HomeMy WebLinkAboutStaff Report 11077City of Palo Alto (ID # 11077)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 3/3/2020
City of Palo Alto Page 1
Council Priority: Fiscal Sustainability
Summary Title: FY 2021 Preliminary Rate Forecasts
Title: Preliminary Financial Forecasts and Proposed Rate Changes for Electric,
Gas, Water and Wastewater Collection Utilities for Fiscal Year 2021
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, Gas, Water and Wastewater
Collection utilities to finalize its recommended FY 2021 Financial Plans and proposed rate
changes for each utility.
Executive Summary
At the meeting staff will provide a presentation describing staff’s preliminary rate projections
for the Electric, Gas, Water and Wastewater Collection utilities. A similar presentation was
provided to the Utilities Advisory Commission (UAC) at its December 4, 2019 meeting. The staff
presentation is available for review prior to the meeting at the following link:
Staff Presentation on Preliminary Rate Projections,
http://cityofpaloalto.org/civicax/filebank/blobdload.aspx?BlobID=75286
The preliminary retail rate forecast over the next five fiscal years is shown in t he 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. An updated cost of service study for
Wastewater Collection is underway and will be factored into staff proposals for FY 2021. Cost of
Service studies for Water and Gas were completed in 2019, and Electric was completed in 2016.
City of Palo Alto Page 2
Table 1: Projected Rate Increases
City of Palo Alto Page 3
Based on current data, reserve levels are projected to remain within guideline levels . Staff will
continue to monitor customer consumption patterns and refine operating and capital cost
projections over the coming months to determine whether any adjustment from this
preliminary forecast is needed. 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, 2020. 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. The Electric and Gas Utilities financial
plans and rates will be presented in May.
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.
Electric
Costs for electric supply purchases have been increasing, primarily as a result of increases in
statewide transmission costs. Recent hydro conditions have led to a short-term increase in
surplus energy revenues, but staff’s forecasts assume normal ongoing hydro conditions over
the long term. As of January 1, 2020, total precipitation is at 74% of average for this date.
These short-term revenue surpluses will be used to fund reserves, and, in the short term, they
will also help to lower needed rate increases.
Current capital spending and distribution system maintenance spending is currently lower than
budgeted, primarily because staffing shortages have prevented the electric utility from
performing the levels of capital improvement and distribution system work desired. Additional
crews are being contracted to perform these functions in upcoming years until full staffing can
be reached. As such, operational and capital costs are projected to increase substantially over
the forecast horizon if the utility can achieve its targeted staffing levels and capital and
maintenance spending levels.
There has been some decrease in the City’s electric load as well, which creates an upward
pressure on rates. Usage has decreased by about 2% each year over the last three years,
compared to an average annual decrease of about 0.3% in the prior decade. Most of the
decrease has been in the medium and small commercial customer groups (E4 and E2 rate
schedules).
Staff is projecting a preliminary rate increase of 2%, but will continue to monitor revenue and
cost projections. The current year (FY 2020) financial plan for the Electric utility (approved June
17, 2019) is available at:
City of Palo Alto Page 4
https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=60223.49&BlobID=71361
Gas
Gas fund expenses are currently split at about 40% supply and 60% for distribution and capital.
Most of the supply costs are market driven and set to be pass-through charges on customers’
bills that change monthly according to market conditions. The long-term gas rate increases
shown in Table 1 will go towards funding the distribution and capital improvement costs of the
gas utility. As discussed in the prior year’s financial plan, the Utility recently resumed regular
scheduled main replacement. A large main replacement project is planned for every other year,
and the majority of any proposed rate increase would go towards capital improvements. Prior
to this, from FY 2018 to FY 2020, only one gas main replacement project was funded due to
staffing issues and competing priorities. Rates were held low during that time because capital
spending was low, but as staff resumes regular scheduled capital spending for the gas utility,
rates need to rise to fund that capital spending. In addition, construction costs have risen
significantly during that time.
Staff is projecting a preliminary rate increase of 5%, but will continue to monitor revenue and
cost projections. The current year (FY 2020) financial plan for the Gas utility (approved June 17,
2019) is available at:
https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=60939.34&BlobID=71364
Water
In FY 2019, expenses were lower than forecasted due to delays in capital projects. The delayed
capital projects are expected to be completed in FY 2020 and FY 2021, and changes to budget
have resulted in a larger than expected ending reserve in FY 2019.
Staff is projecting that no rate increase is needed in FY 2021. This is because SFPUC’s latest
available estimate is that no increase is needed in wholesale water rates and because the water
utility’s reserves are sufficient to provide funding for some major one-time planned
infrastructure projects in the next two years.
The current year (FY 2020) financial plan for the Water utility (approved June 17, 2019) is
available at:
https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=61704.19&BlobID=71368
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Wastewater Collection
Costs are projected to rise over the next several years due primarily to increasing treatment
costs related to capital improvements costs and attendant debt service at the Regional Water
Quality Control Plant (RWQCP). Collection system CIP work is also increasing, but at a lower
rate. Operations and maintenance costs for both Treatment and Collections are expected to
increase with inflation. Current projected rate increases are slightly lower but generally similar
to last year’s projections.
Staff is working on a cost of service study for the Wastewater Collection utility. Factoring in the
results from the study may change rate impacts to individual customer groups in the FY 2021
proposal.
The current year (FY 2020) financial plan for the Wastewater Collection utility (approved June
17, 2019) is available at:
https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=61290.09&BlobID=71366
Commission Review
The UAC reviewed the preliminary financial forecasts at its December 4, 2019 meeting. No
recommendation was requested at that meeting, but staff sought input from Commissioners
regarding the preliminary rate adjustment recommendations. Commissioners asked questions,
but did not request staff re-examine any of the rate changes listed in Table 1. An excerpt of the
draft minutes from the UAC’s December 4, 2019 meeting is located (here).
Next Steps
The UAC is scheduled to review the long-term Financial Plans and proposed rate adjustments
for the Water and Wastewater Collection utilities in March and the Electric and Gas 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/or Wastewater Collection rate
adjustments 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 2021 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 review is required.
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Stakeholder Engagement
Staff met with the Utilties Advisory Commission on December 4, 2019. Notices of proposed rate
changes will be distributed throughout the city as recommendations are finalized.
Resource Impact
The FY 2021 Budget is being developed concurrent with these rates. Depending on final rates,
adjustments may be necessary in the FY 2021 Budget at a later time. Based on the preliminary
rate increases as shown, the estimated revenue impacts would be an increase of $1.2 million in
wastewater collection and $318,000 in gas. Due to projected load losses in Electric, the forecast
rate increase would be relatively revenue neutral for the fund .
Attachments:
•Attachment A: 12-04-2019 UAC Excerpt Minutes Item 3
Utilities Advisory Commission Minutes Approved on: February 5, 2020 Page 1 of 3
UTILITIES ADVISORY COMMISSION MEETING
MINUTES OF DECEMBER 4, 2019 REGULAR MEETING
CALL TO ORDER
Chair Danaher called the meeting of the Utilities Advisory Commission (UAC) to order at 7:00 p.m.
Present: Chair Danaher, Vice Chair Forssell, Commissioners Jackson, Johnston, Segal, and Smith
Absent: Commissioner Scharff
ITEM 3: DISCUSSION: Discussion of Preliminary Rate Change Projections for the Electric, Gas, Water and
Wastewater Collection Utilities for Fiscal Year 2021.
Eric Keniston, Senior Resource Planner, reported a wastewater cost of service study is underway and should
be complete in time for staff to utilize it in calculating new wastewater rates to meet the expected July 1st
date for new rates. Fiscal Year (FY) 2021 preliminary rate projections are a 3% increase for the Electric Utility,
a 5% increase for the Gas Utility, a 6% increase for the Wastewater Utility, a 0% increase for the Water Utility,
and a 0% increase for Refuse. In water, gas, and wastewater collection, staff is planning to stagger main
replacement projects but to allocate funds periodically to the CIP Reserve so that the CIP Reserve reflects
project expenditures and fluctuations caused by main replacement projects occurring every other year.
Beginning this year in the Water Fund, there will be a level amount of funding going to the CIP Reserve to
begin establishing this process.
In response to Commissioner Smith's request for cost containment measures provided in the agreement with
Valley Water, Jonathan Abendschein, Assistant Director of Resource Management, explained that Valley
Water's $16 million payment will fund construction of the reverse osmosis facility. If there was no $16 million
payment, sewer and water ratepayers would have to fund the construction. The cost containment measure
is ratepayers not having to fund construction of the plant. In reply to Commissioner Smith's question of
whether the listed cost containment measures apply to the rate projections, Abendschein indicated most of
them do. Almost any of the cost containment measures directly reduce the cost associated with the individual
utility.
Keniston continued the presentation, stating Electric Utility Operations Reserves are projected to fall within
the guideline ranges. FY 2019 was a good year for hydroelectric power, and CPAU was able to sell its surplus
energy, which reduced purchase costs.
In answer to Commissioner Johnston's inquiry about disposition of surplus funds, Keniston advised that
initially surplus funds are deposited into the Operations Reserve and then transferred to the other Reserve
Funds. Staff proposes to repay the $10 million loan from the Special Projects Reserve and increase the
Hydroelectric Stabilization Reserve Fund to the target level.
Attachment A
Utilities Advisory Commission Minutes Approved on: February 5, 2020 Page 2 of 3
Keniston further reported 40% of electric costs are related to distribution and 60% to supply. Transmission
costs continue to grow rapidly because of the cost to expand the statewide system. Generation costs should
remain stable.
In reply to Vice Chair Forssell's inquiry regarding increased costs from renewable projects coming online,
Abendschein indicated newer contracts for renewable projects are generating some savings. Between 2009
and 2015, many renewable projects were not online, and CPAU benefited from low gas prices. As CPAU
increased its renewable contracts, it was no longer exposed to low gas prices, which raised the cost of the
electric supply.
In response to Commissioner Johnston's noted between FY 2021 and 2022 revenues decrease even though
rates increase. Keniston stated revenue includes hydroelectric revenues, Renewable Energy Certificate (REC)
sales, and other projected revenues. Staff anticipates REC sales will decrease in FY 2022 and less hydroelectric
revenue; revenue will be more normalized by FY 2022. Abendschein clarified that FY 2019 and FY 2020
revenues exceed costs because of the sale of surplus hydroelectric. Staff has questions about the FY 2021
forecast from the Western Area Power Administration. Chair Danaher added that CPAU will not have surplus
hydroelectric power to sell, which will decrease revenue.
Keniston continued the presentation by listing the distribution cost drivers of medical and retirement
benefits, capital investment, and underground construction. Staff projects a 3% rate increase in FY 2021 and
4-5% rate increase thereafter. The main drivers of the rate increase are increased supply costs, increased
operations costs, increased CIP expenses, increased non-retail revenues, and decreased sales. Also, without
the additional hydroelectric revenues a larger rate increase would have been needed. The Electric Supply
Operations and Distribution Operations Reserves are above target levels and projected to remain above
target levels.
In response to Commissioner Segal's query about the rationale for a rate increase if reserve funds are healthy
and revenues exceed costs, Keniston explained that without a rate increase, the balances will begin to fall
below the minimum reserve level. Abendschein added that a one-time surplus can be used to defer rate
increases for a year or two, but a rate increase will be needed eventually. By deferring rate increases, the
reserves decrease such that few funds are available for adverse situations, and greater rate increases are
needed.
Keniston further reported staff projects a 5% rate increase for the Gas Utility in FY 2021 due to decreases in
distribution and increases in CIP cost projections.
In answer to Vice Chair Forssell's inquiry about the impact of reach codes on gas sales, Abendschein indicated
all-electric construction would affect 100-150 projects.
Keniston continued his presentation, advising that 50% of overall gas costs are related to distribution.
Abendschein clarified that the main driver for rate increases over the next five years is investment in the gas
distribution system. Of the 5% rate increase, 3.7% is related to CIP expenses and 1.3% is related to operations
and maintenance (O&M) expenses. Staff has transferred funds from the Rate Stabilization Reserve Fund to
the Gas Operations Reserve Fund. Projected rate increases will slowly increase the Reserve Fund to the target
level.
Lisa Bilir, Acting Senior Resource Planner, reported staff projects a 6% rate increase in FY 2021 for the
Wastewater Collection Utility because of increases in treatment and collection costs. The largest expense
increase is CIP projects. Wastewater costs are divided 50% for treatment and 50% for collection. 2.4% of the
6% rate increase is related to treatment expenses, 1.2% to O&M expenses, and 2.4% to an existing revenue
shortfall. The Wastewater Operations Reserve is projected to remain within target levels.
Utilities Advisory Commission Minutes Approved on: February 5, 2020 Page 3 of 3
In reply to Commissioner Johnston's question about partner agencies utilizing Palo Alto pipelines for
wastewater, Keniston indicated Los Altos Hills utilizes Palo Alto's collection system starting in the foothills,
and Stanford University enters the collection system along Embarcadero Road.
Bilir further reported staff's projection for a 0% rate increase for the Water Utility. The Operations Reserve
Fund is currently above the maximum guideline but should fall to the target level by the end of FY 2021.
In answer to Vice Chair Forssell's query regarding the cause of the reserve being above target level, Bilir
explained that the chart shows the Operations Reserve but does not show the balances of all the reserves.
When the Operations Reserve reaches the maximum guideline level, the additional funds above that level
are reflected in the unassigned reserve, which can be seen in the stacked bar chart.
Chair Danaher remarked that CPAU cannot change gas commodity prices or PG&E's transmission costs. The
only thing CPAU can do is defer or accelerate construction projects or manipulate reserve fund balances to
fall within target levels.
In response to Commissioner Segal's inquiry about gas billing and cost fluctuations, Keniston advised that the
policy is to reflect the bid week price plus any expected loss or shrink. Reserve funds should absorb the extra
cost. Collecting the extra cost the following month would not be appropriate.
In reply to Vice Chair Forssell's question of customer backlash in response to the gas bill increases, Catherine
Elvert, Communications Manager, did not recall any customer comment.
Commissioner Johnston remarked that explaining the rate increases in light of projected revenues exceeding
projected costs could be a challenge. Abendschein indicated the challenge would be explaining wastewater
and gas rate increases because of the plan to alternate years of CIP projects.
Chair Danaher commended staff for maintaining fund balances within target levels and averaging rate
increases over time.
In answer to Vice Chair Forssell's question about the cost of service study, Bilir reported a consultant is
conducting the study.
ACTION: None