for the utility.
Figure 8: Operations Reserve Adequacy
SECTION 6D. ALTERNATE SCENARIOS
The forecast described in the previous sections assumes that gas main replacement costs are
about the same as they were in previous years. There is substantial uncertainty about this
assumption. Staff has created a separate CIP scenario in which main replacement budgets are
50% higher than the base forecast. As described in Section 6A (Seven Year Financial Forecast)
prices for the most recent main replacement projects have been nearly 50% higher than
previous projects. The current forecast assumes that these prices have been temporary spikes
due to the economy picking up, but that may not be the case. The “High CIP Cost” scenario
assumes that CPAU continues its current pace of main replacement and prices remain at these
higher levels.
Figure 9 shows the rate increases under the High CIP Cost scenario and the base case
(inflationary increases in CIP budgets). If this scenario becomes reality, it may be possible to
phase in the increase in CIP budgets over several years to defer the rate impact into later years.
CPAU will be developing a Gas System Master Plan, planned for later in 2015 or 2016. It will
give CPAU the information it needs to determine the feasibility of these types of strategies.
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Figure 9: Rate Increases for High CIP Scenario
SECTION 6E. HISTORICAL AND PROJECTED CONSUMPTION
Gas usage in Palo Alto is volatile, varying with both economic and weather conditions. As
shown in Figure 10, in the early 1970’s, gas purchases reached over 45 million therms per year.
Usage dropped dramatically in the 1976/1977 drought when customers saved significant
amounts of (hot) water by upgrading to efficient showerheads. During the 1980s and 90s
average gas usage was around 36 million therms per year. Usage dropped again in the early
2000’s. In FY 2001, gas prices escalated during the California energy crisis and Palo Alto’s rates
increased by nearly 200%. From 2003 to 2011, usage decreased by 2.3% mainly as a result of
continued customer investments in energy efficiency. Since 2011 usage has decreased by
almost 3% annually, with generally increasing gas rates encouraging conservation and spurring
energy efficiency investment. Gas usage was 28.8 million therms in FY 2014.
Gas consumption is projected to recover somewhat and stay stable over the forecast period,
with growth being offset by gas efficiency savings. Figure 10 presents the historical gas
consumption levels (with and without the gas energy efficiency (EE) programs) from FY 1971
through FY 2014 and projections for FY 2015 through FY 2023.
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Figure 10: Historic and Projected Gas Consumption
SECTION 6F. LONG TERM OUTLOOK
In the longer term (5 to 35 years out) it is very difficult to predict the Gas Utility’s commodity
costs. A variety of long-term trends could affect commodity costs either positively or
negatively. Continuing improvement in gas extraction technology, such as fracking, could
continue to create generous supplies of gas, but these technologies are also under greater
scrutiny with respect to their environmental impacts. On the demand side, a continued shift
from coal to natural gas for electricity generation or an increase in manufacturing in the U.S.
might drive up natural gas prices, but other factors, such as generally more mild winters, might
drive gas demand lower. It is also difficult to predict the magnitude of the additional cost
impacts associated with the State’s cap-and-trade program over the long term. In the face of
this uncertainty, CPAU is able to protect the financial position of the Gas Utility by continuing its
current strategy of passing these costs directly to its customers via month-varying rate
adjustment mechanisms.
As discussed in Section 6A (Seven Year Financial Forecasts), the future CIP investment needs for
the Gas Utility may be lower than in the past, although costs per foot for main replacement
may increase substantially. The Gas Utility has replaced all of its ABS gas mains and its most
problematic steel and PVC mains as well. The PE pipe being used now is expected to have at
least a fifty-year lifetime, and there is growing evidence that it may last much longer than that.
This would result in lower CIP investment over the long term. CPAU is performing a study in
2015 to develop its future main replacements priorities and strategy.
Long-term state or local climate goals could also have a major impact on the Gas Utility. The
Global Warming Solutions Act, Assembly Bill 32 (AB32), set a goal of reducing greenhouse gas
27
29
31
33
35
37
39
41
43
45
47
Th
e
r
m
s
(
M
i
l
l
i
o
n
s
)
Purchases
Purchases without EE
Actual Forecast
GAS UTILITY FINANCIAL PLAN
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(GHG) emissions to 1990 levels by 2020 and then maintaining those reductions. In its
December 2007 Climate Protection Plan, the City set a goal of lowering emissions to 15% below
2005 levels by 2020. As a community Palo Alto achieved these goals in 2012 even with
continued use of natural gas for heating, cooking, and industrial processes. If stricter goals are
enacted at the state or local level, however, it could lead to “electrification”, or consumer
switching from gas-using appliances to electric-using appliances for heating, cooking and
processes. If significant amounts of electrification occurred, stranded investment and higher
rates could be required as the costs of the distribution system are recovered over a lower sales
base. One example of a stricter standard has been stated by the Governor—reducing GHG
emissions to 80 percent below 1990 levels by 2050.13 This goal, or less ambitious interim state
goals, would require legislation to implement. But it is instructional that, in the recent
discussion draft of its scoping plan update, CARB says, to meet those goals, natural gas use
would have to be “mostly phased out.”14 Staff anticipates legislation this year to address the
Governor’s 2030 climate goals of 50% renewable generation, 50% reduction in transportation
fuels, and a doubling of energy efficiency. A few bills have already been introduced on post-
2020 GHG emission reduction goals and the GHG cap-and-trade market. As stewards of the Gas
Utility, the City should continue to stay aware of developments in state climate planning,
participate as a stakeholder, and consider these types of impacts and ways to mitigate them
when developing its own sustainability goals.
SECTION 6G. COMMUNICATIONS PLAN
The FY 2016 communications strategy covers four primary areas: operations, infrastructure,
safety, efficiency, renewables and rates. CPAU has moved to market pricing for commodity
rates. Changes to the commodity rates are posted monthly on the City’s website. This year, in
light of the water and wastewater utility rate increases, CPAU is deferring any formal “rate
change” to the gas utility at this time, but website and community education about rates is
ongoing. Gas use efficiency incentives are promoted year-round, but most heavily during winter
months to impact heating activities. Promotional methods include community outreach events,
print ads in local publications, utility bill inserts, messaging on the bills and envelopes, website
pages, email blasts, videos for the web and local Comcast channels, Home Energy Reports and
the use of social media.
To keep customers apprised of the status and accomplishments of capital improvement
projects, a network of project web pages are maintained. Traffic is driven to the website via
print and digital ads, social media and email blasts. Safety topics are emphasized year-round.
CPAU is engaging in several new campaigns and programs in FY 2016 to promote gas utility
efficiency and renewable energy. The Georgetown University Energy Prize competition is a
friendly, national campaign to encourage communities to reduce energy use. Energy savings
from reduced gas and electric consumption qualify to help Palo Alto compete for a $5 million
prize at the end of a two-year campaign. Since adoption of a carbon neutral electric supply
portfolio and retirement of the PaloAltoGreen program, CPAU launched a new voluntary
13 Executive Orders S-3-05 and B-16-2012.
14 Climate Change Scoping Plan, First Update, Discussion Draft for Public Review and Comment, California Air
Resources Board, October 2013, pg 88.
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renewable natural gas carbon offsets program, PaloAltoGreen Gas. Much of our programmatic
promotional activity will center around customer education and encouragement to sign up for
participation in PaloAltoGreen Gas. Other new programs include home efficiency services and
online tools to help customers manage their energy use.
Stepping up efforts to promote gas safety education, staff is focusing outreach around youth,
the importance of calling USA (811) before digging for anyone who may excavate in and around
Palo Alto, such as plumbers and contractors, potential sewer and gas line crossbores, keeping
fats, oils and greases out of drains, and ensuring clear access to meters. For younger
“customers-to-be,” CPAU created a Home Safety Detective campaign that includes special tool
kits to help them identify home safety problems. Staff provides safety kits to youth and adults
at school presentations, neighborhood safety and emergency preparedness fairs and other
community outreach events. Meter access awareness is highlighted through use of materials
featuring photos of some unusual ways people obstruct access to their meters, including using
them as bike racks and building storage sheds around them.
CPAU will continue to promote safety, infrastructure, operations, efficiency and rate
adjustment messages through a variety of marketing and media channels. Every year, CPAU
publishes an updated gas safety awareness brochure which is mailed to all customers in Palo
Alto, as well as plumbers, contractors and excavators that may work in and around the area.
Staff talks with business customers at special facilities meetings, attends neighborhood safety
and emergency preparedness fairs and offers presentations to school and community groups.
While print materials and website pages still feature prominently, CPAU is turning the outreach
emphasis to direct mail, newspaper inserts, social media, online videos and cable TV. Copies of
all outreach materials and logs of activities are saved in the Gas Safety Public Awareness Plan
that is reviewed at least once per year by the Department of Transportation.
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APPENDICES
Appendix A: Gas Utility Financial Forecast Detail
Appendix B: Gas Utility Capital Improvement Program (CIP) Detail
Appendix C: Gas Utility Reserves Management Practices
Appendix D: Gas Utility Debt Service Details
Appendix E: Description of Gas Utility Cost Categories
Appendix F: Gas Utility Communications Samples
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APPENDIX A: GAS UTILITY FINANCIAL FORECAST DETAIL
Actual Adopted Proj.Proj.Proj.Proj.Proj.Proj.Proj.Proj.
2014 2015 2015 2016 2017 2018 2019 2020 2021 2022
1 RATE CHANGE (%)*0%0%0%0%7%4%4%4%3%3%
2 SALES IN THOUSAND THERMS 28,117 28,881 27,895 28,939 28,995 29,060 29,110 29,160 29,200 29,243
3
4 Utilities Retail Sales 34,843 37,343 32,586 33,327 36,957 39,789 42,197 44,168 45,499 47,036
5 Service Connection & Capacity Fees 654 580 602 640 662 686 707 728 728 728
6 Other Revenues & Transfers In 313 554 1,022 1,620 1,919 2,255 2,623 2,999 3,355 3,689
7 Interest plus Gain or Loss on Investment 706 715 381 407 323 260 213 213 242 306
8 Total Sources of Funds 36,517 39,192 34,592 35,993 39,861 42,990 45,740 48,108 49,824 51,759
9
10 Purchases of Utilities:
11 Supply Commodity 12,992 12,484 10,385 10,723 11,980 13,108 13,778 14,139 14,436 14,848
12 Supply Transportation 1,333 1,248 2,053 2,706 2,982 3,186 3,221 3,225 3,245 3,279
13 Total Purchases 14,325 13,732 12,438 13,429 14,962 16,294 16,999 17,364 17,680 18,127
14
15 Administration (CIP + Operating)3,988 3,331 4,238 4,350 4,473 4,600 4,731 4,865 4,994 5,120
16 Customer Service 1,338 1,629 1,486 1,532 1,590 1,650 1,712 1,777 1,831 1,879
17 Demand Side Management 438 1,284 625 641 657 674 691 709 727 745
18 Engineering (Operating)352 450 367 378 392 406 421 436 449 461
19 Operations and Maintenance 4,119 4,250 4,366 5,497 5,686 5,884 5,086 5,272 5,430 5,571
20 Resource Management 516 976 947 1,276 1,464 1,678 1,914 2,146 2,369 2,586
21 Debt Service Payments 282 802 802 803 803 802 800 800 802 803
22 Rent 419 431 431 443 457 470 485 499 514 530
23 Transfers to General Fund 5,811 5,730 5,730 6,162 6,454 6,709 7,008 7,332 7,679 8,040
24 Other Transfers Out 606 472 486 499 511 524 537 550 564 578
25 Capital Improvement Programs 240 2,341 2,341 5,673 5,214 5,402 5,550 5,728 5,728 5,728
26 Total Uses of Funds 32,435 35,428 34,258 40,683 42,661 45,093 45,933 47,477 48,767 50,168
27
28 Into/ (Out of) Reserves 4,082 3,764 334 (4,690)(2,800)(2,102)(193)630 1,057 1,591
29
30 Reappropriations + Commitments 11,194 11,305 9,817 9,817 9,817 9,817 9,817 9,817 9,817 9,817
31 Plant Replacement 0 0 0 0 0 0 0 0 0 0
32 CIP Reserve 0 0 1,488 1,488 1,488 1,488 1,488 1,488 1,488 1,488
33 Rate Stabilization 8,598 8,598 8,884 3,913 545 0 0 0 0 0
34 Operations Reserve 8,382 8,382 8,429 8,711 9,279 7,721 7,529 8,159 9,216 10,807
35 Unassigned 0 0 0 0 0 0 0 0 0 0
36 Total Reserves 28,174 28,285 28,619 23,929 21,129 19,026 18,834 19,464 20,521 22,112
37 (3,507)445 (4,690)(2,800)(2,102)(193)630 1,057 1,591
38 Short Term Risk Assessment Value 1,226 1,552 1,550 1,633 1,717 1,800 1,836 1,884
39
40 Operations Reserve Guidelines
41 Min (60 Days Commodity + O&M)5,588 5,620 5,620 5,807 6,186 6,529 6,613 6,810 6,994 7,196
42 Target (60 Days Commodity + O&M)8,382 8,429 8,429 8,711 9,279 9,793 9,920 10,214 10,490 10,794
43 Max (60 Days Commodity + O&M)11,176 11,239 11,239 11,614 12,372 13,057 13,227 13,619 13,987 14,392
44
Fiscal Year
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APPENDIX B: GAS UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Project #Project Name
Reappropriated /
Carried Forward from
Previous Years
Current Year
Funding
Budget
Amendments
Spending,
Current Year
Remaining in
CIP Reserve
Fund Commitments FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
ONE TIME PROJECTS
GS-09000 Gas Station 1 Rebuild 6,630 - - - 6,630 - - - - - -
GS-08000 Gas Station 2 Rebuild 10,023 - - - 10,023 - - - - - -
GS-10000 Gas Station 3 Rebuild 8,489 - - (30,125) (21,636) - - - - - -
GS-11001 Gas Station 4 Rebuild 16,898 - - - 16,898 - - - - - -
GS-13003 COBUG emissions equipment - - - - - - - - - - -
GS-15001 Security at Receiving Stations - 150,000 - - 150,000 - - - - - -
Subtotal, One-time Projects 42,040 150,000 - (30,125) 161,915 - - - - - -
GAS MAIN REPLACEMENT (GMR) PROGRAM
GS-08011 GMR - Project 18 10,531 - - - 10,531 - - - - - -
GS-09002 GMR - Project 19 1,683,181 - - (1,072,730) 610,451 1,135,565 - - - - -
GS-10001 GMR - Project 20 4,280,658 - - (1,570,222) 2,710,436 2,956,030 - - - - -
GS-11000 GMR - Project 21 2,314,845 - - (452,823) 1,862,022 1,396,378 - - - - -
GS-12001 GMR - Project 22 - 603,000 - (3,579) 599,421 43,854 3,540,000 - - - -
GS-13001 GMR - Project 23 - - - - - - 621,000 3,010,000 - - -
GS-14003 GMR - Project 24 - - - - - - - 640,000 3,100,000 - -
GS-15000 GMR - Project 25 - - - - - - - - 685,000 3,200,000 -
GS-16000 GMR - Project 26 - - - - - - - - 678,000 3,300,000
GS-20000 GMR - Project 27 - - - - - - - - - 700,000
Subtotal, Gas Main Replacement Program 8,289,216 603,000 - (3,099,354) 5,792,862 5,531,827 4,161,000 3,650,000 3,785,000 3,878,000 4,000,000
TOOLS AND EQUIPMENT
GS-13002 General Shop Equipment/Tools 48,062 100,000 - (13,957) 134,105 - 100,000 100,000 100,000 100,000 100,000
GS-01019 Global Positioning System 80,306 - - (3,887) 76,419 2,810 - - - - -
GS-02013 Directional Boring Machine 413 - - - 413 - - - - - -
GS-03007 Directional Boring Equipment 408 - - - 408 - - - - - -
GS-03008 Polyethylene Fusion Equip.29,168 - - - 29,168 - - - - - -
GS-14004 Gas Distribution System Model 148,608 - - - 148,608 60,918 - - - - -
Subtotal, Tools and Equipment 306,965 100,000 - (17,844) 389,121 63,728 100,000 100,000 100,000 100,000 100,000
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Project #Project Name
Reappropriated /
Carried Forward from
Previous Years
Current Year
Funding
Budget
Amendments
Spending,
Current Year
Remaining in
CIP Reserve
Fund Commitments FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
ONGOING PROJECTS
GS-11002 Gas System Improvements 266,770 219,000 - (186,693) 299,077 222,990 225,000 232,000 239,000 246,000 253,417
GS-03009 System Ext. - Unreimbursed 150,595 183,500 - (17,971) 316,124 - 192,675 198,500 204,455 211,000 216,908
GS-80019 Gas Meters and Regulators 438,837 335,000 - - 773,837 - 345,000 355,000 366,000 377,000 387,952
Subtotal, Ongoing Projects 856,202 737,500 - (204,664) 1,389,038 222,990 762,675 785,500 809,455 834,000 858,277
CUSTOMER CONNECTIONS (FEE FUNDED)
GS-80017 Gas System Extensions (127) 752,000 - (415,114) 336,759 3,000 950,000 978,500 1,007,855 1,038,091 1,069,234
Subtotal, Customer Connections (127) 752,000 - (415,114) 336,759 3,000 950,000 978,500 1,007,855 1,038,091 1,069,234
GRAND TOTAL 9,494,296 2,342,500 - (3,767,101) 8,069,695 5,821,545 5,973,675 5,514,000 5,702,310 5,850,091 6,027,511
Funding Sources
Connection Fees 602,000 - 639,600 662,000 686,360 861,000 728,159
Utility Rates 893,200 - 5,334,075 5,334,075 5,334,075 5,334,075 5,334,075
CIP-RELATED RESERVES DETAIL
6/30/2014
(Actual)12/31/2014
Reappropriations 1,488,296 2,248,150
Commitments 8,006,000 5,821,545
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APPENDIX C: GAS UTILITY RESERVES MANAGEMENT PRACTICES
(Amendments to this section are proposed. See the proposed resolution adopting this Financial
Plan. This section will be added to the Financial Plan following adoption of any amendments to
this section.)
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APPENDIX D: GAS UTILITY DEBT SERVICE DETAILS
The Gas Utility currently makes debt service payments on one bond issuance, the 2011 Series A
Utility Revenue Refunding Bonds. This bond issuance was to refinance the $18 million principal
remaining on the Utility Revenue Bonds, 2002 Series A issued for the Gas and Water Utilities to
finance various improvements to the distribution systems. $9.4 million of this issuance was
secured by the net revenues of the Gas Utility. Debt service for this bond for the financial
forecast period is shown in Table 12. Debt service on this bond will continue through 2026.
Table 12: Gas Utility Debt Service
FY
2015
FY
2016
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
2011 Utility
Revenue Refunding
Bonds, Series A
802 803 803 802 800 800 802 803
The 2011 bonds include two covenants stating that 1) the Gas Utility will maintain a debt
coverage ratio of 125% of debt service, and 2) that the City will maintain “Available Reserves”15
equal to five times the annual debt service. The current financial plan complies with these
covenants throughout the forecast period, as shown in Table 13 and Table 14.
Table 13: Debt Service Coverage Ratio ($000)
FY
2015
FY
2016
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
Revenues 34,592 35,993 39,861 42,990 45,740 48,108 49,824 51,759
Expenses
(Excluding CIP
and Debt Service)
(31,114) (34,207) (36,645) (38,889) (39,584) (40,950) (42,237) (43,637)
Net Revenues 3,478 1,786 3,216 4,101 6,156 7,158 7,587 8,122
Debt Service 802 803 803 802 800 800 802 803
Coverage Ratio 434% 222% 400% 511% 770% 895% 946% 1011%
Table 14: Debt Service Minimum Reserves ($000)
FY 2015 FY
2016
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
Gas Utilitya 18,802 14,112 11,312 9,209 9,017 9,647 10,704 12,295
Debt Serviceb 803 804 803 802 801 801 802 803
Reserves Ratioc 23x 18x 14x 11x 11x 12x 13x 15x
a) CIP, Rate Stabilization, Operations, and Unassigned Reserves
b) Gas Utility’s share of the debt service on the 2011 bonds.
c) Calculated using only Gas Utility reserves. The actual reserves ratio for the 2011 bonds is calculated based on the combined
Electric, Gas, and Water Utility reserves and debt service and is higher than shown here.
15 Available Reserves as defined in the 2011 bonds include the reserves for the Water, Electric, and Gas Utilities
GAS UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 32 | P a g e
The Gas Utility’s reserves and net revenue are also pledged as security for the bond issuances
listed in Table 15, even though the Gas Utility is not responsible for the debt service payments.
The Gas Utility’s reserves or net revenues would only be called upon if the responsible utilities
are unable to make their debt service payments. Staff does not currently foresee this
occurring.
Table 15: Other Issuances Secured by Gas Utility’s Revenues or Reserves
Bond Issuance Responsible Utilities Annual Debt
Service ($000)
Secured by Gas Utility’s:
Net Revenues Reserves
1995 Series A
Utility Revenue
Bonds
Storm Drain $680 Yes No
1999 Utility
Revenue Bonds,
Series A
Wastewater Collection
Wastewater Treatment
Storm Drain
$1,207 No Yes
2009 Water
Revenue Bonds
(Build America
Bonds)
Water $1,977* No Yes
*Net of Federal interest subsidy
GAS UTILITY FINANCIAL PLAN
J u n e 1 6 , 2 0 1 4 33 | P a g e
APPENDIX E: DESCRIPTION OF GAS UTILITY COST CATEGORIES
This appendix describes the activities associated with the various cost categories referred to in
this Financial Plan.
Customer Service: This category includes the Gas Utility’s share of the call center, meter
reading, collections, and billing support functions. Billing support encompasses staff time
associated with bill investigations and quality control on certain aspects of the billing process.
It does not include maintenance of the billing system itself, which is included in Administration.
This category also includes CPAU’s key account representatives, who work with large
commercial customers who have more complex requirements for their gas services.
Resource Management: This category includes gas procurement, contract management, rate
setting, and tracking of legislation and regulation related to the gas industry.
Operations and Maintenance: This category includes the costs of a variety of distribution
system maintenance activities, including:
surveying the gas system (50% of the system each year) and repairing any leaks found;
investigating reports of damaged mains or services and perform emergency repairs;
building and replacing gas services for new or redeveloped buildings; and
testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
the Field Services team (which does field research of various customer service issues);
the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal pipes and reservoirs); and
the General Services team (which manages and maintains equipment, paves and
restores streets after gas, water, or sewer main replacements, and provides welding
services, including certified gas line welding services)
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City’s General Fund staff, as well as shared communications services and Utilities
Department administrative overhead and billing system maintenance costs.
Demand Side Management: Includes the cost of administering gas efficiency programs and the
direct cost of rebates paid.
Engineering (Operating): The Gas Utility’s engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
APPENDIX F: GAS UTILITY COMMUNICATIONS SAMPLES
EXCERPTED DRAFT MINUTES OF THE APRIL 22, 2015
UTILITIES ADVISORY COMMISSION MEETING
ITEM 4: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt a Resolution Approving the Fiscal Year 2016 Gas Financial Plan,
Including no Recommended Rate Changes for July 1, 2015, and Amending the Gas Utility
Reserve Management Practices
Resource Planner Eric Keniston summarized the Gas Financial Plan, which recommends no rate
change for July 1, 2016, but includes a projected 7% rate increase for July 1, 2017. Revenues
were currently below costs, but reserves were high enough to enable delaying any rate
increases by one year. He also presented an alternative plan with a 3% rate increase for July 1,
2016 followed by a 4% rate increase for July 1, 2017. He said that not having a gas increase
provided some relief given the significant water and wastewater rate increases being proposed.
Commissioner Melton reported that the UAC subcommittee, Commissioners Cook and himself,
had reviewed the Gas Utility budget and financial plan. He said they had discussed the two
alternative rate plans. The overall bill increase for all utilities was projected to be higher in FY
2017 than in FY 2017, and having no increase this year would exacerbate this. However, the
subcommittee had decided that there was no right answer and that either alternative was
acceptable.
Senior Resource Planner Jon Abendschein noted that there may be a need for a drought
surcharge on water rates in the current year, which would increase the total bill impact in FY
2016, a possibility that argues for no gas rate increase this year. He also noted that with either
alternative, the change in the bill impact was fairly small, less than a percentage point.
Commissioner Cook noted that while typically he prefers not putting off increases, in this case,
there were not enough compelling reasons to have the rate increase in the current year.
Vice Chair Waldfogel said there was enough information to project a significant increase in FY
2017, and indicated a slight preference for having a rate increase in the current year. However,
he thought the staff recommendation was acceptable.
Commissioner Hall agreed.
ATTACHMENT D
Commissioner Foster indicated a slight preference for no rate increase in the current year, but
thought either alternative was acceptable.
Commissioner Hall asked about the proposed Capital Improvement Program reserve changes. H
asked why the utility needed capital reserves that appeared to be roughly twice the CIP spend
rate.
Abendschein stated that that the proposal was preliminary, and that the reserve levels were set
to match the historic levels of CIP-related funds in the Reappopriation Reserve. He said that
staff would likely return with adjustments to the proposal with the next year’s Financial Plan
after discussions with the City's Office of Management and Budget (OMB).
ACTION:
Commissioner Melton made a motion to approve staff’s recommendation that the UAC
recommend that the City Council adopt a resolution approving the FY 2016 Gas Financial Plan,
including no rate changes for July 1, 2015, and amending the Gas Utility Reserve Management
Practices. Chair Foster seconded the motion. The motion carried unanimously (6-0 with
Commissioners Cook, Eglash, Hall, Melton, Foster, and Waldfogel voting yes and Commissioner
Chang absent).