HomeMy WebLinkAboutStaff Report 11864
City of Palo Alto (ID # 11864)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 2/16/2021
City of Palo Alto Page 1
Council Priority: Fiscal Sustainability
Summary Title: FY 2022 Preliminary Financial Forecasts
Title: Preliminary Financial Forecasts and Proposed Rate Projections for
Electric, Gas, Water and Wastewater Collection Utilities for Fiscal Year 2022
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 2022 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 2, 2020 meeting. The staff
presentation will be available online prior to the meeting.
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 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. A 2020 cost of service study for
Wastewater Collection factored into staff proposals for FY 2022. Cost of Service studies for
Water and Gas were completed in 2019, and Electric was completed in 2016.
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Table 1: Projected Residential Rate Changes
As shown in Table 1, staff’s preliminary rate increase recommendations are 3% increase in the
system average rates for gas, wastewater, and a 2% storm drain increase to enable
continuation of capital investment in these systems, which would otherwise need to be cut
back significantly. Staff is sensitive to the current economic situation, however, and has
included alternative plans with no rate changes for the gas and wastewater utilities. Staff would
need to reduce CIP funding to achieve this.
Gas consumption has been 6% to 10% lower to-date due to the COVID pandemic, and reserve
levels are projected to drop near the minimum guideline levels by FY 2023. Of the four utilities,
the gas utility has had most trouble absorbing reduced consumption due to lower reserves.
Monthly electric utility consumption has decreased by 5% to 10% over prior years, but the
utility has had adequate reserves to absorb the lower sales revenues. The water utility has not
seen reduced consumption. That said, the drop in gas consumption occurred during the
relatively low usage late summer to fall period, and staff continues to watch how this has
progressed into the winter heating season. There are early indications that gas consumption
has started to rise to prior year levels this winter. See Attachment A for more detailed
information.
In Wastewater, because of the economic impacts to residents and businesses of the ongoing
pandemic, staff reduced costs and resulting sewer rate changes by reducing the size of each of
the three sanitary sewer replacements planned during the next five years and delaying two of
these replacements. This approach lowers costs while still replacing the highest priority sewer
mains. However, without a rate increase, further cuts will be needed to ensure that reserves do
not drop below the minimum guideline levels.
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Stormwater management fees increase annually by the calendar year change in the Consumer
Price Index (CPI), which has historically varied between 2 to 3 percent. In addition, the rates for
Fiber Optic services established prior to September 18, 2006 will also increase by the CPI rate.
Based on these preliminary rate increase projections, FY 2022 reserve levels are projected to
remain within guideline levels with the proposal. 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. See
Attachment A for more detail on customer sales and supply data during calendar year 2020.
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, 2021. The
proposed rate adjustment recommendations, along with each utility’s Financial Plans, are
currently scheduled to be presented to the Finance Committee in March or April for the
Wastewater Collection and Electric Utilities. The Water and Gas Utility’s financial plans and
rates will be presented in April or 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 because of increases in
statewide transmission costs. While hydro resources have been lower of late, recent increased
market prices and Council approval to sell excess RECs have led to a short-term increase in
surplus energy sales revenues, but staff’s forecasts assume normal ongoing hydro conditions
over the long term. 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.
Capital spending and distribution system maintenance spending has been 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.
The effects of the COVID pandemic on electric loads have been a drop of around 8 to 10
percent to date, with most of the decrease occurring in the commercial customer sector. Staff
has incorporated this into the load forecast used here and has also factored in an assumption of
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possible customer bill defaults. However, FY 2020 ending reserve levels for the Electric fund
were relatively healthy, within guideline levels and are projected to remain so through FY 2021.
Based on this, staff is projecting no rate increase will be necessary July 1, 2021 but will continue
to monitor revenue and cost projections. The current year (FY 2021) financial plan for the
Electric utility (approved June 22, 2020) is available at:
http://cityofpaloalto.org/civicax/filebank/documents/76982
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. In FY 2021, staff reduced the scope of the gas main replacement
project by $3 million from $10 million to $7 million in order to minimize the rate increase of 2%
and not fall below the minimum reserve guideline.
In last year’s financial plan, staff anticipated that gas sales would not be greatly affected by the
COVID pandemic. However, usage has been between 6 to 10% lower compared to the same
months last year. Staff is waiting to see if this trend continues into the winter heating season
and has also factored in an assumption of possible customer defaults. Staff is currently
projecting a preliminary rate increase of 3% but will continue to monitor revenue and cost
projections.
Staff also evaluated a 0% change in FY 2022, but preliminary forecasts indicate a reduction in
costs of about $5.4 million would be needed by FY 2024 to keep reserves from falling below the
minimum guideline levels. If usage in the winter period does not recover somewhat, it is
possible that an additional $1 million in cuts would be needed. It is likely that these cuts, if
needed, would need to come primarily from capital improvement funding.
The current year (FY 2021) financial plan for the Gas utility (approved June 22, 2020) is available
at:
http://cityofpaloalto.org/civicax/filebank/documents/76973
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Water
In FY 2020, expenses were lower than forecasted due to delays in capital projects. The delayed
capital projects are expected to be completed in FY 2021 and FY 2022, but these delays have
resulted in a larger than expected ending reserve in FY 2020, which is expected to decrease as
the projects are completed.
Staff is projecting that no rate increase is needed in FY 2022. This is because 1) the San
Francisco Public Utilities Commission (SFPUC), the City’s water supplier, indicated in its latest
available estimate that no increase is needed in wholesale water rates, and 2) 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 2021) financial plan for the Water utility (approved June 22, 2020) is
available at:
http://cityofpaloalto.org/civicax/filebank/documents/76983
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.
Based on updated cost and revenue data incorporated into the 2020 Wastewater Collection
utility cost of service study, staff is proposing a 3% system average rate increase for FY 2022
and FY 2023 and 5% in each subsequent year. A series of large increases in treatment costs are
planned during the next five years to address aging infrastructure at the treatment plant and
ongoing collection system infrastructure replacement needs. To mitigate the rate impacts, staff
has decreased the size of each of the upcoming sanitary sewer replacement projects and
deferred two upcoming sewer replacement projects in order to reduce rate impacts in this
proposal. Additionally, staff proposes an alternate rate trajectory of 0% in FY 2022, 3% in FY
2023 and 5% in each subsequent year. However, an average of $200,000 per year in cost
reductions would be needed over the five-year planning period as well as $1.1 million per year
on average from FY 2027 - FY 2031 in order to keep reserves from dropping below minimum
guideline levels and keep rate increases to 5% or less each year.
The most recent (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
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Staff presented a FY 2021 financial forecast to the Finance Committee in April 20201. The City
did not change wastewater rates for FY 2021.
Commission Review
The UAC reviewed the preliminary financial forecasts at its December 2, 2020 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 and concurred
with staff’s initial proposals. An excerpt of the draft minutes from the UAC’s December 2, 2020
meeting is located at the Utilities Advisory Commission website.2
Next Steps
The UAC is scheduled to review the long-term Financial Plans and proposed rate adjustments
for the Wastewater Collection utility in February and the Electric, Water, and Gas utilities in
March or April.
The Finance Committee is tentatively scheduled to review the long-term Financial Plans and
proposed rate adjustments in March or April (for the Wastewater Collection utility) and in April
or May (for the Electric, Water, and Gas utilities). Once the Finance Committee has provided its
recommendation, notification of any recommended 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 2022
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.
Stakeholder Engagement
Staff met with the Utilities Advisory Commission on December 2, 2020. Notices of proposed
rate changes will be distributed throughout the city as recommendations are finalized.
Resource Impact
Based on the preliminary rate increases as shown, the estimated revenue impacts would be an
increase of $612,000 in the Wastewater Collection Fund and $1.2 million in the Gas Fund.
Attachments:
• Attachment A: Sales and Supply Data
1 Staff Report 11234 presented to the Finance Committee April 21, 2020:
https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=68098.52&BlobID=76150
2 https://www.cityofpaloalto.org/civicax/filebank/documents/79862
Sales by Rate Class
Electric
J F M A M J J A S O N D
Residential
Com
m
e
r
c
i
a
l
Lg Com
m
e
r
c
i
a
l
Total
0M
5M
10M
15M
0M
10M
20M
30M
0M
10M
20M
30M
0M
20M
40M
60M
80M
Electric Sales (kWh)
Gas
J F M A M J J A S O N D
0.0M
0.5M
1.0M
1.5M
2.0M
0.0M
0.5M
1.0M
1.5M
0.0M
0.2M
0.4M
0.6M
0.8M
0.0M
1.0M
2.0M
3.0M
4.0M
Gas Sales (Therms)
Water
J F M A M J J A S O N D
Residential
Com
m
e
r
c
i
a
l
Irr
i
g
a
t
i
o
n
Total
0K
100K
200K
300K
0K
100K
200K
0K
100K
0K
200K
400K
600K
Water Sales (CCF)Sector, Calendar Month
Residential, 2020
Residential, 2019
Residential, 2018
Commercial, 2020
Commercial, 2019
Commercial, 2018
Lg Commercial, 2020
Lg Commercial, 2019
Lg Commercial, 2018
Total, 2020
Total, 2019
Total, 2018
Attachment A
Utility Unit Week Number
Wee
k
3
Wee
k
5
Wee
k
7
Wee
k
9
Wee
k
1
1
Wee
k
1
3
Wee
k
1
5
Wee
k
1
7
Wee
k
1
9
Wee
k
2
1
Wee
k
2
3
Wee
k
2
5
Wee
k
2
7
Wee
k
2
9
Wee
k
3
1
Wee
k
3
3
Wee
k
3
5
Wee
k
3
7
Wee
k
3
9
Wee
k
4
1
Wee
k
4
3
Wee
k
4
5
Wee
k
4
7
Wee
k
4
9
Wee
k
5
1
Electric MWh
Gas Therms
Water CCF
0K
5K
10K
15K
20K
0K
500K
1000K
0K
50K
100K
Utility, Year
Electric, 2020
Electric, 2018-19 Average
Gas, 2020
Gas, 2018-19 Average
Water, 2020
Water, 2018-19 Average
Week Number
Utility
Electric Gas Water
Week 2Week 3Week 4Week 5Week 6Week 7Week 8Week 9Week 10Week 11Week 12Week 13Week 14Week 15Week 16Week 17Week 18Week 19Week 20Week 21Week 22Week 23Week 24Week 25Week 26Week 27Week 28Week 29Week 30Week 31Week 32Week 33Week 34Week 35Week 36Week 37Week 38Week 39Week 40Week 41Week 42Week 43Week 44Week 45Week 46Week 47Week 48Week 49Week 50Week 51Week 52 13%20%23%28%0%-12%-14%-9%-2%2%3%-2%6%-4%-4%0%6%-1%5%1%0%-2%1%2%5%5%-1%2%4%5%10%5%3%4%-4%-5%-5%-10%3%3%16%46%51%42%21%7%1%-6%0%-3%1%
-4%-1%2%13%-3%3%8%-24%-18%-30%-39%-21%-38%-20%-20%-22%-14%-19%-31%-21%-14%-14%-11%-14%-14%-11%-17%-13%-4%-23%-38%-32%-30%-20%-31%-10%-25%13%14%16%12%-26%-26%-32%-35%-21%12%6%-10%34%19%
-2%-7%-8%-8%-9%-6%-8%-10%-11%-8%-1%-9%2%-10%-8%-3%-9%-9%5%-7%-12%-11%-13%-11%-10%-7%-7%-9%-15%-5%-1%-11%-12%-11%-11%-14%-13%-11%-11%-11%-8%-6%-3%-3%-4%-3%-2%-2%-2%2%-1%
2018-19 vs 2020 Comparison %
Electric, Gas, and Water Weekly Supply Data 2018-19 Avg vs 2020
*Week 1 and 53 are excluded