HomeMy WebLinkAboutStaff Report 10151
City of Palo Alto (ID # 10151)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 3/19/2019
City of Palo Alto Page 1
Council Priority: Fiscal Sustainability
Summary Title: FY 2020 Preliminary Water and Wastewater Rates
Title: Preliminary Financial Forecasts and Rate Changes for Wastewater
Collection and Water Utilities for Fiscal Year 2020
From: City Manager
Lead Department: Utilities
Recommendation
This item is for discussion and no action is requested. Staff will use input from the Finance
Committee on its preliminary rate projections for the Wastewater Collection and Water utilities
to finalize its recommended FY 2020 Wastewater Collection and Water Financial Plans and
proposed rate changes. Preliminary rate projections for the Electric and Gas utilities will be
presented in April.
Executive Summary
The attached presentation describes staff’s preliminary rate project ions for the Wastewater
Collection and Water Utilities. A similar presentation was provided to the Utilities Advisory
Commission (UAC) at its February 6, 2019 meeting.
Staff’s preliminary retail rate forecast over the next five fiscal years is shown in the table below,
along with the overall impact to the median residential bill. The rate changes shown are
preliminary estimates. Actual rate changes will be based on updated financial data and the cost
of service methodologies and studies for each utility, and may differ by customer class and for
individual customers depending on consumption patterns. Updated cost of service studies for
Water and Gas are nearing completion and will be factored into Staff proposals for FY 2020.
City of Palo Alto Page 2
Table 1: Projected Rate Increases – All Utilities
Staff seeks input from the Finance Committee prior to finalizing the Utilities Financial Plans and
developing recommendations for rate changes that would be effective July 1, 2019. The
proposed rate adjustment recommendations, along with each utility’s Financial Plans, are
currently scheduled to be presented to the Finance Committee in April for the Water and
Wastewater Collection Utilities, and in May for the Electric and Gas Utilities.
As new information may still come in, it is possible that the final rate proposals presented to
the Finance Committee and Council may vary from what is provided here.
Background
Every year staff presents the UAC and Finance Committee with financial forecasts for the
Electric, Gas, Water, and Wastewater Collection Utilities and recommends any rate adjustments
required to maintain their financial health. These forecasts are memorialized in Financial Plans
that comprehensively discuss the outlook for each utility. Before providing recommended
Financial Plans and rate changes, staff typically presents a preliminary forecast to get early
feedback.
As reference, the current year (FY 2019) financial plan for the wastewater collection utility is
available at:
https://www.cityofpaloalto.org/civicax/filebank/documents/64245
And the current year (FY 2019) financial plan for the water utility is available at:
https://www.cityofpaloalto.org/civicax/filebank/documents/64557
Commission Review
The UAC reviewed the preliminary financial forecasts at its February 6, 2019 meeting. No
recommendation was requested at that meeting, but staff sought input f rom Commissioners
before finalizing the Financial Plans and rate adjustment recommendations. Commissioners had
no recommendations as to different rate increase paths. The draft minutes from the UAC’s
February 6, 2019 meeting are provided as Attachment B.
City of Palo Alto Page 3
Next Steps
The UAC is scheduled to review the long-term Financial Plans and proposed rate adjustments
for the Wastewater Collection Utility in March and the Electric, Gas and Water Utilities in April.
The Finance Committee is tentatively scheduled to review the long-term Financial Plans and
proposed rate adjustments in April (for the Water and Wastewater Collection Utilities) and in
May (for the Electric and Gas Utilities). Once the Finance Committee has provided its
recommendation, notification of any recommended Water, and Wastewater Collection rate
increases will be sent to customers giving them the opportunity to protest the proposed
changes as required by Article XIIID of the State Constitution (added by Proposition 218). The
Financial Plans and proposed new rate schedules will be considered by the City Council with the
FY 2020 budget, at which time the public hearing required by Article XIIID of the State
Constitution will be held.
Environmental Review
The Finance Committee’s review of the preliminary financial projections does not meet the
definition of a project, pursuant to Section 21065 of the California Environmental Quality Act,
thus no environmental
Resource Impact
The FY 2020 Budget is being developed concurrent with these rates. Depending on final rates,
adjustments may be necessary in the FY 2020 Budget at a later time. As these figures are
preliminary and subject to change, it is premature to discuss possible resource impacts at this
time. However, resource impacts will be discussed in the final plans to be presented in April, as
well as the impacts of any agreed upon alternatives that arise from this meeting.
Attachments:
• Attachment A: Preliminary Water and Wastewater Financial Forecasts
• Attachment B: Excerpted Draft UAC Minutes of February 6, 2019
1
Preliminary Rate Changes
for Electric, Gas,
Wastewater Collection,
and Water Utilities for
FY2020
Finance Committee
March 5, 2019
ATTACHMENT A
2
Financial Forecast Summary
§Review four funds: Electric, Gas, Water and Wastewater
Collection
§Refuse rate projections included for information
§Review of Financial Reserves
§Staff projects need for Electric, Gas, Water,and
Wastewater Collection rate increases for FY 2020
§Communication plan being prepared
§Gas and Water Cost of Service (COSA) updates to be
completed this year
§Wastewater COSA update to be completed next year
3
FY 2019 Rate Projections
FY 2019 FY 2020 FY 2021 FY 2022 FY 2023
Electric Utility 6%3%2%0%1%
Gas Utility1 4%8%7%6%5%
Wastewater 11%12%10%6%4%
Water Utility 3%4%4%4%4%
Refuse -3%3%3%3%
Storm Drain2 2.9%2%to3%2%to3%2%to3%2%to3%
Bill Change3 (%)4%5%5%4%3%
($/mo)$11 $15 $14 $11 $11
(1)Gas rate changes are shown with commodity rates held constant. Actual gas commodity
rates will vary monthly with wholesale market fluctuations
(2) Storm Drain Rates increase annually by CPI
(3) Median residential bill is $273.56 as of July 1, 2017 (does not include UUT)
4
FY 2020 Rate Projections
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Electric Utility 9%3%-5%3%-5%3%-5%3%-5%
Gas Utility 10%10%10%2%-3%2%-3%
Wastewater 7%8%8%8%8%
Water Utility 4%3%4%5%5%
Refuse -3%3%3%3%
Storm Drain 4.5%2%-3%2%-3%2%-3%2%-3%
Bill Change (%)5%5%5%4%4%
($/mo)$15 $14 $15 $14 $13
•Rate increases to bring Operations Reserves to Target level by FY 2024 (five years)
•Slight increases due to reduced sales volumes, most notably in electric
5
Ongoing Cost Containment
§Consistent with newly approved Utilities Strategic Plan, cost
containment is being instituted as an ongoing priority and
annual cycle
–Fall completion of preliminary out-year rate forecasts
–Review by all Divisions for alignment of multiyear strategies
§Ongoing management review of personnel actions
–Review/revision of position classifications to match evolving needs
–Add/Deletion of positions to reflect organizational priorities
–Review/approval to fill individual position vacancies in conjunction with
ASD Budget Office and Human Resources
§Regular review of performance metrics and expenditures
6
Cost Containment Examples
§Recently implemented cost control measures:
–Gas prepay arrangement for discounted gas (~1M/yr)
–Cost savings for gas transmission due to regulatory advocacy (~$250K/yr)
–Electric transmission savings due to regulatory advocacy (~$1M/year)
–Successfully negotiated with vendor to reduce change request costs for new
customer portal (estimated savings of $40k-$100k)
–Reduced SAP consultant spending due to process reengineering or developing
alternative solutions (estimated savings of $50k)
§Potential future cost control measures:
–Explore outsourcing hedging and risk management
–Enter into prepay deals for existing renewables to reduce costs
–Rebalance electric portfolio to reduce cost while maintaining compliance with
State mandates and local sustainability goals
–Explore ways to reduce merchant fee costs for credit card transactions
–Explore potential savings in utility bill printing through paperless billing and
reducing printing charges
–Switch to new customer information system with reduced support costs
7
Wastewater Utility
8
Wastewater Projections
§FY 2020 proposal:
–7% overall rate increase
§Future projections
–8% per year increases following four years
Wastewater Utility
9
Wastewater Utility Basics
Wastewater Utility
•Five partners: Stanford, East Palo
Alto, Los Altos Hills, Lost Altos, and
Mountain View
•Wastewater drains from partner
systems through the City of Palo Alto
Collection System, and into the City
of Palo Alto Regional Water Quality
Control Plant (RWQCP) for treatment
•City of Palo Alto Utilities Department
manages collection system, Public
Works manages the RWQCP.
10
Wastewater Utility Cost StructureWastewater Utility
Palo Alto’s share of the
cost to treat sewage at
Palo Alto’s Regional Water
Quality Control Plant
Cost to collect sewage
within Palo Alto,
including: maintaining
and replacing sewer
infrastructure, customer
service, billing,
administration, etc.
Treatment
$11.0 million
48%
Collection
$11.9 million
52%
Treatment Collection
11
-
5
10
15
20
25
30
FY 2016 FY 2019 (Budget)Fy 2024 (Projected)
$ (Millions)
Collection Treatment
Long-term Cost TrendsWastewater Utility
Treatment:
7.8%/yr
Collection:
4.5%/yr
Annualized
Increase,
FY16-FY19:
Annualized
Increase,
FY19-FY24:
Treatment:
6.1%/yr
Collection:
0.9%/yr
12
-
2
4
6
8
10
12
14
16
FY 2016 FY 2019 (Budget)Fy 2024 (Projected)
$ (Millions)
Treatment Debt service Treatment Operations
Treatment Cost ForecastWastewater Utility
Treatment
Operations:
9%/yr
Treatment
Debt Service:
3%/yr
Annualized
Increase,
FY16-FY19:
Annualized
Increase,
FY20-FY24:
Treatment
Operations:
4%/yr
Treatment
Debt Service:
17%/yr
•Regional Water Quality Control
Plant needs rehabilitation
•Long Range Facilities Plan
completed in 2012
•Rehab / replacement of:
–Fixed film reactors ($10.7M)
–Headworks facility ($39.1M)
–Outfall pipe ($7.5M)
–Plant equipment ($5.1M)
–Sedimentation tank ($7.5M)
–Secondary treatment ($30.6M)
•Approximately $100M total
Treatment
Cost Drivers
14
-
5
10
15
20
25
30
FY 2016 FY 2019 (Budget)Fy 2024 (Projected)
$ (Millions)
Collection Treatment
Long-term Cost TrendsWastewater Utility
Treatment:
7.8%/yr
Collection:
4.5%/yr
Annualized
Increase,
FY16-FY19:
Annualized
Increase,
FY20-FY24:
Treatment:
6.1%/yr
Collection:
0.9%/yr
15
Collection costsWastewater Utility
Debt Service
$0.1 million
1%
Operations
$5.5 million
47%
Capital
Investment
$6.2 million
52%
Debt Service Operations Capital Investment
16
-
2
4
6
8
10
12
14
FY 2016 FY 2019 (Budget)Fy 2024 (Projected)
$ (Millions)
Debt Service Operations Capital Investment
Collection Cost Trends
Collection
System
Capital:
7.7%/yr
Operations:
1.4%/yr
Annualized
Increase,
FY16-FY19:
Debt Service:
0.0%/yr
Annualized
Increase,
FY20-FY24:
Collection
System
Capital:
No change*
Operations:
2.5%/yr
Debt Service:
eliminated
Wastewater Utility
*Note: FY 2019 collection capital spending is unusually high
due to the Upgrade Downtown project. Costs decrease in FY
2021, then increase from FY 2021 to FY 2024 about 3%/yr,
resulting in FY 2024 capital spending matching FY 2019
•Health, retirement, and
associated overhead
costs continue to
increase
•Underground
construction costs have
increased substantially as
well
Operations and Capital
Cost Drivers
18
Underground Construction Costs
0
100
200
300
400
500
600
2008 2010 2012 2014 2016 2018 2020
Water ($/FT)Gas ($/FT)Elec U/G ($/FT)Sewer ($/FT)
Wastewater Utility
19
Median Monthly Residential Bill
Palo Alto is
29% below
comparison
city average
Wastewater Utility
Palo Alto
Neighboring Communities Neighboring
Community
Average
Menlo
Park
Redwood
City
Santa
Clara
Mountain
View Los Altos Hayward
38.66 93.83 78.24 42.91 40.80 37.36 32.85 54.33
Based on rates as of February 2019
20
Five-Year Rate Trends
80.00
85.00
90.00
95.00
100.00
105.00
110.00
115.00
120.00
125.00
130.00
2014 2015 2016 2017 2018
Palo Alto (4.4%/yr)
Comparison City Average (5.9%/yr)
CPI-U (SF Bay Area) (3.2%/yr)
CPI, Water/Wastewater, National (3.8%/yr)
Wastewater Utility
21
0
5
10
15
20
25
FY 2019 (Projected)FY 2020 (Projected)
$ (Millions)
Debt Service Operations Capital - Ongoing Treatment
FY 2020 Projected Cost Changes
Treatment:
$0.7M increase
Operations:
$0.2M increase
Total Cost:
1% increase
Ongoing Capital:
$0.6M decrease
Wastewater Utility
22
Drivers of FY 2020 Cost Changes
§Treatment spending increase
–Discussed in earlier slides, but mainly driven by ongoing renovation
projects
§CIP spending decrease:
–Preliminary budget proposals for FY 2020 include reduced spending on
•Wastewater main replacements –WC-16001 –Project 29 -$740k
reduction –
–Smaller project size than FY 19 project 28 (14k linear feet vs 22k linear feet)
§Operations cost increase:
–Increases in salary and benefit costs for existing staff. No staff additions.
–Inflationary increases in non-salary costs
Wastewater Utility
23
FY 2020 Revenue at Current Rates
0
5
10
15
20
25
FY 2019 (projected)FY 2020 (projected)
$ (Millions)
Costs Rate revenue Other Revenue
Rate Revenue:
7% increase
Total Revenue:
90% of ongoing
costs
Total Revenue:
95% of ongoing
costs
Wastewater Utility
24
Wastewater Projections
25
Operations Reser ve Impact of
Proposed Rate Plan
0
1
2
3
4
5
6
7
8
YE FY 2019 (projected)YE FY 2020 (projected)
$ (Millions)
Operations Reserve Min Guideline Target Max Guideline
Wastewater Utility
26
Wastewater Projections
27
Wastewater Projections
§FY 2020 proposal:
–7% overall rate increase
§Future projections
–8% per year increases following four years
Wastewater Utility
28
Water Utility
29
Water Projections
§FY 2020 proposal:
–4% overall rate increase
§FY 2020 Rate Design Changes:
–Tentatively planning to creating a separate commodity rate
component for pass-through
–Recommending merging of some residential meter charges
§Future projections
–3% to 4% increases next three years
–Higher increases starting in FY 2023 as SFPUC supply costs
begin to rise again
Water Utility
30
Basics of Palo Alto’s
Water System
Water Utility
Water Supply from Sierras
(SFPUC’s Hetch Hetchy system)
Water Distribution in Palo AltoWater Distribution in Palo Alto
31
Water Utility Cost StructureWater Utility
Cost to bring the
water to Palo Alto
Cost to distribute water
within Palo Alto,
including: maintaining
and replacing water
infrastructure, customer
service, billing,
administration, etc.
Supply
$22.5 million
39%
Distribution
$35.1 million
61%
Supply Distribution
32
Long-term Cost TrendsWater Utility
-
10
20
30
40
50
60
70
FY 2014 FY 2018 Fy 2024 (Projected)
$ (Millions)
Distribution Supply
Supply:
8.7%/yr
Distribution:
1.0%/yr
Annualized
Increase,
FY14-FY18:
Annualized
Increase,
FY19-FY24:
Supply:
2.5%/yr
Distribution:
4.2%/yr
•Water System Improvement
Project (WSIP) a major driver
•2002: advocacy by wholesale
customers results in AB 1823
requiring SFPUC to adopt and
implement the WSIP
•In 2010 construction began -
$4.8B, one of the largest water
projects in the nation
•Level of service goal: return to
service in 24 hours after an
earthquake
Water Supply
Cost Drivers
•WSIP spending 96% complete
as of Jan 2019
•“Upcountry” system in the
Sierras still needs work.
•Wholesale customers (via
BAWSCA) advocating for long-
term capital plan
•Necessary and improves
reliability, but supply costs will
increases in the future as a
result
Water Supply
Cost Drivers
35
Water Supply Rate Forecast
Water Utility
Rates w/o Balancing
Account Refund
SFPUC rates are artificially low due to a
refund of wholesale revenue over-
collected in previous years. Refund will
be delivered from FY 2020 to FY 2023
36
Long-term Cost TrendsWater Utility
-
10
20
30
40
50
60
70
FY 2014 FY 2018 Fy 2024 (Projected)
$ (Millions)
Distribution Supply
Supply:
8.7%/yr
Distribution:
1.0%/yr
Annualized
Increase,
FY14-FY18:
Annualized
Increase,
FY19-FY24:
Supply:
2.5%/yr
Distribution:
4.2%/yr
37
Distribution costs Water Utility
Debt Service
$3.2 million
9%
Operations
$13.6 million
39%
Capital
Investment
$18.3 million
52%
Debt Service Operations Capital Investment
38
-
5
10
15
20
25
30
35
FY 2014 FY 2018 Fy 2024 (Projected)
$ (Millions)
Debt Service Operations Capital Investment
Distribution Cost Trends
Water Utility
Capital:
0.5%/yr
Operations:
2.1%/yr
Annualized
Increase,
FY14-FY18:
Debt Service:
0.0%/yr
Annualized
Increase,
FY19-FY24:
Capital:
5.5%/yr
Operations:
3.8%/yr
Debt Service:
2.9%/yr
•Health, retirement, and
associated overhead costs
continue to increase
•Underground construction
costs have increased
substantially as well
•There is a planned increase in
costs within the five year
forecast period for generator
backup at pumping stations
Operations Cost Drivers
•Construction costs have
increased substantially
•Large one-time costs related
to emergency water supply
and reservoir rehabilitation
Capital Cost Drivers
41
Underground Construction Costs
Water Utility
0
100
200
300
400
500
600
2008 2010 2012 2014 2016 2018 2020
$/Foot
Water ($/FT)Gas ($/FT)Elec U/G ($/FT)Sewer ($/FT)
42
Monthly Residential Bill
Water Utility
-
20
40
60
80
100
120
140
160
180
200
Palo Alto Redwood City Menlo Park Mountain View Hayward Santa Clara
Monthly Bill ($)
Low (4 CCF)Med (8 CCF)High (18 CCF)Average (8 CCF)
Palo Alto is
12% above
comparison
city average
43
The Impact of Capital Investment
§Sustainable capital investment plays a large part in Palo Alto’s higher costs
§Palo Alto has an 80 year replacement cycle, while other cities are on a 200 to 300
year cycle if they maintain their current rates of replacement
44
Other Factors Driving Palo Alto’s
Higher Costs
§Palo Alto built infrastructure to serve planned development in
the Foothills that never occurred.
§This drives higher costs due to long drive times to manage
water quality and maintenance for the pumps and reservoirs
up in the Foothills.
§In addition, Palo Alto’s emergency water supply system relies
more on reservoirs than wells, which is more expensive.
§Long-term cost containment strategies could include:
1.Reducing the number of reservoirs in the Foothills. Currently studying
this alternative since the reservoirs need replacement.
2.Install sensors and water quality devices at higher elevation reservoirs
to minimize maintenance trips
3.Re-examine cost allocations for customers in the Foothills. For example,
East Bay MUD charges an elevation surcharge that results in rates 10%
to 40% higher for customers at higher elevations.
45
Five-Year Rate Trends
Water Utility
80.00
90.00
100.00
110.00
120.00
130.00
140.00
150.00
2014 2015 2016 2017 2018
Palo Alto (6.5%/yr)
Comparison City Average (9.3%/yr)
CPI-U (SF Bay Area) (3.2%/yr)
CPI, Water/Wastewater, National (3.8%/yr)
46
FY 2020 Projected Cost Changes
Supply:
$0.3M decrease
Operations:
$1.8M increase
One-time Capital:
$5.5M decrease
Total Cost:
19% decrease
Ongoing Capital:
$7.0M decrease*
Debt Service:
No change
Water Utility
47
Drivers of FY 2020 Cost Changes
§CIP spending decrease:
–Preliminary budget proposals for FY 2020 include reduced spending on
•Water meter replacements –WS-80015 -$385k reduction –
–Sample testing to occur on meters to determine replacement, rather than blanket
replacement based on age
–Budget needs could increase based upon results of sampling
•General distribution system improvements –WS-11003 -$240k reduction
–Activity on this CIP has not been as large as originally anticipated, thus the reduction.
§Operations cost increase:
–Increases in salary and benefit costs for existing staff. No staff additions.
–Inflationary increases in non-salary costs
–Addition of $1 million for backup generators at pump stations in FY 2020
–Evaluation still underway, may be pushed to FY 2021
§Supply cost decrease
–Projected decrease in water sales in line with long-term trends
–Supply cost decreases are matched by revenue decreases
Water Utility
48
FY 2020 Revenue at Current Rates
Water Utility
0
10
20
30
40
50
60
70
FY 2019 (projected)FY 2020 (projected)
$ (Millions)
Costs One-Time CIP Rate revenue Other Revenue
Rate Revenue:
4% increase
Total Revenue:
97% of ongoing
costs
Total Revenue:
99% at ongoing
costs (using FY19)
49
Water Projections
50
Operations Reser ve Impact of
Proposed Rate Plan
Water Utility
0
2
4
6
8
10
12
14
16
18
YE FY 2019 (projected)YE FY 2020 (projected)
$ (Millions)
Operations Reserve Min Guideline Target Max Guideline
51
Water Rate Proposal
§FY 2020 proposal:
–4% overall rate increase
§FY 2020 Rate Design Changes:
–Tentatively planning to creating a separate commodity rate
component for pass-through
–Evaluating merging of some meter charges
§Future projections
–3% to 4% increases next three years
–Higher increases starting in FY 2023 as SFPUC supply costs
begin to rise again
Water Utility
52
FY 2020 Rate Projections
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Electric Utility 9%3%-5%3%-5%3%-5%3%-5%
Gas Utility 10%10%10%2%-3%2%-3%
Wastewater 7%8%8%8%8%
Water Utility 4%3%4%5%5%
Refuse -3%3%3%3%
Storm Drain 4.5%2%-3%2%-3%2%-3%2%-3%
Bill Change (%)5%5%5%4%4%
($/mo)$15 $14 $15 $14 $13
•Rate increases to bring Operations Reserves to Target level by FY 2024 (five years)
•Slight increases due to reduced sales volumes, most notably in electric
53
Preliminary Rate Changes
for Electric, Gas,
Wastewater Collection,
and Water Utilities for
FY2020
Finance Committee
March 5, 2019
Utilities Advisory Commission Minutes Approved on: Page 1 of 3
UTILITIES ADVISORY COMMISSION MEETING
EXCERPTED DRAFT MINUTES OF FEBRUARY 6, 2019 REGULAR MEETING
ITEM 4: DISCUSSION: Staff Presentation on Preliminary Rate Changes for Electric, Gas, Wastewater
Collection, and Water Utilities for FY 2020.
Eric Keniston, Senior Resource Planner, noted the projections include refuse rates for information only. Staff
will complete gas and water cost of service adjustment (COSA) updates in 2019, and wastewater COSA
updates are planned for 2020. Staff projected a 5-percent overall residential rate increase for fiscal year 2019.
The projection has changed based on ending reserves for FY 2018. For FY 2020, staff projects a 9-percent rate
increase for electric, a 10-percent increase for gas, a 7-percent increase for wastewater, a 4-percent increase
for water, and no increase for refuse.
Jonathan Abendschein, Assistant Director of Resource Management, recalled staff talking with the Finance
Committee about ways to contain costs in each budget cycle without sacrificing service. Staff has advanced
the preliminary rate forecast so that division heads can understand the rate outlook for the next year and
focus their efforts on efficiencies prior to submitting their proposed budgets. In addition, staff continues to
review personnel actions in order to operate efficiently and handle vacancy issues and to regularly review
performance metrics and expenditures.
Keniston further reported the Supply Operations Reserve balance is currently below the minimum guideline.
Staff can utilize the Hydroelectric Stabilization Reserve or the Special Projects Reserve to raise the balance
above the minimum guideline. Staff projects 3-5 percent rate increases beyond FY 2020. All utilities are facing
declining sales as usage moves into the historical long-term decline. The Distribution Operations Reserve
balance is projected to remain around the minimum guideline and increase over time.
In reply to Chair Danaher's query about increasing the Supply Operations Reserve balance by $20 million over
the next few years, Keniston indicated that is staff's intent.
In response to Commissioner Johnston's questions about the reason the projection jumped from 3 to 9
percent, Keniston explained the increases in electric commodity costs and capital project costs caused the
projection to increase. When sales decrease, rate increases are spread over fewer and fewer units. Within
the projection for gas rates, a 15-percent distribution rate increase equates to about a 10-percent overall bill
impact. The projection increased based on plans to resume annual water main replacement projects, cross-
bore contingency costs, and regional backbone transportation cost increases.
In answer to Vice Chair Schwartz's inquiry about the effect of PG&E seeking bankruptcy protection or selling
its gas operation, Abendschein indicated staff continues to explore the possibilities. Staff is less concerned
about CPAU's direct exposure and more concerned about indirect exposure such as loss of privileges on the
transmission pipeline or PG&E passing costs via the transmission access charge. The Northern California
Power Agency (NCPA) is assisting staff with a response on that front.
Keniston continued the presentation, stating Electric Utility revenues are below costs and projected costs;
therefore, 10-percent rate increases will be needed for the next two or three years. With the rate increase,
ATTACHMENT B
Utilities Advisory Commission Minutes Approved on: Page 2 of 3
the Operations Reserve balance will fall within the minimum and maximum guidelines. The minimum
guideline level is $6 million, so the Operations Reserve will provide only a small cushion. For wastewater,
staff proposes a 7-percent rate increase. Staff anticipates an increased amount of capital work on the Palo
Alto distribution system and the Water Quality Control Plant (WQCP). Wastewater collection does not have
much debt service, but most of the WQCP capital expense will be related to debt service. Operations Reserves
are small and will draw down quickly such that staff expects the balance will reach the minimum guideline
balance by FY 2022. A 7-8 percent increase will cause a $2.50-$3.00 per month bill impact. Staff proposes a
4-percent overall water rate increase and plans to create a separate commodity rate component for pass-
through. This is a good time for a separate component as the SFPUC does not appear to be planning rate
increases until 2022 or 2023. In the water COSA, staff is evaluating a merger of all residential meter charges
into one charge for all residential customers. Currently, SFPUC has a $4 billion project for seismic
improvements to the Hetch Hetchy system. In future years, many capital improvements will be needed. The
cost of water accounts for about 40 percent of the utility's costs. From 2014-2024, staff projects average
overall 4-percent cost increases. Capital investments account for slightly more than 50 percent of
distribution-related costs. Over the last five years, distribution costs have been increasing slowly, but staff
believes they will increase faster to 2024. If a project to install backup generators at pumping stations does
not materialize, near-term costs could decrease. The cost of underground construction has increased
precipitously since 2010. Palo Alto's median bill is approximately 12 percent higher than the average bill of
comparable cities.
Chair Danaher commented that a comparison of median monthly residential bills is not meaningful if lots and
yards vary greatly in size. A comparison based on cost per cubic foot could be more meaningful.
Commissioner Forssell interpreted the chart as a comparison of bills for usage of 4 ccf, 8 ccf, and 18 ccf.
Keniston further reported water costs increased due to reservoir infrastructure in the Foothills. Cost
containment strategies could include reducing the number of reservoirs in the Foothills or instituting an
elevation surcharge.
In response to Vice Chair Schwartz's query about reallocating some of those resources to fire prevention,
Keniston advised staff does allocate a portion of costs to fire protection rates and can consider allocations to
other funds.
Keniston continued the presentation, stating over the last five years, rates have increased on average 6.5
percent per year. Rates for comparable cities have increased by 9 percent per year. For FY 2020, CPAU will
probably have an 8-percent cost decrease due to one-time capital decreases. If other revenues such as
interest income or capacity fees decrease, staff may have to increase rates more. Staff anticipates overall
costs will decrease slightly over the next few years. When the SFPUC rate increases take effect, CPAU's costs
will begin to rise. The Operations Reserve balance currently falls well within the minimum and maximum
guidelines.
In response to Chair Danaher's question regarding UAC action on rate proposals, Keniston explained the
Proposition 218 notice requirement for water and wastewater rates. Staff will present the water and
wastewater rate proposals to the UAC in March and the Finance Committee in April. Electric and gas rates
will be presented in the next two to three months.
Commissioner Johnston recommended staff communicate the cost drivers for rate increases to the Finance
Committee.
Vice Chair Schwartz suggested staff also illustrate the fixed costs versus variable costs based on usage. In
reply to her question about the concentration of EVs in Palo Alto not affecting electric revenue, Keniston
reported EVs do not use a lot of energy on a kilowatt per hour (kW h) basis. EVs do create demand issues,
which could drive up costs because of the need to replace transformers. The increase in residential usage has
been countered with a decrease in commercial usage of electricity.
Utilities Advisory Commission Minutes Approved on: Page 3 of 3
Chair Danaher agreed with Vice Chair Schwartz's point about illustrating costs. He commended staff for
including the overall percentages, cost containments, and the chart showing the cost of undergrounding.
CPAU should have a list of capital projects it can accelerate if staff anticipates a recession such that costs
might decrease.
ACTION: None
NEXT SCHEDULED MEETING: March 6, 2019
Meeting adjourned at 9:31 p.m.
Respectfully Submitted
Tabatha Boatwright
City of Palo Alto Utilities