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HomeMy WebLinkAbout2021-02-16 Finance Committee Agenda PacketFinance Committee 1 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION ONLINE ON THE CITY CLERK’S WEBSITE. Tuesday, February 16, 2021 Special Meeting 6:00 PM ***BY VIRTUAL TELECONFERENCE ONLY*** Click to Join Zoom Meeting ID: 992-2730-7235 Phone: 1(669)900-6833 Pursuant to the provisions of California Governor’s Executive Order N-29-20, issued on March 17, 2020, to prevent the spread of Covid-19, this meeting will be held by virtual teleconference only, with no physical location. The meeting will be broadcast on Midpen Media Center at https://midpenmedia.org. Members of the public who wish to participate by computer or phone can find the instructions at the end of this agenda. Call to Order Oral Communications Members of the public may speak to any item NOT on the agenda. Action Items 1. Preliminary Financial Forecasts and Proposed Rate Projections for Electric, Gas, Water and Wastewater Collection Utilities for Fiscal Year 2022 Future Meetings and Agendas Adjournment AMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. 2 February 16, 2021 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. Public Comment Instructions Members of the Public may provide public comments to virtual meetings via teleconference or by phone. 1. Spoken public comments using a computer will be accepted through the teleconference meeting. To address the Committee, click on the link below to access a Zoom-based meeting. Please read the following instructions carefully. A. You may download the Zoom client or connect to the meeting in- browser. If using your browser, make sure you are using a current, up-to-date browser: Chrome 30+, Firefox 27+, Microsoft Edge 12+, Safari 7+. Certain functionality may be disabled in older browsers including Internet Explorer. B. You may be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. C. When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. D. When called, please limit your remarks to the time limit allotted. E. A timer will be shown on the computer to help keep track of your comments. 2. Spoken public comments using a smart phone will be accepted through the teleconference meeting. To address the Committee, download the Zoom application onto your phone from the Apple App Store or Google Play Store and enter the Meeting ID below. Please follow the instructions B-E above. 3. Spoken public comments using a phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Committee. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. https://zoom.us/join CLICK HERE TO JOIN Meeting ID: 992-2730-7235 Phone No: 1 (669) 900-6833 City of Palo Alto (ID # 11864) Finance Committee Staff Report Report Type: Action Items Meeting Date: 2/16/2021 City of Palo Alto Page 1 Council Priority: Fiscal Sustainability Summary Title: FY 2022 Preliminary Financial Forecasts Title: Preliminary Financial Forecasts and Proposed Rate Projections for Electric, Gas, Water and Wastewater Collection Utilities for Fiscal Year 2022 From: City Manager Lead Department: Utilities Recommendation This item is for discussion and no action is requested. Staff will use input from the Finance Committee on its preliminary rate projections for the Electric, Gas, Water and Wastewater Collection utilities to finalize its recommended FY 2022 Financial Plans and proposed rate changes for each utility. Executive Summary At the meeting staff will provide a presentation describing staff’s preliminary rate projections for the Electric, Gas, Water and Wastewater Collection utilities. A similar presentation was provided to the Utilities Advisory Commission (UAC) at its December 2, 2020 meeting. The staff presentation will be available online prior to the meeting. The preliminary retail rate forecast over the next five fiscal years is shown in the table below, along with the overall impact to the median residential bill. The rate changes shown are preliminary estimates. Actual rate changes will be based on updated financial data and the cost-of-service methodologies and studies for each utility and may differ by customer class and for individual customers depending on consumption patterns. A 2020 cost of service study for Wastewater Collection factored into staff proposals for FY 2022. Cost of Service studies for Water and Gas were completed in 2019, and Electric was completed in 2016. City of Palo Alto Page 2 Table 1: Projected Residential Rate Changes As shown in Table 1, staff’s preliminary rate increase recommendations are 3% increase in the system average rates for gas, wastewater, and a 2% storm drain increase to enable continuation of capital investment in these systems, which would otherwise need to be cut back significantly. Staff is sensitive to the current economic situation, however, and has included alternative plans with no rate changes for the gas and wastewater utilities. Staff would need to reduce CIP funding to achieve this. Gas consumption has been 6% to 10% lower to-date due to the COVID pandemic, and reserve levels are projected to drop near the minimum guideline levels by FY 2023. Of the four utilities, the gas utility has had most trouble absorbing reduced consumption due to lower reserves. Monthly electric utility consumption has decreased by 5% to 10% over prior years, but the utility has had adequate reserves to absorb the lower sales revenues. The water utility has not seen reduced consumption. That said, the drop in gas consumption occurred during the relatively low usage late summer to fall period, and staff continues to watch how this has progressed into the winter heating season. There are early indications that gas consumption has started to rise to prior year levels this winter. See Attachment A for more detailed information. In Wastewater, because of the economic impacts to residents and businesses of the ongoing pandemic, staff reduced costs and resulting sewer rate changes by reducing the size of each of the three sanitary sewer replacements planned during the next five years and delaying two of these replacements. This approach lowers costs while still replacing the highest priority sewer mains. However, without a rate increase, further cuts will be needed to ensure that reserves do not drop below the minimum guideline levels. City of Palo Alto Page 3 Stormwater management fees increase annually by the calendar year change in the Consumer Price Index (CPI), which has historically varied between 2 to 3 percent. In addition, the rates for Fiber Optic services established prior to September 18, 2006 will also increase by the CPI rate. Based on these preliminary rate increase projections, FY 2022 reserve levels are projected to remain within guideline levels with the proposal. Staff will continue to monitor customer consumption patterns and refine operating and capital cost projections over the coming months to determine whether any adjustment from this preliminary forecast is needed. See Attachment A for more detail on customer sales and supply data during calendar year 2020. Staff seeks input from the Finance Committee prior to finalizing the Utilities Financial Plans and developing recommendations for rate changes that would be effective July 1, 2021. The proposed rate adjustment recommendations, along with each utility’s Financial Plans, are currently scheduled to be presented to the Finance Committee in March or April for the Wastewater Collection and Electric Utilities. The Water and Gas Utility’s financial plans and rates will be presented in April or May. Background Every year staff presents the UAC and Finance Committee with financial forecasts for the Electric, Gas, Water, and Wastewater Collection utilities and recommends any rate adjustments required to maintain their financial health. These forecasts are memorialized in Financial Plans that comprehensively discuss the outlook for each utility. Before providing recommended Financial Plans and rate changes, staff typically presents a preliminary forecast to get early feedback. Electric Costs for electric supply purchases have been increasing, primarily because of increases in statewide transmission costs. While hydro resources have been lower of late, recent increased market prices and Council approval to sell excess RECs have led to a short-term increase in surplus energy sales revenues, but staff’s forecasts assume normal ongoing hydro conditions over the long term. These short-term revenue surpluses will be used to fund reserves, and, in the short term, they will also help to lower needed rate increases. Capital spending and distribution system maintenance spending has been lower than budgeted, primarily because staffing shortages have prevented the electric utility from performing the levels of capital improvement and distribution system work desired. Additional crews are being contracted to perform these functions in upcoming years until full staffing can be reached. As such, operational and capital costs are projected to increase substantially over the forecast horizon if the utility can achieve its targeted staffing levels and capital and maintenance spending levels. The effects of the COVID pandemic on electric loads have been a drop of around 8 to 10 percent to date, with most of the decrease occurring in the commercial customer sector. Staff has incorporated this into the load forecast used here and has also factored in an assumption of City of Palo Alto Page 4 possible customer bill defaults. However, FY 2020 ending reserve levels for the Electric fund were relatively healthy, within guideline levels and are projected to remain so through FY 2021. Based on this, staff is projecting no rate increase will be necessary July 1, 2021 but will continue to monitor revenue and cost projections. The current year (FY 2021) financial plan for the Electric utility (approved June 22, 2020) is available at: http://cityofpaloalto.org/civicax/filebank/documents/76982 Gas Gas fund expenses are currently split at about 40% supply and 60% for distribution and capital. Most of the supply costs are market driven and set to be pass-through charges on customers’ bills that change monthly according to market conditions. The long-term gas rate increases shown in Table 1 will go towards funding the distribution and capital improvement costs of the gas utility. As discussed in the prior year’s financial plan, the Utility recently resumed regular scheduled main replacement. A large main replacement project is planned for every other year, and the majority of any proposed rate increase would go towards capital improvements. Prior to this, from FY 2018 to FY 2020, only one gas main replacement project was funded due to staffing issues and competing priorities. Rates were held low during that time because capital spending was low, but as staff resumes regular scheduled capital spending for the gas utility, rates need to rise to fund that capital spending. In addition, construction costs have risen significantly during that time. In FY 2021, staff reduced the scope of the gas main replacement project by $3 million from $10 million to $7 million in order to minimize the rate increase of 2% and not fall below the minimum reserve guideline. In last year’s financial plan, staff anticipated that gas sales would not be greatly affected by the COVID pandemic. However, usage has been between 6 to 10% lower compared to the same months last year. Staff is waiting to see if this trend continues into the winter heating season and has also factored in an assumption of possible customer defaults. Staff is currently projecting a preliminary rate increase of 3% but will continue to monitor revenue and cost projections. Staff also evaluated a 0% change in FY 2022, but preliminary forecasts indicate a reduction in costs of about $5.4 million would be needed by FY 2024 to keep reserves from falling below the minimum guideline levels. If usage in the winter period does not recover somewhat, it is possible that an additional $1 million in cuts would be needed. It is likely that these cuts, if needed, would need to come primarily from capital improvement funding. The current year (FY 2021) financial plan for the Gas utility (approved June 22, 2020) is available at: http://cityofpaloalto.org/civicax/filebank/documents/76973 City of Palo Alto Page 5 Water In FY 2020, expenses were lower than forecasted due to delays in capital projects. The delayed capital projects are expected to be completed in FY 2021 and FY 2022, but these delays have resulted in a larger than expected ending reserve in FY 2020, which is expected to decrease as the projects are completed. Staff is projecting that no rate increase is needed in FY 2022. This is because 1) the San Francisco Public Utilities Commission (SFPUC), the City’s water supplier, indicated in its latest available estimate that no increase is needed in wholesale water rates, and 2) because the water utility’s reserves are sufficient to provide funding for some major one-time planned infrastructure projects in the next two years. The current year (FY 2021) financial plan for the Water utility (approved June 22, 2020) is available at: http://cityofpaloalto.org/civicax/filebank/documents/76983 Wastewater Collection Costs are projected to rise over the next several years due primarily to increasing treatment costs related to capital improvements costs and attendant debt service at the Regional Water Quality Control Plant (RWQCP). Collection system CIP work is also increasing, but at a lower rate. Operations and maintenance costs for both Treatment and Collections are expected to increase with inflation. Based on updated cost and revenue data incorporated into the 2020 Wastewater Collection utility cost of service study, staff is proposing a 3% system average rate increase for FY 2022 and FY 2023 and 5% in each subsequent year. A series of large increases in treatment costs are planned during the next five years to address aging infrastructure at the treatment plant and ongoing collection system infrastructure replacement needs. To mitigate the rate impacts, staff has decreased the size of each of the upcoming sanitary sewer replacement projects and deferred two upcoming sewer replacement projects in order to reduce rate impacts in this proposal. Additionally, staff proposes an alternate rate trajectory of 0% in FY 2022, 3% in FY 2023 and 5% in each subsequent year. However, an average of $200,000 per year in cost reductions would be needed over the five-year planning period as well as $1.1 million per year on average from FY 2027 - FY 2031 in order to keep reserves from dropping below minimum guideline levels and keep rate increases to 5% or less each year. The most recent (FY 2020) financial plan for the Wastewater Collection utility (approved June 17, 2019) is available at: https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=61290.09&BlobID=71366 City of Palo Alto Page 6 Staff presented a FY 2021 financial forecast to the Finance Committee in April 20201. The City did not change wastewater rates for FY 2021. Commission Review The UAC reviewed the preliminary financial forecasts at its December 2, 2020 meeting. No recommendation was requested at that meeting, but staff sought input from Commissioners regarding the preliminary rate adjustment recommendations. Commissioners asked questions, but did not request staff re-examine any of the rate changes listed in Table 1 and concurred with staff’s initial proposals. An excerpt of the draft minutes from the UAC’s December 2, 2020 meeting is located at the Utilities Advisory Commission website.2 Next Steps The UAC is scheduled to review the long-term Financial Plans and proposed rate adjustments for the Wastewater Collection utility in February and the Electric, Water, and Gas utilities in March or April. The Finance Committee is tentatively scheduled to review the long-term Financial Plans and proposed rate adjustments in March or April (for the Wastewater Collection utility) and in April or May (for the Electric, Water, and Gas utilities). Once the Finance Committee has provided its recommendation, notification of any recommended Wastewater Collection rate adjustments will be sent to customers, giving them the opportunity to protest the proposed changes as required by Article XIIID of the State Constitution (added by Proposition 218). The Financial Plans and proposed new rate schedules will be considered by the City Council with the FY 2022 budget, at which time the public hearing required by Article XIIID of the State Constitution will be held. Environmental Review The Finance Committee’s review of the preliminary financial projections does not meet the definition of a project, pursuant to Section 21065 of the California Environmental Quality Act, thus no environmental review is required. Stakeholder Engagement Staff met with the Utilities Advisory Commission on December 2, 2020. Notices of proposed rate changes will be distributed throughout the city as recommendations are finalized. Resource Impact Based on the preliminary rate increases as shown, the estimated revenue impacts would be an increase of $612,000 in the Wastewater Collection Fund and $1.2 million in the Gas Fund. Attachments: • Attachment A: Sales and Supply Data 1 Staff Report 11234 presented to the Finance Committee April 21, 2020: https://www.cityofpaloalto.org/civicax/filebank/blobdload.aspx?t=68098.52&BlobID=76150 2 https://www.cityofpaloalto.org/civicax/filebank/documents/79862 Sales by Rate Class Electric J F M A M J J A S O N D Residential Com m e r c i a l Lg Com m e r c i a l Total 0M 5M 10M 15M 0M 10M 20M 30M 0M 10M 20M 30M 0M 20M 40M 60M 80M Electric Sales (kWh) Gas J F M A M J J A S O N D 0.0M 0.5M 1.0M 1.5M 2.0M 0.0M 0.5M 1.0M 1.5M 0.0M 0.2M 0.4M 0.6M 0.8M 0.0M 1.0M 2.0M 3.0M 4.0M Gas Sales (Therms) Water J F M A M J J A S O N D Residential Com m e r c i a l Irr i g a t i o n Total 0K 100K 200K 300K 0K 100K 200K 0K 100K 0K 200K 400K 600K Water Sales (CCF)Sector, Calendar Month Residential, 2020 Residential, 2019 Residential, 2018 Commercial, 2020 Commercial, 2019 Commercial, 2018 Lg Commercial, 2020 Lg Commercial, 2019 Lg Commercial, 2018 Total, 2020 Total, 2019 Total, 2018 Attachment A Utility Unit Week Number Wee k 3 Wee k 5 Wee k 7 Wee k 9 Wee k 1 1 Wee k 1 3 Wee k 1 5 Wee k 1 7 Wee k 1 9 Wee k 2 1 Wee k 2 3 Wee k 2 5 Wee k 2 7 Wee k 2 9 Wee k 3 1 Wee k 3 3 Wee k 3 5 Wee k 3 7 Wee k 3 9 Wee k 4 1 Wee k 4 3 Wee k 4 5 Wee k 4 7 Wee k 4 9 Wee k 5 1 Electric MWh Gas Therms Water CCF 0K 5K 10K 15K 20K 0K 500K 1000K 0K 50K 100K Utility, Year Electric, 2020 Electric, 2018-19 Average Gas, 2020 Gas, 2018-19 Average Water, 2020 Water, 2018-19 Average Week Number Utility Electric Gas Water Week 2Week 3Week 4Week 5Week 6Week 7Week 8Week 9Week 10Week 11Week 12Week 13Week 14Week 15Week 16Week 17Week 18Week 19Week 20Week 21Week 22Week 23Week 24Week 25Week 26Week 27Week 28Week 29Week 30Week 31Week 32Week 33Week 34Week 35Week 36Week 37Week 38Week 39Week 40Week 41Week 42Week 43Week 44Week 45Week 46Week 47Week 48Week 49Week 50Week 51Week 52 13%20%23%28%0%-12%-14%-9%-2%2%3%-2%6%-4%-4%0%6%-1%5%1%0%-2%1%2%5%5%-1%2%4%5%10%5%3%4%-4%-5%-5%-10%3%3%16%46%51%42%21%7%1%-6%0%-3%1% -4%-1%2%13%-3%3%8%-24%-18%-30%-39%-21%-38%-20%-20%-22%-14%-19%-31%-21%-14%-14%-11%-14%-14%-11%-17%-13%-4%-23%-38%-32%-30%-20%-31%-10%-25%13%14%16%12%-26%-26%-32%-35%-21%12%6%-10%34%19% -2%-7%-8%-8%-9%-6%-8%-10%-11%-8%-1%-9%2%-10%-8%-3%-9%-9%5%-7%-12%-11%-13%-11%-10%-7%-7%-9%-15%-5%-1%-11%-12%-11%-11%-14%-13%-11%-11%-11%-8%-6%-3%-3%-4%-3%-2%-2%-2%2%-1% 2018-19 vs 2020 Comparison % Electric, Gas, and Water Weekly Supply Data 2018-19 Avg vs 2020 *Week 1 and 53 are excluded