HomeMy WebLinkAboutStaff Report 11888
City of Palo Alto (ID # 11888)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 4/6/2021
City of Palo Alto Page 1
Summary Title: FY 2022 Gas Financial Plan and Rates
Title: Staff and the Utilities Advisory Commission Request That the Finance
Committee Recommend the City Council Adopt a Resolution Approving the
Fiscal Year 2022 Gas Utility Financial Plan, Including Proposed Transfers and
an Amendment to the Gas Utility Reserve Management Practices, and
Increasing Gas Rates by Amending Rate Schedules G-1 (Residential Gas
Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3
(Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service)
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) request that the Finance Committee
recommend that the City Council adopt a resolution (Attachment A):
a. Approving the fiscal year (FY) 2022 Gas Utility Financial Plan (Linked Document,
Attachment B); and
b. Transferring up to $3.9 million from the Rate Stabilization Reserve (RSR) to the
Operations Reserve at the end of FY 2021; and
c. Transferring $4.542 million from the Rate Stabilization Reserve to the Cap-and-Trade
Program Reserve at the end of FY 2021; and
d. Amending the Gas Utility Reserve Management Practices relating to the Cap-and-Trade
Program Reserve (as set forth in the Financial Plan) (Linked Document, Attachment C);
and
e. Increasing gas rates by amending Rate Schedules G-1 (Residential Gas Service), G-2
(Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas
Service), and G-10 (Compressed Natural Gas Service) (Linked Document, Attachment D).
City of Palo Alto Page 2
Executive Summary
The FY 2022 Gas Utility Financial Plan includes projections of the utility’s costs and revenues for
FY 2022 through FY 2026. Gas utility costs are made up of supply-related costs (27 percent of
costs in FY 2020), which are collected through a pass-through supply rate that varies monthly,
and distribution-related costs (73 percent of costs in FY 2020), which are collected through a
distribution rate that is typically adjusted not more than one time per year. Distribution rates
were last increased on July 1, 2020, which resulted in a roughly 2 percent increase in the total
system average gas rate (the supply rates plus the distribution rates).
The proposed FY 2022 Gas Utility Financial Plan includes an increase in distribution rates
effective July 1, 2021 and will result in a 3 percent increase to the total system average gas rate
if supply rates remain unchanged.1 Additional 5 percent increases to the total system average
gas rate are projected over the next three years. CIP expenditures for the last several years
have been lower than normal while the City was completing the Upgrade Downtown project,
and much of this increase is due to the Gas Utility resuming ongoing main replacement projects
and the cross-bore safety verification program.
In addition, staff proposes a transfer to the Operations Reserve of up to $3.9 million from the
Rate Stabilization Reserve to ensure adequate operating reserves. The Rate Stabilization
Reserve is projected to be at zero balance by the end of FY 2021, consistent with the Council-
adopted Reserves Management Practices, which specify that funds are only intended to be held
in the Rate Stabilization Reserve to manage the trajectory of future year rate increases and
which should be completely used by the end of the financial planning period. A transfer of
$4.542 million to the Cap-and-Trade Program Reserve from the Rate Stabilization Reserve is
also proposed to account for revenues related to the State’s Cap and Trade program that are
required to be used for specific purposes.
The City’s natural gas rates are based on the 2019 Natural Gas Cost of Service and Rates Study,
updated with current and proposed operating costs. With the onset of the COVID-19
pandemic, usage amongst businesses has dropped to reflect people working and staying at
home rather than going to the workplace, as well as restrictions to business operations.
Businesses have been forced to operate at minimum staffing conditions or fully remote while
the pandemic continues. City of Palo Alto staff have worked at reducing cost increases, and
some capital project work has been moved out or restructured to keep costs from rising too
much during this time. However, costs related to the Gas Utility’s resumption of main
replacement projects and the cross-bore safety verification program are increasing. In order to
move towards full cost recovery while minimizing rate impacts considering pandemic-related
economic challenges, staff recommends a distribution rate increase to all customer classes of
5%, which staff estimates will result in a 3% system average rate increase. This 3% does not
include forecasted supply cost increases, detailed below, that may be higher or lower than
forecasted depending on market conditions. With supply cost increases included, the
1 Supply costs are forecasted to rise 1.2%, for an overall 4% rate increase, approximately. However, forecasts are
uncertain, and these supply cost changes may be lower or higher than projected depending on market conditions.
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forecasted rate change is approximately 4%. If, after the pandemic, usage and/or spending
looks to be moving in a different direction, staff will suggest a re-balancing of rates at that time.
While staff is recommending that the distribution component of the rates be increased by 5%,
distribution rates comprise about 70% of the overall rate, which consists of commodity (supply)
and distribution components. Supply-related costs (the cost of the natural gas itself, gas
transmission, and gas environmental charges) are a fluid component of the Gas Utility’s
expenses. It not possible to precisely predict commodity rates, which make up approximately
30% of overall retail gas rates. Market prices are monitored monthly and automatically
incorporated into monthly supply rate adjustments, which are passed directly to customers as a
line item on their utility bills.
Because it is not possible to exactly predict what supply rates will be during the planning
horizon, the overall rate increases (commodity plus distribution) referenced in this report
assume that the commodity portion of the overall rate remains unchanged. The net effect is a
proposed 3% overall rate increase. Recent market indications have led staff to project supply
cost increases of around 4.1 percent annually for the forecast horizon, primarily due to
increasing gas transmission and environmental charges. If these increases did occur, it would
result in an estimated additional 1.2% percent increase in the overall customer bill.
Table 1: Revenue and Rate Increases by Customer Class
Cost of Service Analysis
FY 2022
Rate Increase
needed for
Distribution
Charges
Assumed
Commodity Rate
Changes
Net Rate Increase for
Combined Commodity
and Distribution
Charges
G1 – Residential 5% 0% 3%
G2 - Small Commercial 5% 0% 3%
G3 - Large Commercial 5% 0% 3%
TOTAL 5% 0% 3%
Figure 1 below shows the primary drivers for the proposed rate change, which are almost
equally split between increasing Capital Improvement (CIP) cost and increases in Operations
expenses. The increases are discussed in greater depth in the attached FY 2022 Gas Financial
Plan:
City of Palo Alto Page 4
Figure 1: Allocation of Distribution Rate increase
In the interest of providing options to help the community keep its utility bills low during the
economic crisis created by the COVID-19 pandemic, the Utilities Department is also showing an
alternative rate plan involving a 2 percent rate increase in FY 2022 and no more than 5% rate
increases in the subsequent financial plan years. This alternative plan is projected to bring
reserves below minimum guideline levels unless $700,000 in budget cuts could be achieved
between FY 2023 to FY 2025. This alternative is described in more detail in the FY 2022 Gas
Utility Financial Plan, Section 5G.
Background
Every year staff presents the Finance Committee with Financial Plans for its Electric, Water, Gas,
and Wastewater Collection Utilities and recommends any rate adjustments required to
maintain their financial health. These Financial Plans include a comprehensive overview of the
utility’s operations, both retrospective and prospective, and are intended to be a reference for
UAC, Finance Committee and Council members as they review the budget and staff’s rate
recommendations. Each Financial Plan also contains a set of Reserves Management Practices
describing the reserves for each utility and the management practices for those reserves.
The City’s gas is purchased from a variety of marketers who source gas from throughout the
Western United States. The City then pays Pacific Gas and Electric (PG&E) to transport the gas
across its gas transmission system to Palo Alto, which is then delivered to customers through
Palo Alto’s gas distribution system.
The Gas Utility’s costs are divided into two main categories: gas supply costs (which includes
the cost of the gas itself, the cost of transmitting the gas to Palo Alto, and environmental costs2)
and the costs of running the business and operating the distribution system. As noted above,
gas supply costs vary with the market, and the costs are passed through to customers through a
gas supply rate component that varies monthly.
2 These are the costs of complying with the State’s Cap and Trade system and procuring offsets under the City’s
Carbon Neutral Gas program.
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The Finance Committee reviewed preliminary financial forecasts at its February 16, 2021
meeting (Staff Report #118643). At that meeting, staff also projected a distribution rate increase
that resulted in a 3% increase to the total system gas rate (with supply rates assumed to stay
flat and distribution rates increasing 5%).
Discussion
Staff’s annual assessment of the financial position of the City’s gas utility is completed to ensure
adequate revenue to fund operations and to ensure that the City’s rates comply with cost-of-
service requirements set forth in the California Constitution and applicable statutory law. The
assessment includes making long-term projections of market conditions, of costs associated
with the physical condition of infrastructure, and of other factors that could affect utility costs.
Rates are then proposed that will be adequate to recover projected costs.
Proposed Actions for FY 2021 and FY 2022:
The FY 2022 Gas Utility Financial Plan includes the following proposed actions:
1. Amend gas rate schedules (see Linked Document) to increase distribution rates by 5
percent, resulting in an estimated 3 percent increase on overall rates.
2. Transfer up to $3.9 million from the Rate Stabilization Reserve (RSR) to the Operations
Reserve.
3. Transfer $4.542 million from the RSR to the Cap-and-Trade Program Reserve; and
4. Amend the Gas Utility Reserve Management Practices (as shown in redline in Linked
Document).
The reserve transfers and proposed changes to the Reserve Management Practices will enable
staff to both maintain sufficient funds in the Gas Operations Reserve while establishing a Cap-
and-Trade Program Reserve to account for revenues associated with the State’s Cap and Trade
Program, revenues which are required to be used for specific purposes. All of these proposed
actions are described in more detail below and in the FY 2022 Gas Financial Plan (Linked
Document).
Proposed Gas Rates
Staff proposes to adjust gas rates as shown in Table 2 and Table 3 below, effective July 1, 2021.
These changes are projected to increase the total system average gas rate (total of supply and
distribution) by roughly 3 percent for all classes. These rate changes are included in the
proposed amended rate schedules in Linked Document.
3 https://www.cityofpaloalto.org/civicax/filebank/documents/80154
City of Palo Alto Page 6
Table 2: Current and Proposed Monthly Service Charges
Rate Schedule
Monthly Service Charge
($/month) Change
Current
(as of 7/1/20)
Proposed
for FY 2022 ($) (%)
G-1 (Residential) $10.37 $10.89 $0.52 5.0%
G-2 (Small Commercial) 96.05 100.85 4.80 5.0%
G-3 (Large Commercial) 439.46 461.43 21.97 5.0%
G-10 (CNG) 64.96 68.21 3.25 5.0%
Table 3: Current and Proposed Gas Distribution Charges
Change
Current (as
of 7/1/19)
Proposed
for FY
2022
($) (%)
G-1 (Residential)
Tier 1 Rates $0.5038 $ 0.5290 $0.0252 5.0%
Tier 2 Rates 1.2882 1.3526 0.0644 5.0%
G-2 (Residential Master-Metered and Small Commercial)
Uniform Rate 0.6617 0.6948 0.0331 5.0%
G-3 (Large Commercial)
Uniform Rate 0.6551 0.6879 0.0328 5.0%
G-10 (Compressed Natural Gas)
Uniform Rate 0.0108 0.0113 0.0005 5.0%
Bill Impact of Proposed Rate Changes
Table 4 shows the impact of the proposed July 1, 2021 rate changes on various levels of
residential bills. The average increase for the residential class is roughly 3 percent on average
based on last year’s commodity prices. As the price of commodities changes monthly, the
actual increase may be higher or lower than the 3% average. Table 4 shows a representative
Winter period (November thru March) and Summer period (April through October) bill
comparison:
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Table 4: Impact of Proposed Gas Rate Changes on Residential Bills
Usage
(Therms/month)
Bill under
Current Rates
Bill under
Proposed Rates
Change
$/mo. %
Winter (Using November 2020 commodity prices)
30 $ 41.88 $ 43.15 $ 1.27 3.0%
54 (median) 67.09 68.97 1.88 2.8%
80 110.08 113.40 3.32 3.0%
150 238.51 246.34 7.83 3.3%
Summer (Using October 2020 commodity prices)
10 $ 20.85 $ 21.62 $ 0.77 3.7%
18 (median) 29.23 30.20 0.97 3.3%
30 49.13 50.79 1.66 3.4%
45 76.61 79.24 2.63 3.4%
Table 5 shows the impact of the proposed July 1, 2021 rate changes on various representative
commercial customer bills. The overall increases for the G-2 and G-3 classes are projected to be
about 3 percent on an annual basis.
Table 5: Impact of Proposed Gas Rate Changes on Commercial Bills
(Using December 2020 commodity prices)
Usage
(Therms/month)
Bill under
Current Rates
Bill under
Proposed Rates
Change
%
500 685 706 3.1%
5,000 5,986 6,156 2.8%
10,000 11,875 12,211 2.8%
50,000 59,005 60,665 2.8%
FY 2021 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years
Table 6 shows the projected rate adjustments over the next five years and their impact on the
annual median residential gas bill (54 therms per month in winter, 18 therms per month in
summer).
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Table 6: Projected Rate Adjustments, FY 2022 to FY 2026
FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Gas Utility 3% 5% 5% 5% 0%
Estimated Bill Impact ($/mo)* $1.35 $2.20 $2.31 $2.43 $-
* estimated impact on median residential gas bill, which is currently $43.40 for CY 2020
One of the main drivers for the increase in the Gas Utility’s short-term costs (and therefore
rates) over the next several years are increases in capital improvement costs to maintain a safe
and reliable system. FY 2017 included replacements of gas mains on University Avenue, a
project that has evolved into the Upgrade Downtown project, involving a coordinated
replacement of several different types of infrastructure to avoid multiple disruptions to the
business district. This was a multi-year planning effort, completed in 2019, which did not allow
for design of other new projects. Also, as investor-owned utilities and government agencies
regionally and nationally spend more on infrastructure improvement, contractor bids for
underground construction have risen greatly from where they were in years past.
This current financial plan works to address these challenges in a way that will allow City of Palo
Alto Utilities (CPAU) to meet its gas main replacement (GMR) needs. The next focus of the GMR
program will be the replacement of all Polyvinyl Chloride (PVC) mains with Polyethylene (PE)
mains. CPAU installed PVC pipes from the early 1970s to mid-1980s. Some of the City’s PVC
pipe is approaching 50 years of service, and according to industry data, PVC pipes have a much
higher leakage rate than PE mains after 20 years of service due to potential disbandment of
fittings and joints. This financial plan includes approximately $7 to 9 million every other year for
main replacement construction instead of $5 to 6 million annually, starting in FY 2021. This shift
to larger main replacement construction projects every other year will slightly lengthen the
amount of time needed to replace all PVC pipes in the system but will ideally attract more
contractors and better bid pricing on the larger projects. Additionally, this main replacement
project schedule for gas will be staggered with water and wastewater (water and wastewater
construction every even year and gas construction every odd year), which will ease scheduling
difficulties for inspection coverage due to shared inspection staff across water, wastewater,
gas, and large development services projects. This arrangement is likely to be a short-term
solution (3-5 years) until project capacity can be increased and upward pressure on utility rates
has eased.
Table 7 below shows the reserve balance changes for each reserve from FY 2021 and projected
through FY 2026.
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Table 7: Operations, Rate Stabilization and CIP Reserve Starting and Ending Balances,
Revenues, Transfers To/(From) Reserves, Capital Program Contribution To/(From) Reserves,
and Reserve Guideline Levels for FY 2021 to FY 2026 ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Starting Reserve Balances
1 Operations Reserve 13,450 10,782 12,645 7,214 9,238 7,970
2 CIP Reserve 3,820 3,820 - - 1,000 -
3 Cap and Trade - 5,936 7,458 9,228 11,271 13,573
4 Rate Stabilization 8,419 - - - - -
Revenues
5 Total Revenues 37,368 42,334 45,804 49,160 52,135 53,904
6 Cap and Trade 1,394 1,522 1,770 2,043 2,302 2,565
Transfers
7 Operations Reserve 3,877 3,820 - (1,000) 1,000 (2,000)
8 CIP Reserve - (3,820) - 1,000 (1,000) 2,000
9 Cap and Trade 4,542
10 Rate Stabilization (8,419)
Expenses
11 Non-CIP Expenses (34,630) (39,618) (41,518) (41,875) (43,106) (43,584)
12 Planned CIP (9,283) (4,674) (9,717) (4,261) (11,297) (4,150)
Ending Reserve Balances
1+5+7+11+12 Operations Reserve 10,782 12,645 7,214 9,238 7,970 12,141
2+8 CIP Reserve 3,820 - - 1,000 - 2,000
3+6+9 Cap and Trade 5,936 7,458 9,228 11,271 13,573 16,138
4+10 Rate Stabilization - - - - - -
Operations Reserve Guidelines
13 Minimum 6,439 6,512 6,825 6,884 7,086 7,297
14 Maximum 12,879 13,025 13,650 13,767 14,172 14,593
CIP Reserve Guidelines
15 Minimum 1,770 1,725 1,920 1,775 1,989 1,856
16 Maximum 8,848 8,627 9,601 8,874 9,946 9,280
Figures 2 below illustrates the projected long run changes in the Gas Utility’s costs. Cost
increases over the FY 2016 to FY 2026 time period are mainly from commodity costs, followed
by operations and capital expenses.
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Figure 2: FY 2016, FY 2022 and FY 2026 costs
* Note that FY 2022 and FY 2026 Capital Investment costs are displayed as an average of
two years’ cost to reflect the staggered main replacement schedule.
Over the longer term, gas commodity costs are the most variable factor in customer gas bills,
being subject to market forces, and are currently projected to grow by about 4 percent per year
between FY 2022 and 2026 (which is equivalent to a 1.2% increase in total gas rates). Much of
this has to do with increased cost projections related to cap-and-trade allowance costs, carbon
neutrality costs as well as transportation.
Operations costs are projected to increase at 3 to 4 percent annually, partially due to inflation
and salary and benefit increases, and partially due to a large one-time increase in costs to pay
for phase two of a cross-bore safety verification program. The cross-bore safety program
ensures that gas pipelines have not crossed through sewer laterals, which is rare but possible
during trenchless installation. This is referred to as a “cross-bore,” and while they are very rare,
if they exist, they pose a risk of gas leaks if a plumber uses a cutting tool to clear a sewer line
and accidentally cuts the gas line. The project will video inspect, determine, and repair any
unintended conflicts between gas service pipelines and sewer laterals. In phase one, 7,192
sewer laterals were successfully verified and cleared from potential cross bore, and CPAU Gas
Operations repaired the identified 26 natural gas cross bores. Phase two of this program is
estimated to require $1 million per year for the next two years, although the project may
require additional funding depending on what inspections show.
The COVID pandemic of 2020 has resulted in gas usage decreasing to levels similar to what was
seen in the 2014/2015 drought. Declines have come mainly in the commercial sectors because
City of Palo Alto Page 11
of many businesses operating staff remotely. The impact to FY 2020 was a drop of about 2.6%
from projections, and projections for FY 2021 assumed similar losses of 2 to 4%. However,
monthly consumption during the early part of FY 2021 showed loses of between 6 to 10%,
indicating that gas usage was being impacted much more drastically than initially projected.
The ongoing nature of the pandemic, as well as usage declines similar to what has been seen in
the electric utility, leads to questions of how long the trend of reduced consumption in gas will
last. Staff worked with Northern California Power Agency (NCPA), the City’s electric load
forecaster, to incorporate UCLA’s Anderson School GDP forecast into its electric load forecast
for Palo Alto, which estimates the economic trend impacts to last through December 2020. The
same recovery pattern was used in Figure 3 below to forecast various possible levels of gas
usage recovery. As seen with prior economic and drought gas usage declines in the past, it is
likely that consumption will not come back to pre-conservation/pandemic levels but will likely
stabilize closer to the longer-run decline in gas usage seen over the years. Further changes,
such as the voluntary replacement of gas appliances with electric appliances, building
electrification of new construction as mandated by the 2019 Reach Code, and customer
behavior are also expected to lower long run usage, and this forecast will be revised accordingly
as more customers adopt these measures.4 Staff has also run preliminary estimates of the
impacts of Sustainability and Climate Action Plan (S/CAP) goals on gas use and presented them
to the UAC in January of 2021.5
Based on billing data through December 2020, which has shown some recovery with the return
of winter heating, the monthly usage is matching closer to the ‘Medium Recovery’ (about a 6 to
7% usage decline) line shown in Figure 3, and this is the scenario utilized for the proposed rate
projections. The ‘Deep Recovery’ (about a 10% usage decline) line would result in roughly $1
million in additional lost revenues and may require corresponding expense cuts if future sales
do not recover in a faster fashion.
It is too early in the winter heating season to tell what the trend will continue to be. However,
rapidly declining gas consumption will put upward pressure on rates, as a generally increasing
cost to operate and distribute gas will be spread across fewer units of sale.
4 The City’s Sustainability and Climate Action Plan (S/CAP) is currently being updated. As building
electrification goals in the S/CAP are updated, they will be modeled in this load forecast.
5 January 6, 2021 UAC Meeting, Discussion of Projected Electrification Impacts on Gas Utility System Average
Rates: http://cityofpaloalto.org/civicax/filebank/documents/79748
City of Palo Alto Page 12
Figure 3: Forecast Gas Consumption
Gas Bill Comparison with Surrounding Cities
Table 8 presents winter and summer residential bills for Palo Alto and PG&E at several usage
levels for commodity rates in effect as of July 2020 (to illustrate a summer month bill) and
December 2020 (to illustrate a winter month bill). The annual gas bill for the median residential
customer for calendar year 2020 was $523.59, about 12% lower than the annual bill for a PG&E
customer with the same consumption. PG&E’s distribution rates for gas have increased
substantially to collect for needed system improvements for pipeline safety and maintenance.
The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which
includes the surrounding communities.
Table 8: Residential Monthly Natural Gas Bill Comparison ($/month)
Season
Usage
(therms) Palo Alto PG&E Zone X
%
Difference
Winter
(December
2020)
30 $ 40.97 49.66 -17.5%
(Median) 54 65.45 92.48 -29.2%
80 106.09 149.00 -28.8%
150 232.40 301.19 -22.8%
Summer
(July 2020)
10 $ 19.31 14.07 37.3%
(Median) 18 26.46 26.77 -1.2%
30 44.51 49.86 -10.7%
45 69.69 78.72 -11.5%
Table 99 shows the monthly gas bills for commercial customers for various usage levels for rates
in effect as of December 2020. Bills for CPAU customers at the usage levels shown can vary
from 12% lower to 15% higher for commercial customers than for PG&E customers. This is a
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substantial improvement over the calendar year 2013 bill comparison, when commercial gas
bills for CPAU customers were 27% to 44% higher than for PG&E customers. This is primarily
attributable to PG&E’s higher distribution rates as the commodity rates for CPAU and PG&E are
very similar, both being based on spot market gas prices.
Table 9: Commercial Monthly Average Gas Bill Comparison
(for Rates in Effect December 2019)
Usage (therms/mo)
Gas Bill ($/month) %
Difference Palo Alto PG&E
500 685 718 (5%)
5,000 5,986 6,831 (12%)
10,000 11,875 12,045 (1%)
50,000 59,005 51,419 15%
Cap and Trade Program Reserve
The Global Warming Solutions Act of 2006, also known as Assembly Bill (AB) 32, authorized the
California Air Resources Board (CARB) to develop regulations to lower the state’s greenhouse
gas (GHG) emissions to 1990 levels by 2020. CARB developed a cap-and-trade program as one
of the strategies to achieve the 2020 goal. Entities with emissions are required to hold enough
allowances (an allowance being equivalent to one metric ton of greenhouse gas, or CO2e) to
cover its emitted output in a given year, also called its ‘compliance obligation.’ In addition,
certain entities, and public power agencies, such as Palo Alto, have been distributed free
allowances to reduce the rate impacts to customers from the purchase of required allowances.
Revenues from the auction sale of allowances in each utility must be used exclusively for the
benefit of the ratepayers in that utility. The City Council has adopted a policy on the use of
allowance proceeds (Resolution 9487), with expressed preference that revenues be used for
programs and projects rather than being returned to ratepayers in the form of a bill rebate. Per
the current regulations, the utility must either spend or rebate the funds received in any given
year within 10 years (for example, funds received in 2020 must be spent by 2030, etc.).
To date, the Cap-and-Trade revenues have been tracked internally and placed in the Rate
Stabilization Reserves. Staff is seeking to account for these funds (currently $4.5 million) out in
a separate reserve for ease of accounting and transparency.
Timeline
The City Council will consider adopting the Financial Plan, transfers, the updated Reserve
Management Practices, and rate adjustments as part of the FY 2022 budget review and
adoption process. If Council approves the proposed rate changes, they will become effective
July 1, 2021.
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Resource Impact
Normal year sales revenues for the Gas Utility are projected to increase by roughly 3 percent or
$1.2 million as a result of the proposed rate increases, not including fluctuations in commodity
revenue/cost. The FY 2022 Budget is being developed concurrent with these rates and,
depending on the final rates, adjustments to the budget may be necessary at a later time. See
the attached FY 2022 Gas Financial Plan for a more comprehensive overview of projected cost
and revenue changes for the next five years.
Policy Implications
The proposed gas rate adjustments are consistent with Council-adopted Reserve Management
Practices that are part of the Financial Plan and were developed using a cost-of-service study
and methodology consistent with the California constitution and industry-accepted cost of
service principles.
Stakeholder Engagement
The UAC reviewed preliminary financial forecasts at its December 2, 2020 meeting (Staff Report
#116496), and the Finance Committee reviewed the preliminary forecasts at its February 16,
2021 meeting (Staff Report #118647).
The UAC reviewed staff’s recommendation on the FY 2022 Gas Financial Plan, proposed
transfers and rate increases at its March 3, 2021 meeting. At that meeting, Commissioners
asked if alternate, lower rate scenarios would impact CIP spending, which staff affirmed. There
was also inquiry as to whether the projected supply/commodity increases should be factored
into the overall rate increase, rather than using a no-change assumption. Staff replied that the
rates were presented with commodity prices held flat to show the impact of the action, an
increase to distribution rates on customer rates, as that was what CPAU has control over. Staff
also acknowledged that it was reasonable to include the supply cost changes in thinking about
the real customer impact, while acknowledging it can vary significantly, and would be sure to
include that in future presentation and discussion. The UAC approved staff’s proposal 6-0, with
Commissioner Scharff absent.
If approved, the Finance Committee’s recommendation on the FY 2022 Gas rate changes and
transfers will be presented to City Council in June during the budget adoption process.
Environmental Review
The Finance Committee’s review and recommendation to Council on the FY 2022 Gas Financial
Plan and rate adjustments does not meet the California Environmental Quality Act’s definition
of a project, pursuant to Public Resources Code Section 21065, thus no environmental review is
required.
Attachments:
• Attachment A: Resolution
6 https://cityofpaloalto.org/civicax/filebank/documents/79340
7 https://www.cityofpaloalto.org/civicax/filebank/documents/80154
City of Palo Alto Page 15
• Attachment B: FY2022 Gas Utility Financial Plan
• Attachment C: Gas Utility Reserves Management Practices
• Attachment D: FY 2022 Gas Rates
Attachment A
* NOT YET APPROVED *
6055486A
Resolution No. _________
Resolution of the Council of the City of Palo Alto Approving the Fiscal
Year 2022 Gas Utility Financial Plan, Including Proposed Transfers
and an Amendment to the Gas Utility Reserve Management
Practices, and Increasing Gas Rates by Amending Rate Schedules G-1
(Residential Gas Service), G-2 (Residential Master-Metered and
Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-
10 (Compressed Natural Gas Service)
R E C I T A L S
A. Each year the City of Palo Alto (“City”) regularly assesses the financial position of
its utilities with the goal of ensuring adequate revenue to fund operations. This includes
making long-term projections of market conditions, the physical condition of the system, and
other factors that could affect utility costs, and setting rates adequate to recover these costs. It
does this with the goal of providing safe, reliable, and sustainable utility services at competitive
rates. The City adopts Financial Plans to summarize these projections.
B. The City uses reserves to protect against contingencies and to manage other
aspects of its operations, and regularly assesses the adequacy of these reserves and the
management practices governing their operation. The status of utility reserves and their
management practices are included in Reserves Management Practices attached to and made
part of the Financial Plans.
C. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of
the City of Palo Alto may by resolution adopt rules and regulations governing utility services,
fees and charges.
D. On ____, 2021, the City Council heard and approved the proposed rate increase
at a noticed public hearing.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby approves the FY 2022 Gas Utility Financial Plan.
SECTION 2. The Council hereby approves the transfer of up to $3.9 Million from the
Rate Stabilization Reserve to the Operations Reserve, and up $4.542 Million from the Rate
Stabilization Reserve to the Cap and Trade Program Reserve, as described in the FY 2022 Gas
Utility Financial Plan approved via this resolution.
SECTION 3. The Council hereby approves the amendments to the Gas Utility Reserves
Management Practices relating to the Cap and Trade Program Reserve.
Attachment A
* NOT YET APPROVED *
6055486A
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-1 (Residential Gas Service) is hereby amended to read as attached and
incorporated. Utility Rate Schedule G-1, as amended, shall become effective July 1, 2021.
SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-2 (Residential Master-Metered and Commercial Gas Service) is hereby
amended to read as attached and incorporated. Utility Rate Schedule G-2, as amended, shall
become effective July 1, 2021.
SECTION 6. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-3 (Large Commercial Gas Service) is hereby amended to read as attached and
incorporated. Utility Rate Schedule G-3, as amended, shall become effective July 1, 2021.
SECTION 7. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-10 (Compressed Natural Gas Service Service) is hereby amended to read as
attached and incorporated. Utility Rate Schedule G-10, as amended, shall become effective
July 1, 2021.
SECTION 8. The City Council finds as follows:
a. Revenues derived from the gas rates approved by this resolution do not exceed the
funds required to provide gas service.
b. Revenues derived from the gas rates approved by this resolution shall not be used
for any purpose other than providing gas service, and the purposes set forth in
Article VII, Section 2, of the Charter of the City of Palo Alto.
SECTION 9. The Council finds that the fees and charges adopted by this resolution are
charges imposed for a specific government service or product provided directly to the payor
that are not provided to those not charged, and do not exceed the reasonable costs to the City
of providing the service or product.
//
//
//
//
//
//
//
Attachment A
* NOT YET APPROVED *
6055486A
//
SECTION 10. The Council finds that approving the Financial Plan and amending the Gas
Utility Reserves Management Practices does not meet the California Environmental Quality
Act’s (CEQA) definition of a project under Public Resources Code Section 21065 and CEQA
Guidelines Section 15378(b)(5), because it is an administrative governmental activity which will
not cause a direct or indirect physical change in the environment, and therefore, no
environmental assessment is required. The Council finds that changing gas rates to meet
operating expenses, purchase supplies and materials, meet financial reserve needs and obtain
funds for capital improvements necessary to maintain service is not subject to the California
Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec.
21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing
the staff report and all attachments presented to Council, the Council incorporates these
documents herein and finds that sufficient evidence has been presented setting forth with
specificity the basis for this claim of CEQA exemption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:
___________________________ ___________________________
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
___________________________ ___________________________
Assistant City Attorney City Manager
___________________________
Director of Utilities
___________________________
Director of Administrative Services
FY 2022 GAS
UTILITY
FINANCIAL PLAN
FY 2022 TO FY 2026
Attachment B
GAS UTILITY FINANCIAL PLAN
January 2021 2 | Page
GAS UTILITY FINANCIAL PLAN
FY 2022 TO FY 2026
TABLE OF CONTENTS
Section 1: Definitions and Abbreviations................................................................................ 4
Section 2: Executive Summary and Recommendations ........................................................... 5
Section 2A: Overview of Financial Position .................................................................................. 5
Section 2B: Summary of Proposed Actions .................................................................................. 7
Section 3: Detail of FY 2021 Rate and Reserve Proposals ........................................................ 8
Section 3A: Rate Design ............................................................................................................... 8
Section 3B: Current and Proposed Rates ..................................................................................... 9
Section 3C: Bill impact of Proposed Rate Changes .................................................................... 11
Section 3D: Proposed Reserve Transfers ................................................................................... 11
Section 4: Utility Overview .................................................................................................. 13
Section 4A: Gas Utility History ................................................................................................... 14
Section 4B: Customer Base ........................................................................................................ 15
Section 4C: Distribution System ................................................................................................. 16
Section 4D: Cost Structure and Revenue Sources ...................................................................... 17
Section 4E: Reserves Structure ................................................................................................... 17
Section 4F: Competitiveness ...................................................................................................... 18
Section 4G: Gas Supply Rates .................................................................................................... 19
Section 5: Utility Financial Projections ................................................................................. 20
Section 5A: Load Forecast .......................................................................................................... 20
Section 5A: FY 2015 to FY 2019 Cost and Revenue Trends ........................................................ 22
Section 5B: FY 2019 Results ....................................................................................................... 23
Section 5C: FY 2020 Projections ................................................................................................. 24
Section 5D: FY 2021-FY 2025 Projections .................................................................................. 24
Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 27
GAS UTILITY FINANCIAL PLAN
January 2021 3 | Page
Section 5F: Long-Term Outlook ................................................................................................. 28
Section 6: Details and Assumptions ..................................................................................... 32
Section 6A: Gas Purchase Costs ................................................................................................. 32
Section 6B: Operations .............................................................................................................. 35
Section 6C: Capital Improvement Program (CIP) ....................................................................... 36
Section 6D: Debt Service ............................................................................................................ 38
Section 6E: Equity Transfer ........................................................................................................ 39
Section 6F: Revenues ................................................................................................................. 40
Section 6G: Communications Plan ............................................................................................. 40
Appendices ......................................................................................................................... 42
Appendix A: Gas Financial Forecast Detail ................................................................................ 43
Appendix B: Gas Utility Capital Improvement Program (CIP) Detail ......................................... 44
Appendix C: Gas Utility Reserves Management Practices ......................................................... 45
Appendix D: Description of Gas Utility Cost Categories ............................................................ 49
Appendix E: Gas Utility Communications Samples .................................................................... 50
GAS UTILITY FINANCIAL PLAN
January 2021 4 | Page
SECTION 1: DEFINITIONS AND ABBREVIATIONS
ABS: Acrylonitirile butydene styrene, a plastic gas main material
AMI: Advanced Metering Infrastructure
CARB: California Air Resources Board
CIP: Capital Improvement Program
CNG: Compressed Natural Gas
CPAU: City of Palo Alto Utilities Department
CPUC: California Public Utilities Commission
Cross-bore: A cross-bore exists when one utility line has been drilled or “bored” through a portion
of another line. Gas cross-bores can occur in sewer lines as a result of “horizontal boring”
construction practices.
Distribution: transportation of gas to customers.
GMR Program: Gas Main Replacement Program
Local Transportation: transportation of gas to Palo Alto across PG&E’s distribution system from
PG&E City Gate.
Malin: a delivery hub referred to in gas purchase contracts and located in Malin, Oregon, where
the northern end of PG&E’s Redwood Transmission Pipeline is located.
MMBtu: Millions of British thermal units, a unit of gas measurement equal to ten therms.
Commonly used for high volume gas measurement. Wholesale purchases of gas from suppliers
are typically measured in MMBtu.
O&M: Operations and Maintenance
PE or HDPE: Polyethylene, a gas main material (more specifically, High-Density Polyethylene)
PG&E: Pacific Gas and Electric
PG&E Citygate, or Citygate: a delivery hub referred to in gas purchase contracts. Any gas delivered
to PG&E’s distribution system (such as gas delivered at the southern end of PG&E’s Redwood
Transmission Pipeline) is said to have been delivered at PG&E Citygate.
PVC: Polyvinyl chloride, a plastic gas main material
Summer: April 1 to October 31
Therms: The standard unit of measurement for natural gas sales to customers, equal to 100,000
British thermal units. Therms measure the heating value of the gas, rather than its volume.
Transmission: transportation of gas between major gas delivery hubs via a gas transmission
pipeline, such as PG&E’s Redwood pipeline.
UAC: Utilities Advisory Commission, an appointed body that advises the City Council on CPAU
issues.
Winter: November 1 to March 31
GAS UTILITY FINANCIAL PLAN
January 2021 5 | Page
SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS
This document presents a Financial Plan for the City’s Gas Utility for the next five years. This
Financial Plan provides revenues to cover the costs of operating the utility safely over that time
while adequately investing for the future. It also addresses the financial risks facing the utility
over the short term and long term, and includes measures to mitigate and manage those risks.
SECTION 2A: OVERVIEW OF FINANCIAL POSITION
This financial plan projects overall gas costs to increase from FY 2021 through FY 2026 at about
1.8% per year on average. Commodity prices have remained at near historic lows and there are
not currently any indications that this will change, although weather and/or economic forces can
shift this course rapidly. The cost to purchase Cap and Trade allowances, which offset the carbon
created by burning natural gas, is expected to increase through 2030 as Palo Alto will continue
to receive fewer annual free allowances and the auction price to purchase allowances increases
annually by 5 percent plus inflation. On the operations side, there are some short term increases
related to the cross-bore inspection program, and costs on average are projected to increase by
about 2.6% annually.
Capital improvement program (CIP) costs have also increased. While the COVID-19 pandemic has
caused the economy in general to slow down, contractors have not reduced their prices as the
national and regional focus on infrastructure improvement remains high, and the pool of skilled
construction labor has not grown at the same pace. Costs are projected to increase by about 4.2%
on average over the forecast horizon, when high and low budget years are averaged out. While
CPAU generally has historically planned a new gas main replacement project every year, larger
than expected bids have required resizing and redesign of some existing planned projects. The
size, scope and complexity of the University Avenue Business District project, completed in 2019,
resulted in no new CIP work being budgeted for FY 2020. Staff is currently budgeting for a new,
larger main replacement project every other year, and this revised main replacement schedule
will allow CPAU to reasonably meet its main replacement needs while addressing challenges in
the current construction market and optimizing current staffing resources. However, if it is found
that PVC pipe replacement should be started sooner, then the pace and size of main
replacements may need to increase. Table 1 shows the Gas Utility expenses over the period of
this financial plan.
Table 1: Gas Utility Expenses for FY 2020 to FY 2026 (Thousand $’s)
Expenses
($000)
FY 2020
(act.)
FY 2021
(est.) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Commodity costs 11,102 13,890 16,407 17,113 18,008 18,659 19,520
Operations 20,840 21,880 23,211 26,405 23,866 24,446 24,867
Capital Projects 3,342 9,283 4,674 7,717 4,261 11,297 4,150
TOTAL 35,285 45,053 44,292 51,235 46,136 54,403 48,537
GAS UTILITY FINANCIAL PLAN
January 2021 6 | Page
In order to move towards full cost recovery while minimizing rate impacts in light of pandemic-
related economic challenges, the financial plan includes the rate trajectory shown in Table 2.
Table 2: Projected Gas Rate Trajectory for FY 2021 to FY 2025
Projection FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Current (FY 2022) Financial Plan 3% 5% 5% 5% 0%
FY 2021 Financial Plan 5% 5% 5% 3% 3%
FY 2020 Financial Plan 8% 6% 4% 1% 2%
The Gas Utility maintains Rate Stabilization Reserves which can be used to smooth rate increases,
and this Financial Plan proposes that these reserves will be exhausted by the end of FY 2021. The
Gas Utility also has a CIP Reserve which is used to manage cash flow for capital projects, such as
the staggered gas main replacement schedule, and fund capital contingencies such as
unexpected spikes in CIP spending which do not merit separate bond financing.
Table 3 shows the projected reserve transfers over the forecast period.
GAS UTILITY FINANCIAL PLAN
January 2021 7 | Page
Table 3: Operations, Rate Stabilization and CIP Reserve Starting and Ending Balances,
Revenues, Transfers To/(From) Reserves, Capital Program Contribution To/(From) Reserves,
and Reserve Guideline Levels for FY 2021 to FY 2026 ($000)
SECTION 2B: SUMMARY OF PROPOSED ACTIONS
Staff proposes the following actions for the Gas Utility in FY 2021:
1. Transfer unspent Cap and Trade related funds in the Operations Reserve to a new Cap
and Trade Reserve ($4.542 million)
2. Transfer remaining funds in the Rate Stabilization Reserves to the Operations Reserve
(currently $3.9 million)
3. Amend the Gas Utility Reserves Management Practices for the Cap and Trade Program
Reserve, as shown in Appendix C, Section 6, and described above in Section 2A: Overview
of Financial Position.
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Starting Reserve Balances
1 Operations Reserve 13,450 10,782 12,645 7,214 9,238 7,970
2 CIP Reserve 3,820 3,820 - - 1,000 -
3 Cap and Trade - 5,936 7,458 9,228 11,271 13,573
4 Rate Stabilization 8,419 - - - - -
Revenues
5 Total Revenues 37,368 42,334 45,804 49,160 52,135 53,904
6 Cap and Trade 1,394 1,522 1,770 2,043 2,302 2,565
Transfers
7 Operations Reserve 3,877 3,820 - (1,000) 1,000 (2,000)
8 CIP Reserve - (3,820) - 1,000 (1,000) 2,000
9 Cap and Trade 4,542
10 Rate Stabilization (8,419)
Expenses
11 Non-CIP Expenses (34,630) (39,618) (41,518) (41,875) (43,106) (43,584)
12 Planned CIP (9,283) (4,674) (9,717) (4,261) (11,297) (4,150)
Ending Reserve Balances
1+5+7+11+12 Operations Reserve 10,782 12,645 7,214 9,238 7,970 12,141
2+8 CIP Reserve 3,820 - - 1,000 - 2,000
3+6+9 Cap and Trade 5,936 7,458 9,228 11,271 13,573 16,138
4+10 Rate Stabilization - - - - - -
Operations Reserve Guidelines
13 Minimum 6,439 6,512 6,825 6,884 7,086 7,297
14 Maximum 12,879 13,025 13,650 13,767 14,172 14,593
CIP Reserve Guidelines
15 Minimum 1,770 1,725 1,920 1,775 1,989 1,856
16 Maximum 8,848 8,627 9,601 8,874 9,946 9,280
GAS UTILITY FINANCIAL PLAN
January 2021 8 | Page
Staff proposes the following actions for the Gas Utility in FY 2022:
1. Transfer up to $3.82 million from the Operations Reserve to the CIP Reserve to aid in
funding of future CIP projects.
2. Increase distribution rates by 5% (an estimated 3% overall increase) for FY 2022, primarily
reflecting increases to capital expenditures and increased operations costs. See Section
3B: Current and Proposed Rates for more details.
SECTION 3: DETAIL OF FY 2022 RATE AND RESERVE PROPOSALS
SECTION 3A: RATE DESIGN
The Gas Utility’s rates are evaluated and implemented in compliance with cost of service
requirements. The Gas Utility’s proposed rates are based on the methodology from the March
2019 Natural Gas Cost of Service and Rates Study.
The City’s natural gas rates are based on the 2019 Natural Gas Cost of Service and Rates Study,
updated with current and proposed operating costs. . With the onset of the COVID-19 pandemic,
usage amongst customer classes has dropped to reflect people working and staying at home
rather than going to the workplace. Similarly, businesses have been forced to operate at
minimum staffing conditions or fully remote while the pandemic continues. City of Palo Alto staff
have worked at reducing cost increases, and some capital project work has been moved out or
restructured to keep costs from rising too much during this time. However, costs related to the
Gas Utility’s resumption of main replacement projects and the cross-bore safety verification
program are increasing. In order to move towards full cost recovery while minimizing rate
impacts in light of pandemic-related economic challenges, staff recommends a distribution rate
increase to all customer classes of 5%, which staff estimates will result in a 3% system average
rate increase. If, after the pandemic, usage and/or spending looks to be moving in a different
direction, staff will suggest a re-balancing of rates at that time.
While staff is recommending that the distribution component of the rates be increased by 5%,
distribution rates comprise about 70% of the overall rate, which consists of commodity (supply)
and distribution components. Supply-related costs (the cost of the natural gas itself, gas
transmission, and gas environmental charges) are a fluid component of the Gas Utility’s
expenses. It not possible to precisely predict commodity rates, which make up approximately
30% of overall retail gas rates. Market prices are monitored monthly and automatically
incorporated into monthly supply rate adjustments, which are passed directly to customers as a
line item on their utility bills.
Because it is not possible to exactly predict what supply rates will be during the planning horizon,
the overall rate increases (commodity plus distribution) referenced in this report assume that the
commodity portion of the overall rate remains unchanged. The net effect is a proposed 3% overall
rate increase. Table 4 below shows both the proposed increase in distribution rates (about 5%),
and the net impact on rates including commodity costs (about 3% overall, as distribution is about
2/3 of total rate revenue):
GAS UTILITY FINANCIAL PLAN
January 2021 9 | Page
Table 4: Cost of Service (COSA) Distribution Revenue Requirement by Customer Class
Cost of Service Analysis
FY 2022
Rate Increase
needed for
Distribution
Charges
Assumed
Commodity Rate
Changes
Net Rate Increase for
Combined Commodity
and Distribution
Charges
G1 – Residential 5% 0% 3%
G2 - Small Commercial 5% 0% 3%
G3 - Large Commercial 5% 0% 3%
TOTAL 5% 0% 3%
Rate impacts of these changes are outlined in Section 3B: Current and Proposed Rates.
SECTION 3B: CURRENT AND PROPOSED RATES
Gas rates have two drivers: 1) Commodity costs – these are costs related to the purchase of gas
supply, transmission costs to bring the gas to Palo Alto’s meters, and environmental costs, such
as the purchase of cap and trade allowances for gas burned and carbon neutral offsets; and 2)
Distribution costs. On July 1, 2012 CPAU restructured its rates so that the commodity component
of the rates varied monthly to match changes in gas market prices.1 In January 2015, the Council
adopted a new rate component to collect the costs of purchasing allowances for the purpose of
compliance with the State’s cap-and-trade program.2 This component changes depending on the
cost of allowances and gas demand. In October 2016, the Council adopted a resolution changing
the Local Transportation rate (which had been collapsed into the Distribution rate in 2015 to
streamline bill presentation), to be a pass-through of PG&E’s Gas Transportation Rate to
Wholesale/Resale Customers (G-WSL) charge to Palo Alto.3 This went into effect November 1,
2016. In December 2016, Council approved a carbon neutral gas plan, with a goal of achieving a
carbon neutral gas portfolio by FY 2018.4 Costs associated with the carbon neutral gas plan are
passed through directly to customers as well, although the rate impact is not to exceed $0.10 per
therm. At this point, all gas supply, transmission, and environmental costs are passed through to
customers as prices change. Three years’ worth of history of these commodity rate components
can be found on Palo Alto’s website.5
CPAU has four rate schedules: one for separately metered residential customers (G-1), one for
small commercial and master-metered multi-family residential customers (G-2), one for
customers using over 250,000 therms per year (G-3), and a specific schedule for the Compressed
Natural Gas station (G-10). To recover distribution costs, all customers pay a monthly service
charge, which funds meter reading, billing, and other customer service costs, as well as a portion
of operations and maintenance costs. All customers are also assessed a distribution charge based
1 Staff Report 2812, 5/17/2012: http://archive.cityofpaloalto.org/civica/filebank/blobdload.asp?BlobID=31395
2 Staff Report 5397, 1/26/2015: https://www.cityofpaloalto.org/civicax/filebank/documents/45537
3 Staff Report 7260 10/17/2016 http://www.cityofpaloalto.org/civicax/filebank/documents/54165
4 Staff Report 7533 12/05/2016 http://www.cityofpaloalto.org/civicax/filebank/documents/54882
5 Monthly Gas Commodity & Volumetric Rates http://www.cityofpaloalto.org/civicax/filebank/documents/30399
GAS UTILITY FINANCIAL PLAN
January 2021 10 | Page
on each therm of gas used. Separately metered residential customers are charged on a tiered
basis, differentiated by season. During the winter months, the first 2 therms per day (60 therms
for a 30 day billing period) are charged a base price per therm, and all additional units charged a
higher price per therm. During the summer months, the first tier level is 0.667 therms per day,
or 20 therms for a 30 day billing period. Commercial customers pay a uniform price for each
therm used. Fixed charges include both customer service and meter reading costs as well as a
portion of distribution system costs.
Table 5 shows the current monthly service charges for all rate schedules. Table 6 shows the
consumption charges related to distribution, and the increase in CIP spending has an effect here
as well. As mentioned earlier, commodity charges change monthly, and transportation charges
are tied to the PG&E G-WSL rate schedule. Some recent commodity price history is discussed in
Section 6A: Gas Purchase Costs.
.
Table 5: Current and Proposed Monthly Service Charges
Rate Schedule
Monthly Service Charge
($/month) Change
Current (as of
7/1/20)
Proposed for
FY 2022 ($) (%)
G-1 (Residential) $10.37 $10.89 $0.52 5.0%
G-2 (Small Commercial) 96.05 100.85 4.80 5.0%
G-3 (Large Commercial) 439.46 461.43 21.97 5.0%
G-10 (CNG) 64.96 68.21 3.25 5.0%
Table 6: Current and Proposed Gas Distribution Charges
Change
Current (as of
7/1/19)
Proposed
for FY 2021 ($) (%)
G-1 (Residential)
Tier 1 Rates $0.5038 $ 0.5290 $0.0252 5.0%
Tier 2 Rates 1.2882 1.3526 0.0644 5.0%
G-2 (Residential Master-Metered and Small Commercial)
Uniform Rate 0.6617 0.6948 0.0331 5.0%
G-3 (Large Commercial)
Uniform Rate 0.6551 0.6879 0.0328 5.0%
G-10 (Compressed Natural Gas)
Uniform Rate 0.0108 0.0113 0.0005 5.0%
GAS UTILITY FINANCIAL PLAN
January 2021 11 | Page
SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES
Table 7 shows the impact of the proposed July 1, 2021 rate changes on the median residential
bill. The average increase for the residential class is roughly 3 percent on average based on last
year’s commodity prices. As the price of commodities changes monthly, the actual increase may
be higher or lower than the 3% average. Table 4 shows a representative Winter period
(November thru March) and Summer period (April through October) bill comparison:
Table 7: Impact of Proposed Gas Rate Changes on Residential Bills
Usage
(Therms/month)
Bill under
Current Rates
Bill under
Proposed Rates
Change
$/mo. %
Winter (Using November 2020 commodity prices)
30 $ 41.88 $ 43.15 $ 1.27 3.0%
54 (median) 67.09 68.97 1.88 2.8%
80 110.08 113.40 3.32 3.0%
150 238.51 246.34 7.83 3.3%
Summer (Using October 2020 commodity prices)
10 $ 20.85 $ 21.62 $ 0.77 3.7%
18 (median) 29.23 30.20 0.97 3.3%
30 49.13 50.79 1.66 3.4%
45 76.61 79.24 2.63 3.4%
Table 8 shows the impact of the proposed July 1, 2021 rate changes on various representative
commercial customer bills. The overall increases for the G-2 and G-3 classes are projected to be
about 3% on an annual basis.
Table 8: Impact of Proposed Gas Rate Changes on Commercial Bills
(Using November 2020 commodity prices)
Usage
(Therms/month)
Bill under
Current Rates
Bill under
Proposed Rates
Change
%
500 685 706 3.1%
5,000 5,986 6,156 2.8%
10,000 11,875 12,211 2.8%
50,000 59,005 60,665 2.8%
SECTION 3D: PROPOSED RESERVE TRANSFERS
This Financial Plan proposes to transfer any remaining funds (currently $8.4 million) from the
Rate Stabilization Reserve into the Operations Reserve, establishes a Cap and Trade Program
GAS UTILITY FINANCIAL PLAN
January 2021 12 | Page
Reserve, and transfers collected but unspent Cap and Trade revenues to the Cap and Trade
Program Reserve ($4.542 million) in FY 2021. These funds will be used to mitigate rate increases,
clearly reflect unspent Cap and Trade revenues, and otherwise bring the Rate Stabilization
reserves to zero.
Section 7 of the Gas Utility Reserves Management Practices states that if there are funds in the
Rate Stabilization Reserve at the end of any fiscal year, any subsequent Gas Utility Financial Plan
must result in the withdrawal of all funds from this reserve by the end of the Financial Planning
Period. Once the funds are withdrawn under this plan, they will help keep rates lower by funding
operations and supply costs.
CIP Reserve
There is $3.8 million currently in the CIP Reserve. These funds can be used to cover additional,
one-time capital costs, and with the current plan to stagger main replacement projects every
other year, they can also be used to hold funds collected from rate revenues that will fund CIP
projects in a future year.
As shown in Figure 6 below, in a year with no capital project budgeted, rate revenues may exceed
that year’s capital expenses, but conversely, in years with a main replacement project, rates may
not cover total capital costs. As first described in the FY 2021 Gas Utility Financial Plan, these
annual changes are managed by transferring funds from the Operations Reserve to the CIP
Reserve in non-main replacement years and using those funds for capital expenses in years with
main replacements and other capital program expenses. The net effect is a more evenly funded
Operations Reserve and a CIP reserve that better reflects available funds for projects. The
proposed transfer for FY 2022 is an amount up to $3.8 million, although the amount may be less
if Operations reserve is higher than forecast.
If the ending Operations Reserve balance at the end of FY 2021 allows for the transfer to take
place, then next year’s Financial Plan will advocate for an annual funding for CIP based on staff’s
estimate of annual CIP work for the next 48 months, currently estimated at about $7.5 million.
The Gas CIP Reserve will need to have enough funds to absorb a high-year ($12 to $14 million)
CIP budget after receiving the annual funding while still remaining above the minimum guideline
to start.
Using the CIP Reserve this way will avoid the annual fluctuations of actual CIP costs and revenues
from the Operations reserve (and therefore avoid rate spikes required to fund CIP cost
increases).6 If projects do not get completed within the budgeted year and the CIP reserve
balance grows beyond the maximum guideline, staff may request lowering the amount of annual
6 In several municipalities (as well as CPA’s General Fund), capital projects are budged for in this
way. The utility transfers a certain amount of approved annual funding to the CIP fund to cover
average projected costs and maintain contingency reserves as approved by Council. The day to
day project-related expenses and revenues are still accounted for in their respective cost centers,
but surpluses or deficits flow into and out of the CIP reserve rather than Operations.
GAS UTILITY FINANCIAL PLAN
January 2021 13 | Page
funding until projects are rescheduled. In contrast, if project costs come in higher than expected,
the Operations and CIP fund balances can cover increased costs. In the short term, until an annual
funding and/or initial funding of the CIP reserve can occur, the current plan shows the CIP reserve
balance falling below the minimum reserve guideline every other year with the cyclical main
replacement projects.
Cap and Trade Program Reserve
The Global Warming Solutions Act of 2006, also known as Assembly Bill (AB) 32, authorized the
California Air Resources Board (CARB) to develop regulations to lower the state’s greenhouse gas
(GHG) emissions to 1990 levels by 2020. CARB developed a cap-and-trade program as one of the
strategies to achieve the 2020 goal. Under the cap-and-trade program, an overall limit on GHG
emissions from capped sectors is established and facilities subject to the cap are able to trade
permits (allowances) to emit GHGs. To do this, entities with emissions are required to hold
enough allowances (an allowance being equivalent to one metric ton of greenhouse gas, or CO2e)
to cover its emitted output in a given year, also called its ‘compliance obligation.’ In addition,
certain entities and public power agencies, such as Palo Alto, have been distributed free
allowances to reduce the rate shock to customers from the purchase of required allowances.
Revenues from the auction sale of gas utility allowances must be used exclusively for the benefit
of the ratepayers in that utility. California Code of Regulations (CCR Title 17, section 95893)
details how entities must use those funds, but in general, these can be for 1) the funding of
certain energy efficiency rebates, retrofits, and demand reduction programs, 2) funding for
programs with demonstrated GHG reductions, 3) non-volumetric return to ratepayers, either on
or off bill, and 4) certain administrative, outreach and educational costs related to items 1-3
above. The City Council has also adopted a policy on the use of allowance proceeds (Resolution
9487), generally mirroring the regulations and requiring additional Council approval for rebates.
Per the current regulations, the utility must either spend or rebate the funds received in any
given year within 10 years (for example, funds received in 2020 must be spent by 2030, etc.).
To date the unspent Cap and Trade revenues have been tracked internally and placed in the Rate
Stabilization Reserves. Staff is seeking to call these funds out in a separate reserve for ease of
accounting and transparency.
The impact of these proposed transfers on reserves levels can be seen in Table 3 above and in
Appendix A: Gas Utility Financial Forecast Detail.
SECTION 4: UTILITY OVERVIEW
This section provides an overview of the utility and its operations. It is intended as general
background information and to help readers better understand the forecasts in Section 5: Utility
Financial Projections and Section 6: Details and Assumptions.
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SECTION 4A: GAS UTILITY HISTORY
On September 22, 1917, the City of Palo Alto issued a bond to purchase the property of Palo Alto
Gas Company and continue it as a municipal enterprise. At the time, the system was comprised
of 21 miles of mains, 1,900 meters, and was valued at $65,500. PG&E supplied the gas, which
was synthesized from coal at its Potrero gasification facility. Almost immediately the City faced
challenges. Losses were at nearly 25% according to PG&E’s master meter, and PG&E had filed
with the Railroad Commission (the forerunner to today’s CPUC) to increase rates by nearly 72.5%.
Despite these initial hurdles, Palo Alto’s system grew tremendously, and by 1924 revenues had
exceeded those of the electric utility. Sales were such that the annual reports of the time noted
gas usage “appears to be greater than that of any other city in the state, showing that gas is a
very popular form of fuel in Palo Alto.” Just prior to the acquisition of the neighboring town of
Mayfield’s gas system (centered around today’s California Avenue) in 1929, the miles of main in
service and customers connections had doubled.
Notable changes to the gas supply itself came in 1930, when PG&E ceased supplying purely
manufactured (or coal) gas from its Potrero Hill facility in San Francisco and instead switched to
natural gas. In 1935, a supplementary butane injection system (later retired) was purchased from
Standard Oil to mitigate large wintertime peaks. Gas sales were at 248,658 million cubic feet
(MCF) with 4,849 active services.
Early gas mains in Palo Alto were made of steel, but in the 1950s, like many other utilities, CPAU
switched to ABS plastic. CPAU switched to PVC plastic in the early 1970s, but around 100 miles
of ABS mains had already been installed. A 1990 evaluation of the system found a steadily
increasing rate of gas leaks associated with those mains, something that other gas utilities had
also been experiencing. To reduce leaks, CPAU accelerated its main replacement program from
7,000 feet (1.3 miles) of replacements per year to 20,000 feet (3.8 miles) per year. This would
enable the utility to replace all of its ABS and its most vulnerable steel and PVC mains with
polyethylene (PE) mains over the course of the following 36 years.7 As of 2020, the Gas Utility
has replaced all but .11 miles of ABS gas mains, which consists of mainly short sections of
pipelines in various locations throughout the City. Current pipeline replacement projects are
targeting the replacing of all ABS, Tenite and K40 gas services, to be completed in Summer 2020,
and PVC pipe during larger Capital Improvement Projects. The Gas Utility has identified
approximately 30,000 linear feet of PVC gas main and over 300 natural gas services for
replacement in FY21. This is an example of how local control of its Gas Utility has provided Palo
Alto residents with substantial benefits. During the 1990s and 2000s, while CPAU was increasing
its main replacement rate to ensure a robust gas distribution system, PG&E was underspending
on safety-related infrastructure, according to a past audit.8
In the 1990s, while grappling with the issues surrounding its distribution system, CPAU was also
participating in major changes to the structure of the gas industry in California. Until 1988 CPAU
had a formal policy of setting its rates equal to PG&E’s rates and successfully did so with the
7 Staff Report CMR:183:90. Infrastructure Review and Update, March 1, 1990
8 Focused Financial Audit of The Pacific Gas & Electric Company’s Gas Distribution Operations, Overland Consulting,
made available through a CPUC Administrative Law Judge’s ruling on A12-11-009/I13-03-007 on 5/31/2013
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exception of one year in the mid-1970s. At times this led to inadequate revenue (1974 to 1981)
as PG&E, the City’s only gas supplier, regularly filed requests with the CPUC to increase the
wholesale gas supply rates charged to the Gas Utility. In the 1990s, as the CPUC began
deregulating the natural gas industry in California, the Gas Utility began purchasing gas from
suppliers other than PG&E. In 1997 the CPUC adopted the “Gas Accord,”9 which enabled the Gas
Utility (along with other local transportation-only customers) to obtain transmission rights on
PG&E’s Redwood transmission pipeline running from Malin, Oregon into California.
In 2000/2001 the California energy crisis occurred, causing major disruptions to the Gas Utility’s
supply costs. Wholesale gas prices rose over 500% between January 2000 and January 2001.
The Council approved drawing down reserves to provide ratepayer relief and, for two years
following the crisis, CPAU rates were above PG&E’s as reserves were replenished. In April 2001
the Council approved a hedging practice of buying fixed price gas one to three years into the
future. After reaching a low point in October 2001, prices continued to rise, and the CPAU
hedging strategy frequently resulted in a wholesale supply cost advantage compared to PG&E
until prices began to decline steeply in mid-2008. At that point the Gas Utility’s wholesale
supply costs became higher than market gas prices due to fixed price contracts entered into
prior to 2008. As a result the Gas Utility’s wholesale supply costs were higher than PG&E’s for
several years. In 2012 Council approved a plan to formally cease the hedging strategy and
purchase all gas on the short-term (“spot”) markets. As of July 1, 2012, the commodity portion
of the gas rates changes every month based on the spot market gas price. In January 2015, the
Council adopted a new rate component to collect the costs of purchasing allowances for the
purpose of compliance with the State’s cap-and-trade program.10 As of November 1, 2016, the
Council adopted a resolution changing the Local Transportation rate (which had been collapsed
into the Distribution rate in 2015 to streamline bill presentation), to be a pass-through of
PG&E’s Gas Transportation Rate to Wholesale/Resale Customers (G-WSL) charge to Palo Alto.11
In December 2016, Council approved a carbon neutral gas plan, with a goal of achieving a
carbon neutral gas portfolio by FY 2018.12
SECTION 4B: CUSTOMER BASE
CPAU’s Gas Utility provides natural gas service to the residents, businesses, and other gas
customers in Palo Alto. Close to 23,800 customers are connected to the natural gas system,
approximately 21,500 (90%) of which are residential and 2,300 (10%) of which are non-
residential. In a normal year, residential customers consume about 10 to 11 million therms of gas
per year, roughly 40% of the gas sold, while non-residential customers consume 60% (about 17
to 18 million therms). Residential customers use gas primarily for space heating (46% of gas
consumed) and water heating (42%), with the remainder consumed for other purposes such as
9 CPUC decision 97-08-055. Since then, the Gas Accord has been amended four times, with the most recent being
Gas Accord V, application A.09-09-013 10 Staff Report 5397, 1/26/2015: https://www.cityofpaloalto.org/civicax/filebank/documents/45537
11 Staff Report 7260 10/17/2016 http://www.cityofpaloalto.org/civicax/filebank/documents/54165
12 Staff Report 7533 12/05/2016 http://www.cityofpaloalto.org/civicax/filebank/documents/54882
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cooking, clothes drying, and heating pools and spas.13 Non-residential customers use gas for
space and water heating (73% of gas consumed), cooking (20%), and industrial processes (6%).14
The Gas Utility receives gas at the four receiving stations within Palo Alto where CPAU’s
distribution system connects with Pacific Gas and Electric’s (PG&E’s) system. These receiving
stations are jointly operated by CPAU and PG&E. CPAU purchases gas from various natural gas
marketers, with PG&E providing only local transportation service (transportation from the PG&E
City Gate gas delivery hub to Palo Alto). CPAU also has transmission rights on PG&E’s transmission
pipeline from Malin, Oregon to PG&E City Gate, allowing it to purchase lower priced gas at that
location. CPAU does not produce or store any natural gas, and purchases gas in the monthly and
daily spot markets. The cost of the purchased gas is passed through directly to customers through
a rate adjuster that varies monthly with market (bidweek) prices. In a similar fashion, the cost for
local transportation is tied to PG&E’s G-WSL rate schedule, and varies when and if PG&E changes
its rate schedule. The cost of purchased gas and PG&E local transportation service usually
account for roughly one third of the utility’s expenditures.
SECTION 4C: DISTRIBUTION SYSTEM
To deliver gas from the receiving stations to its customers, the utility owns 210 miles of gas mains
(which transport the gas to various parts of the city) and close to 23,800 gas services (which
connect the gas mains to the customers’ gas lines). These mains and services, along with their
associated valves, regulators, and meters, represent the vast majority of the infrastructure used
to deliver gas in Palo Alto. CPAU has an ongoing CIP to repair and replace its infrastructure over
time, the expense of which normally accounts for around 15 to 20% on average of the utility’s
expenditures. Costs for main replacements have been going up in recent years.
In addition to the CIP, the Gas Utility performs a variety of maintenance activities related to the
system, such as monitoring the system for leaks, testing and replacing meters, monitoring the
condition of steel pipe, and building and replacing gas services for buildings being built or
redeveloped throughout the city. The utility also shares the costs of other system-wide
operational activities (such as customer service, billing, meter reading, supply planning, energy
efficiency, equipment maintenance, and street restoration) with the City’s other utilities. These
maintenance and operations expenses, as well as associated administration, debt service, rent,
and other costs, make up roughly half of the utility’s expenses.
In addition to these ongoing activities, CPAU has conducted a program to find and replace cross-
bores over the last several years. Currently, $1 million is estimated per year for the cross-bore
program through FY 2022. However, the ongoing cross-bore investigation may require additional
funding, or extend for longer into the future, as the remaining sewer lines are more difficult to
examine than the majority of the wastewater collection system that has been examined to date.
13 http://energyalmanac.ca.gov/naturalgas/overview.html
14 Source: Statewide Commercial End Use Study, California Energy Commission report, 2006. Statistics shown are for
end users in PG&E Climate Zone 4 (the Peninsula) where Palo Alto is located.
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SECTION 4D: COST STRUCTURE AND REVENUE SOURCES
As shown in Figure 1, the Gas
Utility receives about 90% of its
revenue from sales of gas and the
remainder from capacity and
connection fees, interest on
reserves, and other sources.
Appendix A: Gas Utility Financial
Forecast Detail shows more detail
on the utility’s cost and revenue
structures.
As shown in Figure 2, in FY 2020,
gas purchase costs accounted for
about a third of the Gas Utility’s
costs. This percentage can vary
widely from year to year, as this
cost is based upon market
purchases, and now also includes
costs related to cap and trade.
Operational costs in FY 2020
represented 65% of expenses and
capital investment was
responsible for the remaining 8%.
CIP is normally about 15 to 20% of
expenses, but this may be lower in
times when spending for new
projects is deferred, as happened in FY 2017.
SECTION 4E: RESERVES STRUCTURE
CPAU maintains six reserves for its Gas Utility to manage various types of contingencies and track
program spending. The summary below describes each of these briefly. See Appendix C: Gas
Utility Reserves Management Practices for more detailed definitions and guidelines for reserve
management:
• Reserve for Commitments: A reserve equal to the utility’s outstanding contract liabilities
for the current fiscal year. Most City funds, including the General Fund, have a
Commitments Reserve.
• Reserve for Re-appropriations: A reserve for funds dedicated to projects re-appropriated
by the City Council, nearly all of which are capital projects. Most City funds, including the
General Fund, have a Re-appropriations Reserve.
• Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate
funds for future expenditure on CIP projects. This CIP can also act as a contingency reserve
Figure 2: Cost Structure (FY 2020)
65%
27%
8%
Operations
Gas Purchases
Capital
Figure 1: Revenue Structure (FY 2020)
89%
11%
Sales of Gas
Other Revenue
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for the CIP. This type of reserve is used in other utility funds (Electric, Water, and
Wastewater Collection) as well.
• Rate Stabilization Reserve: This reserve is intended to be empty unless one or more large
rate increases are anticipated in the forecast period. In that case, funds can be
accumulated to spread the impact of those future rate increases across multiple years.
This type of reserve is used in other utility funds (Electric, Water, and Wastewater
Collection) as well.
• Operations Reserve: This is the primary contingency reserve for the Gas Utility, and is
used to manage yearly variances from budget for operational gas costs. This type of
reserve is used in other utility funds (Electric, Water, and Wastewater Collection) as well.
• Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and
is normally empty.
• Cap and Trade Reserve: This reserve tracks unspent or unallocated revenues from the
sale of carbon allowances freely allocated by the California Air Resources Board to the gas
utility, under the State’s Cap and Trade Program.
SECTION 4F: COMPETITIVENESS
Table 9 presents winter and summer residential bills for Palo Alto and PG&E at several usage
levels for commodity rates in effect as of July 2020 (to illustrate a summer month bill) and
December 2020 (to illustrate a winter month bill). The annual gas bill for the median residential
customer for calendar year 2020 was $523.59, about 12% lower than the annual bill for a PG&E
customer with the same consumption. PG&E’s distribution rates for gas have increased
substantially to collect for needed system improvements for pipeline safety and maintenance.
The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which
includes the surrounding communities.
Table 9: Residential Monthly Natural Gas Bill Comparison ($/month)
Season
Usage
(therms) Palo Alto PG&E Zone X
%
Difference
Winter
(December
2020)
30 $ 40.97 49.66 -17.5%
(Median) 54 65.45 92.48 -29.2%
80 106.09 149.00 -28.8%
150 232.40 301.19 -22.8%
Summer
(July 2020)
10 $ 19.31 14.07 37.3%
(Median) 18 26.46 26.77 -1.2%
30 44.51 49.86 -10.7%
45 69.69 78.72 -11.5%
Table 10 shows the monthly gas bills for commercial customers for various usage levels for rates
in effect as of December 2020. Bills for CPAU customers at the usage levels shown can vary
between 12% lower to 15% higher for commercial customers than for PG&E customers. This is a
substantial improvement over the calendar year 2013 bill comparison, when commercial gas bills
for CPAU customers were 27% to 44% higher than for PG&E customers. This is primarily
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attributable to PG&E’s higher distribution rates as the commodity rates for CPAU and PG&E are
very similar, both being based on spot market gas prices.
Table 10: Commercial Monthly Average Gas Bill Comparison
(for Rates in Effect December 2019)
Usage (therms/mo)
Gas Bill ($/month) %
Difference Palo Alto PG&E
500 685 718 (5%)
5,000 5,986 6,831 (12%)
10,000 11,875 12,045 (1%)
50,000 59,005 51,419 15%
SECTION 4G: GAS SUPPLY RATES
Starting in July 2012, CPAU replaced a “laddering” hedging strategy for purchasing gas supplies
with a strategy to buy gas on the short-term, or “spot” markets and pass the commodity cost to
customers on a monthly basis. Figure 3 shows the actual commodity prices charged. Prior to
December 2018, commodity prices had generally fluctuated in a fairly narrow band, averaging
around $0.32/therm. However, in December 2018, a variety of factors combined that led to a one
time market spike: Regional temperatures were cooler than normal, but in addition, gas supplies
stored in underground facilities were lower than normal, as well as constrained due to problems
with the Aliso Canyon facility in southern California. There were also pipeline constraints at both
the northern and southern California borders. While there was not an actual constriction on
supply, the confluence of all these factors drove up the bidweek prices for all California delivery
points. Once it was seen that these factors were not causing gas supply shortages, prices returned
to levels more commonly seen. There has continued to be a bit more volatility in the market of
late, and the trend of prices appears to be slightly upward over time.
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Figure 3: Gas Commodity Rates from July 2012 through January 2021
SECTION 5: UTILITY FINANCIAL PROJECTIONS
SECTION 5A: LOAD FORECAST
Gas usage in Palo Alto is volatile, varying with both economic and weather conditions. As shown
in Figure 4, in the early 1970’s, gas purchases reached over 45 million therms per year. Usage
dropped dramatically in the 1976/1977 drought when customers saved significant amounts of
(hot) water by upgrading to efficient showerheads. During the 1980s and 90s average gas usage
was around 36 million therms per year. Usage dropped again in the early 2000’s. In FY 2001, gas
prices escalated during the California energy crisis and Palo Alto’s rates increased by nearly 200%.
From 2003 to 2011, usage decreased by 2.3% mainly as a result of continued customer
investments in energy efficiency.
In 2014 and 2015, unusually warm winters, as well as ongoing drought, caused gas usage to
tumble to historic lows. In FY 2017 and FY 2018, as the drought had eased, gas usage increased
again, but appeared to have stabilized. The COVID pandemic of 2020 has resulted in gas usage
decreasing again, mainly in the commercial sectors as a result of many businesses operating staff
remotely. The impact to FY 2020 was a drop of about 2.6% from projections, and projections for
FY 2021 assumed similar losses of 2 to 4%. However, monthly consumption during the early part
of FY 2021 showed loses of between 6 to 10%, indicating that gas usage was being impacted
much more than initially thought.
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Figure 4: Historic Gas Consumption
The ongoing nature of the pandemic, as well as usage declines similar to what has been seen in
the electric utility, leads to questions of how long the trend of reduced consumption in gas will
last. Staff worked with the NCPA to incorporate UCLA’s Anderson School GDP forecast into its
electric load forecast for Palo Alto, which estimates the economic trend impacts to last through
December 2020. The same recovery pattern was used in Figure 5 below to forecast various
possible levels of gas usage recovery. As seen with prior economic and drought gas usage
declines in the past, it is likely that consumption will not come back to pre-
conservation/pandemic levels, but will likely stabilize closer to the longer-run decline in gas
usage seen over the years. Further changes, such as the voluntary replacement of gas
appliances with electric appliances, building electrification of new construction as mandated by
the 2019 Reach Code, and customer behavior are also expected to lower long run usage, and
this forecast will be revised accordingly as more customers adopt these measures.15
Based on billing data through December 2020, which has shown some recovery with the return
of winter heating, the monthly usage is matching closer to the ‘Medium Recovery’ (about a 6 to
7% usage decline) line shown in Figure 5, and this is the scenario utilized for the proposed rate
projections. The ‘Deep Recovery’ (about a 10% usage decline) line would result in roughly $1
15 The City’s Sustainability and Climate Action Plan (S/CAP) is currently being updated. As building
electrification goals in the S/CAP are updated, they will be modeled in this load forecast.
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million in additional lost revenues, and may require corresponding expense cuts if future sales
do not recover in a faster fashion.
It is too early in the winter heating season to tell what the trend will continue to be. However,
the faster that gas consumption falls, that will put upward pressure on rates, as a generally
increasing cost to operate and distribute gas will be spread across fewer units of sale.
Figure 5: Forecast Gas Consumption
SECTION 5A: FY 2016 TO FY 2020 COST AND REVENUE TRENDS
Figure 6 and Appendix A: Gas Utility Financial Forecast Detail show how costs have changed
during the last five years as well as how staff project costs to change over the next decade.
While the gas utility strives to maintain a steady rate of funding for main replacement over time,
this funding pattern was disrupted from FY 2015 to FY 2020. In FY 2015, no funding for gas main
replacement was budgeted due to the fact that staff was completing a prior major gas main
replacement project, the largest in utility history, which completed replacement of most of the
ABS gas mains in Palo Alto. The next main replacement to be budgeted involved replacements of
gas mains on University Avenue, a project that evolved into the Upgrade Downtown project
involving a coordinated replacement of several different types of infrastructure to avoid multiple
disruptions to the business district. This multi-year planning effort that did not allow for design
of other new projects, and the hiatus in starting a new main replacement project allowed the Gas
Utility to temporarily keep rates lower. FY 2021 marked the return to routine funding for main
replacement for the gas utility. However, due to the pattern of funding from FY 2015 to FY 2020,
rates are currently lower than they will need to be to fund future capital replacement while also
funding operations. This Financial Plan includes the rate increases needed to fund regular main
replacement going forward.
Revenues have generally matched expenses in most years and were slightly higher than expenses
in FY’s 2016 and 2017. The absence of new budget funding for main replacement projects for
several years, as well as the availability of relatively large reserves, forestalled the need for rate
increases until FY 2019.
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As shown in Figure 6, the last adjustment to gas distribution rates was in July 2020 when CPAU
increased distribution rates, resulting in a 2% increase to the total system average gas rate
(supply rates plus distribution rates). The revenue (and commodity cost) increase in FY 2019 was
the result of a relatively cooler winter leading to higher usage, but also a spike in commodity
prices, as can be seen on Figure 3 in Section 4G, above. Figure 6 assumes no change in gas supply
costs over the forecast period to illustrate the impact of proposed distribution rate changes on
the overall customer bill. In reality, gas supply costs are uncertain and are passed through to
customers as they change month to month.
Figure 6: Gas Utility Expenses, Revenues, and Rate Changes:
Actual Costs through FY 2020 and Projections through FY 2026
SECTION 5B: FY 2020 RESULTS
With the onset of the COVID epidemic in March/April 2020, sales in FY 2020 were about 1.1
million lower than were forecast in the FY 2021 financial plan. Sales revenues were lower by
about $1.7 million, but other sources of funds were higher by $1.1 million. On the expense side,
a modelling error for purchase costs, which should have all been shown as pass-through, instead
had some values only showing a partial collection through rates. This resulted in the purchases
forecast being lower by $3.3 million than it should have. This did not directly affect retail rate
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setting since the modeling error was in the supply rates, which are passed through based on
monthly market prices, but it did affect staff’s projection of reserve levels in the FY 2020 Financial
Plan. This modelling error was corrected in the FY 2021 Financial Plan.
Operational expenses came in about $456,000 below the expected budget. Total FY 2020
expenses were $39.3 million compared to projections of $35.3 million in the final FY 2021
Financial Plan. Table 11 summarizes the variances from forecast.
Table 11: FY 2020, Actual Results vs. FY 2021 Financial Plan Forecast ($000) Net Cost/(Benefit) Type of change
Lower Sales revenues than forecasted. 1,728 Revenue decrease
Operations cost savings (456) Cost savings
Increased interest income and other non-
sales revenues (1,124)
Revenue increase
Lower purchase costs due to lower sales16 (3,260) Cost increase
Net Cost / (Benefit) of Variances (4,319)
SECTION 5C: FY 2021 PROJECTIONS
Current projections indicate that sales revenues will be slightly lower than last year’s forecast.
This is a combination of both lower sales due to COVID impacts, but offset by higher projected
commodity costs (estimated at $765,000). Other revenues and transfers are projected to be
higher, making up for the loss. Operations costs are tentatively estimated to be lower by about
$1.1 million based on updated projections using actual expenses from FY 2020, which were lower
than previously forecast. The variances nearly offset, making the ending proposed reserve
changes very similar to last year’s projection. Table 12 summarizes the current and projected
variances from the FY 2021 Financial Plan.
Table 12: FY 2021 Projected Results vs. Current Financial Plan Forecast ($000) Net Cost/ (Benefit) Type of change
Sales decrease due to COVID impacts 392 Revenue decrease
Operations cost savings (1,123) Cost decrease
Increased purchase cost estimates 765 Cost increase
Other revenues higher than forecast (811) Revenue increase
Net Cost / (Benefit) of Variances (61)
SECTION 5D: FY 2022-FY 2026 PROJECTIONS
Figure 6 above shows staff projections that overall costs for the Gas Utility are increasing in
FY 2021. This is largely in part due to a modified CIP schedule starting in FY 2020. For FY 2020
through 2026, staff anticipates annual capital expenditures will fluctuate due to planning for
larger main replacement construction projects every other year instead of smaller projects
16 Note: Typically lower sales result in purchase cost decreases that are roughly the same or
smaller than the sales revenue decreases. This was not the case in FY 2020 due to the modeling
error in the FY 2020 Financial Plan described above.
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annually. This revised main replacement schedule will allow CPAU to meet its main replacement
needs while addressing challenges in the current construction market and optimizing current
staffing resources. Averaging the cost of CIP over these two-year cycles, costs are expected to
increase by around 4.2% on average annually through FY 2026. In Operations, there is a short run
addition of $1 million per year in FY 2022 and FY 2023 for cross-bore inspections (this expense is
projected to continue for at least two years, but could be longer depending on what system
investigations show as well as work restrictions due to COVID). General inflationary increases are
expected of around 2 to 3% per year. Salaries and benefits expenses are projected to rise at 3 to
6% per year, per the assumptions used in the City’s Long Range Financial Plan projections.
Construction costs have not appeared to decrease during the COVID-related recession, as they
did during the last economic downturn. The next new main replacement project after the
University Avenue project started in FY 2021, and ongoing main replacement is expected to be
more expensive.
Gas commodity costs are the most variable component. Factoring in the rising costs for cap and
trade allowances (including recent legislation providing fewer free allowances and therefore
higher purchase needs), carbon offset products and rising transmission expenses, costs could
increase by around 8% per year by 2026. These costs are expected to taper off after that point,
but these costs are also directly correlated to gas sales. Given that COVID has decreased sales to
record low levels, a resumption to ‘normal’ usage will incur correspondingly higher costs. Since
these costs are pass-through charges to customers, the impact to reserves of these costs being
higher or lower than expected is minimal.
As shown in Figure 7, this financial plan projects the Rate Stabilization Reserves to be depleted
by FY 2021. In addition, in years where revenues are higher than expenses due to those being CIP
planning years, funds will be moved into the CIP reserve to help counter the following year’s
higher CIP related costs.
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Figure 7: Gas Utility Reserves
Actual Reserve Levels for FY 2020 and Projections through FY 2026
Staff is evaluating when to best implement a fixed funding amount (currently estimated at $8.6
million, derived by calculating the approximate average annual CIP budget for FY 2021 through
FY 2025) that will be provided from the Operations Reserve to the CIP Reserve to fund capital
improvements. This approach will provide stability to the Operations Reserve by providing for a
steady funding stream for CIP work and by reflecting fluctuations due to CIP such as project delays
or accelerations in the CIP Reserve; ultimately, this stability should provide more stable customer
rates. The use of the CIP Reserve in this way will isolate fluctuations due to CIP delays or
accelerations and allow those to be viewed together in the CIP Reserve. Conversely, other trends
or factors affecting the Operations Reserve will be easier to identify and communicate via that
reserve. Without this change, both CIP costs and revenues flows solely through the Operations
Reserve.
However, in order to keep rate impacts lower to customers in light of the COVID-19 pandemic,
staff is not anticipating being able to implement fixed funding at this time, and possibly not within
the 5-year planning horizon. Staff will evaluate the applicability of this plan as ending reserve
balances become available. In the short run, this plan shows that the CIP reserve will fall below
the minimum reserve guideline until annual funding and/or another transfer of funds to the CIP
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reserve can be done. Figure 8 below shows the current estimate of CIP reserve fund balances
before an annual funding amount is applied.
Figure 8: Gas CIP Reserves
Reserve Level Projections through FY 2026
SECTION 5E: RISK ASSESSMENT AND RESERVES ADEQUACY
This Financial Plan projects the Gas Utility’s primary contingency reserve, the Operations Reserve,
to be within guideline levels throughout the forecast period. Staff is accomplishing this by
reducing the size of projected CIP projects in FY 2021 and FY 2023. . Figure 9 shows the
Operations Reserve within the guideline levels.
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Figure 9: Operations Reserve Adequacy
Forecasted Operations Reserve levels also exceed the short-term risk assessment for the Utility.
Table 13 summarizes the risk assessment calculation for the Gas Utility through FY 2026. The risk
assessment includes the revenue shortfall that could accrue due to:
1. Lower than forecasted distribution sales revenue; and
2. An increase of 10% of planned system improvement CIP expenditures for the budget year.
Table 13: Gas Risk Assessment ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Total non-commodity revenue $22,900 $24,325 $26,948 $29,369 $31,505 $32,559
Max. revenue variance,
previous ten years
16% 16% 16% 16% 16% 16%
Risk of revenue loss $3,672 $3,901 $4,321 $4,710 $5,052 $5,221
CIP Budget $8,200 $3,550 $8,550 $3,050 $10,050 $3,050
CIP Contingency @10% $820 $355 $855 $305 $1,005 $305
Total Risk Assessment value $4,492 $4,256 $5,176 $5,015 $6,057 $5,526
SECTION 5F: LONG-TERM OUTLOOK
In the longer term (5 to 35 years out) it is very difficult to predict the Gas Utility’s commodity
costs. A variety of long-term trends could affect commodity costs either positively or negatively.
Continuing improvement in gas extraction technology, such as fracking, could continue to create
generous supplies of gas, but these technologies are also under greater scrutiny with respect to
GAS UTILITY FINANCIAL PLAN
January 2021 29 | Page
their environmental impacts. On the demand side, a continued shift from coal to natural gas for
electricity generation, an expansion of export capabilities, or an increase in manufacturing in the
U.S. might drive up natural gas prices, but other factors, such as generally more mild winters or
an increased drive towards electrification, might drive gas demand lower. It is also difficult to
predict the magnitude of the additional cost impacts associated with the State’s cap-and-trade
program over the long term. In the face of this uncertainty, CPAU is able to protect the financial
position of the Gas Utility by continuing its current strategy of passing these costs directly to its
customers via month-varying rate adjustment mechanisms. The City pursues a policy of
purchasing offsets to make gas usage in Palo Alto carbon neutral. The cost is not to exceed
$0.10/therm.
Future CIP investment needs for the Gas Utility may be lower than in the past, although costs per
foot for main replacement have been increasing substantially. The Gas Utility has replaced nearly
all of its ABS gas mains and its most problematic steel and PVC mains as well. The PE pipe being
used now is expected to have at least a fifty-year lifetime, and there is growing evidence that it
may last much longer than that. This would result in lower CIP investment over the long term.
CPAU is continuing to study and develop its future main replacements priorities and strategy.
Long-term state or local climate goals will also have a major impact on the Gas Utility. The Global
Warming Solutions Act, Assembly Bill 32 (AB32), set a goal of reducing greenhouse gas (GHG)
emissions to 1990 levels by 2020. In its December 2007 Climate Protection Plan, the City set a
goal of lowering emissions to 15% below 2005 levels by 2020. As a community Palo Alto achieved
these goals in 2012 even with continued use of natural gas for heating, cooking, and industrial
processes. However, to achieve the recently adopted Sustainability and Climate Action Plan
(S/CAP) goal of an 80% reduction in carbon emissions by 2030, or the State’s adopted goal of an
80% reduction in emissions by 2050, extensive electrification of gas-using appliances is necessary.
If significant amounts of electrification occurred, stranded investment and higher rates could be
required as the costs of the distribution system are recovered over a lower sales base. It is
instructional that, in the recent discussion draft of its scoping plan update, CARB says, to meet
those goals, natural gas use would have to be “mostly phased out.”17 Staff has already begun to
evaluate how to manage potential impacts of these trends over the next few years.
SECTION 5G: ALTERNATIVE GAS INCREASE PLANS
Alternative Proposal: 2% rate increase in FY 2022
In the interest of providing options to help the community keep its utility bills low during the
economic crisis created by the COVID-19 pandemic, the Utilities Department is showing an
alternative rate plan involving a 2 percent rate increase in FY 2022 and no more than 5% rate
increases in the subsequent financial plan years. In order to do this, staff looked at a 10 year
17 Climate Change Scoping Plan, First Update, Discussion Draft for Public Review and Comment, California Air
Resources Board, October 2013, pg 88.
GAS UTILITY FINANCIAL PLAN
January 2021 30 | Page
forecast period rather than 5 years so as to better maintain the City’s priorities for its utilities
(safety, reliability, cost-effectiveness, and sustainability) over the forecast period.
Table 14: Projected Gas Rate Trajectory for FY 2022 to FY 2030
Projection FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
FY
2027
FY
2028
FY
2029
FY
2030
Current Financial Plan 2% 5% 5% 5% 2% 2% 1% 1% 1%
In order to have this rate increase trajectory, however, the Gas Utility would require
approximately $700,000 in expense reductions to keep Operations reserves above minimum
guideline levels. This has been estimated as $350,000 in FY 2023 and $350,000 in FY 2025.
Without these cuts, the Operations Reserve trajectory would go below the minimum guidelines,
as shown in Figure 10:
Figure 10: Operations Reserve with No Expense Reductions
With the reductions, the Operations Reserve is projected to stay at or near minimum though FY
2025 and would not reach near target levels until FY 2026:
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January 2021 31 | Page
Figure 11: Operations Reserve with Expense Reductions
To make reductions, staff may need to temporarily make significant reductions in capital
investment for this utility. Examples of the types of actions that might need to be taken by the
Gas Utility include:
• Ending the City’s Carbon Neutral Gas carbon offset program (~$1 million to $1.5 million
per year, depending on market prices)
• Temporarily reducing utility efforts in energy efficiency in the sectors with longer payback
periods for efficiency investments (residential and small and medium business
customers). (Exact amount subject to internal review of various programs to review
payback periods. Total annual gas efficiency spending is approximately $600,000 per
year.)
• Postponing or eliminating cross-bore inspections
• Postpone installation of advanced metering infrastructure and gas meter replacement
(~$3 million in FY 2022)
• Cutting back on capital investment by postponing or reducing project scope of work of
gas main PVC pipe replacement (up to $10 million)
• The impacts of implementing all of the above cost reductions would impede sustainability
efforts, leave the City at some level of risk from cross-bores, delay customer availability
of hourly usage data for several years, and slow down the rate of replacement of PVC gas
mains, which have glued joints that are at higher risk of leakage during an earthquake. To
offset the potential safety impact of these cost reductions, Utilities would increase the
frequency of citywide gas surveying (mobile and walking) for gas leaks ($100,000).
GAS UTILITY FINANCIAL PLAN
January 2021 32 | Page
SECTION 6: DETAILS AND ASSUMPTIONS
SECTION 6A: GAS PURCHASE COSTS
The Gas Utility purchases much of its gas for delivery at Malin, Oregon which is almost always
cheaper than delivery at PG&E Citygate, even including the costs of transmission from Malin to
Citygate. The Gas Utility purchases gas on a month-ahead and day-ahead basis in the spot market.
The last few years have seen gas prices in a relatively narrow but low band, and slowly declining
over time. In FY 2019, however, lower levels of natural gas in storage , along with colder than
normal weather and pipeline constraints on both the northern and southern borders of California
has created some short term price spikes, as shown in Figure 12.
Figure 12: Gas Market Prices at PG&E Citygate
On September 15, 2014, Council adopted Resolution #9451 authorizing the City’s participation in
a natural gas purchase from Municipal Gas Acquisition and Supply Corporation (MuniGas) for the
City’s entire retail gas load for a period of at least 10 years. The MuniGas transaction includes a
mechanism for municipal utilities to utilize their tax-exempt status to achieve a discount on the
market price of gas. As of November 1, 2018, gas began flowing under this program, reducing the
City’s gas commodity cost by about $1 million per year and saving gas customers approximately
$0.03 per therm on the commodity portion of their bills.
Gas commodity costs are expected to increase slowly but steadily over the next several years.
Figure 13a shows the projected gas prices used to generate this forecast. Projections for
transmission costs associated with transporting gas over PG&E’s Redwood transmission pipeline
(from Malin, Oregon to the PG&E Citygate) are based on rates adopted in the most recent update
to the Gas Accord.
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January 2021 33 | Page
Figure 13a: Wholesale Gas Price Projections
Local transportation costs decreased on January 1, 2015 due to the expiration of a temporary
adder to PG&E’s local transportation rate,18 but in December 2014 PG&E applied to the CPUC to
more than double local transportation costs. The application was not settled until late 2016. As
these charges are dictated by PG&E and are outside of Palo Alto’s control, staff proposed making
these costs pass-through charge, similar to the commodity charge, and this became effective in
November 2016. Figure 13b shows some historical as well as projected transmission cost
projections:
18 California Public Utilities Commission Advice Letter 3430-G, effective January 1, 2014. Also see CPUC Decision
12-12-30 regarding the Pipeline Safety Enhancement Plan Adder.
GAS UTILITY FINANCIAL PLAN
January 2021 34 | Page
Figure 13b: Gas Transportation Cost Projections
For Cap and Trade compliance costs, the gas utility has been regulated under California’s
greenhouse house (GHG) regulations since January 2015 with a GHG emissions cap
that declines over time. The gas utility receives carbon allowances equal to the emissions allowed
under the cap and is required to auction off a portion (50% in 2021, increasing by 5% annually)
of the allowances through the state Cap and Trade Program. To meet its annual GHG compliance
obligation, the gas utility must purchase allowances based on actual gas load.
The auction price to either purchase or sell allowances also increases annually by 5% plus
inflation. Given the rate of increased allowance purchases and the increasing market prices,
these costs are anticipated to increase from $1.5 million in FY 2022 to $5.6 million in FY 2030,
about an 18% increase per year on average.
The City also has a Carbon Neutral Natural Gas plan (Staff Report 744119), which go towards
buying offsets for natural gas. These high-quality carbon offsets support projects that reduce the
amount of GHGs in the atmosphere, such as planting trees or capturing methane from dairy
farms. The climate impact of our natural gas use is thus carbon neutral. Purchasing carbon offsets
is a good first step towards reducing carbon in the atmosphere, but our longer-term goal is to
reduce our use of natural gas by maximizing efficiency and switching to high-efficiency electric
appliances where possible. The costs for these offsets are projected to increase from $2.2 million
in FY 2022 to $5.1 million in FY 2030, or about an 11% increase per year on average.
19 https://www.cityofpaloalto.org/civicax/filebank/documents/54588
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January 2021 35 | Page
SECTION 6B: OPERATIONS
Operations costs include the Customer Service, Demand Side Management, Operations and
Maintenance (including Engineering), Resource Management, and Administration categories in
Figure 11, below. Debt service, rent, and transfers are also included in Operations costs
(excluding the General Fund equity transfer). Appendix D: Description of Gas Utility Cost
Categories includes detailed descriptions of the activities associated with these cost categories.
Operations costs are generally projected to increase by 2 to 4% per year. Salary and benefits,
inflation, and other assumptions match those used in the City’s long-range financial forecast.
Operations costs for FY 2022 to FY 2023 include funding for the cross-bore program. In the 1970s
CPAU, like many other utilities, adopted horizontal drilling as an alternative to trenching when
installing new gas services. This created the possibility of cross-bores, which can happen when a
gas service is bored through a sewer lateral. Though cross-bores are very rare, they can create a
dangerous situation when a contractor attempts to clear a blocked sewer line, because if the
cross-bored gas service is damaged during the line, clearing it can result in a gas leak. CPAU has
been inspecting new gas services since 2001, and in 2011 began video inspections of the sewer
laterals at the location of horizontally-drilled gas services installed before 2001. This inspection
program has cost roughly $1 million per year since FY 2012. While a majority of sewer laterals
have been inspected, staff has come across several services which are not able to be scoped,
either due to infiltration by roots or broken/collapsed pipe segments. Staff has included roughly
$3 million in additional funding between FY 2019 and FY 2022 for this program, but the program
will likely require additional funding in future years to complete.
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January 2021 36 | Page
Figure 14: Historical and Projected Operational Costs
SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP)
The Gas Utility’s CIP program consists of the following programs and budgets:
• The Gas Main Replacement Program, under which the Gas Utility replaces aging gas
mains ranked to have the highest threat scores within the system.
• Customer Connections, which covers the cost when the Gas Utility installs new services
or upgrades existing services at a customer’s request in response to development or
redevelopment. The Gas Utility charges a fee to these customers to cover the cost of
these projects.
• Ongoing Projects, which covers the cost of routine meter, regulator, and service
replacement, minor projects to improve reliability or increase capacity, and other general
improvements.
• Tools and Equipment, which covers the cost of capitalized equipment, such as directional
boring, gas pipeline maintenance and emergency equipment.
• One-time Projects, which represents occasional large projects that do not fall into any
other category.
Table 15 shows the current status of these project categories and future projected spending.
GAS UTILITY FINANCIAL PLAN
January 2021 37 | Page
Table 15: Budgeted Gas CIP Spending ($000)
The Gas Main Replacement (GMR) Program has completed a major milestone with the
replacement of gas mains made from Acrylonitrile-Butadiene-Styrene (ABS) plastic. There is 0.1
miles of remaining ABS in the system, scattered throughout the City in very small sections. With
the replacement of all ABS mains with Polyethylene (PE) plastic completed, the material most at
risk for failure is the remaining Polyvinyl chloride (PVC) plastic and steel (wrapped, with cathodic
protection). The next focus of the GMR program will be the replacement of all PVC mains with PE
mains. CPAU has been updating the Gas System Master Plan to determine which sections of
pipeline to prioritize and assist in determining the pace of main replacement. With the current
economic restrictions, replacement of PVC mains has been reduced to approximately three to
four miles per year, or 1.9% of the system.
The current budget for the gas main replacement program takes into account the rise in
construction costs. Several factors are contributing to the increase in construction costs in the
Bay Area, such as a greater focus on infrastructure improvement by many municipal agencies,
and the higher demand for utility contractors within these fields. CPAU has seen the replacement
cost per linear foot steadily increase, even in the current economic conditions brought about by
the COVID epidemic. The Gas Utility posted the most recent project for competitive bid (the Gas
Main Replacement 23 Project) and this resulted in two contractor bids. Currently, CPAU plans to
replace as many aging mains as possible within its current budget. However, if this trend of higher
construction cost continues, the Gas Utility may require larger CIP budgets and as a result, an
increase in rates.
This financial plan addresses these challenges in a way that will allow CPAU to meet its main
replacement needs. This plan includes approximately $7 to 9 million every other year for main
replacement construction instead of $5 to 6 million annually. This shift to larger main
replacement construction projects every other year will lengthen the amount of time needed to
replace all PVC pipes in the system, but will ideally attract more contractors to bid on the larger
projects. Additionally, this main replacement project schedule for gas will be staggered with
water and wastewater (water and wastewater construction every even year and gas construction
every odd year), which will ease scheduling difficulties for inspection coverage due to shared
inspection staff across water, wastewater, gas, and large development services projects.
However, if staff sees a greater rate of failure of existing pipe materials, CIP projects may resume
a more frequent schedule and may require additional rate funding needs.
GMR 23 is slated to begin during FY 2021. However, work will also continue on outstanding main
replacement projects in FY 2021 and into FY 2022. As staffing vacancies become filled and
Project Category
Current
Budget *
Spending,
Curr. Yr.
Remain.
Budget **Committed FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
One Time Projects - - - - - - - - -
Gas Main Replacement 8,960 (970) 7,990 7,662 2,000 7,000 2,000 9,000 2,000
Tools and Equipment 100 - 100 10 50 50 50 50 50
Ongoing Projects 695 (122) 573 255 1,500 1,500 1,000 1,000 1,000
Customer Connections 1,155 (386) 769 43 1,124 1,167 1,211 1,247 1,100
TOTAL 10,910 (1,478) 9,431 7,970 4,674 9,717 4,261 11,297 4,150
* Includes unspent funds from previous years carried forward or reappropriated into th ecurrent fiscal year
** Included with CIP Reserves (Reserve for Reappropriations + Reserve for Commitments)
GAS UTILITY FINANCIAL PLAN
January 2021 38 | Page
construction costs stabilize, staff can re-evaluate the need to return to an annual replacement
program.
Staff projects ongoing projects, tools and equipment, and customer connections to cost
approximately $2.7 million in FY 2022 and remain relatively flat at about $2.2 million through the
end of the forecast period. In practice, these projects can fluctuate dramatically depending on
prices of material, system conditions and the pace of development and redevelopment in the
city. It is worth noting that fee revenue pays for the Customer Connections program, so when
costs go up fees will be adjusted as well.
Aside from customer connections and transfers from other funds, the CIP plan for FY 2021 to FY
2026 is funded by utility rates. Appendix B: Gas Utility Capital Improvement Program (CIP) Detail
shows the details of the plan.
SECTION 6D: DEBT SERVICE
The Gas Utility currently makes debt service payments on one bond issuance, the 2011 Series A
Utility Revenue Refunding Bonds. This bond issuance was to refinance the $18 million principal
remaining on the Utility Revenue Bonds, 2002 Series A issued for the Gas and Water Utilities to
finance various improvements to the distribution systems. $9.4 million of this issuance was
secured by the net revenues of the Gas Utility. Table 16 shows debt service for this bond for the
financial forecast period. Debt service on this bond will continue through 2026.
Table 16: Gas Utility Debt Service
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
2011 Utility Revenue
Refunding Bonds, Series A 802 803 804 802 799 802
The 2011 bonds include two covenants stating that 1) the Gas Utility will maintain a debt
coverage ratio of 125% of debt service, and 2) that the City will maintain “Available Reserves”20
equal to five times the annual debt service. The current financial plan complies with these
covenants throughout the forecast period, as shown in Table 17 and Table 18.
20 Available Reserves as defined in the 2011 bonds include the reserves for the Water, Electric, and Gas Utilities
GAS UTILITY FINANCIAL PLAN
January 2021 39 | Page
Table 17: Debt Service Coverage Ratio ($000)
FY
2021
FY
2022
FY
2023
FY
2024
FY
2025
FY
2026
Revenues 38,762 42,697 46,215 49,744 52,830 55,996
Expenses
(Excluding CIP and
Debt Service)
(26,584)
(30,930)
(30,016)
(32,404)
(30,906)
(34,474)
Net Revenues 12,178 11,767 16,199 17,340 21,924 21,522
Debt Service 802 803 804 802 799 802
Coverage Ratio 1518% 1465% 2014% 2161% 2742% 2685%
Table 18: Debt Service Minimum Reserves ($000)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Gas Utility a 10,785 7,668 3,078 4,644 3,269 8,967
Debt Service b 802 803 804 802 799 802
Reserves Ratio c 13x 10x 4x 6x 4x 11x
a) CIP, Rate Stabilization, Operations, and Unassigned Reserves
b) Gas Utility’s share of the debt service on the 2011 bonds.
c) Calculated using only Gas Utility reserves. The actual reserves ratio for the 2011 bonds is calculated based on the
combined Electric, Gas, and Water Utility reserves and total debt service and is higher than shown here.
The Gas Utility’s reserves and net revenue are also pledged as security for the bond issuances
listed in Table 19, even though the Gas Utility is not responsible for the debt service payments.
The Gas Utility’s reserves or net revenues would only be called upon if the responsible utilities
are unable to make their debt service payments. Staff does not currently foresee this occurring.
Table 19: Other Issuances Secured by Gas Utility’s Revenues or Reserves
Bond Issuance Responsible Utilities Annual Debt
Service ($000)
Secured by Gas Utility’s:
Net Revenues Reserves
1999 Utility Revenue
Bonds, Series A
Wastewater Collection
Wastewater Treatment
Storm Drain
$1,207 No Yes
2009 Water Revenue
Bonds (Build America
Bonds)
Water $1,977* No Yes
*Net of Federal interest subsidy
SECTION 6E: EQUITY TRANSFER
The City calculates the equity transfer from its Gas Utility based on a methodology adopted by
Council in 2009 that has remained unchanged since.21 Each year it is calculated according to the
2009 Council-adopted methodology, and does not require additional Council action.
21 For more detail on the ordinance adopting the 2009 transfer methodology, see CMR 280:09, Budget Adoption
Ordinance for Fiscal Years 2009 and 2010; and CMR 260:09, Finance Committee Report explaining proposed changes
to equity transfer methodology.
GAS UTILITY FINANCIAL PLAN
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SECTION 6F: REVENUES
The Gas Fund receives most of its revenues from sales of gas, but about 10% comes from other
sources. Interest income, service connection and capacity fees (the latter two being cost-
recovery fees) are the main inputs, but a large source of revenue also comes from sales of
allowances related to California’s cap-and-trade program. This latter source, however, is
generally committed for specific programs which reduce greenhouse gas and are not usable as
an offset to general expenses.
Another revenue item related to the cap-and-trade program is collected in customers’ bills. While
the State provides CPAU with a certain number of free allowances each year, the Gas Utility is
required to sell a portion of those in accordance with the regulations. In order to have enough
allowances to cover customers’ natural gas emissions, CPAU must buy allowances at market, and
subsequently passes through the cost of those allowances to customers. The regulations do not
allow the revenue derived from the sale of the free allowances to offset allowance purchases,
thus the pass-through rate component.
This financial plan bases sales revenue projections on the load forecast in Section 5A: Load
Forecast. Except where stated otherwise, these load forecasts are based on normal weather.
Weather can vary substantially, however, and this can affect revenues substantially. Also,
changes in customer behavior, as well as changes to more efficient gas appliances, or switching
to electric appliances, will modify these forecasts. Staff continually evaluates forecasts to see
when new trends emerge.
SECTION 6G: COMMUNICATIONS PLAN
The FY 2022 Gas Utility communications strategy covers these primary areas: operations,
infrastructure, safety, efficiency, renewables, rates, and cost containment measures. The City of
Palo Alto Utilities (CPAU) communication methods include use of the Utilities website, utility bill
inserts, messaging on bills and envelopes, email newsletters, print and digital ads in local
publications, videos and participation in community outreach events. Since moving to market
pricing for commodity rates, the City of Palo Alto Utilities (CPAU) commodity rates can change
monthly. Staff post these updates to the Utilities rates webpages. Consistent with the newly
approved Utilities Strategic Plan, CPAU is instituting cost containment as an ongoing priority that
is part of our annual cycle.
In FY 2022, CPAU is proposing a 3 percent overall rate increase for the gas utility. However, we
anticipate that gas distribution rates will need to increase about 5% in FY 2022 due to a
resumption in capital improvement projects. Such maintenance and operations projects are
important to maintain a safe and reliable gas distribution system. To keep customers apprised of
the status and accomplishments of capital improvement projects, the City maintains a network
of project web pages. Print and digital ads, social media and email blasts drive traffic to the
website.
CPAU promotes gas use efficiency incentives year-round, but most heavily during winter months
to impact heating activities. CPAU continues to look for more ways to promote gas use efficiency
GAS UTILITY FINANCIAL PLAN
January 2021 41 | Page
and awareness of the City’s carbon neutral natural gas utility. Programs such as the Home
Efficiency Genie and commercial energy efficiency programs help residents and businesses better
understand energy usage, activities and/or upgrades they can implement to improve efficiency
and keep utility costs low. CPAU will be launching an upgraded version of its online utility account
services portal this year, which can provide customers with direct access and more information
about utility account and consumption data.
CPAU emphasizes safety for all utility services year-round. Stepping up efforts to promote gas
safety education, staff is focusing outreach among stakeholders to increase awareness of the
need to call USA (811) before digging for anyone who may excavate in and around Palo Alto, such
as plumbers and contractors. Staff is also focusing outreach on the importance of contacting
CPAU to check for potential sewer and gas line cross-bores prior to clearing a sewer line.
Additional outreach messaging includes keeping fats, oils and greases out of drains, and ensuring
clear access to meters. CPAU has developed a number of safety outreach materials to distribute
to customers at community outreach events, emergency preparedness fairs, school and business
meetings.
CPAU will continue to promote safety, infrastructure, operations, efficiency and rate adjustment
messages through a variety of marketing and media channels. Every year, CPAU publishes an
updated gas safety awareness brochure and mails it to all customers in Palo Alto, as well as to
emergency responders, public officials, plumbers, contractors and excavators that may work in
and around the area. Staff talk with business customers at special facilities meetings, attend
neighborhood safety and emergency preparedness fairs and offer presentations to school and
community groups. While print materials and website pages still feature prominently, CPAU is
increasing emphasis on outreach through email newsletters, direct mail, newspaper inserts,
social media and online videos. The Gas Safety Public Awareness Plan contains saved copies of
all outreach materials and logs of activities; the Department of Transportation typically reviews
this Plan at least once per year.
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APPENDICES
Appendix A: Gas Financial Forecast Detail
Appendix B: Gas Utility Capital Improvement Program (CIP) Detail
Appendix C: Gas Utility Reserves Management Practices
Appendix D: Description of Gas Utility Cost Categories
Appendix E: Gas Utility Communications Samples
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APPENDIX A: GAS FINANCIAL FORECAST DETAIL
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
1 RATE CHANGE (%)*0% 8% 0% 4% 5% 2% 3% 5% 5% 5% 0%
2 TOTAL SYSTEM AVERAGE RATE ($/Therm)1.050$ 1.212$ 1.203$ 1.340$ 1.289$ 1.386$ 1.536$ 1.580$ 1.677$ 1.791$ 1.817$
0.841$ 0.891$ 0.935$ 1.002$ 1.082$ 1.068$
3 SUPPLY COMPONENTS* ($/Therm)0.320$ 0.458$ 0.457$ 0.550$ 0.417$ 0.546$ 0.645$ 0.646$ 0.675$ 0.709$ 0.749$
3 SALES IN THOUSAND THERMS 26,719 28,146 28,314 29,110 26,610 25,451 25,426 26,505 26,674 26,314 26,062
4 CHANGE IN RETAIL SALES REVENUE - 2,574 910 1,492 1,817 953 1,191 2,126 2,292 2,446 -
5
6 Utilities Retail Sales 28,065 34,110 34,056 39,017 34,294 35,283 39,062 41,890 44,742 47,121 47,365
7 Service Connection & Capacity Fees 961 940 1,078 997 902 1,145 1,124 1,167 1,211 1,247 1,100
8 Other Revenues & Transfers In 2,450 1,051 1,740 2,023 2,159 2,409 3,238 3,988 4,725 5,392 6,105
9 Interest plus Gain or Loss on Investment 712 13 22 1,404 1,139 691 432 529 525 677 678
10 Total Sources of Funds 32,188 36,115 36,895 43,441 38,494 39,527 43,856 47,574 51,203 54,437 55,248
11
12 Purchases of Utilities:
13 Supply Commodity & Cap and Trade 9,178 9,720 9,698 12,470 8,376 10,712 12,001 12,415 13,187 13,807 14,619
14 Supply Transportation (1,051) 2,843 3,223 3,487 2,727 3,178 4,406 4,698 4,822 4,852 4,901
15 Total Purchases 8,127 12,563 12,921 15,958 11,102 13,890 16,407 17,113 18,008 18,659 19,520
16
17 Administration (CIP + Operating)3,328 3,148 3,574 3,353 3,711 3,789 3,876 3,968 4,057 4,145 4,217
18 Customer Service 1,364 1,441 1,529 1,558 1,700 1,741 1,795 1,855 1,907 1,957 1,978
19 Demand Side Management 566 855 829 536 550 563 578 594 609 623 632
20 Engineering (Operating)426 355 351 400 666 681 697 515 528 540 548
21 Operations and Maintenance 4,153 4,321 4,673 4,957 5,334 5,460 6,693 6,875 5,965 6,117 6,188
22 Resource Management 472 566 357 401 463 474 489 506 520 534 539
23 Debt Service Payments 248 226 203 179 155 802 803 804 802 799 802
24 Rent 443 455 602 618 634 750 770 790 811 832 852
25 Transfers to General Fund 6,194 6,726 6,699 6,601 7,106 7,088 7,343 7,536 7,688 7,901 8,093
26 Other Transfers Out 303 510 808 704 521 531 541 961 980 999 1,018
27 Capital Improvement Programs 6,889 2,214 7,804 5,567 3,342 9,283 4,674 9,717 4,261 11,297 4,150
28 Total Uses of Funds 32,512 33,380 40,349 40,831 35,285 45,053 44,292 51,235 46,136 54,403 48,537
29
30 Into/ (Out of) Reserves (325) 2,735 (3,454) 2,610 3,209 (5,526) (436) (3,661) 5,067 34 6,711
31
32 Reappropriations + Commitments 7,167 5,407 8,674 11,251 3,662 3,662 3,662 3,662 3,662 3,662 3,662
33 Plant Replacement 0 0 0 0 0 0 0 0 0 0 0
Debt Service Reserve 816 813 795 795 804 804 804 804 804 804 0
34 CIP Reserve 3,820 3,820 3,820 3,820 3,820 3,820 0 0 1,000 0 2,000
35 Rate Stabilization 6,018 6,539 7,090 2,533 8,419 0 0 0 0 0 0
36 Operations Reserve 10,296 13,549 8,638 9,966 13,450 10,782 12,645 7,214 9,238 7,970 10,920
Cap and Trade Reserve 0 5,936 7,458 9,228 11,271 13,573 16,138
37 Unassigned 0 0 0 0 0 0 0 0 0 0 0
38 Total Reserves 28,117 30,128 29,017 28,365 30,155 25,003 24,568 20,907 25,975 26,009 32,720
39 1,148 2,011 (1,112) (651) 1,789 (5,151) (436) (3,661) 5,067 34 6,711
40 Short Term Risk Assessment Value 3,753 3,516 4,051 4,138 3,940 4,492 4,256 5,176 5,015 6,057 5,330
41
42 Operations Reserve Guidelines
43 Min (60 Days Commodity + O&M)5,000 5,518 5,727 6,172 5,251 6,565 6,512 6,825 6,884 7,086 7,297
44 Target (90 Days Commodity + O&M)7,500 8,277 8,590 9,258 7,876 9,848 9,769 10,237 10,325 10,629 10,945
45 Max (120 Days Commodity + O&M)10,000 11,036 11,454 12,344 10,502 13,130 13,025 13,650 13,767 14,172 14,593
46
City of Palo Alto
Gas Utility
Fiscal Year
GAS UTILITY FINANCIAL PLAN
January 2021 44 | Page
APPENDIX B: GAS UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL
Project # Project Name
Reappropriated/ Carried Forward
from Previous Year
Current Year
Funding
Spending,
Curremt Year
Remaining in CIP
Reserve Fund Commitments FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
GAS MAIN REPLACEMENT (GMR) PROGRAM
GS-12001 - Gas Main Replacement - Project 22 70,000$ 70,000$ 184,845$ (114,845)$ 37,020$ -$ -$ -$ -$ -$
GS-13001 - Gas Main Replacement - Project 23 120,651$ 7,740,697$ 98,336$ 7,642,361$ 7,167,485$ -$ -$ -$ -$ -$
GS-14003 - Gas Main Replacement - Project 24 -$ -$ -$ -$ -$ 2,000,000$ 7,000,000$ -$ -$ -$
GS-15000 - Gas Main Replacement - Project 25 -$ -$ -$ -$ -$ -$ -$ 2,000,000$ 9,000,000$ -$
GS-XXXXX - Gas Main Replacement - Project 26 -$ -$ -$ -$ -$ -$ -$ -$ -$ 2,000,000$
GS-18000 - Gas ABS/Tenite Replacement Project 1,149,062$ 1,149,062$ 686,961$ 462,101$ 457,160$ -$ -$ -$ -$ -$ Subtotal, Gas Main Replacement Programs 1,339,713$ 8,959,759$ 970,142$ 7,989,617$ 7,661,665$ 2,000,000$ 7,000,000$ 2,000,000$ 9,000,000$ 2,000,000$
TOOLS AND EQUIPMENT
GS-13002 - Gas Equipment and Tools -$ 100,000$ -$ 100,000$ 10,250$ 50,000$ 50,000$ 50,000$ 50,000$ 50,000$
Subtotal, Tools and Equipment -$ 100,000$ -$ 100,000$ 10,250$ 50,000$ 50,000$ 50,000$ 50,000$ 50,000$
ONGOING PROJECTS
GS-03009 - System Extensions - Unreimbursed -$ -$ -$ -$ -$ -$ -$ -$ -$ -$
GS-11002 - Gas Distribution System Improvements 11,465$ 511,465$ 73,407$ 438,058$ 93,163$ 500,000$ 500,000$ 500,000$ 500,000$ 500,000$
GS-80019 - Gas Meters and Regulators 183,395$ 183,395$ 48,925$ 134,470$ 161,907$ 1,000,000$ 1,000,000$ 500,000$ 500,000$ 500,000$ Subtotal, Ongoing Projects 194,860$ 694,860$ 122,332$ 572,528$ 255,070$ 1,500,000$ 1,500,000$ 1,000,000$ 1,000,000$ 1,000,000$
CUSTOMER CONNECTIONS
GS-80017 - Gas System, Customer Connections 72,365$ 1,155,053$ 385,738$ 769,315$ 42,869$ 1,124,169$ 1,166,894$ 1,210,901$ 1,247,228$ 1,100,000$
Subtotal, Customer Connections 72,365$ 1,155,053$ 385,738$ 769,315$ 42,869$ 1,124,169$ 1,166,894$ 1,210,901$ 1,247,228$ 1,100,000$
GRAND TOTAL 1,606,938$ 10,909,672$ 1,478,212$ 9,431,460$ 7,969,854$ 4,674,169$ 9,716,894$ 4,260,901$ 11,297,228$ 4,150,000$
Funding Sources
Connection Fees 901,573$ 1,124,169$ 1,166,894$ 1,210,901$ 1,247,228$ 1,100,000$
Utility Rates/CIP Reserve 10,008,099$ 3,550,000$ 8,550,000$ 3,050,000$ 10,050,000$ 3,050,000$
GAS UTILITY FINANCIAL PLAN
January 2021 45 | Page
APPENDIX C: GAS UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Gas Utility
Financial Plan:
Section 1. Definitions
a)“Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015
to FY 2019 would be the Financial Planning Period.
b)“Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c)“Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets
as the difference between its assets and liabilities.
d)“Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Supply Fund Reserves
The Gas Utility’s Supply Fund Balance is reserved for the following purposes:
a)For existing contracts, as described in Section 4 (Reserve for Commitments)
b)For operating and capital budgets re-appropriated from previous years, as described in
Section 5 (Reserve for Re-appropriations)
Section 3. Distribution Fund Reserves
a)For existing contracts, as described in Section 4 (Reserve for Commitments)
b)For operating and capital budgets re-appropriated from previous years, as described in
Section 5 (Reserve for Re-appropriations)
c)For cash flow management and contingencies related to the Gas Utility’s Capital
Improvement Program (CIP), as described in Section 6 (CIP Reserve)
d)For rate stabilization, as described in Section 7 (Rate Stabilization Reserve)
e)For operating contingencies, as described in Section 8 (Operations Reserve)
f)Any funds not included in the other reserves will be considered Unassigned Reserves and
shall be returned to ratepayers or assigned a specific purpose as described in Section 9
(Unassigned Reserves)
Section 4. Reserve for Commitments
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for
Commitments will be set to an amount equal to the total remaining spending authority for
all contracts in force for the Wastewater Collection Utility at that time.
Section 5. Reserve for Reappropriations
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for
Reappropriations will be set to an amount equal to the amount of all remaining capital and
GAS UTILITY FINANCIAL PLAN
January 2021 46 | Page
non-capital budgets, if any, that will be re-appropriated to the following fiscal year for each
fund in accordance with Palo Alto Municipal Code Section 2.28.090.
Section 6. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following practices:
The following guideline levels are set forth for the CIP Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period based on the levels of CIP
expense budgeted for that year.
Minimum Level 12 months of budgeted CIP expense
Maximum Level 24 months of budgeted CIP expense
a) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added to or removed from the Reserve for
Commitments as a result of a change in contractual commitments related to CIP projects.
Any other additions to or withdrawals from the CIP reserve require Council action.
b) Minimum Level:
i) Funds held in the Reserve for Commitments may be counted as part of the CIP Reserve
for the purpose of determining compliance with the CIP Reserve minimum guideline
level.
ii) If, at the end of any fiscal year, the minimum guideline is not met, staff shall present
a plan to the City Council to replenish the reserve. The plan shall be delivered by the
end of the following fiscal year, and shall, at a minimum, result in the reserve reaching
its minimum level by the end of the next fiscal year. For example, if the CIP Reserve is
below its minimum level at the end of FY 2017, staff must present a plan by June 30,
2018 to return the reserve to its minimum level by June 30, 2019. In addition, staff
may present, and the Council may adopt, an alternative plan that takes longer than
one year to replenish the reserve, or that does so in a shorter period of time.
c) Maximum Level: If, at any time, the CIP Reserve reaches its maximum level, no funds may
be added to this reserve. If there are funds in this reserve in excess of the maximum level
staff must propose to transfer these funds to another reserve or return them to
ratepayers in the next Financial Plan. Staff may also seek Council approval to hold funds
in this reserve in excess of the maximum level, if they are held for a specific future purpose
related to the CIP.
Section 7. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held
to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate
Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization
Reserve at the end of any fiscal year, any subsequent Gas Utility Financial Plan must result in
the withdrawal of all funds from this Reserve by the end of the Financial Planning Period.
Section 8. Operations Reserve
GAS UTILITY FINANCIAL PLAN
January 2021 47 | Page
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Gas Utility’s Fund Balance not included in the reserves
described in Section 4-Section 7 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 8 d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for that
year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months of
the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Gas Utility shall be designed to
return the Operations Reserve to its target level by the end of the forecast period.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Gas Utility’s Fund Balance
shall be automatically included in the Unassigned Reserve described in Section 9, below.
Section 9. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Gas Utility’s
Fund Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned
Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council
must include a plan to assign them to a specific purpose or return them to the Gas Utility
ratepayers by the end of the first fiscal year of the next Financial Planning Period. For
example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next
Financial Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a plan
to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may
present an alternative plan that retains these funds or returns them over a longer period of
time.
Section 10. Intra-Utility Transfers Between Supply and Distribution Funds
GAS UTILITY FINANCIAL PLAN
January 2021 48 | Page
The Gas Utility records costs in two separate funds: the Gas Supply Fund and the Gas
Distribution Fund. At the end of each fiscal year staff is authorized to transfer an amount
equal to the difference between Gas Supply Fund costs and Gas Supply Fund Revenues from
the Gas Distribution Fund Operations Reserve to the Gas Supply Fund, or vice versa. Such
transfers shall be included in the ordinance closing the budget for the fiscal year.
Section 11. Cap and Trade Program Reserve
This reserve tracks revenues from the sale of carbon allowances freely allocated by the
California Air Resources Board to the gas utility, under the State’s Cap and Trade Program.
Funds in this Reserve are managed in accordance with the City’s Policy on the Use of Freely
Allocated Allowances under the State’s Cap and Trade Program (the Policy), adopted by
Council Resolution 9487 in January 2015.
GAS UTILITY FINANCIAL PLAN
January 2021 49 | Page
APPENDIX D: DESCRIPTION OF GAS UTILITY COST CATEGORIES
This appendix describes the activities associated with the various cost categories referred to in
this Financial Plan.
Customer Service: This category includes the Gas Utility’s share of the call center, meter reading,
collections, and billing support functions. Billing support encompasses staff time associated with
bill investigations and quality control on certain aspects of the billing process. It does not include
maintenance of the billing system itself, which is included in Administration. This category also
includes CPAU’s key account representatives, who work with large commercial customers who
have more complex requirements for their gas services.
Resource Management: This category includes gas procurement, contract management, rate
setting, and tracking of legislation and regulation related to the gas industry.
Operations and Maintenance: This category includes the costs of a variety of distribution system
maintenance activities, including:
• surveying the gas system (50% of the system each year) and repairing any leaks found;
• investigating reports of damaged mains or services and perform emergency repairs;
• building and replacing gas services for new or redeveloped buildings; and
• testing and replacing meters to ensure accurate sales metering.
This category also includes a variety of functions the utility shares with other City utilities,
including:
• the Field Services team (which does field research of various customer service issues);
• the Cathodic Protection team (which monitors and maintains the systems that prevent
corrosion in metal pipes and reservoirs); and
• the General Services team (which manages and maintains equipment, paves and restores
streets after gas, water, or sewer main replacements, and provides welding services,
including certified gas line welding services)
Administration: Accounting, purchasing, legal, and other administrative functions provided by
the City’s General Fund staff, as well as shared communications services and Utilities Department
administrative overhead and billing system maintenance costs.
Demand Side Management: Includes the cost of administering gas efficiency programs and the
direct cost of rebates paid.
Engineering (Operating): The Gas Utility’s engineers focus primarily on the CIP, but a small
portion of their time is spent assisting with distribution system maintenance.
APPENDIX E: GAS UTILITY COMMUNICATIONS SAMPLES
APPENDIX C: GAS UTILITY RESERVES MANAGEMENT PRACTICES
The following reserves management practices shall be used when developing the Gas Utility
Financial Plan:
Section 1. Definition
a)“Financial Planning Period” – The Financial Planning Period is the range of future fiscal
years covered by the Financial Plan. For example, if the Financial Plan delivered in
conjunction with the FY 2015 budget includes projections for FY 2015 to FY 2019, FY 2015
to FY 2019 would be the Financial Planning Period.
b)“Fund Balance” – As used in these Reserves Management Practices, Fund Balance refers
to the Utility’s Unrestricted Net Assets.
c)“Net Assets” - The Government Accounting Standards Board defines a Utility’s Net Assets
as the difference between its assets and liabilities.
d)“Unrestricted Net Assets” - The portion of the Utility’s Net Assets not invested in capital
assets (net of related debt) or restricted for debt service or other restricted purposes.
Section 2. Supply Fund Reserves
The Gas Utility’s Supply Fund Balance is reserved for the following purposes:
a)For existing contracts, as described in Section 4 (Reserve for Commitments)
b)For operating and capital budgets re-appropriated from previous years, as described in
Section 5 (Reserve for Re-appropriations)
Section 3. Distribution Fund Reserves
a)For existing contracts, as described in Section 4 (Reserve for Commitments)
b)For operating and capital budgets re-appropriated from previous years, as described in
Section 5 (Reserve for Re-appropriations)
c)For cash flow management and contingencies related to the Gas Utility’s Capital
Improvement Program (CIP), as described in Section 6 (CIP Reserve)
d)For rate stabilization, as described in Section 7 (Rate Stabilization Reserve)
e)For operating contingencies, as described in Section 8 (Operations Reserve)
f)Any funds not included in the other reserves will be considered Unassigned Reserves and
shall be returned to ratepayers or assigned a specific purpose as described in Section 9
(Unassigned Reserves)
Section 4. Reserve for Commitments
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for
Commitments will be set to an amount equal to the total remaining spending authority for
all contracts in force for the Wastewater Collection Utility at that time.
Section 5. Reserve for Reappropriations
At the end of each fiscal year the Gas Supply Fund and Gas Distribution Fund Reserve for
Reappropriations will be set to an amount equal to the amount of all remaining capital and
Attachment C
non-capital budgets, if any, that will be re-appropriated to the following fiscal year for each
fund in accordance with Palo Alto Municipal Code Section 2.28.090.
Section 6. CIP Reserve
The CIP Reserve is used to manage cash flow for capital projects and acts as a reserve for
capital contingencies. Staff will manage the CIP Reserve according to the following practices:
a) The following guideline levels are set forth for the CIP Reserve. These guideline levels are
calculated for each fiscal year of the Financial Planning Period and approved by Council
resolution.
Minimum Level 20% of the maximum CIP Reserve guideline
level l
Maximum Level Average annual (12 month)1 CIP budget, for
48 months of budgeted CIP expenses2
b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and
the Reserve for Commitments when funds are added to or removed from that reserve as
a result of a change in contractual commitments related to CIP projects. Any other
additions to or withdrawals from the CIP reserve require Council action.
c) Minimum Level: If, at the end of any fiscal year, the minimum guideline is not met, staff
shall present a plan to the City Council to replenish the reserve. The plan shall be delivered
by the end of the following fiscal year, and shall, at a minimum, result in the reserve
reaching its minimum level by the end of the next fiscal year. For example, if the CIP
Reserve is below its minimum level at the end of FY 2017, staff must present a plan by
June 30, 2018 to return the reserve to its minimum level by June 30, 2019. In addition,
staff may present, and the Council may adopt, an alternative plan that takes longer than
one year to replenish the reserve, or that does so in a shorter period of time.
d) Maximum Level: If there are funds in this reserve in excess of the maximum level staff
must propose in the next Financial Plan to transfer these funds to another reserve, return
the funds to ratepayers, or designate a specific use of the funds for CIP investments that
will be made by the end of the next Financial Planning Period. Staff may also seek Council
approval to hold funds in this reserve in excess of the maximum level, if they are held for
a specific future purpose related to the CIP.
Section 7. Rate Stabilization Reserve
Funds may be added to the Rate Stabilization Reserve by action of the City Council and held
to manage the trajectory of future year rate increases. Withdrawal of funds from the Rate
Stabilization Reserve requires Council action. If there are funds in the Rate Stabilization
Reserve at the end of any fiscal year, any subsequent Gas Utility Financial Plan must result in
the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. The
1 Each month is calculated based upon 1/12 of the annual budget.
2 For example, in the Financial Plan for FY 2021, the 48 month period to use to derive the annual
average is FY 2021 through FY 2024. In the FY 2022 Financial Plan, the 48 month period to use to
derive the annual average would be FY 2022 through FY 2025 etc.
Council may approve exceptions to this requirement, when proposed by staff to provide
greater rate stabilization to customers.
Section 8. Operations Reserve
The Operations Reserve is used to manage normal variations in costs and as a reserve for
contingencies. Any portion of the Gas Utility’s Fund Balance not included in the reserves
described in Section 4-Section 7 above will be included in the Operations Reserve unless this
reserve has reached its maximum level as set forth in Section 8 d) below. Staff will manage
the Operations Reserve according to the following practices:
a) The following guideline levels are set forth for the Operations Reserve. These guideline
levels are calculated for each fiscal year of the Financial Planning Period based on the
levels of Operations and Maintenance (O&M) and commodity expense forecasted for that
year in the Financial Plan.
Minimum Level 60 days of O&M and commodity expense
Target Level 90 days of O&M and commodity expense
Maximum Level 120 days of O&M and commodity expense
b) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Operations
Reserve are lower than the minimum level set forth above, staff shall present a plan to
the City Council to replenish the reserve. The plan shall be delivered within six months of
the end of the fiscal year, and shall, at a minimum, result in the reserve reaching its
minimum level by the end of the following fiscal year. For example, if the Operations
Reserve is below its minimum level at the end of FY 2014, staff must present a plan by
December 31, 2014 to return the reserve to its minimum level by June 30, 2015. In
addition, staff may present, and the Council may adopt, an alternative plan that takes
longer than one year to replenish the reserve.
c) Target Level: If, at the end of any fiscal year, the Operations Reserve is higher or lower
than the target level, any Financial Plan created for the Gas Utility shall be designed to
return the Operations Reserve to its target level by the end of the forecast period.
d) Maximum Level: If, at any time, the Operations Reserve reaches its maximum level, no
funds may be added to this reserve. Any further increase in the Gas Utility’s Fund Balance
shall be automatically included in the Unassigned Reserve described in Section 9, below.
Section 9. Unassigned Reserve
If the Operations Reserve reaches its maximum level, any further additions to the Gas Utility’s
Fund Balance will be held in the Unassigned Reserve. If there are any funds in the Unassigned
Reserve at the end of any fiscal year, the next Financial Plan presented to the City Council
must include a plan to assign them to a specific purpose or return them to the Gas Utility
ratepayers by the end of the first fiscal year of the next Financial Planning Period. For
example, if there were funds in the Unassigned Reserves at the end of FY 2015, and the next
Financial Planning Period is FY 2016 through FY 2020, the Financial Plan shall include a plan
to return or assign any funds in the Unassigned Reserve by the end of FY 2016. Staff may
present an alternative plan that retains these funds or returns them over a longer period of
time.
Section 10. Intra-Utility Transfers Between Supply and Distribution Funds
The Gas Utility records costs in two separate funds: the Gas Supply Fund and the Gas
Distribution Fund. At the end of each fiscal year staff is authorized to transfer an amount
equal to the difference between Gas Supply Fund costs and Gas Supply Fund Revenues from
the Gas Distribution Fund Operations Reserve to the Gas Supply Fund, or vice versa. Such
transfers shall be included in the ordinance closing the budget for the fiscal year.
Section 11. Cap and Trade Program Reserve
This reserve tracks revenues from the sale of carbon allowances freely allocated by the
California Air Resources Board to the gas utility, under the State’s Cap and Trade Program.
Funds in this Reserve are managed in accordance with the City’s Policy on the Use of Freely
Allocated Allowances under the State’s Cap and Trade Program (the Policy), adopted by
Council Resolution 9487 in January 2015.
RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-1 Sheet No G-1-1
dated 7-1-202019 Effective 7-1-20201
A. APPLICABILITY:
This schedule applies to the following Customers receiving Gas Service from City of Palo Alto
Utilities:1. Separately-metered single-family residential Customers.2.Separately-metered multi-family residential Customers in multi-family residentialfacilities.
B.TERRITORY:
This schedule applies anywhere the City of Palo Alto provides Gas Service.
C. UNBUNDLED RATES:Per Service
Monthly Service Charge: ....................................................................................................$10.8937
Tier 1 Rates: Per Therm
Supply Charges:
1. Commodity (Monthly Market Based) .......................................... $0.10-$2.00 2.Cap and Trade Compliance Charge ............................................ $0.00-$0.25 3. Transportation Charge ................................................................. $0.00-$0.15 4. Carbon Offset Charge .................................................................. $0.00-$0.10
Distribution Charge:....................................................................................... $0.5290038
Tier 2 Rates: (All usage over 100% of Tier 1) Supply Charges:
1.Commodity (Monthly Market Based) .......................................... $0.10-2.00
2.Cap and Trade Compliance Charge ............................................. $0.00-$0.25 3. Transportation Charge ................................................................. $0.00-$0.15 4. Carbon Offset Charge .................................................................. $0.00-$0.10
Distribution Charge:.............................................................................................$1.35262882
D.SPECIAL NOTES:
1. Calculation of Cost Components
Attachment D
RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-2 Sheet No G-1-2
dated 7-1-202019 Effective 7-1-20201
The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as
calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Meter.
The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required.
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced in the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per therm cap.
The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto, accounting for delivery losses to the Customer’s Meter. The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges
will fall within the minimum/maximum ranges set forth in Section C. Current and historic per therm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website.1
2. Seasonal Rate Changes:
The Summer period is effective April 1 to October 31 and the Winter period is effective from November 1 to March 31. When the billing period includes use in both the Summer and the Winter periods, the usage will be prorated based on the number of days in each
seasonal period, and the charges based on the applicable rates for each period. For
further discussion of bill calculation and proration, refer to Rule and Regulation 11.
1 https://www.cityofpaloalto.org/civicax/filebank/documents/30399
RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-3 Sheet No G-1-3
dated 7-1-202019 Effective 7-1-20201
3. Calculation of Usage Tiers Tier 1 natural gas usage shall be calculated and billed based upon a level of 0.667 therms per day during the Summer period and 2.0 therms per day during the Winter period,
rounded to the nearest whole therm, based on meter reading days of service. As an
example, for a 30 day bill, the Tier 1 level would be 20 therms during the Summer period and 60 therms during the Winter period months. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. {End}
RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-2-1 Effective 7-1-20210
dated 7-1-202019 Sheet No G-2-1
A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto
Utilities:
1. Commercial Customers who use less than 250,000 therms per year at one site. 2. Master-metered residential Customers in multi-family residential facilities. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides Gas Service. C. UNBUNDLED RATES: Per Service Monthly Service Charge: ..............................................................................................$10096.0855 Per Therm
Supply Charges: 1. Commodity (Monthly Market Based) .......................................... $0.10-$2.00 2. Cap and Trade Compliance Charges ........................................... $0.00-0.25 3. Transportation Charge ................................................................. $0.00-$0.15 4. Carbon Offset Charge .................................................................. $0.00-$0.10
Distribution Charge: .................................................................................................. $0.6948617 D. SPECIAL NOTES: 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for
delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Meter. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and
Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required.
RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-2-2 Effective 7-1-20210
dated 7-1-202019 Sheet No G-2-2
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases
produced in the burning of natural gas. The Carbon Offset Charge will change in response to
changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per therm cap. The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto,
accounting for delivery losses to the Customer’s Meter.
The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic per therm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and
Transportation Charges are posted on the City Utilities website.1
{End}
1 https://www.cityofpaloalto.org/civicax/filebank/documents/30399
LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3
CITY OF PALO ALTO UTILITIES Issued by the City Council
Supersedes Sheet No G-3-1 Effective 7-1-20201
dated 7-1-202019 Sheet No G-3-1
A. APPLICABILITY: This schedule applies to the following Customers receiving Gas Service from the City of Palo
Alto Utilities:
1. Commercial Customers who use at least 250,000 therms per year at one site. 2. Customers at City-owned generation facilities. B. TERRITORY:
This schedule applies anywhere the City of Palo Alto provides Gas Service. C. UNBUNDLED RATES: Per Service
Monthly Service Charge: $46139.463
Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .................................................... $0.10-$2.00
2. Cap and Trade Compliance Charges ...................................................... $0.00-0.25
3. Transportation Charge .......................................................................... $0.00-$0.15 4. Carbon Offset Charge ........................................................................... $0.00-$0.10 Distribution Charge: .......................................................................................................$0.6879551
D. SPECIAL NOTES: 1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity Charge is based on the monthly natural gas Bidweek Price Index for
delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Meter. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance
LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3
CITY OF PALO ALTO UTILITIES Issued by the City Council
Supersedes Sheet No G-3-2 Effective 7-1-20201
dated 7-1-202019 Sheet No G-3-2
instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required.
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced in the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-approved per therm cap.
The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto, accounting for delivery losses to the Customer’s Meter. The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges
will fall within the minimum/maximum ranges set forth in Section C. Current and historic
per therm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website.1 2. Request for Service A qualifying Customer may request service under this schedule for more than one
account or meter if the accounts are located on one site. A site consists of one or more
contiguous parcels of land with no intervening public right-of- ways (e.g. streets). 3. Changing Rate Schedules Customers may request a rate schedule change at any time to any applicable City of Palo Alto full-service rate schedule.
{End}
1 https://www.cityofpaloalto.org/civicax/filebank/documents/30399
COMPRESSED NATURAL GAS SERVICE
UTILITY RATE SCHEDULE G-10
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-10-1 Effective 7-1-20201
dated 7-1-202019 Sheet No. G-10-1
A. APPLICABILITY: This schedule applies to the sale of natural gas to the City-owned compressed natural gas (CNG) fueling station at the Municipal Service Center in Palo Alto. B. TERRITORY: Applies to the City’s CNG fueling station located at the Municipal Service Center in City of Palo Alto. C. UNBUNDLED RATES: Per Service Monthly Service Charge: ..................................................................................................$648.2196 Per Therm Supply Charges:
Commodity (Monthly Market Based) ................................................................ $0.10-$2.00 Cap and Trade Compliance Charges .............................................................. $0.00 to $0.25 Transportation Charge ....................................................................................... $0.00-$0.15 Carbon Offset Charge ........................................................................................ $0.00-$0.10
Distribution Charge ...........................................................................................................$0.011308 D. SPECIAL CONDITIONS 1. Calculation of Cost Components The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. The Commodity charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, accounting for delivery losses to the Customer’s Meter. The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the
state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to
cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge will change in response to changing market conditions, retail sales volumes and the quantity of allowances required.
COMPRESSED NATURAL GAS SERVICE
UTILITY RATE SCHEDULE G-10
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-10-2 Effective 7-1-20201
dated 7-1-202019 Sheet No. G-10-2
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced in the burning of natural gas. The Carbon Offset Charge will change in response to changing market conditions, changing sales volumes and the quantity of offsets purchased within the Council-
approved per therm cap.
The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto, accounting for delivery losses to the Customer’s Meter.
The Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges will fall
within the minimum/maximum range set forth in Section C. Current and historic per therm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website.1 {End}
1 https://www.cityofpaloalto.org/civicax/filebank/documents/30399