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Home My WebLink About1998-05-19 City Council (7)BUDGET ’98 - ’99 City of Palo Alto City Manager’s Report TO: ATTENTION: FROM: AGENDA DATE: SUBJECT: HONORABLE CITY COUNCIL FINANCE COMMITTEE CITY MANAGER MAY 19, 1998 PROPOSED GAS RATE DECREASE AND ESTABLISHMENT OF UNBUNDLED RATES FOR NONCORE COMMERCIAL CUSTOMERS DEPARTMENT:UTILITIES CMR:195:98 REPORT IN BRIEF This report requests that Council approve a gas rate decrease of approximately 7 percent to reduce the current surplus in the Gas Fund Rate Stabilization Reserve (RSR). While all customers would experience a bill decrease, the actual percentage decrease will vary between residential and commercial customers based on cost of service. In addition, staff recommends that gas transportation rates for large commercial customers be unbundled to implement the Gas Accord. CMR:195:98 Page I of 6 RECOMMENDATION Staff recommends that Council adopt the attacl~ed resolution elective July 1, 1998 to: Amend Palo Alto’s retail gas rates to reflect a 7 percent system-wide revenue decrease; Revise Gas Rate Schedules G-3 and G-4 to unbundle distribution, transportation, and supply charges applicable to large noncore commercial customers. BACKGROUND Based on a comprehensive financial review of the Utilities reserves in 1993, the City Council adopted a Utility Reserve Policy and established a Rate Stabilization Reserve (RSR) in each Utility Fund (CMR:263:93). Part of this policy includes a process whereby staff notifies Council of plans to dispose of any surplus which may accumulate in an RSR. In accordance with this policy, staffrecommends that an existing surplus in the Gas Fund RSR be reduced gradually by enacting a moderate gas rate decrease in 1998 and, if necessary, a subsequent rate decrease in 2000. In response to Gas Deregulation, the Council approved Gas Rate Schedule G-4 in 1994, which provided an option for large commercial customers to elect an alternate supplier of natural gas other than the Palo Alto Gas Utility (CMR:238:94). Last year, the California Public Utilities Commission (CPUC) approved a plan called the Gas Accord, which fundamentally restructured the way gas is bought, sold, and transported in California. One of the implications of the Gas Accord to Palo Alto is a need to restructure or further "unbundle" transportation rates for Palo Alto’s noncore gas rate schedules in order to separate PG&E transportation fees from Palo Alto’s transportation charge: Generally, all customers are considered core customers unless they consume more than 250,000 therms per year and elect to be treated as a noncore customer. To elect to become a noncore customer, a commercial user must be willing to risk curtailment: In accepting this risk, customers pay less for noncore gas service than for core service. In some cases, noncore customers have backup fuel oil on site to use as an alternative to natural gas. DISCUSSION Despite a 12 percent gas rate decrease in 1996, the Gas Fund RSR balance has continued to rise, due to lower-than-budgeted spending on capital improvement projects, commodity purchases, transmission costs, and operating expenditures. As a result, the Gas Fund RSR balance exceeds its maximum guideline level. For 1997-98 the maximum CMR: 195:98 Page 2 of 6 guideline level is $6.8 million and the projected balance at the end of this fiscal year is approximately $11 million. In accordance with Council policy, staff has evaluated alternative actions to dispose of the surplus balance in the RSR For example, a customer rebate, similar to the 1993 electric rebate is considered a preferable solution but is not a practical remedy given that the billing system is undergoing a major conversion to a new Customer Information System this year. Another solution is tO enact a rate decrease. While a moderate rate decrease can help reduce the surplus, it may take until the year 2000 before the estimated $4 million surplus is eliminated. To eliminate the surplus in one year, a substantial rate decrease, approximately 24 percent, would be necessary. However, staff does not recommend a rate decrease of this magnitude because current rate levels would become set significantly below current costs. This could lead to a double digit rate increase in 2000. Furthermore, there is uncertainty regarding the direction of gas prices in future years. Recent forecasts by the City’s supplier, Coral, indicate that market prices will escalate over the next few years. To balance the need to reduce the RSR balance with minimizing the risk of a double- digit rate increase within two years, staff proposes a 7 percent or $1.15 million reduction in gas revenues effective July 1, 1998. Reducing gas revenues 7 percent will not bring the RSR level below its maximum level in 1998-99, but will bring the reserve balance closer to its maximum level. If gas market prices rise over the next few years,, staff anticipates that the RSR balance will fall below its maximum guideline level in 2000-01. However, in the event that gas market prices remain stable, another rate decrease will be proposed for 2000-2001. In spreading the 7 percent rate decrease among customer classes, several rate making objectives were balanced to arrive at the recommended rate adjustments. These objectives are: [] [] All customer classes would receive a decrease; The amount of decrease for residential customers and commercial customers would be consistent with the results of a cost-of-service study to assure that costs are spread equitably; and Palo Alto gas rates should be competitive with corresponding gas rates charged by PG&E for distribution service. The results of a recent cost-of-service study indicate that commercial customers are contributing more net revenue than residential customers towards distribution cost of CMR: 195:98 Page 3 of 6 service. Accordingly, staffproposes an average decrease of approximately 3 percent for residential customers and an average decrease of approximately 8 percent for small and medium core commercial customers. With this decrease, Palo Alto residential bills will continue to remain the largest percentage below Pacific Gas and Electric Company (PG&E) bills for any Palo Alto customer class. For large core commercial customers served under Rate Schedule G-7, staff proposes a 2.7 percent decrease, which reflects an overall rate that includes a lower distribution charge and a higher commodity charge. Finally, with regard to noncore commercial customers served under Rate Schedules G-3 and G-4, a significant rate reduction of 22.3 percent is recommended, based on the results of the cost-of-service study and a need to align this rate at a competitive level. Presently, Palo Alto’snoncore gas rate is the only rate which is higher than the corresponding PG&E rate. Despite the proposed decrease, Palo Alto’s noncore rate will remain 4.2 percent higher than PG&E’s noncore rate.. However, PG&E has a rate increase application before the CPUC, which could result in raising PG&E’s rate approximately 20 percent above Palo Alto’s noncore rate on 1-1-99. The following table indicates the impact of this rate proposal on a typical monthly bill for the various customer classes. TABLE ONE. Impact of Rate Decrease on Customer Bills FY 1998-99 . - Customer -Usage--::-.. :Monthly i --:. : Therms " ::: Bill Residential/Winter 100 $ 43.09 Residential/Winter 150 72.94 Residential/Sum.26 12.06 Residential/Sum.40 20.42 Commercial G-2 500 234.00 (small core) -I .Amount of: :"Decrease/- $ (.82) (2.67) (.36) (.88) (20.00) Percent -Deer.eaSe. (1.9) (3.5) (2.9) (4.1) (7.9) .:Above -- PG&E (30.2) (26.2) (24.0) (21.2) (20.1) CMR: 195:98 Page 4 of 6 Customer Industrial G-2 (core) Industrial G-3 (noncore) Transportation & Commodity Industrial G-3 (noncore) Transportation only Ind G-7 (core) Usage ThermS 10,000 60,000 60,000 30,000 Monthly .Bill 4,680.00 20,145.00 6,060.00 10,680.00 Amountof Decrease (400.00) (2,115.00) (1,740.00) (300.00) Percent Decrease (7.9) (9.5) (22.3) (2.7) Percent PA Below or Above PG&E (16.4) (4.7) +4.2 (17:1) A final rate making objective reflected in this proposal is to unbundle large commercial noncore gas rates to achieve consistency with the Gas Accord. The Gas Accord is a collaborative settlement agreement between PG&E and more than 25 gas industry participants, including the Palo Alto Gas Utility, to create a new gas market structure to bring increased competition and customer choice to California. On March 1, 1998, the Gas Accord became effective. Among other things, it will allow marketers, suppliers, and customers to contract for intrastate pipeline capacity. Prior to the Gas Accord, gas had to be delivered to the California border at specific receipt points. Now, customers can buy gas from suppliers and have it delivered at PG&E’s local del!very point under different service levels. The Accord separates, or unbundles, PG&Erates for transporting gas from the California border (on PG&E’s "backbone" transmission system) to the applicable PG&E delivery point from the rates to deliver gas from the delivery point to the City of Palo Alto. This allows customers to choose from a menu of services and pay for only the systems that they use. To achieve consistency with the Gas Accord and to continue to provide Palo Alto noncore customers with a choice of suppliers, staffproposes to unbundle noncore gas transportation rates on Gas Rate Schedule G-3 (Commercial Noncore Gas Service) and CMR:195:98 Page 5 of 6 Gas Rate Schedule G-4 (Commercial Noncore Transportation Gas Service). The current transportation rates on these schedules are proposed to be separated into two components: (1) PG&E local transportation costs and (2) Palo Alto distribution costs. Under the Gas Accord, the market value of transportation on PG&E’s "backbone" transmission system to the PG&E delivery point is included as part of the commodity price. Accordingly, the commodity market price on Palo Alto Gas Rate Schedule G-3, which is revised monthly, will include the value of PG&E’s "backbone" transmission service. RESOURCE IMPACT Approval of this rate proposal will reduce Gas Fund revenues approximately $1.15 million on a fiscal year basis. POLICY IMPLICATIONS These recommendations do not represent a change in current City policies. ENVIRONMENTAL ASSESSMENT The adoption of the resolution does not constitute a project under the California Environmental Quality Act, therefore, no environmental assessment is required. ATTACHMENTS Resolution Rate Schedules G-l, G-2, G-3, G-4, G-7 PREPARED BY:,Lucie Hirmina, Manager, Utilities Rates Randy Baldschun, Assistant Director of Utilities, Administrative Services DEPARTMENT HEAD REVIEW: CITY MANAGER APPROVAL: CMR: 195:98 Page 6 of 6 RESOLUTION NO. RESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING UTILITY RATE SCHEDULES G-l, G-2, G-3, G-4 AND G-7 OF THE CITY OF PALO ALTO UTILITIES RATES AND CHARGES PERTAINING TO RESIDENTIAL, COMMERCIAL CORE, COMMERCIAL NONCORE, AND LARGE COMMERCIAL CORE GAS SERVICE AND LARGE COMMERCIAL NONCORE GAS TRANSPORTATION SERVICE The Council of the City of Paio Alt0 does hereby RESOLVE as follows: SECTION I. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Schedules G-I (Residential Gas Service), G-2 (Commercial Core Gas Service), G-3 (Commercial Noncore Gas Service, G-4 (Noncore Gas Transportation Service) and G-7 (Large Commercial Core Gas Service) of the Palo Alto Utilities Rates and Charges are hereby amended to read in accordance with Sheets G-l-l, G-2-1, G-3-1, G-3-2, G-4-1 and G-7-1 attached hereto and incorporated herein by reference. The foregoing Utility Rate Schedules, as am ended and as adopted, shall become effective July i, 1998. SECTION 2. The Council finds that the revenue derived from the authorized adjustments of the general natural gas service rates shall be used only for the purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. SECTION 3. The Council finds that the adoption of this resolution does not constitute a project under the California Environmental Quality Act, California Public Resources Code section 21080, subdivision (b) (8). INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST:APPROVED: City Clerk Mayor APPROVED AS TO FORM:City Manager Senior Asst. City Attorney Acting Director of Administrative Services Director of Utilities 980421 syn 0071402 RESIDENTIAL CORE GAS SERVICE A. APPLICABILITY: UTILITY RATE SCHEDULE G-1 This schedule applies to core natural gas service to individually metered single family premises, including those separately metered in a multi-family complex. B.TERRITORY: Within the service area of the City of Palo Alto and on land owned or leased by the City. C.RATES: For individually metered residential customers Per Meter Per Month (A) Summer Rates (May 1 to October 31): 0-20 therms per therm ..............................................42.4¢ Over 20 therms per therm ..............................’ ....; ........59.7¢ Winter Rates (Nov. 1 to April 30): 0-96 therms per therm ..............................................42.4¢ Over 96 therms per therm ...........................................59.7¢ D. SPECIAL NOTES: Seasonal rate changes: The applicable residential rate structure will be prorated in the May and November billing periods based on the rates of the number of days prior to May 1 and subsequent to October 31, respectively, to the total number of days in the billing period. Service under this schedule is subject to discontinuance in whole or in part, for operational reasons or if the City experiences supply or capacity shortages. The City will exercise reasonable diligence and care to furnish and deliver continuous service and a sufficient quantity of gas to customers, but does not guarantee continuity of service or sufficiency of quantity. The City shall not be liable for any damage caused by interruption of service, if the interruption of service is caused by an act of God, Fire, Strikes, riots, war, or any other cause that is beyond the City’s control. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. G-1-1 dated 7-1-96 CITY OF PALO ALTO UTILITIES Effective 7-1-98 Sheet No. G-l-1 COMMERCIAL CORE GAS SERVICE UTILITY RATE SCHEDULE G-2 A. APPLICABILITY: This schedule applies to non-residential core customers. Core customers include all customers using less than 250,000 therms per year at a single address. In addition, this schedule applies to customers who use more than 250,000 therms per year at a single address but elect to be core customers served under this schedule. B.TERRITORY: Within the service area of the City of Palo Alto and on land owned or leased by the City. C.RATES: All year-round delivered commodity:Per Meter Per Month Per Therm ..................................................................46.8¢ D. SPECIAL CONDITIONS: 1.Service under this schedule is subject to discontinuance in whole or in part, for operational reasons or if the City experiences supply or capacity shortages. The City will exercise reasonable diligence and care to furnish and deliver continuous service and a sufficient quantity of gas to customers, but does not guarantee continuity of service or sufficiency of quantity. The City shall not be liable for any damage caused by interruption of service, if the interruption of service is caused by an act of God, Fire, Strikes, riots, war, or any other cause that is beyond the City’s control. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. G-2-1 dated 7-1-96 CITY OF PALO ALTO UTILITIES Effective 7-1-98 Sheet No. G-2-1 LARGE COMMERCIAL NONCORE GAS SERVICE UTILITY RATE SCHEDULE G-3 A. APPLICABILITY: This schedule applies to noncore service for customers who use at least 250,000 therrns per year per service address. B. TERRITORY: Co Within the service area of the City of Palo Alto and on land owned or leased by the City. RATES:Cents Per Therm 1.Commodity Charge ..................................................10.0 - 65.0¢ 2.Administrative Fee ........................................................0.4¢ 3.Transportation Charges: PG&E Local Transportation .............................................1.6¢ Palo Alto Local Distribution .............................................8.5¢ D. SPECIAL CONDITIONS: Service under this schedule is subject to discontinuance in whole or in part in case of actual or anticipated shortage of natural gas resulting from an insufficient supply, inadequate transmission or delivery capacity of facilities, or shortage requirements. However, the City will attempt to minimize disruption by providing adequate notice prior to curtailment. The City will not be liable for damages occasioned by interruption or discontinuance of service supplied under this schedule. Specific terms and conditions shail be covered by separate agreement between the City and customers served under this rate schedule. The commodity charge is equal to the City’s bidweek price of the natural gas paid at the PG&E City Gate for the month immediately preceding the month in which the customer is billed. The commodity charge will fall within the minimum/maximum range set forth in C. 1. and include the cost of PG&E’s "backbone" Transmission market value. 4.A customer who elects to be served under this rate will pay an administrative fee equal to the allocable administrative costs incurred by the City in providing the non-core gas service. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. G-3-1 dated 1-1-97 CITY OF PALO ALTO UTILITIES Effective 1-1-98 Sheet No. G-3-1 LARGE COMMERCIAL NONCORE GAS SERVICE UTILITY RATE SCHEDULE G-3 (Continued) PG&E Local transportation charge is equal to the cost of transporting gas from the PG&E’s City Gate to the Palo Alto City Gate. The total monthly charge = therms used during the month X (commodity charge + administrative fee + PG&E local transportation charge + Palo Alto distribution charge). A customer may request service under this schedule for more than one account or meter if the accounts are located on one site. A site shall be defined as one or more utility accounts serving contiguous parcels of land with no intervening public right-of- ways (e.g. streets) and have a common billing address. Customers may request a rate schedule change during a Rate Selection Period as established by the City of Palo Alto Gas Utility.The Gas Utility may make more than one change of rate schedules outside the Rate Selection Period if a rate schedule is replaced by a successor rate schedule or the customer’s gas usage has changed significantly to warrant a change. CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. G-3-2 dated 7-1-95 CITY OF PALO ALTO UTILITIES Effective 7-1-98 Sheet No. G-3-2 NONCORE GAS TRANSPORTATION SERVICE UTILITY RATE SCHEDULE G-4 A. APPLICABILITY: This schedule applies to gas transportation service for noncore commercial customers who use at least 250,000 therms per year at one site. B. TERRITORY: Within the service area of the City of Palo Alto and on land owned or leased by the City. Co RATES: 1. 2. Cents Per Therm Administrative Fee ........................................................0.4¢ Transportation Charges: PG&E Local Transportation .............................................1.6¢ Palo Alto Local Distribution .............................................8.5¢ Do SPECIAL CONDITIONS: 1. A customer may elect to be served under this rate schedule during an open season specified by the Cityas established by the City of Palo Alto Gas Utility. Specific terms and conditions shall be covered by separate agreement between the City and the gas supplier and/or customers served under this rate schedule. o A customer who elects to be served under this rate will pay an administrative fee equal to the allocable administrative costs incurred by the City in providing the transportation gas service. If the customer’s gas supplier fails to deliver, the customer will be placed on Gas Rate Schedule G-3 temporarily until the next Rate Selection Period. PG&E local transportation charge is equal to the cost of transporting natural gas from PG&E City Gate to Palo Alto City Gate. Therefore, a customer who elects this service will have to have the gas delivered to PG&E City Gate. 5. ¯Total monthly charge = therms used x (administrative fee + PG&E local transportation + P.A. distribution charge). common billing address. CITY OF PALO ALTO UTILITIES Issued by the City Council A customer may request service under this schedule for more than one account or meter if the accounts are located on one site. A site shall be defined as one or more utility accounts serving contiguous parcels of land with no intervening public right-of- ways (e.g. streets) and have a , {End} CITY OF PALO ALTO UTILITIES Supersedes Original Sheet No. G-4-1 dated 7-1-95 Effective 7-1-98 Sheet No. G-4-1 LARGE COMMERCIAL CORE GAS SERVICE UTILITY RATE SCHEDULE G-7 APPLICABILITY: ~ This schedule applies to large commercial core customers who use at least 250,000 therms per year at one site. B. TERRITORY: Co Within the service area of the City of Palo Alto and on land owned or leased by the City. RATES: Per Meter Per Month Per Therm ................................................................35.6¢ D. SPECIAL CONDITION: A customer may qualify for service under this schedule for more than one account if the accounts are located on one site. A site shall be defined as contiguous parcels of land with no intervening right-of-way (e.g. streets) and have a common billing address. Service under this schedule is subject to discontinuance in whole for operational reasons or it the City experiences supply or capacity shortages. The City will exercise reasonable diligence and care to furnish and deliver continuous service and a sufficient quantity of gas to customers, but does not guarantee continuity of service or sufficiency of quantity. The City shall not be liable for any damage caused by interruption of service, if the interruption of service is caused by an act of God, Fire, Strikes, riots, war, or any other cause that is beyond the City’s control. Customers may request a rate schedtfle ch~mge during a Rate Selection Period as established by the City of Palo Alto Gas Utility.The Gas Utility may make more than one change of rate schedules outside the Rate Selection Period if a rate schedule is replaced by a successor rate schedule or the customer’s gas usage has changed significantly to warrant a change. {End] CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. G-7-1 dated 7-1-96 CITY OF PALO ALTO UTILITIES Effective 7-1-98 Sheet No. G-7-1