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HomeMy WebLinkAboutStaff Report 2504-4606CITY OF PALO ALTO Finance Committee Regular Meeting Wednesday, May 07, 2025   Agenda Item     2.Infrastructure and Environment: (9:30 AM – 11:00 AM) Staff Presentation a) Utilities: Operating 1) Electric Fund (O: 429-444) 2) Fiber Optics Fund (O: 445-452) 3) Gas Fund (O: 453-466) a) Gas Fund b) Recommendation to the City Council to Adopt a Resolution Approving the FY 2026 Gas Utility Financial Forecast and Reserve Transfers, the Natural Gas Cost of Service and Rate Study, and General Fund Transfer; and 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) and Implement a Climate Credit in FY 2026 Supplemental Report 4) Wastewater Collection Fund (O: 467-478) 5) Water Fund (O: 479-492) b) Public Works: Operating 1) General Fund (O: 345-362) 2) Airport Fund (O: 363-372) 3) Refuse Fund (O: 373-384) 4) Stormwater Management Fund (O: 385-398) 5) Vehicle Replacement and Maintenance Fund (O: 399-408) c) Wastewater Treatment Fund (O: 409-420) Item No. 2.a, 3.b. Page 1 of 2 7 2 0 3 Finance Committee Supplemental Report From: Kiely Nose, Interim Director of Utilities Meeting Date: May 7, 2025 Item Number: 2.a, 3.b Report #:2504-4606 TITLE Recommendation to the City Council to Adopt a Resolution Approving the FY 2026 Gas Utility Financial Forecast and Reserve Transfers, the Natural Gas Cost of Service and Rate Study, and General Fund Transfer; and 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) and Implement a Climate Credit in FY 2026 RECOMMENDATION This item is a continuation of the item discussed with the Finance Committee on April 15, 2025. Staff originally recommended the City Council to Adopt a Resolution Approving the FY 2026 Gas Utility Financial Forecast and Reserve Transfers, the Natural Gas Cost of Service and Rate Study, and General Fund Transfer; and 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) and Implement a Climate Credit in FY 2026. Alternatively, staff have identified options for the Committee to consider ultimately with an alternative recommendation for consideration: Committee provide feedback to staff to revise the proposed FY 2026 rates to retain the current FY 2025 rate structure, with rate increases to meet the revenue requirements for FY 2026, and provide a one-time climate credit to some of the G2 small commercial customers (small and medium meter capacities), approximately $1.1 million. BACKGROUND / ANALYSIS On April 15, 2025, the Finance Committee discussed a Recommendation to the City Council to Adopt a Resolution Approving the FY 26 Gas Utility Financial Forecast and Reserve Transfers, the Natural Gas Cost of Service and Rate Study, and General Fund Transfer. The Finance Committee did not take any action on that date and continued the meeting to May 7, 2025. The Finance Committee directed staff to return on May 7, 2025 with answers to a series of questions on climate credit options for residential gas customers as well as provide information Item No. 2.a, 3.b. Page 2 of 2 7 2 0 3 on the Natural Gas Cost of Service and Rate Study. Staff will share this information via a presentation on May 7, 2025 and continue the discussion with the Finance Committee members Overall, staff recognize a key step in the COSA process was not completed, which was typically a public discussion to kick off the study with the appropriate body to discuss guiding principles and legal requirements. Cost of Service Analyses are intended to provide an objective and accurate study of the aggregate cost to provide a service, and how to allocate that cost across customer base, which then informs rate-setting decisions. However, staff recognizes that stakeholder engagement and feedback is a critical step in the rate-setting process. The 2025 COSA proposes to re-allocate costs between the G1 and G2 customer classes. In light of the feedback from the Finance Committee and residents on this revised cost allocation, staff recommends that the 2025 COSA continue to be reviewed with the UAC for further refinement in advance of and in preparation for implementation as part of the FY 2027 rate setting process. In the interim, staff recommend the committee adopt the current FY 2025 rate structure, with rate increases to meet the revenue requirements for FY 2026, and provide a one-time climate credit to some of the G2 small commercial customers (small and medium meter capacities), using approximately $1.1 million in funding from the City’s Cap and Trade program revenue. The City’s gas utility sells freely allocated allowances which generates revenue. The City receives allowances as part of its State-mandated participation in the Western Climate Initiative Cap and Trade Program (Cap and Trade). Council has adopted a policy for the use of Cap and Trade revenues identifying a preference for emissions reductions, though it does not preclude use of funds for climate credits. Climate credits are a legally permissible and commonly used by electric and gas utilities. For example, PG&E has issued climate credits to its residential and commercial customers for several years. There are approximately $13.6 million in available funds as a result of spending delays through the pandemic. These funds must be spent within 10 years of collection and a credit demonstrates a continued necessity and use of these funds. Allocating climate credits to the G2 (small and medium meter capacities) customers would advance the relief to the applicable customers anticipated by Council’s election to continue to base rates on the 2020 COSA . ATTACHMENTS Attachment A: Presentation APPROVED BY: Kiely Nose, Interim Director of Utilities May 7, 2025 www.cityofpaloalto.org FY 2026 Gas Rate Proposal Finance Committee (Continued from April 15, 2025) 2 2025 COST OF SERVICES ANALYSIS (COSA) -GAS UTILITY Customers served and their usage under current rate schedules in FY 2025-2026 Rate Schedule Service Connections % of Total Annual Use (in Therms) % of Total G1 Residential 21,255 91%9.76 Million 38% G2 Residential Master Metered & Commercial 2,193 9%11.51 Million 45% G3 Large Commercial 30 <0.5%4.51 Million 17% System Total 23,477 100%25.78 Million 100% •G1 customers reflect 91% of service connections while only 38% of total consumption of gas •G2 customers reflect less than 10% of the service connections while 45% of the total consumption of gas 3 KEY VARIABLES USED TO ALLOCATE COSTS To develop a COSA, three key steps are completed functionalization, classification, and allocation of costs. The gas utility functionally is looking to allocate distribution costs only. Classification categories: •Demand: Costs driven by peak demand for natural gas. •Energy: Cost incurred to provide the annual average amount of gas to customers. •Customer: Costs for facilities and operations that vary by number of customers. •Direct Assignment: Costs directly assigned to a specific class of service. MAJOR CHANGES Allocation was changed to Average and Excess, classified as Demand (46% Demand, 54% Energy): •Equipment Services costs, such as service lines that connect from the main to the property’s gas meter, •Equipment Mains costs, such as underground pipeline that carries gas through the street General Fund transfer was changed to reflect Measure L calculation update –a percentage of the gross sales revenue. Reserve replenishment was reallocated to reflect a cost allocated across each therm 4 KEY FINDINGS FROM 2025 COSA •Additional revenue of $3.3 million, or 8.7% more than current estimates is needed to cover expenses in the Gas utility from FY 2025 to FY 2026. •Higher rate adjustments (adjustments above the additional revenue growth) are needed in the G1 residential and the G3 commercial rate schedules due to lower average usage. When average usage declines, fixed costs are spread across a smaller number of therms. •Cost classification and resulting allocation assumptions were adjusted for 4 key distribution costs. •Distribution costs have increased 71% from 2020 estimates and overall rates are insufficient to recover the costs of the distribution of gas services today. TOTAL G1 Resident G2 Small Comm G3 Large Comm System Characteristics Service Connections 100%91%9%<0.5% Therms Annual Usage 100%38%45%17% System Cost Allocations 2020 COSA $101 M 39%46%15% 2025 COSA $117 M 44%41%15% $- $0.50 $1.00 $1.50 $2.00 $2.50 FY 2025 Tier 1 FY 2025 Tier 2 FY 2026 Tier 1 (proposed) FY 2026 Tier 2 (proposed) DE (Tier 1 and Tier 2)DD (Tier 1 and Tier 2)DD (Tier 2 only) 5 WHY IS G1 TIER 1 DISTRIBUTION RATE UP 49%? Key drivers in addition to cost increases and COSA Results are the Rate Calculations: •Increase in Distribution Energy (DE) recovered from each unit of gas (reserve replenishment, General Fund Transfer) •Increase in portion of Distribution Demand (DD) recovered from each unit of gas as a result of the average and excess calculation update •Increase in summer baseline decreased number of units of gas in Tier 2 •4% reduction in residential demand since 2020 Note: FY 2025 Tier 1 and Tier 2 DE calculated based on prior study escalated uniformly 49% or $0.40/ therm -10% or $0.21/therm 6 WHY IS THE G2 MONTHLY SERVICE CHARGE CHANGING SO MUCH FOR LOWER CAPACITY METERS? $- $50 $100 $150 $200 $250 $300 $350 $400 $450 - 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 St a n d a r d C u b i c F e e t p e r H o u r Maximum Meter Capacity (standard cubic feet per hour) FY 2025 Monthly Service Charge ($) FY 2026 Monthly Service Charge Proposed ($) 1,134 G-2 customers 942 G-2 customers 116 G-2 customers $29.06 $94.94 $417.62 $156.90 Definition: Monthly Service Charges reflect costs that result from receiving service, regardless of the energy use or peak demand. For example, customer service, billing and overhead adders Key Drivers: •Updated based on actual cost for meter replacement and billing, customer groups weighting adjusted based on meter size & billing complexity. G1 & G3 go up at a faster rate than the system average increase. •Better recognizes small capacity meters in the G2 customer class, the meter size of this subgroup are similar to residential customers Climate Credits can be applied either monthly or annually. Climate Credits G1: -Maintain a 9% overall bill = $1.6M -Maintain a 9% gas bill = $2.4M Climate Credits G2 Small & Medium, staff estimate $1.1M. Gas Cap & Trade funds have an available balance of $13.6M. 7 CLIMATE CREDIT OPTIONS 1.6 M 3.1 M 6.10 11.95 - 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 11.00 12.00 13.00 14.00 15.00 - 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 11%11%11%10%10%10%10%10%10%9%9%9%9%9%9%8%8%8%8%8%7%7% 22%21%20%19%18%17%16%15%14%13%12%11%10%9%8%7%6%5%4%3%2%1% Mo n t h l y C l i m a t e C r e d i t ($) Ca p -an d -Tra d e F u n d s N e e d e d ($) Es�mate Es�mate Cap & Trade Funds Monthly Climate Credit Est Gas Bill Est Total Bill Residential Customer Climate Credit Model 8 ALTERNATIVES Alternatives are not mutually exclusive, and reflect options and opportunities for the Committee’s consideration: Cap & Trade Fund(s), use as a climate credit. (UAC recommended use of $1.6M for G1 residential customers with the adoption of the 2025 COSA) Refer the 2025 COSA study to the UAC with direction to revisit the guiding principles desired in the rate design. Direction for an alternative rate design from the G1 Residential Tiered Rates (e.g.uniform rate or declining tiers) Direction to use the FY 2025 rate schedule with rate increases to achieve full revenue recovery in FY 2026. 9 ALTERNATIVE RECOMMENDATION Staff recommend the Finance Committee provide feedback to staff: a)Revise the proposed FY 2026 rates to retain the current FY 2025 rate structure, with rate increases to meet the revenue requirement for FY 2026 in the gas utility; b)In FY 2026 only, apply a climate credit to G2 customers (small and medium meter capacities) in the amount of $1.1 million in total, and c)Refer staff to return to the UAC to further review the 2025 COSA assumptions and principles.