HomeMy WebLinkAboutStaff Report 10161
City of Palo Alto (ID # 10161)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/2/2019
City of Palo Alto Page 1
Council Priority: Fiscal Sustainability
Summary Title: FY 2020 Preliminary Electric and Gas Rates
Title: Preliminary Rate Changes for the Electric and Gas 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 Electric and Gas utilities to finalize its
recommended FY 2020 Electric and Gas Financial Plans and proposed rate changes.
Executive Summary
The attached presentation describes staff’s preliminary rate projections for the Electric and Gas
Utilities. This is an expanded presentation from what was provided to the Utilities Advisory
Commission (UAC) at its February 6, 2019 meeting, and contains some slightly revised figures
for electric and gas.
The 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 the cost of service studies for each
utility and may differ modestly 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. Wastewater Collection will be
done in FY 2020, while the Electric study was recently completed in 2016.
Table 1: Projected Rate Increases
City of Palo Alto Page 2
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 staff continues to refine cost projections and amass current customer data, 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 electric utility is available at:
https://www.cityofpaloalto.org/civicax/filebank/documents/64921
And the current year (FY 2019) financial plan for the gas utility is available at:
https://www.cityofpaloalto.org/civicax/filebank/documents/64920
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 from 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 can be found at (web address pending).
City of Palo Alto Page 3
Next Steps
The UAC reviewed the long-term Financial Plans and proposed rate adjustments for the
Wastewater Collection Utility in March, and will review 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 Wa stewater 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.
Attachments:
• Attachment A: Preliminary Rate Forecasts - Electric and Gas
1
Preliminary Rate Changes
for Electric and Gas,
Utilities for FY2020
Finance Committee
April 2, 2019
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 $273.56 as of July 1, 2017 (does not include UUT)
4
FY 2020 Rate Projections
FY 2020 FY 2021 FY 2022 FY 2023 FY 2024
Electric Utility 8%3%-5%3%-5%3%-5%3%-5%
Gas Utility 9%9%7%2%-3%2%-3%
Wastewater 7%8%8%8%8%
Water Utility 4%3%4%5%5%
Refuse -3%3%3%3%
Storm Drain 4.5%2%-3%2%-3%2%-3%2%-3%
Bill Change (%)4%5%5%4%4%
($/mo)$13 $14 $15 $14 $13
•Rate increases to bring all 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
Electric Utility
8
Electric Utility Rate Projections
§FY 2020 Proposal: 8% rate increase
–Operations Reserves below minimum guidelines due to cost
increases and reduced customer sales
–Other reserves low as well, but could be utilized:
•$11.4M in Hydro Stabilization Reserve (Target -$17M)
•$41M available in Special Projects Reserve -$10M loan
already taken against this reserve
–Rate increase are entirely related to cost increases and load
loss –will not increase reserves.
§Future projections:
–3%-5% increases thereafter
–Reserve health should slowly recover over several years
Electric Utility
9
Electric Utility Basics
Electric Utility
Palo Alto’s primary business
10
Electric Utility Distribution System
Electric Utility
472 miles of distribution line
(45% overhead, 55% underground)
•Nine substations
•2000 overhead transformers
•1100 underground/substation
transformers
11
Electric Utility Supply Contracts
Electric Utility
12
Electric Utility Cost StructureElectric Utility
Electric Distribution:
The cost to distribute
electricity within Palo
Alto, including:
maintaining and
replacing electric
infrastructure,
customer service,
billing, administration,
etc.
Electric Supply: The cost to
buy electricity and transport
it to Palo Alto, including
operational overhead (e.g.
energy scheduling)
13
Long-term Cost Trends
Electric Utility
Electric
Supply:
3.5%/yr
Distribution:
3.2%/yr
Annualized
Increase,
FY14-FY19:
Annualized
Increase,
FY20-FY24:
Distribution:
4.1%/yr
Electric
Supply:
1%/yr
14
Electric Supply Cost StructureElectric Utility
15
Electric Supply Cost Forecast
Electric Utility
Transmission:
13%/yr
Generation:
1%/yr
Annualized
Increase,
FY14-FY19:
Annualized
Increase,
FY20-FY24:
Transmission:
3%/yr
Generation:
0%/yr
Overhead:
6%/yr
Overhead:
2%/yr
•Overhead costs have decreased as
NCPA has sought revenue by providing
services to more agencies.
•Transmission costs have increased
dramatically –system replacement,
new lines to integrate new generators.
CPA partners with others to advocate
for cost control.
•Renewable projects have come online.
In the longer term, generation costs
should flatten due to CPA’s long-term
fixed price contracts
Electric Supply
Cost Drivers
17
Long-term Cost Trends
Electric Utility
Electric
Supply:
3.5%/yr
Distribution:
3.2%/yr
Annualized
Increase,
FY14-FY19:
Annualized
Increase,
FY20-FY24:
Distribution:
4.1%/yr
Electric
Supply:
1%/yr
18
Electric distribution costs
Electric Utility
19
Electric Distribution Cost Trends
Electric
Distribution
Operations:
5%/yr
Annualized
Increase,
FY14-FY19:
Annualized
Increase,
FY20-FY24:
Electric
Capital
Investment:
8%/yr*
Electric
Distribution
Operations:
3%/yr
Electric Utility
Electric
Capital
Investment:
7%/yr*
•Health, retirement, and associated
overhead costs continue to
increase
•Increased capital investment in the
electric distribution system needed
due to age of the system.
•Underground construction costs
have increased substantially as well
•Additional contract expense for line
crew until internally staffed
Operations and Capital
Cost Drivers
21
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)
Electric Utility
22
Median Monthly Residential Bill
The median Palo Alto residential bill was roughly
40% lower than PG&E as of March 2018
Electric Utility
23
FY 2020 Projected Cost Changes
Supply-Related:
$1M increase (+)
Electric Operations:
$1.7M increase (+)
Total Cost:
3% increase
Electric Capital:
$1.2M increase (+)
Electric Utility
24
Drivers of FY 2020 Cost Changes
§Small increase in purchase costs –shifts in
market prices, and FY 2019 included a
substantial one-time refund related to one of
our contracts
§Distribution spending to increase, but costs
could be higher contingent on contract line
crew utilization
Electric Utility
25
FY 2020 Revenue at Current Rates
0
20
40
60
80
100
120
140
160
FY 2019 (projected)FY 2020 (projected)
$ (Millions)
Costs Rate Revenue Other Revenue
Rate Revenue:
8% increase
Revenue:
100% of costs
Revenue:
100% of costs
Electric Utility
26
Electric Cost and Revenue Projections
27
Supply Operations Reser ve
28
Distribution Operations Reser ve
29
Gas Utility
30
Gas Utility Rate Projections
§Rate Design:
–One-third of the rate is “supply-related:” gas supply, transmission,
and environmental charges. These rates vary monthly according to
market-driven costs that are passed directly to customers
–Two-thirds of the rate is set based on the City ’s costs for maintaining
its gas distribution system (gas mains, services, related equipment)
§FY 2020 preliminary proposal:
–9% customer bill increase due to distribution system rate increases
–Supply-related costs will vary with the market and may result in a
total customer bill increase that is higher or lower than 9%.
§Future projected rate actions
–9% for FY 2021 and 7% for FY 2022 (in addition to any supply-related
charge variation), inflationary increases thereafter
Gas Utility
31
Gas Utility Basics
Gas Utility
Map of Western
natural gas
transmission lines
“Malin” gas delivery point
(70% of Palo Alto gas)
(30% of Palo Alto gas)
“City gate” gas delivery point
(30% of Palo Alto gas)
has transmission rights
Redwood pipeline –Palo Alto
has transmission rights
City of Palo Alto gas
distribution system:
•20,000 meters
•205 miles of mains
•18,000 service lines
32
Gas Utility Cost StructureGas Utility
Gas Distribution: The
cost to distribute gas
within Palo Alto,
including: maintaining
and replacing gas
infrastructure,
customer service,
billing, administration,
etc.
*
*
*
* Market-based pass-through costs.
33
Long-term Cost Trends Gas Utility
Supply,
Transmission,
Environmental:
19%/yr
Distribution:
3%/yr
Annualized
Increase,
FY16-FY19:
Annualized
Increase,
FY20-FY24:
Distribution:
4%/yr
Supply,
Transmission,
Environmental:
4%/yr*
*Forecast is uncertain and will vary with the markets
•Gas supply –some volatility in
gas market prices. Gas prices
have risen in recent years as
supplies have become tighter,
demand has increased
•PG&E gas transmission rates
rising to fund safety
investments in the wake of the
San Bruno disaster
•Cap and trade costs continue to
rise (as intended by design)
•Carbon Neutral Gas Plan
Gas Supply-Related
Cost Drivers
35
Long-term Cost Trends Gas Utility
Supply,
Transmission,
Environmental:
19%/yr
Distribution:
3%/yr
Annualized
Increase,
FY16-FY19:
Annualized
Increase,
FY20-FY24:
Distribution:
4%/yr
Supply,
Transmission,
Environmental:
4%/yr*
*Forecast is uncertain and will vary with the markets
36
Gas distribution costs Gas Utility
37
Gas Distribution Cost Trends
Gas Capital:
-7%/yr*
Gas
Operations:
7%/yr
Annualized
Increase,
FY16-FY19:
Debt Service:
0%/yr
Annualized
Increase,
FY20-FY24:
Gas Capital:
12%/yr*
Gas
Operations:
2%/yr
Gas Utility
Debt Service:
0%/yr
* No main replacement project budgeted in FY 2019, so CIP spending was
unusually low. Gas main replacement spending to resume in FY 2020
** Funding for crossbore program in FY 2019 leads to unusually high
Operations costs.
•Health, retirement, and
associated overhead costs
continue to increase
•Underground construction
costs have increased
substantially as well
•Temporary funding ($1M/yr)
for three years for crossbore
investigations (starting FY 20)
•Increases in overhead
transfers
Operations and Capital
Cost Drivers
39
Underground Construction Costs
0
100
200
300
400
500
600
2008 2010 2012 2014 2016 2018 2020
Water ($/FT)Gas ($/FT)Elec U/G ($/FT)Sewer ($/FT)
Gas Utility
40
Median Monthly Residential Bill
The median Palo Alto residential bill was 14%
lower than PG&E as of January 2018
Gas Utility
41
FY 2020 Projected Cost Changes
Supply-Related:
$1.3M increase**
Gas Operations:
$1.0M increase
Total Cost:
15% increase
Gas Capital:
$3.9M increase
Gas Utility
* Market-based gas supply, transmission, and
environmental costs passed through to customers.
** Projected. Will vary with market prices
42
Drivers of FY 2020 Cost Changes
§Resumption of routine gas main replacement
capital projects
§Crossbore inspection program costs –program to
find rare but hazardous condition: gas lines
installed through sewer lines via horizontal drilling
Gas Utility
43
FY 2020 Revenue at Current Rates
0
5
10
15
20
25
30
35
40
45
50
FY 2019 (projected)FY 2020 (projected)
$ (Millions)
Distribution Costs Supply-related Costs
Distribution Rate Revenue Other Distribution Revenue
Supply Revenue
Rate Revenue:
9% increase*
Distribution Revenue:
85% of distribution
costs
Distribution Revenue:
81% of distribution
costs
Gas Utility
* Due to distribution rate changes only. Supply
rate revenue will vary with market prices.
44
Gas Costs and Revenues by FY
Actual Projected
45
Gas Operations Reser ve Projections
46
Gas Utility Rate Projections
§Rate Design:
–One-third of the rate is “supply-related:” gas supply, transmission,
and environmental charges. These rates vary monthly according to
market-driven costs that are passed directly to customers
–Two-thirds of the rate is set based on the City ’s costs for maintaining
its gas distribution system (gas mains, services, related equipment)
§FY 2020 preliminary proposal:
–9% customer bill increase due to distribution system rate increases
–Supply-related costs will vary with the market and may result in a
total customer bill increase that is higher or lower than 9%.
§Future projected rate actions
–9% for FY 2021 and 7% for FY 2022 (in addition to any supply-related
charge variation), inflationary increases thereafter
Gas Utility