HomeMy WebLinkAboutStaff Report 9157
City of Palo Alto (ID # 9157)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 5/15/2018
City of Palo Alto Page 1
Summary Title: FY 2019 Gas Financial Plan and Proposed Rates
Title: Utilities Advisory Commission Recommendation that the City Council
Adopt: 1) a Resolution Approving the Fiscal Year 2019 Gas Utility Financial
Plan; and 2) a Resolution Increasing Gas Rate s by 4% by Amending Rate
Schedules G -1 (Residential Gas Service), G -2 (Residential Master-Metered
and Commercial Gas Service), G -3 (Large Commercial Gas Service), and G -10
(Compressed Natural Gas Service)
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee
recommend that the Council:
1. Adopt a resolution (Attachment A) approving the fiscal year (FY) 2019 Gas Utility
Financial Plan (Attachment B); and
2. Adopt a resolution (Attachment C) increasing gas rates by amending Rate Schedules G-1
(Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas
Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas
Service) (Attachment D).
Executive Summary
The FY 2019 Gas Utility Financial Plan includes projections of the utility’s costs and revenues for
FY 2019 through FY 2028. Gas rates related to distribution costs were last adjusted by 8% on
July 1, 2016, and the FY 2018 Financial Plan included a tentative rate increase of 4% for FY 2019.
The proposed FY 2019 Gas Utility Financial Plan includes a 6% increase in distribution rates,
resulting in a 4% overall gas rate increase, on July 1, 2018. Increases of 7% to 8% are projected
over the next three years. In addition, the plan proposes transfers to the Operations Reserve of
$129,000 and $2 million from the Rate Stabilization Reserve in FY 2018 and FY 2019,
respectively, to ensure that there are appropriate financial reserves for contingenci es. The Rate
Stabilization Reserve is projected to be zero by the end of FY 2020.
City of Palo Alto Page 2
Gas Utility expenses are projected to increase by roughly 3 to 4 percent annually from FY 2019
to FY 2028. In the short term, some increases in operations costs are related to the cross-bore
inspection program, but capital improvement program (CIP) costs have also increased as the
economy has improved. Future CIP project costs have been revised significantly upwards from
prior forecasts ($3 million to $6 million) to reflect higher bids on gas main replacement projects.
Commodity costs are the most volatile component of the Gas Utility’s expenses, but market
prices have been steady and current forecasts project increases of around 1% to 2% annually.
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
generally decreased to about 7% of pre-drought levels, but as with water, it is difficult to
determine whether long run usage will resume the declining trend seen over the last few
decades.
Background
Every year staff presents the Finance Committee and UAC with 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 re trospective 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.
Discussion
Staff’s annual assessment of the financial position of the City’s gas utility is completed to ensure
adequate revenue to fund operations in compliance with the cost of service requirements set
forth in the California Constitution. 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 2018
The FY 2019 Gas Utility Financial Plan includes the following proposed action:
1. Reduce the $1.22 million proposed transfer from the Rate Stabilization Reserve to the
Operations Reserve proposed in the FY 2018 Gas Financial Plan to $129,000.
Proposed Actions for FY 2019
The FY 2019 Gas Utility Financial Plan also includes the following proposed action s:
1. Amend gas rate schedules (see Attachment D) to increase rates by approximately 4%.
2. Transfer up to $2 million from the Rate Stabilization Reserve to the Operations Reserve.
The reserve transfers will enable staff to maintain sufficient funds in the Gas Operations
Reserve levels while spreading the required rate increases for the gas utility over several years.
City of Palo Alto Page 3
These proposed actions are described in more detail in the FY 2019 Gas Financial Plan
(Attachment B).
Staff proposes to adjust gas rates as shown in Table 1 and Table 2 below, effective July 1, 2018.
These changes are projected to increase the system average gas rate by roughly 4%. These rate
changes are included in the proposed amended rate schedules in Attachment D.
Table 1: Current and Proposed Monthly Service Charges
Rate Schedule
Monthly Service Charge
($/month)
Change
Current (as of
7/1/16)
Proposed for
FY 2019
($) (%)
G-1 (Residential) $10.32 $10.94 $0.62
6% G-2 (Small Commercial) 78.23 82.94 4.69
G-3 (Large Commercial) 377.43 400.08 22.65
G-10 (CNG) 52.93 56.11 3.18
Table 2: Current and Proposed Gas Distribution Charges
Change
Current (as of
11/1/16)
Proposed
for FY 2019
($) (%)
G-1 (Residential)
Tier 1 Rates $0.3933 $0.4239 $0.0306 7.8%
Tier 2 Rates 0.9319 0.9948 0.0629 6.7%
G-2 (Residential Master-Metered and Small Commercial)
Uniform Rate 0.5767 0.6183 0.0416 7.2%
G-3 (Large Commercial)
Uniform Rate 0.5687 0.6098 0.0411 7.2%
G-10 (Compressed Natural Gas)
Uniform Rate 0.0093 0.0100 0.0007 7.2%
Bill Impact of Proposed Rate Changes
Table 3 shows the impact of the proposed July 1, 2018 rate changes on the median residential
bill. The average increase is roughly 4% based on commodity prices in February 2018, but some
customers may see slightly higher or lower increases due to slight changes in the composition
of the utility’s costs, as well as prevailing market prices.
City of Palo Alto Page 4
Table 3: Impact of Proposed Gas Rate Changes on Residential Bills
Usage
(Therms/month)
Bill under
Current Rates
Bill under
Proposed Rates
Change
$/mo. %
Winter (Using February 2018 commodity prices)
30 $36.93 $ 38.47 $ 1.54 4%
54 (median) 58.21 60.49 2.28 4%
80 94.20 98.04 3.84 4%
150 193.98 202.23 8.25 4%
Summer (Using July 2017 commodity prices)
10 18.73 $ 19.90 $ 1.17 6%
18 (median) 25.45 27.08 1.63 6%
30 40.57 43.16 2.59 6%
45 61.26 65.17 3.91 6%
Table 4 shows the impact of the proposed July 1, 2018 rate changes on various representative
commercial customer bills.
Table 4: Impact of Proposed Gas Rate Changes on Commercial Bills
(Using February 2018 commodity prices)
Usage
(Therms/month)
Bill under Current
Rates
Bill under
Proposed Rates
Change
%
500 613 639 4%
5,000 5,430 5,642 4%
10,000 10,781 11,202 4%
50,000 53,493 55,571 4%
FY 2019 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 5 shows the projected rate adjustments over the next five years and their impact on the
annual median residential gas bill.
Table 5: Projected Rate Adjustments, FY 2019 to FY 2023
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Gas Utility 4% 8% 7% 7% 4%
Estimated Bill Impact ($/mo)* $1.56 $3.25 $3.07 $3.29 $2.01
* estimated impact on median residential gas bill, which is currently $39.09 for CY 2017.
Cost Drivers and Cost Containment
One of the main drivers for the increase in the Gas Utility’s short run costs (and theref ore rates)
over the next several years are increases in capital improvement costs. In FY 2014, FY 2015 and
FY 2017, costs for the gas utility were unusually low as new main replacements were not
budgeted. The gas, water and wastewater utilities genera lly try to perform one main
City of Palo Alto Page 5
replacement construction contract annually in each utility, but in the gas utility completing new
projects was determined infeasible in those years. In FY 2014 and FY 2015, this was due to the
fact that staff was completing a prior major gas main replacement project, the largest in CPAU
history, which completed replacement of all ABS gas mains in Palo Alto. Then, FY 2016 included
replacements of gas mains on University Avenue, a project that has evolved into the Upgrade
Downtown project involving a coordinated replacement of several different types of
infrastructure to avoid multiple disruptions to the business district. This has been a multi-year
planning effort that did not allow for design of other new projects.
This allowed the Gas Utility to temporarily keep rates lower than they would typically have
been needed to be to fund future operations and capital replacement. These future capital
replacement costs will be higher, as well. As the emphasis on infrastructure improvement has
taken hold both regionally and nationally, contractor bids for new projects have risen greatly
from where they were during the last recession. Lastly, one additional project which will
increase costs on a one-time basis is the modification of gas meters to an Advanced Metering
Infrastructure platform (AMI). Much of this project is expected to be completed by FY 2022.
Going forward, main replacement projects will focus on replacing polyvinyl chloride (PVC) and
steel (wrapped with cathodic protection) main s, the materials most at risk of failure on the
system, with polyethelene (PE) mains. Annual operations expense allocations will also include
the elimination of gas cross-bore risks.
Over the longer term, increases to Operations and CIP costs are projected to be roughly
equivalent in terms of driving costs. Growth in these categories of expenses is projected to
increase by about 2 to 3% annually, mainly driven by expected increases in inflation as well as
salaries and benefits costs. In addition, additional costs will be seen over at least the next three
years from the cross-bore inspection program. Gas commodity costs are the most variable,
being subject to market forces. This category of costs is currently forecast to remain relatively
stable, but this can change rapidly.
Figures 1 below illustrates the projected long run changes in the Gas Utility’s costs. The figures
use FY 2013 and FY 2022 as comparison years because of one time savings in FY 2014, FY 2015,
and FY 2017 due to a lack of main replacement funding. Projected cost increases over the
FY 2013 to FY 2022 time period are primarily related to Operations and Capital are roughly
equal in terms of projected cost growth . Commodity costs are projected to be roughly
equivalent between these two time periods, although being market driven, this can change at
any time, with the additional cost or savings passed directly to consumers.
Figure 1: FY 2013 and FY 2022 costs
City of Palo Alto Page 6
It’s worth noting that although costs are increasing 17% over the FY 2013 to FY 2 022 time
period, the average customer rate is projected to increase 19% over that period. This is due to
the fact that rates were lower than costs in FY 2013, so will need to rise more steeply than costs
through FY 2022.
Distribution rates were increased only once from July 2012 through today because of the one-
time capital cost savings in FY 2014, FY 2015, and FY 2017 as discussed above. Raising rates
would have resulted in accumulation of reserves in excess of reserve guidelines. The FY 2017
Financial Plan, anticipated further increases in FY 2018 and FY2019 of 9 % and 7%, respectively,
to bring distribution revenues in line with costs. Reserve positions at the end of FY 2017
allowed staff to delay these increases. The current projected rate increases simply allow
revenues to rise to match increased costs as staff resumes regular main replacement.
Even though costs have risen in recent years, they have not risen as much as they would have if
City staff did not take efforts to contain costs. Some examples include:
City staff looks for opportunities to save money operationally, small opportunities that
add up. For example, the City recently creatively rebid its contract for construction
material supply and spoils hauling to go from using a single vendor to multiple vendors
that each specialized in specific materials, realizing nearly $250,000 in savings over
three years.
The current climate of high construction costs results in less capital replacement for
dollars invested. Staff will continue to prioritize near-term projects to address
immediate needs, and potentially defer projects where system reliability will not be
impacted to ensure full value is extracted from existing infrastructure.
A regular review of performance metrics and expenditures.
City of Palo Alto Page 7
Consistent with newly approved Utilities Strategic Plan, cost containment is being instituted as
an ongoing priority and annual cycle. This will include the completion of preliminary out -year
rate forecasts in the fall, which will allow for a review by all Divisions for alignment of multiyear
strategies. This includes ongoing management review of personnel transactions, including
Review/Revisions of position classifications to match evolving needs, Addition/Deletion of
positions to reflect organizational priorities, and Review/Approval to fill individual position
vacancies in conjunction with ASD Budget Office and Human Resources.
Changes from Preliminary Financial Forecast
After presenting the preliminary financial forecast to the UAC on February 7, 2018, addition al
budget information and changes to usage projections have been changed in outer years, but
the FY 2019 proposal of a 4% overall rate increase remains the same.
Gas Bill Comparison with Surrounding Cities
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 July 2017 (to illustrate a summer month bill) and
February 2018 (to illustrate a winter month bill). The annual gas bill for the median residential
customer for calendar year 2017 was $469.05, about 14% lower than the annual bill for a PG&E
customer with the same consumption. PG&E’s distribution rates for gas have increased
substantially to collect for needed system improvements for pipeline safety and maintenance.
The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which
includes the surrounding communities.
Table 6: Residential Monthly Natural Gas Bill Comparison ($/month)
Season
Usage
(therms) Palo Alto PG&E Zone X
%
Difference
Winter
(February 2018)
30 36.93 42.39 -12.9%
(Median) 54 58.21 76.31 -23.7%
80 94.20 126.58 -25.6%
150 193.98 264.07 -26.5%
Summer
(July 2017)
10 18.73 13.01 44.0%
(Median) 18 25.45 23.41 8.7%
30 40.57 45.24 -10.3%
45 61.26 72.72 -15.8%
Table 7 shows the monthly gas bills for commercial customers for various usage levels for rates
in effect as of February 2018. Bills for CPAU customers at the usage levels shown are around 2%
to 27% 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.
City of Palo Alto Page 8
Table 7: Commercial Monthly Average Gas Bill Comparison
(for Rates in Effect February 2018)
Usage (therms/mo)
Gas Bill ($/month) %
Difference Palo Alto PG&E
500 613 600 2%
5,000 5,430 5,242 4%
10,000 10,781 9,211 17%
50,000 53,493 42,036 27%
Commission Review and Recommendation
The UAC reviewed this proposal at its April 12, 2018 meeting. After a brief presentation by staff,
Commissioners noted that capital costs are a driver, and that discussing the safety aspects of
future projects should be something staff should focuses on when communicating to the public.
Commissioners also sought clarification as to how the reserve guid eline levels were derived,
how they followed cost increases, as well as how the reserve funds were separated. The UAC
voted 4-0 (Commissioners Trumbull and Segal absent) to recommend staff’s proposal.
Attached is the excerpted draft minutes from the UAC’s April 12, 2018 meeting (Attachment E).
Timeline
If the Finance Committee supports the proposed rate adjustments, the City Council will
consider adopting the Financial Plan and rate amendments as part of the FY 2019 budget
review and adoption process. If Council approves the proposed rate changes, they will become
effective July 1, 2018.
Resource Impact
Normal year sales revenues for the Gas Utility are projected to increase by roughly 4% ($1.2
million) as a result of the proposed rate increases, not including fluctuations in commodity
revenue/cost. See the attached FY 2019 Gas Financial Plan for a more comprehensive overview
of projected cost and revenue changes for the next ten years.
Policy Implications
The proposed gas rate adjustments are consistent with Council-adopted Reserve Management
Practices that are part of the Financial Plan, and were developed using a cost of service study
and methodology consistent with industry-accepted cost of service principles.
Environmental Review
The Finance Committee and UAC’s review and recommendation to Council on the FY 2019 Gas
Financial Plan and rate adjustments does not meet the California Environmental Quality Act’s
definition of a project, pursuant to Public Resources Code Section 21065, thus no
environmental review is required.
Attachments:
Attachment A: Resolution Approving FY 2019 Gas Utility Financial Plan
City of Palo Alto Page 9
Attachment B: FY 2019 Gas Utility Financial Plan
Attachment C: Resolution Amending Gas Rates Utility for FY 2019
Attachment D: Amended Rate Schedules G-1, G-2, G-3 and G-10
Attachment E: Excerpted Draft UAC Minutes of April 12, 2018 Special Meeting
Attachment A
NOT YET APPROVED
180327 jb 6055005
Resolution No. ____
Resolution of the Council of the City of Palo Alto Approving the
FY 2019 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 2019 Gas Utility Financial Plan.
SECTION 2. The Council hereby approves the transfer of up to $129,000 in FY 2019
from the Rate Stabilization Reserve to the Operations Reserve, as described in the FY 2019 Gas
Utility Financial Plan approved via this resolution.
SECTION 3. 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
Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative
governmental activity which will not cause a direct or indirect physical change in the
environment, and therefore, no environmental assessment is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
Attachment A
NOT YET APPROVED
180327 jb 6055005
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Assistant City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
FY 2019 GAS
UTILITY
FINANCIAL PLAN
FY 2019 TO FY 2028
ATTACHMENT B
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 2 | P a g e
GAS UTILITY FINANCIA L PLAN
FY 201 9 TO FY 202 8
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 3C: Proposed Reserve Transfers ...................................................................................... 9
Section 4: Utility Overview .................................................................................................. 10
Section 4A: Gas Utility History ................................................................................................... 10
Section 4B: Customer Base ........................................................................................................ 11
Section 4C: Distribution System ................................................................................................. 12
Section 4D: Cost Structure and Revenue Sources ...................................................................... 13
Section 4E: Reserves Structure ................................................................................................... 13
Section 4F: Competitiveness ...................................................................................................... 14
Section 4G: Gas Supply Rates .................................................................................................... 15
Section 5: Utility Financial Projections ................................................................................. 16
Section 5A: Load Forecast .......................................................................................................... 16
Section 5A: FY 2013 to FY 2017 Cost and Revenue Trends ........................................................ 17
Section 5B: FY 2017 Results ....................................................................................................... 18
Section 5C: FY 2018 Projections ................................................................................................. 19
Section 5D: FY 2019-FY 2028 Projections .................................................................................. 19
Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 20
Section 5F: Long-Term Outlook ................................................................................................. 22
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 3 | P a g e
Section 6: Details and Assumptions ..................................................................................... 23
Section 6A: Gas Purchase Costs ................................................................................................. 23
Section 6B: Operations .............................................................................................................. 24
Section 6C: Capital Improvement Program (CIP) ....................................................................... 25
Section 6D: Debt Service ............................................................................................................ 27
Section 6E: Equity Transfer ........................................................................................................ 28
Section 6F: Revenues ................................................................................................................. 28
Section 6G: Communications Plan ............................................................................................. 29
Appendices ......................................................................................................................... 31
Appendix A: Gas Financial Forecast Detail ................................................................................ 32
Appendix B: Gas Utility Capital Improvement Program (CIP) Detail ......................................... 33
Appendix C: Gas Utility Reserves Management Practices ......................................................... 35
Appendix D: Description of Gas Utility Cost Categories ............................................................ 39
Appendix E: Gas Utility Communications Samples .................................................................... 40
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 4 | P a g e
SECTION 1: DEFINITIONS AND ABBR EVIATIONS
ABS: Acrylonitirile butydene styrene, a plastic gas main material
AMI: Advanced Metering Infrastructure
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
M a r c h 2 0 1 8 5 | P a g e
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 2 A : OVERVIEW OF F INANCIAL P OSITION
This financial plan projects non-commodity costs to increase from FY 2019 through FY 2028 at
about 3.5% per year on average. In the short term, some of these cost increases are related to
the cross-bore inspection program, but capital improvement program (CIP) costs have also
increased as the economy has improved. The national and regional focus on infrastructure
improvement has created more demand, and the pool of skilled construction labor has not grown
at the same pace. While CPAU generally plans a new gas main replacement project every year,
recent larger than expected bids have required resizing and redesign of some existing plan ned
projects. Because of this (as well as the complexity of the project), CIP costs for FY 2018 increased
for the University Avenue Business District project, which is scheduled to begin construction in
mid-2018. Due to the amount of planning required for this project, no new CIP work was
budgeted for FY 2017, and because of the complexity of the University Avenue project, no CIP
work is budgeted for FY 2019, resulting in one-time cost savings. The next new main replacement
project after the University Avenue project will take place in FY 2020. Table 1 shows the Gas
Utility expenses over the period of this financial plan .
Table 1: Gas Utility Expenses for FY 2017 to FY 2028 (Thousand $’s)
Expenses
($000)
FY
2017
(act.)
FY
2018
(est.)
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
Commodity costs 12,563 14,137 13,022 12,851 13,040 13,233 13,499 13,855 14,188 14,576 14,731 14,932
Operations 21,050 20,302 20,509 21,133 20,579 21,874 22,508 23,270 24,048 24,879 24,303 24,649
Capital Projects 2,214 7,804 5,197 10,217 12,080 9,815 9,892 9,970 10,050 10,131 10,214 10,299
TOTAL 35,827 42,243 38,728 44,202 45,698 44,922 45,898 47,095 48,286 49,587 49,248 49,880
To ensure that revenues cover projected rising costs, the financial plan includes the rate
trajectory shown in Table 2.
Table 2: Projected Gas Rate Trajectory for FY 2019 to FY 2028
Projection FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
Current Financial Plan 4% 8% 7% 7% 4% 4% 1% 1% 0% 2%
FY 2018 Financial Plan 4% 6% 6% 5% 3% 3% 2% 1% 0% N/A
FY 2017 Financial Plan 7% 4% 1% 1% 1% 1% 1% 1% N/A N/A
The Gas Utility has a Rate Stabilization Reserve, which can be 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 Utility also has a CIP Reserve to help offset one-time and/or unanticipated, spikes
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 6 | P a g e
in CIP spending which do not merit separate bond financing. Table 3 shows the projected reserve
transfers over the forecast period.
Table 3: Transfers To/(From) Reserves for FY 2018 to FY 2028 ($000)
Reserve FY 2018 FY 2019 FY 2020 to FY 2028
Rate Stabilization (129) (2,006) (4,404)
CIP - - (3,820)
Operations 129 2,006 8,224
SECTION 2 B : SUMMARY OF PROPOSE D ACTIONS
Staff proposes the following actions for the Gas Utility in FY 2018:
1. Amend the proposal of a $1.2 million transfer from the Rate Stabilization Reserve to the
Operations Reserve, as proposed in the FY 2018 Gas Financial Plan, to a transfer of
$129,000, based on projected ending Operations Reserve levels.
Staff proposes the following actions for the Gas Utility in FY 2019:
2. Increase distribution rates by 6% (a 4% overall increase) for FY 2019, primarily reflecting
increases to capital expenditures and also increased operations costs . See Section 3B:
Current and Proposed Rates for more details.
3. Transfer $2 million from the Rate Stabilization Reserve to the Operations Reserve. See
Section 3D: Proposed Reserve Transfers for more details.
SECTION 3: DETAIL OF FY 201 8 RATE AND RESERVE PRO POSALS
SECTION 3 A : 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 Solutions.1 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 2016 2 . The updated study is projected to be
completed by late FY 2018 or the early part of FY 2019, and will provide guidance for the next
proposed rate action.
SECTION 3 B : CURRENT AND PROPOS ED 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, CPAU increased monthly service charges to
recover the cost of providing gas service to customers. In January 2015, the Council adopted a
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
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 7 | P a g e
new rate component to collect the costs of purchasing allowances for the purpose of compliance
with the State’s cap-and-trade program.4 This component changes 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 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 $0.10 per
therm. Three years’ worth of volumetric rate history can be found on Palo Alto’s website.7
CPAU has four rate schedules: one for separately metered residential customers (G-1), one for
small commercial and master-metered multi-family residential customers (G-2), one for
customers using over 250,000 therms per year (G-3) and a specific schedule for the Compressed
Natural Gas station (G-10). All customers pay a monthly service charge, which represents meter
reading, billing, and other customer service costs, as well as a portion of operations and
maintenance cost. All customers are also charged for each therm of gas used. Separately metered
residential customers are charged on a tiered basis, differentiated by season. During the winter
months, the first 2 therms per day (60 therms for a 30 day billing period) are charged a base price
per CCF, and all additional units charged a higher price per therm . During the summer months,
the first tier level is 0.667 therms per day, or 20 therms for a 30 day billing period. Commercial
customers pay a uniform price for each therm used.
Table 4 shows the current monthly service charges for all rate schedules. Table 95 shows the
consumption charges related to distribution charges. As mentioned earlier, commodity charges
change monthly, and transportation charges are tied to the PG&E G-WSL rate schedule. Some
recent commodity price history is discussed in Section 6A: Gas Purchase Costs.
4 Staff Report 5397, 1/26/2015: https://www.cityofpaloalto.org/civicax/filebank/documents/45537
5 Staff Report 7260 10/17/2016 http://www.cityofpaloalto.org/civicax/filebank/documents/54165
6 Staff Report 7533 12/05/2016 http://www.cityofpaloalto.org/civicax/filebank/documents/54882
7 Monthly Gas Commodity & Volumetric Rates http://www.cityofpaloalto.org/civicax/filebank/documents/30399
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 8 | P a g e
Table 4: Current and Proposed Monthly Service Charges
Rate Schedule
Monthly Service Charge
($/month)
Change
Current (as of
7/1/16)
Proposed for
FY 2019
($) (%)
G-1 (Residential) $10.32 $10.94 $0.62 6%
G-2 (Small Commercial) 78.23 82.94 4.69 6%
G-3 (Large Commercial) 377.43 400.08 22.65 6%
G-10 (CNG) 52.93 56.11 3.18 6%
Table 5: Current and Proposed Gas Distribution Charges
Change
Current (as of
11/1/16)
Proposed
for FY 2019
($) (%)
G-1 (Residential)
Tier 1 Rates $0.3933 $0.4239 $0.0306 7.8%
Tier 2 Rates 0.9319 0.9948 0.0629 6.7%
G-2 (Residential Master-Metered and Small Commercial)
Uniform Rate 0.5767 0.6183 0.0416 7.2%
G-3 (Large Commercial)
Uniform Rate 0.5687 0.6098 0.0411 7.2%
G-10 (Compressed Natural Gas)
Uniform Rate 0.0093 0.0100 0.0007 7.2%
SECTION 3 C : BILL IMPACT OF PRO POSED RATE CHANGES
Table 6 shows the impact of the proposed July 1, 2018 rate changes on the median residential
bill. The average increase is roughly 4% based on prices in February 2018, but some customers
may see slightly higher or lower increases due to slight changes in the composition of the utility’s
costs, as well as prevailing market prices.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 9 | P a g e
Table 6: Impact of Proposed Gas Rate Changes on Residential Bills
Usage
(Therms/month)
Bill under
Current Rates
Bill under
Proposed Rates
Change
$/mo. %
Winter (Using February 2018 commodity prices)
30 $36.93 $ 38.47 $ 1.54 4%
54 (median) 58.21 60.49 2.28 4%
80 94.20 98.04 3.84 4%
150 193.98 202.23 8.25 4%
Summer (Using July 2017 commodity prices)
10 18.73 $ 19.90 $ 1.17 6%
18 (median) 25.45 27.08 1.63 6%
30 40.57 43.16 2.59 6%
45 61.26 65.17 3.91 6%
Table 7 shows the impact of the proposed July 1, 2018 rate changes on various representative
commercial customer bills.
Table 7: Impact of Proposed Gas Rate Changes on Commercial Bills
(Using February 2018 commodity prices)
Usage
(Therms/month)
Bill under Current
Rates
Bill under
Proposed Rates
Change
%
500 613 639 4%
5,000 5,430 5,642 4%
10,000 10,781 11,202 4%
50,000 53,493 55,571 4%
SECTION 3D : PROPOSED RESERVE TRANSFERS
The FY 2018 Financial Plan proposed a $1.2 million transfer from the Rate Stabilization Reserve
into the Operations Reserve in FY 2018. Lower actual expenses in FY 2017 resulted in higher
ending reserve balances than initially projected, so staff recommends revising the transfer down
to $129,000 at this time. A tentative transfer of $2 million in FY 2019, followed by $4.4 million in
FY 2020, is included in the financial projections in this Financial Plan. In addition, $3.8 million in
the CIP Reserve may need to be utilized in FY 2021. This will help mitigate additional, one -time
costs related to the replacement of gas meters for AMI deployment. The transfers in general 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.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 10 | P a g e
SECTION 4: UTILITY O VERVIEW
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.
SE CTION 4 A : 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 was comprised
of 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 gasification 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 CPUC) to increase rates by nearly 72.5%.
Despite these initial hurdles, Palo Alto’s system grew tremendously, and by 1924 revenues had
exceeded those of the electric utility. Sales were such that the annual reports of the time noted
gas usage “appears to be greater than that of any other city in the state, showing that gas is a
very popular form of fuel in Palo Alto.” Just prior to the acquisition of the neighboring town of
Mayfield’s gas system (centered around today’s California Avenue) in 1929, the miles of main in
service and customers connections had doubled.
Notable changes to the gas supply itself came in 1930, when PG&E ceased supplying purely
manufactured (or coal) gas from its Potrero Hill facility in San Francisco and instead switched to
natural gas. In 1935, a supplementary butane injection system (later retired) was purchased from
Standard Oil to mitigate large wintertime peaks. Gas sales were at 248,658 million cubic feet
(MCF) with 4,849 active services.
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
8 Staff Report CMR:183:90. Infrastructure Review and Update, March 1, 1990
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 11 | P a g e
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.
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 4 B : CUSTOMER BASE
CPAU’s Gas Utility provides natural gas service to the residents, businesses, and other gas
customers in Palo Alto. Close to 23,600 customers are connected to the natural gas system,
approximately 22,000 (93%) of which are residential and 1,600 (7%) of which are non-residential.
Residential customers consume about 11 to 13 million therms of gas per year, roughly 45% of the
gas sold, while non-residential customers consume 55% (about 14 to 16 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,
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
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 12 | P a g e
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 is now tied to PG&E’s G-WSL rate schedule, and varies when and if PG&E changes
its rate schedule. The cost of purchased gas and PG&E local transportation service usually
account for roughly one third of the utility’s expenditures.
SECTION 4 C : DISTRIBUTION SYSTE M
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 close to 23,600 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 i nfrastructure 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 2021.
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.
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.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 13 | P a g e
SECTION 4 D : C OST S TRUCTURE AND R EVENUE S OURCES
As shown in Figure 1, the Gas
Utility receives 95% 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 2017,
gas purchase costs accounted for
roughly 31% of the Gas Utility’s
costs. This percentage can vary
widely from year to year, as this
cost is based upon market
purchases, and now also includes
costs related to cap and trade.
Operational costs in FY 2017
represented roughly 51%, of
expenses and capital investment
was responsible for the remaining
18%. CIP is normally about 20% of
expenses, but this may be lower in
times when new budgeting for
projects is deferred, as happened in FY 2017.
SECTION 4 E : RESERVES STRUCTURE
CPAU maintains six reserves for its Gas Utility to manage various types of contingencies. The
summary below describes each of these briefly. 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.
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
Figure 2: Cost Structure (FY 2017)
51%
31%
18%
Operations
Gas Purchases
Capital
Figure 1: Revenue Structure (FY 2017)
95%
5%
Sales of Gas
Other Revenue
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 14 | P a g e
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 4 F : COMPETITIVENESS
Table 8 presents winter and summer residential bills for Palo Alto and PG&E at several usage
levels for commodity rates in effect as of July 2017 (to illustrate a summer month bill) and
February 2018 (to illustrate a winter month bill). The annual gas bill for the median residential
customer for calendar year 2017 was $469.05, about 14% lower than the annual bill for a PG&E
customer with the same consumption. PG&E’s distribution rates for gas have increased
substantially to collect for needed system improvements for pipeline safety and maintenance.
The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which
includes the surrounding communities.
Table 8: Residential Monthly Natural Gas Bill Comparison ($/month)
Season
Usage
(therms) Palo Alto PG&E Zone X
%
Difference
Winter
(February 2018)
30 36.93 42.39 -12.9%
(Median) 54 58.21 76.31 -23.7%
80 94.20 126.58 -25.6%
150 193.98 264.07 -26.5%
Summer
(July 2017)
10 18.73 13.01 44.0%
(Median) 18 25.45 23.41 8.7%
30 40.57 45.24 -10.3%
45 61.26 72.72 -15.8%
Table 9 shows the monthly gas bills for commercial customers for various usage levels for rates in
effect as of February 2018. Bills for CPAU customers at the usage levels shown are around 2% to
27% 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 higher distribution rates as the commodity rates for CPAU and PG&E are very similar, both
being based on spot market gas prices.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 15 | P a g e
Table 9: Commercial Monthly Average Gas Bill Comparison
(for Rates in Effect February 2018)
Usage (therms/mo)
Gas Bill ($/month) %
Difference Palo Alto PG&E
500 613 600 2%
5,000 5,430 5,242 4%
10,000 10,781 9,211 17%
50,000 53,493 42,036 27%
SECTION 4 G : 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. Figure 3 shows the actual commodity prices charged. 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 February 2018
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 16 | P a g e
SECTION 5 : UTILITY F INANCIAL PROJECTIONS
SECTION 5 A : LOAD F O RECAST
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 and FY 2018, as the drought has eased, 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 resume the long run trend of decreasing usage over the forecast period, although changes
such as replacement of gas appliances with electric appliances or customer behavior may result
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 17 | P a g e
in lower long run usage. As with prior drought/gas usage declines in the past, it is likely that
consumption will not come 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 5 A : FY 201 3 TO FY 201 7 COST AND REVENUE TRE NDS
Figure 6 and Appendix A: Gas Utility Financial Forecast Detail show how costs have changed
during the last five years as well as how staff project costs to change over the next decade.
The annual expenses for the gas utility decreased substantially between 2013 and 2017. Lower
gas sales in conjunction with the drought, as well as lower gas market prices in FY 2015 and FY
2016 (as shown in Figure 3 above) resulted in lower overall commodity expenses. FY 2014, FY
2015 and FY 2017 were notable due to the fact that no new funding was added for main
replacement projects. In FY 2014 and FY 2015, this was due to the fact that staff was completing
a prior major gas main replacement project, the largest in utility history, which completed
replacement of ABS gas mains in Palo Alto. The FY 2016 project included replacements of gas
mains on University Avenue, a project that has evolved into the Upgrade Downtown project
involving a coordinated replacement of several different types of infrastructure to avoid multiple
disruptions to the business district. This has been a multi-year planning effort that did not allow
for design of other new projects. This allowed the Gas Utility to temporarily keep rates lower
than they will need to be to fund future operations and capital replacement .
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 18 | P a g e
Revenues have generally matched expenses in most years and were higher than expenses in FY
2017. As shown in Figure 6 below, revenues were below cost in FY 2013 and nearly at cost in FY
2016. The absence of new budget funding for main replacement projects for several years, 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 distribution rates was in July 2016 when CPAU
increased rates by 8%. In FY 2012, commodity rates were changed to a market-based, monthly
pass-through cost—and commodity rates (and usage) fell, so revenues (and gas supply costs)
actually declined in FY 2013 after the rate increase. Figure 6 assumes no change in gas supply
costs over the forecast period to illustrate the impact of proposed distribution rate changes on
the overall customer bill. In reality, gas supply costs are uncertain and are passed through to
customers as they change month to month.
Figure 6: Gas Utility Expenses, Revenues, and Rate Changes:
Actual Costs through FY 2017 and Projections through FY 2028
SECTION 5 B : FY 201 7 RESULTS
Sources of funds for FY 2017 were lower than projections by $885,000, but operational expenses
came in well below the expected budget. Total FY 2017 expenses were $32.7 million compared
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 19 | P a g e
to projections of $36.9 million in the FY 2018 Financial Plan. Table 10 summarizes the variances
from forecast.
Table 10: FY 2017, Actual Results vs. Financial Plan Forecast ($000)
Net Cost/(Benefit) Type of change
Purchase costs lower than forecast (479) Cost savings
Operations cost savings (3,774) Cost savings
Decreased interest income and other
non-sales revenues 1,753
Revenue decrease
Increased sales revenues (867) Revenue increase
Net Cost / (Benefit) of Variances (3,368)
SECTION 5 C : FY 201 8 PROJECTIONS
Current projections indicate that sales revenues will be slightly higher than last year’s forecast,
but other revenues have been revised downwards based on prior year actuals. While gas
purchase costs are not projected to increase appreciably during the forecast period, the current
financial plan anticipates CIP costs will be substantially higher in FY 2018 than projected in the
prior financial plan. Table 11 summarizes the current and projected variances from the FY 2018
Financial Plan.
Table 11: FY 2018 Projected Results vs. Current Financial Plan Forecast ($000)
Net Cost/ (Benefit) Type of change
Sales revenues higher than forecast (160) Revenue increase
Other revenues and interest lower than forecast 1,272 Revenue decrease
Purchase cost decrease (2,108) Cost decrease
Operations & maintenance and customer service
cost decreases
(1,477) Cost decrease
Capital Improvement Cost increases 5,730 Cost increase
Net Cost / (Benefit) of Variances 3,259
SECTION 5 D : FY 201 9 -FY 202 8 PROJECTIONS
Figure 6 above shows that staff projects costs for the Gas Utility to rise substantially in FY 2018,
and then to increase at around 2.9% per year on average through FY 2028. In Operations, there
is a short run addition of $1 million, starting in FY 2019, for cross-bore inspections (this expense
is projected to continue for at least three years), as well as general inflationary increases of
around 2 to 3% per year. Salaries and benefits expenses are projected to rise at 3 to 4% per year,
per the City’s Long Range Financial Plan. Construction costs continue to increase, which resulted
in increased costs in FY 2018 for the University Avenue Business District project, which is
scheduled to begin construction in mid-2018. Due to the amount of planning required for this
project, no new CIP work was budgeted for FY 2017, and because of its complexity, no CIP work
is budgeted for FY 2019, resulting in one-time cost savings. The next new main replacement
project after the University Avenue project will take place in FY 2020, and ongoing main
replacement is expected to be more expensive. In addition to these trends, additional costs
related to AMI deployment are projected in FY 2020 and 2021. Gas commodity costs are the most
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 20 | P a g e
variable component but are currently projected to increase by less than 2% annually. 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, this financial plan projects the Rate Stabilization Reserves to be depleted
by FY 2020.
Figure 7: Gas Utility Reserves
Actual Reserve Levels for FY 2017 and Projections through FY 2028
SECTION 5 E : RISK ASSESSMENT AND RESERVES ADEQUAC Y
This financial plan projects the Gas Utility’s primary contingency reserve, the Operations Reserve,
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 within the
guideline levels.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 21 | P a g e
Figure 8: Operations Reserve Adequacy
Forecasted Operations Reserve levels also exceed the short-term risk assessment for the Utility.
Table 12 summarizes the risk assessment calculation for the Gas Utility through FY 2023. The
same methodology is used for FY 2024 through FY 2028 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 12: Gas Risk Assessment ($000)
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Total non-commodity revenue $21,457 $23,226 $25,843 $28,443 $29,930
Max. revenue variance, previous ten years 16% 16% 16% 16% 16%
Risk of revenue loss $3,441 $3,725 $4,144 $4,561 $4,799
CIP Budget $3,894 $8,875 $10,697 $8,391 $8,425
CIP Contingency @10% $389 $888 $1,070 $839 $842
Total Risk Assessment value $3,830 $4,612 $5,214 $5,400 $5,642
Finally, the City created the CIP Reserve 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, but staff will continue to review this reserve
and the appropriateness of the current minimum and maximum guideline levels.
At the end of FY 2017, the sum of the CIP Reserve and existing Commitments was $8 million, as
shown in Figure 7.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 22 | P a g e
SECTION 5 F : 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, an expansion of export capabilities, 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 pursues 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, extensive electrification of gas-using appliances is
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 Update, Discussion Draft for Public Review and Comment , California Air
Resources Board, October 2013, pg 88.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 23 | P a g e
SECTION 6 : D ETAILS AND A SSUMPTIONS
SECTION 6 A : 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 Citygate, even including the costs of transmission from Malin to
Citygate. The Gas Utility purchases gas 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. 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 slowly but 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 to
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.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 24 | P a g e
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 6 B : 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 2019 to FY 2021 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 included $3
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 25 | P a g e
million in additional funding between FY 2019 and FY 2021 for this program, but the program will
likely require additional funding in future years to complete.
Figure 11: Historical and Projected Operational Costs
SECTION 6 C : 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 ranked to have the highest threat scores within the system.
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, gas pipeline maintenance and emergency equipment.
One-time Projects, which represents occasional large projects that do not fall into any
other category.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 26 | P a g e
Table 13 shows the current status of these project categories and future projected spending.
Table 13: Budgeted Gas CIP Spending ($000)
The Gas Main Replacement (GMR) Program is in the final stages of completing a major milestone
with the replacement of gas mains made from Acrylonitrile-Butadiene-Styrene (ABS) plastic. The
program to replace ABS and other low-performing materials within the gas system started in the
1990s (see Section 4A: Gas Utility History for more detail). CPAU temporarily slowed down its FY
2014 and 2015 CIP appropriations in this category in order to finalize the last major ABS main
replacement project and to catch up on projects t hat had accumulated due to staffing issues.
With the replacement of all ABS mains with Polyethylene (PE) plastic near completion, the
material most at risk for failure is the remaining Polyvinyl chloride (PVC) plastic and steel
(wrapped, with cathodic protection). The next focus of the GMR program will be the replacement
of all PVC mains with PE mains. CPAU is considering updating the Gas System Master Plan to
determine which sections of pipeline to prioritize and assist in determining the pace of main
replacement (approximately three miles of main each year, or 1.5% of the system).
The current budget for the gas main replacement program takes into account the recent rise in
construction costs. Several factors are contributing to the increase in constructio n costs and
include economic recovery in the Bay Area, a greater focus on infrastructure improvement by
many municipal agencies, and the higher demand for utility contractors within these fields. CPAU
has seen the replacement cost per linear foot increase by 25% to 50% over the last couple of
years. The Gas Utility posted the most recent project for competitive bid (the Upgrade Downtown
Project) and this resulted in very few contractor bids and an eventual contract price that was
much higher than estimated (staff has requested $6.7 million additional funding in FY 2018
related to this project) . Staff is beginning to include the higher construction cost in future project
estimates in order to maximize the amount of pipe replaced, as well as insuring the over all
integrity of the gas system. Currently, CPAU plans to replace as many aging mains as possible
within its current budget. However, if this trend of higher construction cost continues, the Gas
Utility may require larger CIP budgets and as a result, an increase in rates.
Staff has also included projections for costs related to AMI deployment, primarily centered
around meter replacement costs in FY 2021.
Staff projects ongoing projects, tools and equipment, and customer connections to cost
approximately $2.7 million in FY 2019 and remain relatively flat through the end of the forecast
period. In practice, these projects can fluctuate dramatically depending on prices of material,
system conditions and the pace of development and redevelopment in the city. It is worth noting
Project Category
Current
Budget*
Spending,
Curr. Yr
Remain.
Budget**Committed FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
One Time Projects 129 (1) 128 42 1,680 530 2,320 - -
Gas Main Replacement 10,913 (225) 10,688 311 600 7,150 7,150 7,150 7,150
Tools And Equipment 89 (5) 84 15 370 120 120 100 100
Ongoing Projects 1,455 (164) 1,291 134 1,044 1,075 1,107 1,141 1,175
Customer Connections 1,414 (418) 997 99 1,303 1,342 1,383 1,424 1,467
TOTAL 14,001 (812) 13,189 600 4,997 10,218 12,080 9,815 9,892
*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).
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 27 | P a g e
that fee revenue pays for the Customer Connections program, so when costs go up fees will be
adjusted as well. .
Aside from customer connections and transfers from other funds, the CIP plan for FY 2019 to FY
2023 is funded by utility rates. Appendix B: Gas Utility Capital Improvement Program (CIP) Detail
shows the details of the plan.
SECTION 6 D : 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. Table 14 shows debt service for this bond for the
financial forecast period. Debt service on this bond will continue through 2026.
Table 14: Gas Utility Debt Service
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
2011 Utility Revenue
Refunding Bonds, Series A
802 801 801 803 804 805 803 800 803 1
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 15 and
Table 16.
Table 15: Debt Service Coverage Ratio ($000)
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Revenues 37,112 36,361 38,526 41,445 44,381 46,250 47,956 48,837 49,742 49,505
Expenses
(Excluding CIP and
Debt Service)
(26,079) (25,309) (25,572) (25,192) (25,765) (26,408) (27,104) (27,763) (28,489) (28,865)
Net Revenues 11,033 11,052 12,954 16,253 18,616 19,842 20,852 21,074 21,253 20,639
Debt Service 802 801 801 803 804 805 803 800 803 1
Coverage Ratio 1375% 1381% 1618% 2023% 2315% 2464% 2596% 2633% 2648% N/A
15 Available Reserves as defined in the 2011 bonds include the reserves for the Water, Electric, and Gas Utilities
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 28 | P a g e
Table 16: Debt Service Minimum Reserves ($000)
FY
2018
FY
2019
FY
2020
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
Gas Utilitya 22,986 20,619 14,943 10,690 10,149 10,501 11,362 11,913 12,882 13,140
Debt Serviceb 802 801 801 803 804 805 803 800 803 1
Reserves Ratioc 29x 26x 19x 13x 13x 13x 14x 15x 16x N/A
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 total 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 17, 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 17: 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 6 E : E QUITY T RANSFER
The City calculates the equity transfer from its Gas Utility based on a methodology adopted by
Council in 2009 that has remained unchanged since.16 Each year it is calculated according to the
2009 Council-adopted methodology, and does not require additional Council action.
SECTION 6 F : REVENUE S
The Gas Fund receives most of its revenues from sales of gas, but about 5% 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 cover
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
M a r c h 2 0 1 8 29 | P a g e
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.
This financial plan bases sales revenue projections 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. Staff continually evaluate forecasts to see
when new trends emerge.
SECTION 6 G : COMMUNICATIONS PLAN
The FY 2019 communications strategy covers four primary areas: operations, infrastructure,
safety, efficiency, renewables and rates. Since moving to market pricing for commodity rates, the
City’s website posts changes to the commodity rates monthly. The City promotes gas use
efficiency incentives 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 use of social media.
To keep customers apprised of the status and accomplishments of capital improvement projects,
the City maintains a network of project web pages. Print and digital ads, social media and email
blasts drive traffic to the website. CPAU emphasizes safety topics year-round. CPAU is engaging
in several campaigns and programs in FY 2019 to promote gas utility efficiency and awareness of
the City’s carbon neutral natural gas utility. Programs such as the Home Efficiency Genie and
commercial energy efficiency programs help residents and businesses better understand energy
usage, activities and/or upgrades they can implement to improve efficiency and reduce utility
costs. CPAU will be launching an upgraded version of its online utility account services portal
(www.cityofpaloalto.org/myutilitiesaccount) this year, which can provide customers with direct
access and more information about utility account and consumption data.
Stepping up efforts to promote gas safety education, staff is focusing outreach among
stakeholders to increase awareness of the need to call USA (811) before digging for anyone who
may excavate in and around Palo Alto, such as plumbers and contractors. Staff is also focusing
outreach on the importance of contacting CPAU to check for potential sewer and gas line cross -
bores prior to clearing a sewer line. Additional outreach messaging includes keeping fats, oils and
greases out of drains, and ensuring clear access to meters. CPAU has developed a number of
safety outreach materials to distribute to customers at community outreach events, emergency
preparedness fairs, school and business meetings. The use of materials featuring photos of some
unusual ways people obstruct access to their meters, including using them as bike racks and
building storage sheds around them, highlights meter access awareness.
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 and mails it to all customers in Palo Alto, as well as to
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 30 | P a g e
plumbers, contractors and excavators that may work in and around the area. Staff talk with
business customers at special facilities meetings, attend neighborhood safety and emergency
preparedness fairs and offer presentations to school and community groups. While print
materials and website pages still feature prominently, CPAU is increasing emphasis on outreach
through email newsletters, direct mail, newspaper inserts, social media and online videos. The
Gas Safety Public Awareness Plan contains saved copies of all outreach materials and logs of
activities; the Department of Transportation reviews this Plan at least once per year.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 31 | P a g e
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
M a r c h 2 0 1 8 32 | P a g e
APPENDIX A : GAS FINANCIAL FORECA ST D ETAIL
($'000)($'000)
Actual Actual Actual
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028
1 RATE CHANGE (%)*12%0%0%0%8%0%4%8%7%8%4%4%1%1%0%1%
2 SALES IN THOUSAND THERMS 28,901 28,117 28,881 26,719 27,829 27,434 27,289 26,752 26,847 26,547 26,245 25,939 25,726 25,507 25,095 25,071
3
4 Utilities Retail Sales 33,759 34,843 29,515 28,065 34,110 34,012 33,096 34,849 37,506 40,126 41,690 43,082 43,663 44,218 43,971 44,693
5 Service Connection & Capacity Fees 731 654 748 961 940 1,048 1,079 1,111 1,145 1,179 1,179 1,179 1,179 1,179 1,179 1,179
6 Other Revenues & Transfers In 830 313 414 2,346 694 1,508 1,818 2,261 2,599 2,895 3,185 3,467 3,740 4,074 4,079 4,205
7 Interest plus Gain or Loss on Investment (239)706 450 730 13 545 368 304 196 181 196 228 255 272 276 284
8 Total Sources of Funds 35,081 36,517 31,127 32,102 35,758 37,112 36,361 38,526 41,445 44,381 46,250 47,956 48,837 49,742 49,505 50,361
9
10 Purchases of Utilities:
11 Supply Commodity 12,461 12,992 9,537 6,648 9,720 9,998 8,587 8,226 8,205 8,200 8,268 8,429 8,569 8,708 8,855 9,001
12 Supply Transportation 994 1,333 982 (1,051)2,843 3,331 3,507 3,473 3,482 3,490 3,497 3,504 3,510 3,515 3,520 3,524
13 Total Purchases 13,455 14,325 10,519 5,597 12,563 13,329 12,094 11,699 11,687 11,690 11,765 11,933 12,079 12,223 12,375 12,525
14
15 Administration (CIP + Operating)4,273 3,988 4,007 3,337 2,450 2,519 2,577 2,640 2,707 2,775 2,845 2,906 2,968 3,051 3,106 3,178
16 Customer Service 1,358 1,338 1,195 1,097 1,581 1,643 1,700 1,781 1,858 1,925 1,992 2,051 2,107 2,155 2,184 2,237
17 Demand Side Management 630 438 632 566 855 879 900 922 945 969 993 1,015 1,036 1,065 1,084 1,110
18 Engineering (Operating)340 352 369 426 355 367 377 390 404 416 428 439 450 461 469 480
19 Operations and Maintenance 4,940 4,119 4,403 4,153 4,321 5,482 5,651 5,871 5,087 5,261 5,433 5,586 5,732 5,868 5,953 6,094
20 Resource Management 506 516 556 3,002 566 1,393 1,530 1,777 1,999 2,210 2,420 2,626 2,830 3,093 3,107 3,176
21 Debt Service Payments 296 805 804 249 227 802 801 801 803 804 805 803 800 803 1 1
22 Rent 219 419 431 443 455 467 480 492 505 519 532 546 561 574 587 601
23 Transfers to General Fund 5,971 5,811 5,730 6,194 6,594 7,035 6,888 7,069 7,069 7,972 8,214 8,629 9,072 9,547 9,539 9,538
24 Other Transfers Out 207 606 151 303 510 523 533 543 554 566 579 590 601 617 628 642
25 Capital Improvement Programs 7,620 1,026 1,832 6,889 2,214 7,804 5,197 10,217 12,080 9,815 9,892 9,970 10,050 10,131 10,214 10,299
26 Total Uses of Funds 39,814 33,743 30,629 32,256 32,690 42,243 38,728 44,202 45,698 44,922 45,898 47,095 48,286 49,587 49,248 49,880
27
28 Into/ (Out of) Reserves (4,733)2,773 498 (154)3,067 (5,131)(2,367)(5,676)(4,253)(541)352 861 551 155 257 481
29
30 Reappropriations + Commitments 19,363 11,305 6,491 6,255 4,209 4,209 4,209 4,209 4,209 4,209 4,209 4,209 4,209 4,209 4,209 4,209
31 Plant Replacement 1,000 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
32 CIP Reserve 0 0 1,591 3,820 3,820 3,820 3,820 3,820 0 0 0 0 0 0 0 0
33 Rate Stabilization 11,318 15,981 7,215 6,018 6,539 6,411 4,291 0 0 0 0 0 0 0 0 0
34 Operations Reserve 0 0 10,847 10,296 13,549 8,547 8,300 6,915 6,482 5,941 6,293 7,153 7,705 8,673 8,930 9,411
35 Unassigned 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1
36 Total Reserves 31,681 27,286 26,144 26,389 28,117 22,986 20,619 14,943 10,690 10,149 10,501 11,362 11,913 12,882 13,140 13,621
37 (1,142)245 1,728 (5,131)(2,367)(5,676)(4,253)(541)352 861 551 968 258 481
38 Short Term Risk Assessment Value 1,226 3,753 3,516 3,928 3,830 4,612 5,214 5,400 5,642 5,843 5,919 5,991 5,935 6,034
39
40 Operations Reserve Guidelines
41 Min (60 Days Commodity + O&M) 5,620 5,000 5,690 5,698 5,533 5,576 5,488 5,706 5,828 5,986 6,142 6,308 6,242 6,328
42 Target (90 Days Commodity + O&M) 8,429 7,500 8,535 8,547 8,300 8,364 8,232 8,560 8,742 8,978 9,213 9,462 9,362 9,492
43 Max (120 Days Commodity + O&M) 11,239 10,000 11,380 11,396 11,067 11,152 10,976 11,413 11,656 11,971 12,284 12,616 12,483 12,656
44
City of Palo Alto
Gas Utility
Fiscal Year
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 33 | P a g e
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 2019 FY 2020 FY 2021 FY 2022 FY 2023
ONE TIME PROJECTS
GS-15001 Security at Receiving Stations 64,700 64,700 - (1,101) 128,299 41,534 - - - - -
Unk AMI Project 180,000 530,000 2,320,000 - -
GS-18000 Gas ABS/Tenite Replacement - 1,500,000 - - - -
Subtotal, One-time Projects 64,700 64,700 - (1,101) 128,299 41,534 1,680,000 530,000 2,320,000 - -
GAS MAIN REPLACEMENT (GMR) PROGRAM
GS-11000 GMR - Project 21 100,000 100,000 - - 200,000 - - - - - -
GS-12001 GMR - Project 22 (150,372) 3,104,410 6,722,029 (224,576) 9,451,491 310,563 600,000
GS-13001 GMR - Project 23 337,000 700,000 - - 1,037,000 - - 6,500,000 - - -
GS-14003 GMR - Project 24 - - - - - - - 650,000 6,500,000 - -
GS-15000 GMR - Project 25 - - - - - - - - 650,000 6,500,000 -
GS-16000 GMR - Project 26 - - - - - - - - - 650,000 6,500,000
GS-20000 GMR - Project 27 - - - - - - - - - - 650,000
GS-20001 GMR - Project 28 - - - - - - - - - - -
Subtotal, Gas Main Replacement Program 286,628 3,904,410 6,722,029 (224,576) 10,688,491 310,563 600,000 7,150,000 7,150,000 7,150,000 7,150,000
TOOLS AND EQUIPMENT
GS-13002 General Shop Equipment/Tools - 50,000 - - 50,000 - 350,000 100,000 100,000 100,000 100,000
GS-14004 Gas Distribution System Model 19,574 19,574 - (4,660) 34,488 14,914 20,000 20,000 20,000
Subtotal, Tools and Equipment 19,574 69,574 - (4,660) 84,488 14,914 370,000 120,000 120,000 100,000 100,000
ONGOING PROJECTS
GS-11002 Gas System Improvements 75,624 555,672 - (114,215) 517,081 37,979 246,036 253,417 261,020 268,851 276,916
GS-03009 System Ext. - Unreimbursed - 204,455 - (19,127) 185,328 - 421,180 433,816 446,830 460,234 474,042
GS-80019 Gas Meters and Regulators 126,772 492,453 - (30,676) 588,549 96,096 376,652 387,952 399,591 411,579 423,926
Subtotal, Ongoing Projects 202,396 1,252,580 - (164,018) 1,290,958 134,075 1,043,868 1,075,185 1,107,441 1,140,664 1,174,884
CUSTOMER CONNECTIONS (FEE FUNDED)
GS-80017 Gas System Extensions 74,468 1,339,823 - (417,703) 996,588 98,562 1,303,315 1,342,415 1,382,688 1,424,169 1,466,894
Subtotal, Customer Connections 74,468 1,339,823 - (417,703) 996,588 98,562 1,303,315 1,342,415 1,382,688 1,424,169 1,466,894
GRAND TOTAL 647,766 6,631,087 6,722,029 (812,058) 13,188,824 599,648 4,997,183 10,217,600 12,080,129 9,814,833 9,891,778
Funding Sources
Connection Fees 1,017,000 - 1,078,935 1,111,303 1,144,642 1,178,981 266,894
Utility Rates 5,614,087 6,722,029 3,918,248 9,106,297 10,935,487 8,635,852 9,624,884
CIP-RELATED RESERVES DETAIL
6/30/2017
(Actual)
6/30/2018
(Unaudited)
Reappropriations 298,178 12,589,176
Commitments 349,588 599,648
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 34 | P a g e
This Page intentionally left blank.
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 35 | P a g e
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
M a r c h 2 0 1 8 36 | P a g e
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 bas ed 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 F inancial Planning Period.
Section 8. Operations Reserve
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 37 | P a g e
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 purpos e or return them to the Gas Utility
ratepayers by the end of the first fiscal year of the next Financial Planning Period. For
example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next
Financial Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a plan
to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may
present an alternative plan that retains these funds or returns them over a longer period of
time.
Section 10. Intra-Utility Transfers Between Supply and Distribution Funds
GAS UTILITY FINANCIAL PLAN
M a r c h 2 0 1 8 38 | P a g e
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
M a r c h 2 0 1 8 39 | P a g e
APPENDIX D : DESCRIP TION 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 incl uded 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 issu es);
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 COMMUNIC ATIONS SAMPLES
Attachment C
* NOT YET APPROVED *
6055006
Resolution No. _________
Resolution of the Council of the City of Palo Alto Increasing Gas
Rates by Amending Rate Schedules G-1 (Residential Gas Service),
G-2 (Residential Master-Metered and Commercial Gas Service), G-3
(Large Commercial Gas Service), and G-10 (Compressed Natural Gas
Service Service)
R E C I T A L S
A. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of
the City of Palo Alto may by resolution adopt rules and regulations governing utility services,
fees and charges.
B. On ____, 2018, the City Council heard and approved the proposed rate increase
at a noticed public hearing.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-1 (Residential Gas Service) is hereby amended to read as attached and
incorporated. Utility Rate Schedule G-1, as amended, shall become effective July 1, 2018.
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-2 (Residential Master-Metered and Commercial Gas Service) is hereby
amended to read as attached and incorporated. Utility Rate Schedule G-2, as amended, shall
become effective July 1, 2018.
SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-3 (Large Commercial Gas Service) is hereby amended to read as attached and
incorporated. Utility Rate Schedule G-3, as amended, shall become effective July 1, 2018.
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-10 (Compressed Natural Gas Service Service) is hereby amended to read as
attached and incorporated. Utility Rate Schedule G-10, as amended, shall become effective
July 1, 2018.
SECTION 5. The City Council finds as follows:
a. Revenues derived from the gas rates approved by this resolution do not exceed the
funds required to provide gas service.
b. Revenues derived from the gas rates approved by this resolution shall not be used
for any purpose other than providing gas service, and the purposes set forth in
Article VII, Section 2, of the Charter of the City of Palo Alto.
Attachment C
* NOT YET APPROVED *
6055006
SECTION 6. The Council finds that the fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
SECTION 7. The Council finds that the adoption of this resolution changing gas rates
to meet operating expenses, purchase supplies and materials, meet financial reserve needs and
obtain funds for capital improvements necessary to maintain service is not subject to the
California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec.
21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing
the staff report and all attachments presented to Council, the Council incorporates these
documents herein and finds that sufficient evidence has been presented setting forth with
specificity the basis for this claim of CEQA exemption.
Attachment C
* NOT YET APPROVED *
6055006
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Assistant City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-1 Effective 97-1-20187
dated 119-1-20176 Sheet No G-1-1
A. APPLICABILITY:
This schedule applies to the following Customers receiving Gas Service from City of Palo Alto
Utilities:
1. Separately-metered single-family residential Customers.
2.Separately-metered multi-family residential Customers in multi-family residential facilities.
B. TERRITORY:
This schedule applies anywhere the City of Palo Alto provides Gas Service.
C. UNBUNDLED RATES: Per Service
Monthly Service Charge: ....................................................................................................$10.9432
Tier 1 Rates: Per Therm
Supply Charges:
1.Commodity (Monthly Market Based) .......................................... $0.10-$2.00
2.Cap and Trade Compliance Charge ..................................................$0.00-$0.25
3. Transportation Charge........................................................................$0.00-$0.15
4.Carbon Offset Charge ........................................................................$0.00-$0.10
Distribution Charge: .............................................................................................$0.42393933
Tier 2 Rates: (All usage over 100% of Tier 1)
Supply Charges:
1.Commodity (Monthly Market Based) .......................................... $0.10-2.00
2.Cap and Trade Compliance Charge ...................................................$0.00-$0.25
3. Transportation Charge........................................................................$0.00-$0.15
4.Carbon Offset Charge ........................................................................$0.00-$0.10
Distribution Charge: .............................................................................................$0.99489319
D. SPECIAL NOTES:
1. Calculation of Cost Components
ATTACHMENT D
RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-2 Effective 97-1-20187
dated 119-1-20176 Sheet No G-1-2
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
The Commodity Charge is based on the monthly natural gas Bidweek Price Index for
delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Meter.
The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance
with the state’s Cap and Trade Program, including the cost of acquiring compliance
instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap
and Trade Compliance Charge will change in response to changing market conditions,
retail sales volumes and the quantity of allowances required.
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse
gases produced in the burning of natural gas. The Carbon Offset Charge will change in
response to changing market conditions, changing sales volumes and the quantity of
offsets purchased within the Council-approved per therm cap.
The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto,
accounting for delivery losses to the Customer’s Meter.
The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges
will fall within the minimum/maximum ranges set forth in Section C.
2. Seasonal Rate Changes:
The Summer period is effective April 1 to October 31 and the Winter period is effective from
November 1 to March 31. When the billing period includes use in both the Summer and the
Winter periods, the usage will be prorated based on the number of days in each seasonal
period, and the charges based on the applicable rates for each period. For further discussion
of bill calculation and proration, refer to Rule and Regulation 11.
3. Calculation of Usage Tiers
Tier 1 natural gas usage shall be calculated and billed based upon a level of 0.667 therms per
day during the Summer period and 2.0 therms per day during the Winter period, rounded to
the nearest whole therm, based on meter reading days of service. As an example, for a 30
RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-3 Effective 97-1-20187
dated 119-1-20176 Sheet No G-1-3
day bill, the Tier 1 level would be 20 therms during the Summer period and 60 therms during
the Winter period months. For further discussion of bill calculation and proration, refer to
Rule and Regulation 11.
{End}
RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-2-1 Effective 97-1-20187
dated 119-1-20176 Sheet No G-2-1
A. APPLICABILITY:
This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto
Utilities:
1. Commercial Customers who use less than 250,000 therms per year at one site.
2. Master-metered residential Customers in multi-family residential facilities.
B. TERRITORY:
This schedule applies anywhere the City of Palo Alto provides Gas Service.
C. UNBUNDLED RATES: Per Service
Monthly Service Charge: ...............................................................................................$82.9278.23
Per Therm
Supply Charges:
1. Commodity (Monthly Market Based) .................................... $0.10-$2.00
2. Cap and Trade Compliance Charges ................................................. $0.00-0.25
3. Transportation Charge........................................................................$0.00-$0.15
4. Carbon Offset Charge ........................................................................$0.00-$0.10
Distribution Charge: ........................................................................................................$0.61835767
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
The Commodity Charge is based on the monthly natural gas Bidweek Price Index for
delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Meter.
The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with
the state’s Cap and Trade Program, including the cost of acquiring compliance instruments
sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade
Compliance Charge will change in response to changing market conditions, retail sales
RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-2-2 Effective 97-1-20187
dated 119-1-20176 Sheet No G-2-2
volumes and the quantity of allowances required.
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases
produced in the burning of natural gas. The Carbon Offset Charge will change in response to
changing market conditions, changing sales volumes and the quantity of offsets purchased
within the Council-approved per therm cap.
The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto,
accounting for delivery losses to the Customer’s Meter.
The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges will
fall within the minimum/maximum ranges set forth in Section C.
{End}
LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-3-1 Effective 97-1-20187
dated 119-1-20176 Sheet No G-3-1
A. APPLICABILITY:
This schedule applies to the following Customers receiving Gas Service from the City of Palo
Alto Utilities:
1. Commercial Customers who use at least 250,000 therms per year at one site.
2. Customers at City-owned generation facilities.
B. TERRITORY:
This schedule applies anywhere the City of Palo Alto provides Nnatural Ggas Sservice.
C. UNBUNDLED RATES: Per Service
Monthly Service Charge: $400.08377.43
Per Therm
Supply Charges:
1. Commodity (Monthly Market Based) .................................................... $0.10-$2.00
2. Cap and Trade Compliance Charges ...................................................... $0.00-0.25
3. Transportation Charge .......................................................................... $0.00-$0.15
4. Carbon Offset Charge ........................................................................... $0.00-$0.10
Distribution Charge: .....................................................................................................$0.60985687
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
The Commodity Charge is based on the monthly natural gas Bidweek Price Index for
delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Meter.
The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance
with the state’s Cap and Trade Program, including the cost of acquiring compliance
LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-3-2 Effective 97-1-20187
dated 119-1-20176 Sheet No G-3-2
instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap
and Trade Compliance Charge will change in response to changing market conditions,
retail sales volumes and the quantity of allowances required.
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse
gases produced in the burning of natural gas. The Carbon Offset Charge will change in
response to changing market conditions, changing sales volumes and the quantity of
offsets purchased within the Council-approved per therm cap.
The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto,
accounting for delivery losses to the Customer’s Meter.
The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges
will fall within the minimum/maximum ranges set forth in Section C.
2. Request for Service
A qualifying Customer may request service under this schedule for more than one
account or meter if the accounts are located on one site. A site consists of one or more
contiguous parcels of land with no intervening public right-of- ways (e.g. streets).
3. Changing Rate Schedules
Customers may request a rate schedule change at any time to any applicable City of Palo
Alto full-service rate schedule.
{End}
COMPRESSED NATURAL GAS SERVICE
UTILITY RATE SCHEDULE G-10
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-10-1 Effective 97-1-20187
dated 119-1-20176 Sheet No.G-10-1
A. APPLICABILITY:
This schedule applies to the sale of natural gas to the City-owned compressed natural gas (CNG) fueling
station at the Municipal Service Center in Palo Alto.
B. TERRITORY:
Applies to the City’s CNG fueling station location located at the Municipal Service Center in City of
Palo Alto.
C. UNBUNDLED RATES: Per Service
Monthly Service Charge: ...............................................................................................$56.1152.93
Per Therm
Supply Charges:
Commodity (Monthly Market Based) ................................................................ $0.10-$2.00
Cap and Trade Compliance Charges .............................................................. $0.00 to $0.25
Transportation Charge........................................................................................ $0.00-$0.15
Carbon Offset Charge ........................................................................................ $0.00-$0.10
Distribution Charge ....................................................................................................$0.01000.0093
D. SPECIAL CONDITIONS
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for
any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount
may be broken down into appropriate components as calculated under Section C.
The Commodity charge is based on the monthly natural gas Bidweek Price Index for delivery at
PG&E Citygate, accounting for delivery losses to the Customer’s Meter.
The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the
state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to
cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will
COMPRESSED NATURAL GAS SERVICE
UTILITY RATE SCHEDULE G-10
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-10-2 Effective 97-1-20187
dated 119-1-20176 Sheet No.G-10-2
change in response to changing market conditions, retail sales volumes and the quantity of
allowances required.
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced
in the burning of natural gas. The Carbon Offset Charge will change in response to changing market
conditions, changing sales volumes and the quantity of offsets purchased within the Council-
approved per therm cap.
The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto, accounting for
delivery losses to the Customer’s Meter.
The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges will fall
within the minimum/maximum range set forth in Section C.
{End}
EXCERPTED DRAFT MINUTES OF THE APRIL 12, 2018 SPECIAL MEETING
UTILITIES ADVISORY COMMISSION
ITEM 2. ACTION: Staff recommendation that the Utilities Advisory Commission recommend that the City
Council adopt 1) a Resolution approving the Fiscal Year 2019 Gas Utility Financial Plan, and 2) a Resolution
increasing Gas Rates by 4% by amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential
Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10
(Compressed Natural Gas Service).
Eric Keniston, Senior Resource Planner, reported staff recommends a 4% rate increase in fiscal year 2019
followed by increases of 8% and 7%. Again, a projected increase in capital investment costs drives the rate
increase. Currently, gas supply is projected to remain relatively flat; although, the projection can change
at any time. Gas supply and operations are expected to increase by approximately the rate of inflation.
Over the long term, operations, distribution, and capital improvements are major cost drivers. Commodity
costs decreased overall between fiscal year 2013 and fiscal year 2022. The Operations Reserve Fund is
projected to decrease. The proposed rate increases anticipate staff reducing the Rate Stabilization
Reserve Fund to zero by fiscal year 2020. Costs for commodity, Cap-and-Trade, carbon neutrality, and
transmission will continue to pass through to customers. Reserve funds are quite healthy at the current
time; however, staff anticipates cost increases for capital spending will reduce reserve fund balances to
the minimum guideline level in approximately 2022. Larger subsequent rate increases will be necessary
to retain reserve fund balances at the minimum level. For the Operations Reserve Fund, the risk
assessment level is slightly below the minimum guideline level, which is only $6 million. The change to
most customers' bills will be about 4%. Palo Alto residential bill amounts during winter months are well
below PG&E's bill amounts and slightly higher than PG&E's during summer months. Commercial bill
amounts are about the same as PG&E's commercial bills.
In answer to Commissioner Johnston's question regarding Tables 1 and 2 in the staff report about what
parts of the bill were being increased, Keniston explained that staff increased the distribution component
by 6% such that the net effect on the overall bill is 4%. The distribution component is not a pass-through
cost. Distribution is comprised of all operations within the City system, maintenance of mains, and capital
improvements for mains. Distribution is driving the overall increase in the short-term. The gas main
replacement project will drive the increase in 2019, and meters compatible with advanced metering
infrastructure (AMI) will drive the increase in 2020 and 2021. Ed Shikada, Utilities General Manager,
reported the cost for the gas main replacement project is $7 million in fiscal year 2020 and beyond. Staff
is beginning to explore the possibility of spreading the cost of AMI through debt financing.
Commissioner Schwartz suggested staff frame the increase in terms of safety and emissions control and
talk about the benefits of capital improvements rather than merely the projects. Staff should include in
the staff report historical data refuting the concept that maintenance should be deferred to the future
when costs will be less.
ATTACHMENT E
In reply to Commissioner Forssell's query about the impact of higher-than-expected bids for capital
improvement projects on the health of the Gas Utility if reserves declined, Keniston indicated staff would
withdraw money from reserve funds to cover the increased costs if the utility received higher than
expected bids. Currently, reserve funds can absorb higher-than-expected bids, but in later years it could
result in a higher rate increase.
In response to Chair Danaher's request for an explanation of the structure of the minimum and maximum
reserve guidelines, why those guidelines were not increasing despite costs increasing, and of the
elimination of the Rate Stabilization Reserve Fund, Keniston stated the minimum guideline level for the
Operations Reserve is calculated as 60 days of operating and commodity expenses. The maximum
guideline level is 120 days of operating and commodity expenses. The other reserve funds, like the Rate
Stabilization Reserve, were used for specific purposes. Jonathan Abendschein, Assistant Director of
Resource Management, clarified that most of the cost increases were related to capital improvement
costs, which were not used to calculate the minimum and maximum guideline levels, and therefore the
minimum and maximum guideline levels were not increasing significantly.
In answer to Commissioner Forssell's asked a follow-up question, noting that operational costs were
increasing at the rate of inflation and the guideline levels should increase. Abendschein explained that
there were near-term one-time operational costs that increased the guideline levels in the near term.
When those costs were removed from the budget in later years, it ended up offsetting inflationary
increases for the purpose of guideline calculation.
In answer to Chair Danaher's query about capital costs and the Operations Reserve Fund, Keniston advised
that the Capital Improvement Program (CIP) budget covers capital costs. Dave Yuan, Strategic Business
Manager, reported that staff doubled the budget for capital projects. Abendschein added that staff uses
the Operations Reserve Fund for capital cost variances but ensures the balance remains within the
guidelines.
ACTION: Commissioner Johnston moved to recommend the City Council adopt 1) a Resolution approving
the Fiscal Year 2019 Gas Utility Financial Plan, and 2) a Resolution increasing Gas Rates by 4% by amending
Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas
Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service). Vice Chair
Ballantine seconded the motion. The motion carried 5-0 with Chair Danaher, Vice Chair Ballantine, and
Commissioners Forssell, Johnston, and Schwartz voting yes.