HomeMy WebLinkAboutStaff Report 14975
City of Palo Alto (ID # 14975)
Finance Committee Staff Report
Meeting Date: 11/29/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Staff Recommends the Finance Committee Recommend the City Council
Adopt a Resolution Amending Electric Rate Schedule E -HRA (Electric Hydro
Rate Adjuster) Increasing the Current E -HRA Rate to $0.050/kWh Effective
January 1, 2023
From: City Manager
Lead Department: Utilities
Recommended Motion
Staff recommends that the Finance Committee recommend the City Council adopt a Resolution
of the Council of the City of Palo Alto Amending the Electric Hydro Rate Adjuster rate schedule
(E-HRA), Increasing the Current E-HRA Rate to $0.050/kWh Effective January 1, 2023, to reflect
current hydrological conditions and market purchase costs. This would replace the existing E-
HRA surcharges and discounts across all levels, and increase the current E -HRA rate from
$0.013/kWh to $0.050/kWh .
Executive Summary
Power available to the City of Palo Alto (City or 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 greater than 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 higher ongoing costs.
On November 2, 2022, staff recommended, and the Utilities Advisory Commission approved,
increasing the E-HRA from $0.013/kWh to $0.026/kWh (ID# 14837). However, further increases
to electric purchase cost from September projections are prompting staff to revise their
recommendation.
Staff has provided two E-HRA alternatives for Finance Committee consideration. Both
alternatives aim to keep the Electric Supply Operations Reserve (E-SOR) above minimum
guideline levels at the end of FY 2023. Alternative #1 results in a projected E-SOR slightly higher
than the minimum guideline, while Alternative #2 adds additional supporting funds to the E-
SOR.
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Staff recommends Alternative #2 to the Finance Committee, increasing the current $0.013/kwh
surcharge to $0.05/kwh forecasted to end June 30, 2023. This change will preserve reserve
levels above the minimum guidelines if market prices remain in the forecasted range during the
fiscal year. Activation of the E-HRA surcharge creates a temporary rate increase. When
triggered, the proposed E-HRA increase is approximately a 21% or $18.13 monthly increase for
a median electric residential customer, which remains 38% below a comparable PG&E
customer.
Staff expects that the E-HRA will have to be modified again in July. If market costs continue to
be high, staff will likely increase base electric rates to reflect the new commodity cost
environment, and the E-HRA would be reduced. As part of the FY 2023 rate setting the Utilities
department will evaluate and recalibrate electric rates and adapt to the changing market.
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
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 comp ly with the
Carbon Neutral Plan, renewable energy certificates, or RECs) to make up for the reduced
hydroelectric output during dry years. Compounding the problem, market power prices are
often higher in dry years when the City must purchase more because t he 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 purcha se 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 (Wester 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 (ID 8962) to manage the financial impacts of
the annual variability in production of the City’s hydroelectric resource. The E-HRA and the HS
Reserve are used to stabilize electric rates when hydrological conditions are either poor, as is
currently the case, or exceptionally good. 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
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
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above this level, staff recommends amending the E-HRA structure to update energy prices to
reflect current conditions. The model’s generation levels remain valid.
The E-HRA rate structure in effect now can result in either a 4% rate increase (at the
$0.0065/kWh level) or an 8% increase (at the $0.013/kWh level)2. The proposed E-HRA increase
of $0.037/kWh (from $0.013 to $0.050) is approximately a 21% or $18.13/month increase for a
median electric residential customer and 38% 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 (ID 13905), 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
The City receives power from two hydroelectric projects, the Calavera s project and the Western
Base Resource contract for Federal hydropower from the Central Valley Project.3 The
watershed for Western hydropower is primarily in the northern end of California, while the
watershed for the Calaveras project is in the Central S ierras.
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 below 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.4
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%
2 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.
3 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” el ectricity,
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.
4The 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.
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Long-term Average Total Hydro 481 481
Reservoir levels remain very low across Northern and Central California. Most reservoirs are 30
to 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 the E-HRA 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
million5 by the end of FY 2022. Market prices are now more than double the price used to
estimate the existing E-HRA rate. Actual power supply costs for FY 2022 were about $16 million
more than adopted budget levels, and FY 2023 costs are projected to be similarly high. As a
result, staff requested a transfer of all $15 million of HSR funds to the Operations Reserve to
offset costs in FY 2022. Council’s activation of 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 Reserves.
While the FY 2022 Annual Comprehensive Financial Report is still being reviewed , the
unaudited 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 20236.
Updated November estimates for FY 2023 electric purchase costs are now $16.1 million more
than budget, compared to the $9 million previously estimated and cited in the November 2 UAC
staff report (which was based on September data). The proposal provided to the UAC was to
increase the E-HRA to $0.026/kwh, resulting in about $5 million in additional revenue (over the
last 6 months of FY 2023). Based upon updated purchase cost estimates, this would still leave
the Supply Operations Reserve roughly $6.8 million below minimum guideline levels at the end
of FY 2023, as shown in Table 2 below:
Table 2: Projected FY 2023 Supply Operations Reserve Balances (Million $’s)
($’s in millions) FY 2023
Financial Plan
(Adptd Budget)
UAC
Projections
(Nov 2022)
Updated
Projections
($0.026/kwh surcharge)
Beginning Supply Operations Reserve
Balance $33,046 $22,197 $22,197
Net Fund Revenues/(Expenses) 927 927 927
Revenue: Proposed Additional E-HRA N/A 5,000 5,000
5 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.
6 FY 2023 Electric Financial Plan, adopted June 13, 2022, Staff Report ID# 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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Expense: Additional Purchase Cost N/A (9,000) (16,100)
Ending Supply Operations Reserve Balance $34,973 $19,124 $12,024
Supply Operations Reserve Minimum
Guideline $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 over all of FY 2023, as projected in the FY 2023
Financial Plan.
In November 2022, staff proposed the UAC recommend doubling of the E-HRA rate, as shown in
Table 6, which is projected to bring the Electric Fund appr oximately $5 million in additional
revenues in FY 2023 assuming an effective date of January 1, 2023.
Staff has determined that meeting the revised supply cost increases and keeping reserves at or
above minimum guideline levels, would require increasing the E-HRA surcharge to at least
$0.044/kwh. However, even this would result in an ending Supply Operations Reserve lower
than the original UAC proposal.
To keep the Supply Operations Reserve from eroding further, staff has provided two
alternatives in Table 3 below: Alternative #1 which provides for $1.6 million above minimum
guideline levels by the end of FY 2023, and Alternative #2, which provides for $2.4 million above
minimum levels by the end of FY 2023.
Table 3: Projected FY 2023 Supply Operations Reserve Balances (Million $’s)
FY 2023
Financial
Plan
UAC Proposal
($0.026/kwh
surcharge)
Alternative #1
($0.048/kwh
surcharge)
Alternative #2
($0.050/kwh
surcharge)
Beginning Supply Operations
Reserve Balance $33,046 $22,197 $22,197 $22,197
Net Fund Revenue (Expense) 927 927 927 927
Revenue: New E-HRA Revenue N/A 5,000 13,462 14,231
Expense: Additional Purchase Cost N/A (9,000) (16,100) (16,100)
Ending Supply Operations Reserve
Balance $34,973 $19,124 $20,486 $21,255
Supply Operations Reserve
Minimum Guideline $18,843
For reference, each additional $0.001/kwh would add about $380,000 to FY 2023 revenues,
based on current sales estimates.
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Table 4 shows the relative bill impacts of these proposals on a median electric customer , as well
as how far below comparable PG&E bills the new rates would be:
Table 4: Bill Impacts
Current
($0.013/kwh
surcharge)
UAC Proposal
($0.026/kwh
surcharge)
Alternative #1
($0.048/kwh
surcharge)
Alternative #2
($0.050/kwh
surcharge)
Monthly bill $86.57 $92.94 $103.72 $104.70
Bill Impact ($) - 6.37 17.15 18.13
Bill Impact (%) - 7% 20% 21%
% Below PG&E 49% 45% 39% 35%
The current E-HRA levels are shown in Table 5:
Table 5: 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)
$- $- $- $-
25% and below
(<$11 million)
$0.013 $0.0065 $- $-
The proposed E-HRA as presented to the UAC on November 2, 2022 is shown in Table 6:
Table 6: Proposed Hydro Rate Adjustments at November 2022 UAC meeting ($/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% $- $- $- $-
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($11 to $27 million)
25% and below
(<$11 million)
$0.026 $0.013 $- $-
Table 7 shows the overall revised rates under Alternative #1:
Table 7: Proposed Hydro Rate Adjustments ($/kWh) – Alternative #1
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)
$- $(0.024) $(0.024) $(0.066)
75% to 100%
($27 to $35 million)
$- $- $(0.024) $(0.048)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.048 $0.024 $- $-
Table 8 shows the overall revised rates under Alternative #2:
Table 8: Proposed Hydro Rate Adjustments ($/kWh) -Alternative #2
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)
$- $(0.029) $(0.029) $(0.069)
75% to 100%
($27 to $35 million)
$- $- $(0.029) $(0.050)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.050 $0.029 $- $-
While either of the alternative increases shown would keep the Supply Operations Reserve
above minimum if all other revenue and expense conditions hold, it is still possible that external
factors (higher/lower market prices, reduced/increased sales, etc.) could positively or
negatively impact the Operations Reserve by fiscal year end.
E-HRA going forward
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Staff expects that the E-HRA will have to be modified again in July. If market costs continue to
be high, staff will likely increase base electric rates to reflect the new commodity cost
environment, and the E-HRA would be reduced. Staff is also investigating an alterna tive
mechanism for passing through cost variations from budget, to be provided and reviewed
during the upcoming FY 2024 budget cycle.
Staff Proposed Alternative
Staff recommends that the Finance Committee recommend that City Council adopt the rates
shown in Table 8 (Alternative #2).
While this proposal is different from what the Utilities Advisory Commission reviewed in
November, staff feels that the projected continued increases to electricity costs from what was
seen back in September warrant the change. Further, given the burgeoning electricity costs and
the relatively low level of current Operations Reserves, staff believes the higher Alternative #2
rate would place the Electric Utility in a better financial position for FY 2023 and beyond.
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. If higher market prices 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 re venue impacts for the existing
$0.013/kwh adjuster is an increase of $10.25 million in the Electric Fund in FY 2023, which has
already been included in the adopted budget.
If, in December 2022, Council additionally adopts:
• UAC proposal ($0.026/kWh), FY 2023 revenues would increase by $5 million;
• Alternative #1 ($0.048/kWh), FY 2023 revenues would increase by $13.5 million; and
• Alternative #2 ($0.050/kWh), FY 2023 revenues would increase by $14.2 million.
Staff’s recommendation is Alternative #2. 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 mid-year 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 considered staff’s request (Table 6) at its November 2, 2022 meeting. At that meeting,
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the UAC agreed that, given the escalating costs of purchasing electricity, that the rate increase
was prudent. The UAC approved Staff’s motion unanimously.
Staff will provide a subsequent memo the UAC informing of them of staff’s modified
recommendation, as well as the Finance Committee’s actions on that recommendation.
Environmental Review
The Finance Committee’s recommendation that Council amend the E-HRA rate does not meet
the California Environmental Quality Act’s definition of a project, pursuant to Public Resources
Code 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
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Attachment A
6056681F 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 $0.050/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 original model inputs have changed
since then, with multi-year drought conditions, rising inflation, increased market costs for
alternative fuels, and uncertainty in natural gas markets greatly increasing 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:
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.
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Attachment A
6056681F 2
Reference Document: Utility Rate Schedule E-HRA
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 $0.050/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
6056681F 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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