HomeMy WebLinkAboutStaff Report 14872
City of Palo Alto (ID # 14872)
Finance Committee Staff Report
Meeting Date: 11/15/2022 Report Type:
City of Palo Alto Page 1
Title: Staff and the Utility Advisory Commission Recommend that the Finance
Committee Recommend the City Council Adopt a Resolution Amending the E -
HRA (Electric Hydro Rate Adjuster) Rate Schedule, Increasing the Current E -
HRA Rate to $0.026/kwWh Effective January 1, 2023
From: City Manager
Lead Department: Utilities
Recommended Motion
Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee
recommend the City Council adopt a resolution amending the Electric Hydro Rate Adjuster (E-
HRA), effective January 1, 2023, to reflect current hydrological conditions and market purchase
costs. This would double the existing E-HRA surcharges and discounts across all levels,
increasing the current E-HRA rate from $0.013/kwh to $0.026/kwh.
Executive Summary
Power available to the City of Palo Alto from hydroelectric resources is reduced due to the
ongoing drought. Reduced hydro output has resulted in increased demand for market power
resources which is largely comprised of gas-fired generation. The increase in demand combined
with high fossil fuel prices caused by unstable socio-political conditions has resulted in power
prices that are nearly double the values used to calculate the existing E-HRA surcharge. Hydro
Stabilization Reserves (HSR) have been exhausted, and Operations Reserves are being
negatively impacted by ongoing higher costs.
Staff recommends increasing the E-HRA from $0.013/kWh to $0.026/kWh to reflect current
market costs and continued drought conditions. This change will double the existing E-HRA
surcharges and discounts across all adjustment levels, and fund Operations reserve levels above
the minimum guidelines if market prices remain in the forecasted range during the fiscal year.
The E-HRA rate creates a temporary rate increase. When triggered, the proposed E-HRA
increase is approximately a 7% or $6.37 increase for a median electric residential customer,
which remains 45% below a comparable PG&E customer.
Background
The City has access to a large amount of relatively low-cost, carbon free hydroelectric
generation to meet its electric supply needs. Whereas hydroelectric generation supplies about
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10% of the overall electric supply for California, the City meets about 50% of its electric supply
needs with hydro generation in an average year.
The drawback to maintaining such a heavy reliance on hydroelectric generation is that the
output of these resources is highly sensitive to weather conditions. Although the City receives
about 50% of its electric supplies from its hydroelectric resources in a “normal” weather year,
that amount can fall to as low as 20% in extremely dry years. And unlike many of the City’s
supply contracts, where the cost of the resource is proportional to the amount of generation
delivered, the City essentially pays a fixed amount every year for the output of its two
hydroelectric resources (Western Base Resource and the Calaveras project) regardless of the
amount of electricity they produce.
The City purchases additional supply resources (generic market power and, to comply with the
Carbon Neutral Plan, renewable energy certificates, or RECs) to make up for the reduced
hydroelectric output in these dry years. Compounding the problem, market power prices are
often higher in dry years, when the City must purchase more, because the entire state is
experiencing reduced hydro supply conditions. Market prices are influenced by inflation,
weather, alternative fuel costs, and global supply and demand.
Figure 1, below, illustrates this relationship between the City’s annual market purchase costs
and the amount of hydroelectric generation it receives.
Figure 1: Annual Hydro Generation vs. Market Purchase Costs (2012-2022)
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In 2005, when a new “Contract for Electric Service-Base Resource” with the Western Area
Power Administration (Western or WAPA) increased the City’s exposure to hydro variability,
Council adopted a policy of maintaining reserves, combined with “laddered” market purchases,
to manage this variability1.
In 2018, Council adopted the E-HRA mechanism (CMR 89622) to manage the financial impacts
of the annual variability in production of the City’s hydroelectric resource. The E-HRA and the
HSR are used to stabilize electric rates when hydrological conditions are either poor, as is
currently the case, or exceptionally good, and activation of the E-HRA is based on staff’s
evaluation of hydro generation availability and the HS Reserve level. When the HS Reserve falls
below 25% of its maximum ($11 million) and hydro generation is projected to be below normal
through the end of the current fiscal year, the E-HRA surcharge is applied. The resulting
revenues are used to fund the additional short-term costs of providing electric service. When
drought conditions subside and/or HS Reserves are within guideline ranges, the surcharge can
be de-activated and standard rates can resume.
In 2018, staff developed the E-HRA mechanism utilizing a 20-year simulation model, estimating
reserve needs under periods of both above average hydro generation as well as periods of
extended drought. The model estimated high market prices during periods of drought using
generation prices that were high at the time, about $47/MWh. As market costs have increased
above this level, staff recommends amending the HRA structure to update energy prices to
reflect current conditions. The model’s generation levels remain valid.
The E-HRA rate creates either a temporary 4% rate increase (at the $0.0065/kWh level) or an
8% increase (at the $0.013/kWh level)3. The proposed E-HRA increase of $0.013/kWh (from
$0.013 to $0.026) is approximately a 7% or $6.37 increase for a median electric residential
customer which remains 45% below a comparable PG&E customer.
In March 2022, in response to rapidly worsening drought conditions in California, Council
adopted changes to the E-HRA surcharge (CMR 139054), broadening the conditions under which
the rate could be utilized and activating the rate effective April 1, 2022. This was done to help
lower longer-term average rates, as well as help maintain general reserve health.
Discussion
1 As described in Palo Alto’s current Long-term Electric Acquisition Plan (LEAP) Objectives and Strategies:
https://www.cityofpaloalto.org/files/assets/public/environment-in-palo-alto/energy-compost-facility-
consideration/leap-objectives-and-strategies-april-2012.pdf
2 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/year-archive/2018/final-staff-report-id-8962_hydroelectric-rate-adjustment-mechanism-adoption.pdf
3 For the median Palo Alto household, which consumes approximately 490 kWh/month, rate adjustments of 0.65
¢/kWh, 1.3 ¢/kWh, and 1.8 ¢/kWh equate to monthly bill impacts of $3.19, $6.37, and $8.82, respectively.
4 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2022/20220314/20220314pccsm-amended-final-revised-ppt.pdf
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The City receives power from two hydroelectric projects, the Calaveras project and the Western
Base Resource contract for Federal hydropower from the Central Valley Project.5 The
watershed for Western hydropower is primarily in the northern end of California, while the
watershed for the Calaveras project is in the Central Sierras.
Power from these sources is reduced under continued drought conditions. For water year 2020-
2021 (October 2020 to September 2021), total precipitation was just below 50% of average in
both watersheds. For water year 2021-2022, total precipitation was about 80% of average in
Northern California and about 63% of average in the Central Sierras. As shown in Table 1 total
actual hydropower for FY 2021 was 295 GWh, which is 183 GWh (38%) below the long-term
average, and total actual hydropower for FY 2022 was 230 GWh, which is 250 GWh (52%) below
the long-term average.6
Table 1: Hydro Generation FY 2021-22 Actuals (GWh)
Hydro Generation FY 2021 FY 2022
Calaveras Actuals 49 61
Western Actuals 246 169
Total Hydro Generation 295 230
Long-term Average Total (%) 61% 48%
Long-term Average Total Hydro 481 481
Reservoir levels remain very low across Northern and Central California. Most reservoirs are 30-
50% below their average levels for this time of year. As a result, Palo Alto’s hydroelectric
projections are approximately 275 GWh for this fiscal year, which is about 57% of the long-term
average level of hydro output, and 377 GWh for FY 2024, which is 78% of the long-term average
level.
When Council activated at the $0.013/kwh level effective April 1, 2022, projected hydro output
was about 310 GWh/year and HSR funds were projected to be drawn below $11 million7 by the
end of FY 2022. Market prices are now around $93/MWh, or roughly double the price used to
estimate the existing E-HRA rates. Actual power supply costs for FY 2022 were about $16
million more than the adopted budget, and FY 2023 costs are higher than expected. As a result,
in June 2022, staff requested a $15 million transfer of HSR funds to the Operations Reserve to
5 The Calaveras project is a hydropower project located in Calaveras County that is maintained and operated by the
Northern California Power Agency on behalf of the City and other project participants. The City is also one of
several public entities with contracts with the Western Area Power Administration for “Base Resource” electricity,
which is the hydroelectric power available from the Federal Government’s Central Valley Project (operated by the
Bureau of Reclamation) after accounting for power used for Central Valley Project operations and power delivered
to certain “preference” customers.
6The long-term average forecast levels for both Western and Calaveras have been revised downward (about 10%
each) in recent years to reflect the impact of climate change. These values may need to be revisited again in the
coming years.
7 When the HS Reserve level falls below 25% of its maximum, or $11 million, the E-HRA can be activated if
projected hydro generation is also below 480 GWh/yr
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offset costs in FY 2022. The E-HRA rate offset $1.5 million of higher costs that remained after
the $15 million HS Reserve transfer. $400,000 remains in the Hydro Stabilization Reserve.
While the FY 2022 Annual Comprehensive Financial Report is still being reviewed by auditors,
the current ending balance for the Supply Operations Reserve is approximately $22.2 million.
This is about $3.3 million above the Council-adopted minimum guideline levels for FY 20238.
Current projections are that purchase costs will be $9 million higher than projected in the FY
2023 Financial Plan, which will bring the Operations Reserve well below minimum by the end of
FY 2023. Amending the E-HRA rate is projected to generate an additional $5 million in E-HRA
revenues and keep the Supply Operations Reserve above minimum, as shown in Table 2 below:
Table 2: Projected FY 2023 Supply Operations Reserve Balances (Million $’s)
FY 2023 Financial Plan Current Projections
Beginning Supply Operations Reserve Balance 33,046 22,197
Net Fund Revenues/(Expenses) 927 927
Additional Purchase Cost N/A (9,000)
Proposed Additional E-HRA Revenue N/A 5,000
Ending Supply Operations Reserve Balance 34,973 19,124
Supply Operations Reserve Minimum Guideline 18,843 18,843
Based on the current sales trends for FY 2023, staff estimates the existing $0.013/kwh adjuster
will generate $10.25 million in the Electric Fund in FY 2023, as projected in the FY 2023
Financial Plan. Doubling the E-HRA rate as shown in Table 4 is projected to bring the Electric
Fund approximately $5 million in additional revenues in FY 2023 assuming an effective date of
January 1, 2023. If purchase power costs increase further, however, Supply Operations
Reserves may still drop below minimum guideline levels.
Table 3: Current Hydro Rate Adjustments ($/kWh)
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.0065) $(0.0065) $(0.018)
75% to 100%
($27 to $35 million)
$- $- $(0.0065) $(0.013)
25% to 75%
($11 to $27 million)
$- $- $- $-
8 FY 2023 Electric Financial Plan, adopted June 13, 2022, CMR 13661:
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-
councilagendas-minutes/2022/20220613/20220613pccsm-final-amended-linked.pdf
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25% and below
(<$11 million)
$0.013 $0.0065 $- $-
Table 4: Proposed Hydro Rate Adjustments ($/kWh)
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.013) $(0.013) $(0.036)
75% to 100%
($27 to $35 million)
$- $- $(0.013) $(0.026)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.026 $0.013 $- $-
The alternative to increasing the E-HRA surcharge is implementing a general rate increase.
Utilizing the E-HRA is a targeted way to mitigate the impacts of hydro generation and supply
cost fluctuations. When conditions stabilize, the E-HRA can be quickly be amended, leaving the
base rates intact. If higher market conditions persist or appear to be a ‘new normal’, or larger
long-term reserves are needed, general rates can be increased at the next fiscal year and the E-
HRA brought to zero as additional revenue recovery is not needed.
Resource Impact
Based on the current sales trends for FY 2023, the estimated revenue impacts for the existing
$0.013/kwh adjuster would be an increase of $10.25 million in the Electric Fund in FY 2023.
With the recommendation, annual revenues would double to $20.5 million, or an additional
$5.12 million for the latter half of FY 2023. The City is a utility customer so rate increases will
also result in City expense increases. Resource impacts to City departments and funds of the
recommended rate adjustments will be reflected in the midyear budget process.
Policy Implications
The proposed Electric Hydro Rate Adjuster (E-HRA) rate amendment is consistent with Council-
adopted Reserve Management Practices that are part of the adopted 2023 Electric Financial
Plans.
Stakeholder Engagement
The UAC heard staff’s request at its November 2, 2022 meeting. At that meeting, the UAC
agreed that, given the escalating costs of purchasing electricity, that the rate increase was
prudent. The UAC approved Staff’s motion unanimously.
Given the need to implement this rate quickly and avoid further net revenue loss and prevent
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falling below minimum reserve guidelines, Council is scheduled to consider these amendments
in December 2022.
Environmental Review
The Finance Committee’s review of the attached amendment to the E-HRA rate does not meet
the California Environmental Quality Act’s definition of a project, pursuant to Public Resources
Code Section 21065 and CEQA Guidelines Section 15378(b)(4) and (5), because it is a
governmental fiscal and administrative activity which will not cause a direct or indirect physical
change in the environment.
Attachments:
• Attachment A: Resolution Amending the Electric Hydro Rate Adjuster (E-HRA)
• Attachment B: Proposed Electric Hydro Rate Adjuster (E-HRA)
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Attachment A
6056681 1
Reference Document: Utility Rate Schedule E-HRA
Resolution No.___
Resolution of the Council of the City of Palo Alto Amending Electric
Rate Schedule E-HRA (Electric Hydro Rate Adjuster), Increasing the
Current E-HRA Rate to $0.026/kWh Effective January 1, 2023
R E C I T A L S
A. Hydroelectric Rate Adjustment mechanisms are designed to modify customer
rates, either up or down, such that overall sales revenue is aligned with supply costs for the
electric utility.
B. Hydroelectric Rate Adjustment mechanisms are intended to enable the electric
utility to maintain a reasonably stable level of financial reserves, and maintain base electric
rates at lower levels over the long term.
C. In 2018, staff developed the E-HRA rate mechanism utilizing a 20-year
simulation model, estimating reserve needs under periods of both above average hydro
generation as well as periods of extended drought. The model estimated high market prices
during periods of drought using generation prices that were high at the time, about $47/MWh.
Since then, multi-year drought conditions, rising inflation, increased market costs for
alternative fuels and uncertainty in natural gas markets have nearly doubled the market costs
for electricity. The existing E-HRA rate is no longer collecting enough revenue to adequately
offset required market purchases.
D. Section D(2)(a) of the Council-adopted E-HRA Rate Schedule directs staff to
calculate the Hydro Rate Adjustment annually in May. E-HRA activation may also occur at other
times throughout the year, such as when hydrologic conditions are poor and Hydroelectric
Stabilization Reserve levels are projected to fall below the 25% level within the current fiscal
year.
E. Therefore, staff recommends the Council modify the E-HRA rate schedule to
reflect updated market supply costs and hydrologic conditions, and mitigate Operations
Reserve impacts.
F. 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.
The Council of the City of Palo Alto hereby RESOLVES as follows:
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Attachment A
6056681 2
Reference Document: Utility Rate Schedule E-HRA
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule E-HRA (Electric Hydro Rate Adjuster) is added as attached and incorporated.
Utility Rate Schedule E-HRA, as amended, shall become effective January 1, 2023.
SECTION 2. As a result, on January 1, 2023 the $0.013/kWh E-HRA rate activated by
Council on March 14, 2022, and effective April 1, 2022, will increase to $0.026/kWh.
SECTION 3. The Council finds that the revenue derived from the adoption of this
resolution shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of
the City of Palo Alto.
SECTION 4. 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.
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Attachment A
6056681 3
Reference Document: Utility Rate Schedule E-HRA
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SECTION 5. The Council finds that the adoption of this resolution changing electric
rates to meet operating expenses and meet financial reserve needs 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
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ELECTRIC HYDRO RATE ADJUSTER
UTILITY RATE SCHEDULE E-HRA
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No EHRA-1 Sheet No E-HRA-1
dated 47-1-20221 Effective 14-1-20232
A. APPLICABILITY:
This schedule applies to all Customers receiving Electric Service from the City of Palo Alto
Utilities.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Electric Service.
C. RATES:
Per kWh
Hydro Rate Adjustment: ...............................................................................($0.03618) - $0.02613
D. SPECIAL NOTES:
1. Hydro Rate Adjustment
a. The Hydro Rate Adjustment is a surcharge or discount applied to Electric rates based
on the strength of the City’s hydrological generation portfolio, applied to manage
volatility in energy costs and generation and the impact of that volatility on customer
rates.
b. The Hydro Rate Adjustment is determined based on the level of funding in the Hydro
Stabilization Reserve, including transfers or withdrawals projected to be made in the
current fiscal year according to the City’s Electric Utility Reserve Management
Practices, and on the forecasted amount of annual generation the City of Palo Alto
Utilities will receive from its hydroelectric generation resources through the end of the
current fiscal year.
2. Calculation of Hydro Rate Adjustment
a. Staff calculates the Hydro Rate Adjustment surcharge or discount annually in May, or
whenever hydrologic conditions are poor and Hydro Stabilization Reserves are
projected to fall below the 25% level within the current fiscal year.
b. The Hydro Rate Adjustment will be applied to all Customers’ Electric rate schedules
upon Council approval, and re-evaluated annually.
c. The Hydro Rate Adjustment surcharge or discount will fall within the
minimum/maximum range set forth in Section C, and will be applied as follows:
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ELECTRIC HYDRO RATE ADJUSTER
UTILITY RATE SCHEDULE E-HRA
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No EHRA-2 Sheet No E-HRA-2
dated 47-1-20221 Effective 14-1-20232
Hydro Rate Adjustment ($/kWh)
Hydro
Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above
Maximum
$- $(0.013065) $(0.013065) $(0.03618)
75% to 100% $- $- $(0.013065) $(0.02613)
25% to 75% $- $- $- $-
25% and below $0.02613 $0.013065 $- $-
{End}
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