HomeMy WebLinkAboutStaff Report 7979
City of Palo Alto (ID # 7979)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 5/18/2017
City of Palo Alto Page 1
Summary Title: FY 2018 Gas Utility Financial Plan and Rate Proposals
Title: Utilities Advisory Commission Recommendation that the City Council
Adopt a Resolution Approving the Fiscal Year 2018 Gas Utility Financial Plan
with no Changes to Distribution Rates
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission request that Finance Committee recommend that
Council adopt a resolution (Attachment A) approving the fiscal year (FY) 2018 Gas Utility
Financial Plan (Attachment B)
Executive Summary
The FY 2018 Gas Utility Financial Plan includes projections of the utility’s costs and revenues for
FY 2018 through FY 2027. In FY 2017, gas rates were increased by 8% effective on July 1, 2016.
In the FY 2017 Financial Plan, staff projected a tentative rate increase of 9% for FY 2018.
However, better than expected ending Operations reserve levels in FY 2016, coupled with a
delay in starting new gas main replacement projects due to staff capacity and to coordinate
planning of downtown projects, as well as recovering post-drought sales, have improved the
near-term financial outlook for the gas fund. Staff proposes utilization of reserves and a series
of lesser rate increases over the next three years to minimize impacts to customers. The
proposed FY 2018 Gas Utility Financial Plan includes no distribution-related gas rate increase
effective on July 1, 2017, however, beginning July 1, 2017, customers may see an estimated
impact of up to 4% on their bills as a result of the Carbon Neutral Gas Plan adopted by Council
in December 2016. Future-year distribution-related rate increases are projected to be 4 to 6
percent over the next four years. In addition, the plan includes proposed transfers to the
Operations Reserve of $1.2 million and $4.8 million from the Rate Stabilization Reserve in FY
2018 and FY 2019, respectively, to ensure that there are appropriate financial reserves for
contingencies. The Rate Stabilization Reserve is projected to be zero balance by the end of FY
2020.
Gas Utility expenses are projected to increase by roughly 3 to 4 percent annually from FY 2017
to FY 2027 due primarily to increased gas supply costs (monthly commodity purchases as well
City of Palo Alto Page 2
as carbon neutral plan and cap and trade allowance purchase costs), as well as higher
operations and maintenance expenses. In the near-term, some of these costs relate to the
cross-bore inspection program and increased capital improvement program (CIP) costs from
higher bids. While existing projects are completed and staffing issues are addressed, new main
replacement projects are not planned until FY 2019. The annual Gas Utility equity transfer to
the General Fund is estimated at $7.0 million in FY 2018 rising to 9.7 million in FY 2027 under
the Council-adopted calculation methodology.
Gas usage was trending downward over the last several years, most likely due to relatively
warm winter heating seasons, as well as lower hot water usage during the drought, but a cooler
winter and the end of drought restrictions has brought increased usage. Gas usage has started
to recover somewhat, but as with water, it is difficult to determine if changes in behavior will
persist, reducing gas usage long term.
The Utilities Advisory Commission (UAC) reviewed the Gas Utility Financial Plan and Rate
Proposals at its meeting on April 5, 2017 meeting, and unanimously recommended approval of
the proposed financial plan.
Background
Every year staff presents the Financial Plans for its Electric, Water, Gas, 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. Each Financial Plan also
contains a set of Reserves Management Practices describing the reserves for each utility and
the management practices for those reserves.
The Finance Committee reviewed preliminary financial forecasts at its March 21, 2017 meeting.
Staff has not made any changes to the preliminary projections for gas presented at that
meeting.
Discussion
Staff’s annual assessment of the financial position of the City’s gas utility 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 setting rates adequate to recover these costs.
Proposed Actions for FY 2017
The FY 2017 Gas Utility Financial Plan includes the following proposed action:
1. Reduce the $5.3 million transfer from the Rate Stabilization Reserve to the Operations
Reserve proposed in the FY 2017 Gas Financial Plan to zero.
Proposed Actions for FY 2018
City of Palo Alto Page 3
The FY 2018 Gas Utility Financial Plan also includes the following proposed action:
1. Transfer $1.2 million from the Rate Stabilization Reserve to the Operations Reserve.
The reserve transfers will enable staff to maintain sufficient funds in the Gas Operations
Reserve levels while spreading the required rate increases for the gas utility over several years.
These proposed actions are described in more detail in the FY 2018 Gas Financial Plan
(Attachment B). The annual Gas Utility equity transfer to the General Fund is estimated at $7.0
million in FY 2018, rising to 9.7 million in FY 2027. Each year it is calculated according to the
2009 Council-adopted methodology, and does not require additional Council action.
Staff proposes no adjustments to gas rates in FY 2018 at this time.
FY 2018 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 1 shows the projected rate adjustments over the next five years and their impact on the
annual median residential gas bill.
Table 1: Projected Rate Adjustments, FY 2017 to FY 2021
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Gas Utility 0% 4% 6% 6% 5%
Estimated Bill Impact ($/mo)* $- $1.79 $2.79 $2.96 $2.61
* estimated impact on median residential gas bill, which is currently $44.72 for CY 2016. This
does not include the bill impacts in FY 2018 associated with the Carbon Neutral Gas Portfolio.
Changes from Preliminary Financial Forecast
After presenting the preliminary financial forecast to the UAC on February 1, 2017, additional
budget information and changes to usage projections have been modified for outer years, but
the FY 2018 proposal of no rate increase remains the same.
Gas Bill Comparison with Surrounding Cities
Table 2 presents winter and summer residential bills for Palo Alto and PG&E at several usage
levels for commodity rates in effect as of May 2016 (to illustrate a summer month bill) and
March 2017 (to illustrate a winter month bill). The annual gas bill for the median residential
customer for calendar year 2016 was $426.72, about 20% lower than the annual bill for a PG&E
customer with the same consumption. PG&E’s distribution rates for gas have increased
substantially to collect for needed system improvements for pipeline safety and maintenance.
The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which
includes the surrounding communities:
Table 2: Residential Monthly Gas Bill Comparison
Season
Usage
(therms) Palo Alto PG&E Zone X
%
Difference
Winter
(March
30 34.88 41.57 -16%
(Median) 54 54.53 74.82 -27%
City of Palo Alto Page 4
2016) 80 85.50 120.77 -29%
150 180.51 255.05 -29%
Summer
(Jul 2015)
10 19.93 17.77 12%
(Median) 18 21.94 21.46 2%
30 35.13 41.55 -15%
45 52.91 66.66 -21%
Monthly gas bills for commercial customers for various usage levels for rates in effect as of
March 1, 2016 are shown in Table 3. Bills for CPAU customers at the usage levels shown are
around 10% to 33% higher for commercial customers than for PG&E customers. This is a
substantial improvement over the calendar year 2013 bill comparison, when commercial gas
bills for CPAU customers were 27% to 44% higher than for PG&E customers. This is primarily
attributable to PG&E’s increased distribution rates as the commodity rates for CPAU and PG&E
are very similar, both being based on spot market gas prices.
Table 3: Commercial Monthly Average Gas Bill Comparison
(for Rates in Effect Mar. 1, 2017)
Usage
(therms/mo)
Gas Bill ($/month) %
Difference Palo Alto PG&E
500 616 545 13%
5,000 5,459 4,957 10%
10,000 10,840 8,856 22%
50,000 53,788 40,453 33%
Commission Review and Recommendation
The UAC reviewed this proposal at its April 5, 2017 meeting. Staff noted that, while there was
no distribution -related increase, an estimated 4 percent increase is projected when the cost of
purchasing carbon neutral offsets is included as a separate rate component, effective July 1,
2017 when the Carbon Neutral Plan takes effect.
After the presentation, with no discussion, the UAC voted to recommend that the Council adopt
the resolution approving the FY 2018 Gas Utility Financial Plan. The vote was unanimous (5-0),
with Commissioners Forssell and Trumbull absent. The draft excerpted minutes from the UAC’s
April 5, 2017 meeting are provided as Attachment C.
Timeline
The City Council will consider adopting the Financial Plan as part of the FY 2018 budget review
and adoption process.
Resource Impact
See the attached FY 2018 Gas Financial Plan for a more comprehensive overview of projected
cost and revenue changes for the next ten years.
City of Palo Alto Page 5
Policy Implications
The proposed Gas Financial Plan is consistent with Council-adopted Reserve Management
Practices.
Environmental Review
The Finance Committee’s review and recommendation to Council on the FY 2018 Gas Financial
Plans 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 of the Council of the City of Palo Alto Approving the FY 2018
Gas Utility Financial Plan
Attachment B: Proposed FY 2018 Gas Utility Financial Plan
Attachment C: Excerpted UAC Meeting Minutes of April 5, 2017
Attachment A
* NOT YET APPROVED *
170320 jb 6053929
Resolution No. _________
Resolution of the Council of the City of Palo Alto Approving the
FY 2018 Gas Utility Financial Plan
R E C I T A L S
A. Each year the City of Palo Alto (“City”) regularly 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
part of the Financial Plans.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby adopts the FY 2018 Gas Utility Financial Plan.
SECTION 2. The Council finds that the adoption of this resolution does not meet the
California Environmental Quality Act’s (CEQA) definition of a project under Public Resources
/ /
/ /
/ /
/ /
/ /
/ /
Attachment A
* NOT YET APPROVED *
170320 jb 6053929
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
FY 2018 GAS
UTILITY
FINANCIAL PLAN
FY 2018 TO FY 2027
ATTACHMENT B
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 2 | Page
GAS UTILITY FINANCIAL PLAN
FY 2018 TO FY 2027
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations................................................................................ 4
Section 2: Executive Summary and Recommendations ........................................................... 5
Section 2A: Overview of Financial Position .................................................................................. 5
Section 2B: Summary of Proposed Actions .................................................................................. 6
Section 3: Detail of FY 2018 Rate and Reserve Proposals ........................................................ 6
Section 3A: Rate Design ............................................................................................................... 6
Section 3B: Current and Proposed Rates ..................................................................................... 6
Section 3D: Proposed Reserve Transfers ..................................................................................... 8
Section 4: Utility Overview .................................................................................................... 8
Section 4A: Gas Utility History ..................................................................................................... 8
Section 4B: Customer Base ........................................................................................................ 10
Section 4C: Distribution System ................................................................................................. 11
Section 4D: Cost Structure and Revenue Sources ...................................................................... 12
Section 4E: Reserves Structure ................................................................................................... 12
Section 4F: Competitiveness ...................................................................................................... 13
Section 4G: Gas Supply Rates .................................................................................................... 14
Section 5: Utility Financial Projections ................................................................................. 15
Section 5A: Load Forecast .......................................................................................................... 15
Section 5A: FY 2012 to FY 2016 Cost and Revenue Trends ........................................................ 16
Section 5B: FY 2016 Results ....................................................................................................... 17
Section 5C: FY 2017 Projections ................................................................................................. 18
Section 5D: FY 2018-FY 2027 Projections .................................................................................. 18
Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 19
Section 5G: Long-Term Outlook ................................................................................................. 21
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 3 | Page
Section 6: Details and Assumptions ..................................................................................... 22
Section 6A: Gas Purchase Costs ................................................................................................. 22
Section 6B: Operations .............................................................................................................. 23
Section 6C: Capital Improvement Program (CIP) ....................................................................... 24
Section 6D: Debt Service ............................................................................................................ 26
Section 6E: Equity Transfer ........................................................................................................ 27
Section 6F: Revenues ................................................................................................................. 27
Section 6G: Communications Plan ............................................................................................. 28
Appendices ......................................................................................................................... 30
Appendix A: Gas Financial Forecast Detail ................................................................................ 31
Appendix B: Gas Utility Capital Improvement Program (CIP) Detail ......................................... 32
Appendix C: Gas Utility Reserves Management Practices ......................................................... 34
Appendix D: Description of Gas Utility Cost Categories ............................................................ 38
Appendix E: Gas Utility Communications Samples .................................................................... 39
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.
O&M: Operations and Maintenance
PE or HDPE: Polyethylene, a gas main material (more specifically, High-Density Polyethylene)
PG&E: Pacific Gas and Electric
PG&E Citygate, or Citygate: 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 Citygate.
PVC: Polyvinyl chloride, a plastic gas main material
Summer: April 1 to October 31
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.
Winter: November 1 to March 31
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 5 | Page
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City’s Gas Utility for the next ten years. This
Financial 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.
SECTION 2A: OVERVIEW OF FINANCIAL POSITION
From FY 2018 through FY 2027, non-commodity costs are projected to increase at 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 and carbon neutral allowance purchase costs. Capital improvement
program (CIP) costs have increased as the economy has improved, and while CPAU plans a new
gas main replacement project every year, recent larger than expected bids have required
resizing and redesign of some existing plan projects. Because of this, the next new main
replacement project will take place in FY 2019. As a result, CIP costs for FY 2017 and 2018 will
be lower than normal by around $3.7 million. The Gas Utility expenses over the period of this
financial plan are shown in Table 1 below.
Table 1: Gas Utility Expenses for FY 2016 to FY 2027 (Thousand $’s)
Expenses
($000)
FY
2016
(act.)
FY
2017
(est.)
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Commodity costs 8,127 13,042 15,437 14,931 15,304 15,584 16,021 16,569 17,227 17,909 18,679 19,235
Operations 17,239 21,687 22,587 22,901 22,559 23,022 24,403 25,292 26,221 27,195 28,222 27,982
Capital Projects 5,017 2,214 2,074 5,725 5,960 6,145 6,335 6,525 6,721 6,923 7,130 7,344
TOTAL 30,384 36,943 40,098 43,557 43,823 44,751 46,759 48,386 50,169 52,027 54,032 54,561
To ensure that revenues cover projected rising costs, the financial plan includes the rate
trajectory shown in Table 2. No increase is projected for FY 2018.
Table 2: Projected Gas Rate Trajectory for FY 2018 to FY 2027
Projection FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Current Financial Plan 0% 4% 6% 6% 5% 3% 3% 2% 1% 0%
FY 2017 Financial Plan 9% 7% 4% 1% 1% 1% 1% 1% 1% N/A
FY 2016 Financial Plan 4% 4% 4% 3% 3% N/A N/A N/A N/A N/A
The Gas Rate Stabilization Reserve is used to smooth rate increases over several years. This
Financial Plan projects that these reserves will be exhausted by the end of FY 2020. The Gas CIP
Reserve can be used to offset one-time unanticipated capital costs. Table 3 shows the projected
reserve transfers over the forecast period.
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 6 | Page
Table 3: Transfers To/(From) Reserves for FY 2017 to FY 2027 ($000)
Reserve FY 2017 FY 2018 FY 2019 to FY 2027
Rate Stabilization 0 (1,208) (4,810)
Operations 0 1,208 4,810
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Gas Utility in FY 2017:
1. Amend the proposed $5.3 million transfer from the Rate Stabilization Reserve to the
Operations Reserve, as proposed in the FY 2017 Gas Financial Plan, to no transfer, based
on projected ending Operations Reserve levels.
Staff proposes the following actions for the Gas Utility in FY 2018:
2. No distribution rate increase for FY 2018. See Section 3B: Current and Proposed Rates
for more details.
3. Transfer $1.2 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 3C: Proposed Reserve Transfers for more details.
SECTION 3: DETAIL OF FY 2018 RATE AND RESERVE PROPOSALS
SECTION 3A: RATE DESIGN
The Gas Utility’s rates are evaluated and implemented in compliance with cost of service
requirements. 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 Solutions1. In preparation for an
update to the study, staff discussed a proposed scope with the Utilities Advisory Commission in
October 2016, and the Council in November 20162. The updated study is projected to be
completed by the end of FY 2017, and will provide guidance for the next proposed rate action,
currently slated for FY 2019.
SECTION 3B: 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 prices.3 In addition, monthly service charges were increased to
recover the cost of providing gas service to customers. 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 program4. This component will change depending on
the cost of allowances and gas demand. In October 2016, the Council adopted a resolution
changing the Local Transportation rate (which had been collapsed into the Distribution rate in
1 Staff Report 2812, 5/17/ 2012 http://archive.cityofpaloalto.org/civica/filebank/blobdload.asp?BlobID=31395 2 Staff Report 7416 11/14/2016 http://www.cityofpaloalto.org/civicax/filebank/documents/54576 3 Staff Report 2812, 5/17/2012: http://archive.cityofpaloalto.org/civica/filebank/blobdload.asp?BlobID=31395 4 Staff Report 5397, 1/26/2015: https://www.cityofpaloalto.org/civicax/filebank/documents/45537
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 7 | Page
2015 to streamline bill presentation), to be a pass-through of PG&E’s Gas Transportation Rate to
Wholesale/Resale Customers (G-WSL) charge to Palo Alto.5 This went into effect November 1,
2016. In December 2016, Council approved a carbon neutral gas plan, with a goal of achieving a
carbon neutral gas portfolio by FY 2018.6 The plan is for costs associated with the plan to be a
passed through directly to customers as well, although the rate impact is not to exceed $0.10
per therm.
CPAU has four rate schedules: one for separately metered residential customers (G-1), one for
small commercial and master-metered multi-family residential customers (G-2), one for
customers using over 250,000 therms per year (G-3) and a specific schedule for the Compressed
Natural Gas station (G-10). All customers pay a monthly service charge, which represents meter
reading, billing, and other customer service costs, as well as a portion of operations and
maintenance cost. All customers are also charged for each therm of gas used. Separately
metered residential customers are charged on a tiered basis, differentiated by season. During
the winter months, the first 2 therms per day (60 therms for a 30 day billing period) are charged
a base price per CCF, and all additional units charged a higher price per therm. During the
summer months, the first tier level is 0.667 therms per day, or 20 therms for a 30 day billing
period. Commercial customers pay a uniform price for each therm used.
Table 4 shows the current monthly service charges for all rate schedules. Table 7 shows the
consumption charges related to distribution charges. As mentioned earlier, commodity charges
change monthly, and transportation charges are tied to the PG&E G-WSL rate schedule. Three
years’ worth of volumetric rate history can be found on Palo Alto’s website.7 Some recent
commodity price history is discussed in Section 6A: Gas Purchase Costs.
Table 4: Current Monthly Service Charges
Rate Schedule Monthly Service Charge ($/month)
Current ( as of 7/1/16)
G-1 (Residential) $10.32
G-2 (Small Commercial) $78.23
G-3 (Large Commercial) $377.43
G-10 (CNG) $52.93
5 Staff Report 7260 10/17/2016 http://www.cityofpaloalto.org/civicax/filebank/documents/54165 6 Staff Report 7533 12/05/2016 http://www.cityofpaloalto.org/civicax/filebank/documents/54882 7 Monthly Gas Commodity & Volumetric Rates http://www.cityofpaloalto.org/civicax/filebank/documents/30399
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 8 | Page
Table 5: Current Gas Distribution Charges
Current ( as of 11/1/16)
G-1 (Residential)
Tier 1 Rates 0.3933
Tier 2 Rates 0.9319
G-2 (Residential Master-Metered and Small Commercial)
Uniform Rate 0.5767
G-3 (Large Commercial)
Uniform Rate 0.5687
G-10 (Compressed Natural Gas)
Uniform Rate 0.0093
No changes to distribution rates are proposed for FY 2018.
SECTION 3C: PROPOSED RESERVE TRANSFERS
In the FY 2017 Financial Plan, $5.3 million was proposed to be transferred from the Rate
Stabilization Reserve into the Operations Reserve.
Lower actual expenses in FY 2016 as well as projected lower expenses in FY 2017 are expected
to result in higher ending reserve balances than initially projected, so staff recommends not
transferring funds at this time. A tentative transfer of $1.2 million in FY 2018, followed by $4.3
million in FY 2019, is included in the financial projections in this Financial Plan. These will enable
CPAU to maintain adequate Operations Reserve levels while moderating the pace of increase in
gas rates. The impact of these transfers on reserves levels can be seen in Appendix A: Gas Utility
Financial Forecast Detail.
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information and to help readers better understand the forecasts in Section 5:
Utility Financial Projections and Section 6: Details and Assumptions.
SECTION 4A: GAS UTILITY HISTORY
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
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 9 | Page
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.
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 around 100 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 2015 the Gas Utility
had replaced approximately 99 miles of ABS, as well as some sections of steel where cathodic
protection was 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
appropriate footage of annual PVC replacement for future CIP projects is currently being
conducted. This is 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 past 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.
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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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.
SECTION 4B: CUSTOMER BASE
CPAU’s Gas Utility provides natural gas service to the residents, businesses, and other gas
customers in Palo Alto. Close to 23,400 customers are connected to the natural gas system,
approximately 21,700 (93%) of which are residential and 1,700 (7%) of which are non-
residential. Residential customers consume about 10 to 12 million therms of gas per year,
roughly 45% of the gas sold, while non-residential customers consume 55% (about 14 to 15
million 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 spas.11 Non-residential customers use gas for
space and water heating (73% of gas consumed), cooking (20%), and industrial processes
(6%).12
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 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. In a similar
fashion, the cost for local transportation has now been tied to PG&E’s G-WSL rate schedule,
and varies when and if PG&E changes their rate schedule. The cost of purchased gas and PG&E
local transportation service usually account for roughly one third of the utility’s expenditures.
11 http://energyalmanac.ca.gov/naturalgas/overview.html 12 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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SECTION 4C: DISTRIBUTION SYSTEM
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 23,400 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 normally accounts for around 15 to 20% of the utility’s
expenditures. Costs for main replacements have been going up in recent years.
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. Currently, $1 million is budgeted per year for the cross-bore program through FY 2019.
However, the ongoing cross-bore investigation may require additional funding, or extend for
longer into the future, as the remaining sewer lines are more difficult to examine than the
majority of the wastewater collection system that has been examined to date.
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Figure 2: Cost Structure (FY 2016)
57%27%
16%
Operations
Gas Purchases
Capital
Figure 1: Revenue Structure (FY 2016)
93%
7%
Sales of Gas
Other Revenue
SECTION 4D: COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 1, the Gas
Utility receives 93% of its revenue
from sales of gas and the
remainder from capacity and
connection fees, interest on
reserves, and other sources.
Appendix A: Gas Utility Financial
Forecast Detail shows more detail
on the utility’s cost and revenue
structures.
As shown in Figure 2, in FY 2016,
gas purchase costs accounted for
roughly 27% of the Gas Utility’s
costs. This percentage can vary
widely from year to year, as this
cost is based upon market
purchases, but now also includes
costs related to cap and trade. In
FY 2016, Palo Alto received a
large transportation rate
settlement from PG&E, which
lowered costs substantially. This
stemmed from the CPUC’s
findings related to the San Bruno
pipeline explosion. Operational
costs represented roughly 57%, and capital investment was responsible for the remaining 16%.
CIP is normally about 20% of expenses, but this may be lower in times when projects are
deferred, as will happen in FY 2017 and FY 2018.
SECTION 4E: RESERVES STRUCTURE
CPAU maintains six reserves for its Gas Utility to manage various types of contingencies. These
are summarized below, but see Appendix C: Gas Utility Reserves Management Practices for
more detailed definitions and guidelines for reserve management:
• Reserve for Commitments: A reserve equal to the utility’s outstanding contract
liabilities for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
• Reserve for Reappropriations: A reserve for funds dedicated to projects reappropriated
by the City Council, nearly all of which are capital projects. Most City funds, including
the General Fund, have a Reappropriations Reserve.
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• Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to
accumulate funds for future expenditure on CIP projects and is anticipated to be empty
unless a major one-time CIP expenditure is expected in future years. This CIP can also
act as a contingency reserve for the CIP. This type of reserve is used in other utility funds
(Electric, Water, and Wastewater Collection) as well.
• Rate Stabilization Reserve: This reserve is intended to be empty unless one or more
large rate increases are anticipated in the forecast period. In that case, funds can be
accumulated to spread the impact of those future rate increases across multiple years.
This type of reserve is used in other utility funds (Electric, Water, and Wastewater
Collection) as well.
• Operations Reserve: This is the primary contingency reserve for the Gas Utility, and is
used to manage yearly variances from budget for operational gas costs. This type of
reserve is used in other utility funds (Electric, Water, and Wastewater Collection) as
well.
• Unassigned Reserve: This reserve is for any funds not assigned to the other reserves
and is normally empty.
SECTION 4F: COMPETITIVENESS
Table 6 presents winter and summer residential bills for Palo Alto and PG&E at several usage
levels for commodity rates in effect as of May 2016 (to illustrate a summer month bill) and
March 2017 (to illustrate a winter month bill). The annual gas bill for the median residential
customer for calendar year 2016 was $426.72, about 20% lower than the annual bill for a PG&E
customer with the same consumption. PG&E’s distribution rates for gas have increased
substantially to collect for needed system improvements for pipeline safety and maintenance.
The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which
includes the surrounding communities.
Table 6: Residential Monthly Natural Gas Bill Comparison ($/month)
Season
Usage
(therms) Palo Alto PG&E Zone X
%
Difference
Winter
(March 2017)
30 34.88 41.57 -16%
(Median) 54 54.53 74.82 -27%
80 85.50 120.77 -29%
150 180.51 255.05 -29%
Summer
(May 2016)
10 19.93 17.77 12%
(Median) 18 21.94 21.46 2%
30 35.13 41.55 -15%
45 52.91 66.66 -21%
Table 7 shows the monthly gas bills for commercial customers for various usage levels for rates
in effect as of March, 2017. Bills for CPAU customers at the usage levels shown are around 10%
to 33% higher for 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
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April 1 2 , 2016 14 | Page
customers were 27% to 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 7: Commercial Monthly Average Gas Bill Comparison
(for Rates in Effect March, 2017)
Usage (therms/mo)
Gas Bill ($/month) %
Difference Palo Alto PG&E
500 616 545 13%
5,000 5,459 4,957 10%
10,000 10,840 8,856 22%
50,000 53,788 40,453 33%
SECTION 4G: GAS SUPPLY RATES
Starting in July 2012, CPAU replaced a “laddering” hedging strategy for purchasing gas supplies
with a strategy to buy gas on the short-term, or “spot” markets and pass the commodity cost to
customers on a monthly basis. The actual commodity prices are shown in Figure 3. As shown,
commodity prices have fluctuated by around $0.20 over the last two years, but have generally
been lower than prices seen in 2013 and 2014.
Figure 3: Gas Commodity Rates from July 2012 through March 2017
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SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: LOAD FORECAST
Gas usage in Palo Alto is volatile, varying with both economic and weather conditions. As shown
in Figure 4, 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.
In 2014 and 2015, unusually warm winters, as well as ongoing drought, caused gas usage to
tumble to historic lows. In FY 2017, as the drought has eased and a relatively normal winter has
progressed, gas usage has started to increase again.
Figure 4: Historic Gas Consumption
Gas consumption, as denoted by the dotted line in Figure 5, is projected to recover somewhat
and stay stable over the forecast period, although changes such as replacement of gas
appliances with electric appliances or customer behavior may result in lower long run usage. As
with prior drought/gas usage declines in the past, it is likely that consumption will not come
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back to pre-conservation levels. It is too early to tell, however, where the new ‘normal’ level of
consumption will be.
Figure 5: Forecast Gas Consumption
SECTION 5A: FY 2012 TO FY 2016 COST AND REVENUE TRENDS
Figure 6 and Appendix A: Gas Utility Financial Forecast Detail show how costs have changed
during the last five years as well as how they are projected to change over the next decade.
The annual expenses for the gas utility decreased substantially between 2012 and 2016 due to
lower gas sales. Market prices for gas supplies are shown in Figure 3 above. FY 2014 and 2015
were notable due to the fact that no new funding was added for main replacement projects, to
permit the completion of a backlog of projects which had previously been funded. This allowed
for backlogged gas main replacement projects to be started, and used existing capital reserves.
Starting in FY 2012, additional funding for gas cross-bore inspections increased Operations
costs.
Revenues have generally matched expenses in most years. As shown in Figure 6 below,
revenues were below cost in FY 2011 and FY 2013 and nearly at cost in FY 2016. The absence of
funding for main replacement projects in FY 2014 and FY 2015, as well as the availability of
relatively large reserves, forestalled the need for rate increases until now.
As shown in Figure 6, the last adjustment to gas distributionrates was in July 2016 when rates
were increased by 8%. In FY 2012, commodity rates were changed to a market-based, monthly
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pass-through cost—and commodity rates (and usage) fell, so revenues actually declined in FY
2013 after the rate increase.
Figure 6: Gas Utility Expenses, Revenues, and Rate Changes:
Actual Costs through FY 2016 and Projections through FY 2027
SECTION 5B: FY 2016 RESULTS
Sources of funds for FY 2016 were in line with projections, but expenses related to Purchases
and Capital spending came in well below expected budget. Total FY 2016 expenses were $30.4
million compared to projections of $35.9 million in the FY 2017 Financial Plan. Table 8
summarizes the variances from forecast.
Table 8: FY 2016, Actual Results vs. Financial Plan Forecast
Net Cost/(Benefit) Type of change
Purchase costs lower than forecast (1,132,000) Cost savings
Operations cost savings and reclass (2,498,000) Cost savings
Capital Improvement cost spending (1,872,000) Cost savings
Operations cost savings (31,000) Cost savings
Net Cost / (Benefit) of Variances $(5,465,000)
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SECTION 5C: FY 2017 PROJECTIONS
Current projections indicate that sales revenues will be slightly higher than last year’s forecast.
However, a main replacement projected budgeted for this year will not be started until FY
2019. Table 9 summarizes the current and projected variances from FY 2017 Financial Plan.
Table 9: FY 2017 Projected Results vs. Financial Plan Forecast
Net Cost/ (Benefit) Type of change
Sales revenues higher than forecast (984,000) Revenue increase
Other revenues and interest higher than forecast (742,000) Revenue increase
Operations & maintenance, Customer service and
purchase cost increases
617,000 Cost increase
Main replacement projects delayed (4,091,000) Cost savings
Net Cost / (Benefit) of Variances ($5,200,000)
SECTION 5D: FY 2018-FY 2027 PROJECTIONS
As can be seen in Figure 6 above, costs for the Gas Utility are projected to rise in FY 2017, then
are projected to increase at around 3% per year through FY 2026. In Operations, this is due to
an additional continuing $1 million for cross-bore inspections (this expense is projected to
continue for at least three years), as well as general inflationary increases of around 2.6% per
year. Salaries and benefits expenses are projected to rise at nearly 4% per year, per the City’s
Long Range Financial Plan. New CIP main replacement programs are projected to be put on
hold until FY 2019. At that point, CIP spending is projected to return to normal levels (around $6
million), then grow at around 2% per year thereafter. Gas commodity costs are the most
variable component. At the time the budget was developed in December 2016, gas supply
prices were projected to increase by around 3 to 4% per year. Since this is a pass-through cost
to customers, the risk of these costs being higher or lower than expected has a minimal impact
on reserves.
As shown in Figure 7, the Rate Stabilization Reserves are projected to be depleted by FY 2020.
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Figure 7: Gas Utility Reserves
Actual Reserve Levels for FY 2016 and Projections through FY 2027
SECTION 5E: RISK ASSESSMENT AND RESERVES ADEQUACY
The Gas Utility’s primary contingency reserve, the Operations Reserve, is projected to be within
guideline levels throughout the forecast period, barring either short-run budget savings and/or
larger future increases. Figure 8 shows the Operations Reserve recovering to the target level by
FY 2027 with the projected rate trajectory.
Figure 8: Operations Reserve Adequacy
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Forecasted Operations Reserve levels also exceed the short-term risk assessment for the Utility.
Table 10 summarizes the risk assessment calculation for the Gas Utility through FY 2022. The
same methodology is used for FY 2023 through FY 2027 as well. The risk assessment includes
the revenue shortfall that could accrue due to:
1. Lower than forecasted distribution sales revenue; and
2. An increase of 10% of planned system improvement CIP expenditures for the budget
year.
Table 10: Gas Risk Assessment ($000)
FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
Total non-commodity revenue $20,465 $21,676 $23,503 $25,557 $27,559
Max. revenue variance, previous ten years 16% 16% 16% 16% 16%
Risk of revenue loss $3,282 $3,476 $3,769 $4,098 $4,419
CIP Budget $809 $4,421 $4,617 $4,762 $4,911
CIP Contingency @10% $81 $442 $462 $476 $491
Total Risk Assessment value $3,363 $3,918 $4,231 $4,575 $4,910
Finally, the CIP Reserve was created at the end of FY 2015 to act as a contingency reserve for
capital improvement projects. Current guidelines state that the balance of this reserve should
fall between 12 and 24 months of budgeted CIP expense.
At the end of FY 2016, the sum of the CIP Reserve and existing Commitments was a bit over $10
million, as shown in Figure 7. Based upon FY 2017’s adjusted CIP budget, this is well above the
maximum reserve level of $1.97 million. However, the next two years are anomalous in that a
main replacement project is not scheduled. As a normal year maximum would be between $9
to $11 million, staff does not recommend reducing the CIP reserve at this time, especially in
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light of the fact that CIP project costs have been increasing. Staff will continue to review this
reserve and the appropriateness of the current minimum and maximum guideline levels.
SECTION 5F: 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. The City has recently opted to pursue a policy of purchasing offsets to
make gas usage in Palo Alto carbon neutral. The cost is not to exceed $0.10/therm.
Future CIP investment needs for the Gas Utility may be lower than in the past, although costs
per foot for main replacement have been increasing substantially. The Gas Utility has replaced
nearly 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 considering performing a study in the near future 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
(GHG) emissions to 1990 levels by 2020. 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. However, to achieve the recently adopted Sustainability and Climate
Action Plan (S/CAP) goal of an 80% reduction in carbon emissions by 2030, or the State’s
adopted goal of an 80% reduction in emissions by 2050 some amount of electrification of gas-
using appliances is likely to be necessary. 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. 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.”13 Staff intends to begin evaluating how to manage potential impacts of these
trends over the next few years..
13 Climate Change Scoping Plan, First fUpdate, Discussion Draft for Public Review and Comment, California Air
Resources Board, October 2013, pg 88.
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SECTION 6: DETAILS AND ASSUMPTIONS
SECTION 6A: GAS PURCHASE 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. The last
few years have seen gas prices in a relatively narrow but low band, but prices for the last year
have risen somewhat. High levels of natural gas in storage, along with warmer than normal
weather on the West coast has kept prices low, as shown in Figure 9.
Figure 9: Gas Market Prices at PG&E Citygate
Gas commodity costs are expected to increase steadily over the next several years. Figure 10
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 (from Malin,
Oregon to the PG&E Citygate) 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,14 but in December 2014 PG&E applied to the CPUC
14 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.
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to more than double local transportation costs. The application was not settled until late 2016.
As these charges are dictated by PG&E and are outside of Palo Alto’s control, staff proposed
making these costs pass-through charge, similar to the commodity charge, and this became
effective in November, 2016.
Figure 10: Wholesale Gas Price Projections
SECTION 6B: OPERATIONS
Operations costs include the Customer Service, Demand Side Management, Operations and
Maintenance (including Engineering), Resource Management, and Administration categories in
Figure 11, below. Debt service, rent, and transfers are also included in Operations costs
(excluding the General Fund equity transfer). Appendix D: Description of Gas Utility Cost
Categories includes detailed descriptions of the activities associated with these cost categories.
Operations costs are projected to increase by 2 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 2017 to FY 2019 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 between FY 2017 and FY 2019 for this program, but
the program will likely require additional funding in future years to complete.
Figure 11: Historical and Projected Operational Costs
SECTION 6C: 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.
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Table 11 shows the current status of these project categories and future projected spending.
Table 11: 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 4A: Gas Utility
History for more detail). CPAU temporarily slowed down its new CIP appropriations in this
category in FY 2014 and 2015 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 is considering updating the Gas System
Master Plan 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.
The current budgets for gas main replacement might not fully 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.
These increases in cost are a partial reason for the two year delay in projects. The most recent
project, when put out for bid, resulted in very few contractors competing, and project bids
larger than budgeted. Staff will redesign this and future projects into smaller segments to keep
budgets lower, while not compromising on overall system integrity. The other reason for delay
is the University Avenue Business District project, and getting coordination amongst all
departments is taking more time than expected. Finally, there has been an ongoing issue with
keeping and maintaining qualified staff to design and work on projects.
Project Category
Current
Budget*
Spending,
Curr. Yr
Remain.
Budget**Committed FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
One Time Projects 425 (2) 423 109 - - - - -
Gas Main Replacement 4,878 (187) 4,691 - - 3,588 3,759 3,878 4,000
Tools And Equipment 146 - 146 20 - 640 - - -
Ongoing Projects 254 (140) 114 88 809 833 858 884 911
Customer Connections 232 (660) (428) 159 1,265 1,303 1,342 1,383 1,424
TOTAL 5,935 (988) 4,946 375 2,074 6,365 5,960 6,145 6,335
*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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Ongoing Projects, Tools and Equipment, and Customer Connections are projected to cost
approximately $0.8 million in FY 2018 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 2018 to FY 2022 is funded by utility rates. The details of the plan are shown in Appendix B:
Gas Utility Capital Improvement Program (CIP) Detail.
SECTION 6D: DEBT SERVICE
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
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
2011 Utility Revenue
Refunding Bonds, Series A 803 802 800 800 802 804 805 803 800 803
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
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Revenues 36,643 38,225 39,175 41,695 44,306 46,879 49,025 50,992 52,835 54,530
Expenses
(Excluding CIP and
Debt Service)
(33,926) (37,223) (37,033) (37,063) (37,804) (39,621) (41,057) (42,646) (44,305) (46,100)
Net Revenues 2,717 1,002 2,142 4,632 6,502 7,258 7,968 8,346 8,530 8,430
Debt Service 803 802 800 800 802 804 805 803 800 803
Coverage Ratio 338% 125% 268% 579% 811% 903% 990% 1039% 1039% 1039%
15 Available Reserves as defined in the 2011 bonds include the reserves for the Water, Electric, and Gas Utilities
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 27 | Page
Table 14: Debt Service Minimum Reserves ($000)
FY
2017
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Gas Utilitya 19711 17838 13456 11328 10883 11003 11642 12465 13273 14588
Debt Serviceb 803 804 803 802 801 801 802 803 800 803
Reserves Ratioc 25x 22x 17x 14x 14x 14x 15x 16x 16x 16x
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.
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
SECTION 6E: EQUITY TRANSFER
The City calculates the equity transfer from its Gas Utility based on a methodology adopted by
Council in 2009 that has remained unchanged since16. Each year it is calculated according to the
2009 Council-adopted methodology, and does not require additional Council action.
SECTION 6F: REVENUES
The Gas Fund receives most of its revenues from sales of gas, but about 8% comes from other
sources. The largest of these comes from service connection and capacity fees, followed closely
by sales of allowances related to California’s cap-and-trade program. Another revenue item
related to the cap-and-trade program is collected in customers’ bills. While the State provides
CPAU with a certain number of free allowances each year, the Gas Utility is required to sell a
portion of those in accordance with the regulations. In order to have enough allowances to
16 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.
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 28 | Page
cover customers’ natural gas emissions, CPAU must buy allowances at market, and
subsequently passes through the cost of those allowances to customers. The regulations do not
allow the revenue derived from the sale of the free allowances to offset allowance purchases,
thus the pass-through rate component.
Sales revenue projections are based on the load forecast in Section 5A: Load Forecast. Except
where stated otherwise, these load forecasts are based on normal weather. Weather can vary
substantially, however, and this can affect revenues substantially. Also, changes in customer
behavior, as well as changes to more efficient gas appliances, or switching to electric
appliances, will modify these forecasts. Forecasts are continually evaluated to see when new
trends emerge.
SECTION 6G: COMMUNICATIONS PLAN
The FY 2018 communications strategy covers four primary areas: operations, infrastructure,
safety, efficiency, renewables and rates. Since moving to market pricing for commodity rates,
changes to the commodity rates are posted monthly on the City’s website. 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 campaigns and programs in FY 2018 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, CPAU launched a new voluntary 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 cross-bores, 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
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 29 | Page
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.
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 30 | Page
APPENDICES
Appendix A: Gas Financial Forecast Detail
Appendix B: Gas Utility Capital Improvement Program (CIP) Detail
Appendix C: Gas Utility Reserves Management Practices
Appendix D: Description of Gas Utility Cost Categories
Appendix E: Gas Utility Communications Samples
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 31 | Page
APPENDIX A: GAS FINANCIAL FORECAST DETAIL
($'000)
Actual Actual Actual Actual Actual
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
1 RATE CHANGE (%)*0%12%0%0%0%8%0%4%6%6%5%3%3%2%1%0%
2 SALES IN THOUSAND THERMS 30,447 28,901 28,117 28,881 26,719 27,829 27,434 27,463 27,623 27,546 27,482 27,432 27,394 27,450 27,510 27,541
3
4 Utilities Retail Sales 41,034 33,759 34,843 29,515 28,065 33,243 33,852 34,339 36,422 38,683 40,918 42,694 44,275 45,736 46,948 47,566
5 Service Connection & Capacity Fees 592 731 654 602 961 1,017 1,048 1,079 1,111 1,145 1,179 1,179 1,179 1,179 1,179 1,179
6 Other Revenues & Transfers In 103 830 313 415 873 1,857 2,965 3,395 3,906 4,251 4,573 4,916 5,266 5,623 6,081 6,043
7 Interest plus Gain or Loss on Investment 1,119 (239)706 450 730 526 361 362 256 227 209 237 272 297 322 338
8 Total Sources of Funds 42,847 35,081 36,517 30,982 30,629 36,643 38,225 39,175 41,695 44,306 46,879 49,025 50,992 52,835 54,530 55,126
9
10 Purchases of Utilities:
11 Supply Commodity 15,356 12,461 12,992 9,537 9,178 10,098 12,106 11,487 11,805 12,097 12,495 13,001 13,616 14,254 14,980 15,468
12 Supply Transportation 879 994 1,333 982 (1,051)2,944 3,331 3,444 3,499 3,487 3,526 3,568 3,611 3,655 3,699 3,767
13 Total Purchases 16,235 13,455 14,325 10,519 8,127 13,042 15,437 14,931 15,304 15,584 16,021 16,569 17,227 17,909 18,679 19,235
14
15 Administration (CIP + Operating)3,473 4,273 3,988 4,007 3,337 3,064 3,147 3,232 3,319 3,408 3,500 3,594 3,691 3,790 3,892 3,997
16 Customer Service 1,270 1,358 1,338 1,195 1,097 1,584 1,644 1,705 1,767 1,830 1,896 1,964 2,034 2,107 2,183 2,261
17 Demand Side Management 614 630 438 632 566 1,471 1,512 1,554 1,597 1,641 1,686 1,732 1,780 1,828 1,879 1,930
18 Engineering (Operating)333 340 352 369 426 529 547 565 584 604 623 644 665 687 710 733
19 Operations and Maintenance 5,032 4,940 4,119 4,403 4,153 5,980 6,189 6,398 5,613 5,807 6,007 6,215 6,429 6,652 6,882 7,120
20 Resource Management 729 506 516 556 472 724 748 772 798 823 850 877 905 934 965 996
21 Debt Service Payments 406 296 805 804 249 803 802 800 800 802 803 804 802 799 802 -
22 Rent 230 219 419 431 443 455 467 480 492 505 519 532 546 561 574 587
23 Transfers to General Fund 6,006 5,971 5,811 5,730 6,194 6,594 7,035 6,888 7,069 7,069 7,974 8,370 8,794 9,248 9,734 9,739
24 Other Transfers Out 170 207 606 151 303 484 496 508 520 533 546 560 573 587 602 617
25 Capital Improvement Programs 7,821 7,620 1,026 1,832 5,017 2,214 2,074 5,725 5,960 6,145 6,335 6,525 6,721 6,923 7,130 7,344
26 Total Uses of Funds 42,320 39,814 33,743 30,629 30,384 36,943 40,098 43,557 43,823 44,751 46,759 48,386 50,169 52,027 54,032 54,561
27
28 Into/ (Out of) Reserves 528 (4,733)2,773 353 245 (300)(1,874)(4,382)(2,127)(446)120 639 823 808 499 565
29
30 Reappropriations + Commitments 19,211 19,363 11,305 6,491 6,255 6,255 6,255 6,255 6,255 6,255 6,255 6,255 6,255 6,255 6,255 6,255
31 Plant Replacement 1,000 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0
32 CIP Reserve 0 0 0 1,591 3,820 3,820 3,820 3,820 3,820 3,820 3,820 3,820 3,820 3,820 3,820 3,820
33 Rate Stabilization 15,992 11,318 15,981 7,215 6,018 6,018 4,810 524 0 0 0 0 0 0 0 0
34 Operations Reserve 0 0 0 10,847 10,296 9,873 9,208 9,112 7,508 7,063 7,183 7,822 8,645 9,453 10,768 11,333
35 Unassigned 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1
36 Total Reserves 36,203 31,681 27,286 26,144 26,389 25,966 24,093 19,711 17,583 17,138 17,258 17,897 18,720 19,528 20,843 21,409
37 (1,142)245 (423)(1,874)(4,382)(2,127)(446)120 639 823 808 1,315 566
38 Short Term Risk Assessment Value 1,226 3,753 3,560 3,363 3,918 4,231 4,575 4,910 5,144 5,340 5,510 5,635 5,659
39
40 Operations Reserve Guidelines
41 Min (60 Days Commodity + O&M) 5,620 5,000 5,821 6,139 6,074 6,039 6,136 6,412 6,622 6,856 7,100 7,357 7,425
42 Target (90 Days Commodity + O&M) 8,429 7,500 8,731 9,208 9,112 9,058 9,204 9,618 9,933 10,284 10,650 11,036 11,137
43 Max (120 Days Commodity + O&M) 11,239 10,000 11,641 12,277 12,149 12,077 12,272 12,824 13,244 13,712 14,201 14,715 14,849
44
City of Palo Alto Gas Utility
Fiscal Year
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 32 | Page
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 2018 FY 2019 FY 2020 FY 2021 FY 2022
ONE TIME PROJECTS
GS-10000 Gas Station 3 Rebuild - - - - - - - - - - -
GS-15001 Security at Receiving Stations 275,000 - 150,000 (1,563) 423,437 109,174 - - - - -
Subtotal, One-time Projects 275,000 - 150,000 (1,563) 423,437 109,174 - - - - -
GAS MAIN REPLACEMENT (GMR) PROGRAM
GS-09002 GMR - Project 19 - - - - - - - - - - -
GS-10001 GMR - Project 20 - - - - - - - - - - -
GS-11000 GMR - Project 21 100,000 - (100,000) - - - - - - - -
GS-12001 GMR - Project 22 3,571,560 - 3,000 (144,495) 3,430,065 - - - - - -
GS-13001 GMR - Project 23 620,650 3,010,000 (2,967,500) (42,500) 620,650 - - 3,588,150 - - -
GS-14003 GMR - Project 24 - 640,000 - - 640,000 - - - 3,100,000 - -
GS-15000 GMR - Project 25 - - - - - - - - 659,000 3,200,000 -
GS-16000 GMR - Project 26 - - - - - - - - - 678,200 3,300,000
GS-20000 GMR - Project 27 - - - - - - - - - - 700,000
GS-20001 GMR - Project 28 - - - - - - - - - - -
Subtotal, Gas Main Replacement Program 4,292,210 3,650,000 (3,064,500) (186,995) 4,690,715 - - 3,588,150 3,759,000 3,878,200 4,000,000
TOOLS AND EQUIPMENT
GS-13002 General Shop Equipment/Tools 70,106 100,000 (170,106) - - - - - - - -
GS-01019 Global Positioning System - - - - - - - - - - -
GS-03008 Polyethylene Fusion Equip.- - - - - - - - - - -
GS-14004 Gas Distribution System Model 126,365 - 19,574 - 145,939 19,574 - 640,000 - - -
Subtotal, Tools and Equipment 196,471 100,000 (150,532) - 145,939 19,574 - 640,000 - - -
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 33 | Page
Gas Utility Capital Improvement Program (CIP) Detail (continued)
Project #Project Name
Reappropriated /
Carried Forward from
Previous Years
Current Year
Funding
Budget
Amendments
Spending,
Current Year
Remaining in
CIP Reserve
Fund Commitments FY 2018 FY 2019 FY 2020 FY 2021 FY 2022
ONGOING PROJECTS
GS-11002 Gas System Improvements 202,373 231,913 (173,254) (77,393) 183,639 87,771 238,870 246,036 253,417 261,020 268,851
GS-03009 System Ext. - Unreimbursed 128,690 198,500 (334,679) (62,123) (69,612) - 204,455 210,590 216,908 223,415 230,117
GS-80019 Gas Meters and Regulators 304,927 355,030 (659,957) - - - 365,681 376,652 387,952 399,591 411,579
Subtotal, Ongoing Projects 635,990 785,443 (1,167,890) (139,516) 114,027 87,771 809,006 833,278 858,277 884,026 910,547
CUSTOMER CONNECTIONS (FEE FUNDED)
GS-80017 Gas System Extensions 213,712 1,228,500 (1,209,764) (660,368) (427,920) 158,819 1,265,355 1,303,315 1,342,415 1,382,688 1,424,169
Subtotal, Customer Connections 213,712 1,228,500 (1,209,764) (660,368) (427,920) 158,819 1,265,355 1,303,315 1,342,415 1,382,688 1,424,169
GRAND TOTAL 5,613,383 5,763,943 (5,442,686) (988,442) 4,946,198 375,338 2,074,361 6,364,743 5,959,692 6,144,914 6,334,716
Funding Sources
Connection Fees 1,017,000 (1,209,764) 1,047,510 1,078,935 1,111,303 1,144,642 1,178,981
Utility Rates 4,746,943 (4,232,922) 1,026,851 5,285,808 4,848,389 5,000,272 5,155,735
CIP-RELATED RESERVES DETAIL
6/30/2016
(Actual)
6/30/2017
(Unaudited)
Reappropriations 5,345,914 4,570,860
Commitments 267,469 375,338
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 34 | Page
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 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.
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
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 35 | Page
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
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 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.
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 Council approval to
hold 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.
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 36 | Page
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.
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.
GAS UTILITY FINANCIAL PLAN
April 1 2 , 2016 37 | Page
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
April 1 2 , 2016 38 | Page
APPENDIX D: 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 E: GAS UTILITY COMMUNICATIONS SAMPLES
EXCERPTED DRAFT MINUTES OF THE APRIL 5, 2017 UTILITIES ADVISORY COMMISSION
ITEM 3: ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Adopt a Resolution Approving the Fiscal Year 2018 Gas Utility Financial
Plan With no Changes to Gas Distribution Rates
Senior Resource Planner Eric Keniston gave an overview of the Gas Utility financial forecast. No
gas distribution rate change was proposed, but customers would see a bill increase as a result
of the Carbon Neutral Gas Plan approved by Council in November 2016. A charge of up to ten
cents per therm had been approved to buy offsets for all gas delivered within Palo Alto. Staff
projected this would cost $1.3 million dollars in FY 2017, resulting in a projected 4% increase.
This had not been highlighted in the projections presented at the March 2017 UAC meeting.
However, aside from noting this impact, staff had no changes from the proposal presented at
the March meeting.
ACTION: Vice Chair Danaher made a motion to recommend Council approval of the staff
recommendation. Commissioner Ballantine seconded the motion. The motion passed
unanimously (5-0, with Chair Cook, Vice Chair Danaher and Commissioners Ballantine,
Johnston, and Schwartz voting yes and Commissioners Forssell and Trumbull absent)
ATTACHMENT C