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Home My WebLink About2021-04-06 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, April 6, 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. PUBLIC COMMENT Members of the public may speak to agendized items. If you wish to address the Committee on any issue that is on this agenda, please complete a speaker request card located on the table at the entrance to the Council Chambers/Community Meeting Room, and deliver it to the Clerk prior to discussion of the item. You are not required to give your name on the speaker card in order to speak to the Committee, but it is very helpful. Public comment may be addressed to the full Finance Committee via email at City.Council@cityofpaloalto.org. Call to Order Oral Communications Members of the public may speak to any item NOT on the agenda. Action Items 1.Approval of the Macias Gini & O’Connell’s Single Audit Report for the Year Ended June 30, 2020 2.Staff Recommendation That the Finance Committee Recommend the City Council Adopt a Resolution Approving the Fiscal Year (FY) 2022 Wastewater Collection Utility Financial Plan Including Transfers to and From Wastewater Collection Utility Reserve Accounts and an Amendment to the Wastewater Collection Utility Reserves ManagementPractices; and Adopt a Resolution Adjusting Wastewater Rates by Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) Presentation Presentation 2 April 6, 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 ONLINE ON THE CITY CLERK’S WEBSITE. 3.Staff Recommendation That the Finance Committee Recommend the City Council Adopt a Resolution Approving the Fiscal Year 2022 Water Utility Financial Plan, With no Water Rate Increase for Fiscal Year 2022 4.Staff and the Utilities Advisory Commission Recommendation 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) 5.Staff and the Utilities Advisory Commission Recommendation That the Finance Committee Recommend the City Council Adopt a ResolutionApproving the Fiscal Year 2022 Electric Financial Plan and Reserve Transfers, and Amending Utility Rate Schedules E-EEC-1 (Export Electricity Compensation), E-NSE-1 (Net Surplus Electricity Compensation), E-2-G (Residential Master-metered and Small Non- residential Green Power Electric Service), E-4-G (Medium Non-residential Green Power Electric Service, and E-7-G (Large Non- residential Electric Service) 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. Presentation Presentation Presentation 3 April 6, 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 ONLINE ON THE CITY CLERK’S WEBSITE. 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 # 12107) Finance Committee Staff Report Report Type: Action Items Meeting Date: 4/6/2021 City of Palo Alto Page 1 Summary Title: Approval of FY2020 Single Audit Report Title: Approval of the Macias Gini & O’Connell’s Single Audit Report for the Year Ended June 30, 2020 From: City Manager Lead Department: City Auditor RECOMMENDATION The Office of the City Auditor and Staff recommend that the Finance Committee approve and forward to Council for consent the following audit reports for the fiscal year ended June 30, 2020 prepared by Macias Gini & O’Connell (“MGO”). These reports are collectively referred to as the Single Audit. 1. Independent Auditor’s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements in Accordance With Government Auditing Standards. 2. Independent Auditor’s Report on Compliance for Each Major Federal Program; Report on Internal Control Over Compliance; and Report on the Schedule of Federal Awards Required by the Uniform Guidance. SUMMARY At the January 11, 2021 City Council Meeting, the City Council approved the following audit reports prepared by MGO: a) Report to the City Council (the “Management Letter”) b) Cable TV Franchise, Independent Auditor’s Report and Statements of Franchise Revenues and Expenses for the years ended December 31, 2019 and 2018 c) Palo Alto Public Improvement Corporation (a component unit of the City of Palo Alto) Annual Financial Report for the year ended June 30, 2020 d) Regional Water Quality Control Plant, Independent Auditor’s Report and Financial Statements for the year ended June 30, 2020 e) Independent Accountant’s Report on Applying Agreed-Upon Procedures related to the Article XIII-B Appropriations (GANN) Limit for the year ended June 30, 2020 City of Palo Alto Page 2 At that time, guidance necessary for the completion of the Single Audit had not yet been released by Federal Office of Management and Budget. The Single Audit report has since been completed, thus the recommended action within this report. MGO reports the following within the Single Audit Report: - Unmodified opinions as it pertains to both the Financial Statements and to Federal Awards - No material weaknesses or significant deficiencies in internal controls over financial reporting or over major programs - No findings or questioned costs STAKEHOLDER ENGAGEMENT This report has been prepared by the Office of the City Auditor in coordination with the Administrative Services Division. Attachments: • City of Palo Alto - Single Audit Report FY2020 /dzK&W>K>dK ^ŝŶŐůĞƵĚŝƚZĞƉŽƌƚƐ zĞĂƌŶĚĞĚ:ƵŶĞϯϬ͕ϮϬϮϬ /dzK&W>K>dK ^ŝŶŐůĞƵĚŝƚZĞƉŽƌƚƐ zĞĂƌŶĚĞĚ:ƵŶĞϯϬ͕ϮϬϮϬ dĂďůĞŽĨŽŶƚĞŶƚƐ WĂŐĞ /ŶĚĞƉĞŶĚĞŶƚƵĚŝƚŽƌ͛ƐZĞƉŽƌƚŽŶ/ŶƚĞƌŶĂůŽŶƚƌŽůKǀĞƌ&ŝŶĂŶĐŝĂůZĞƉŽƌƚŝŶŐĂŶĚŽŶ ŽŵƉůŝĂŶĐĞĂŶĚKƚŚĞƌDĂƚƚĞƌƐĂƐĞĚŽŶĂŶƵĚŝƚŽĨ&ŝŶĂŶĐŝĂů^ƚĂƚĞŵĞŶƚƐ WĞƌĨŽƌŵĞĚŝŶĐĐŽƌĚĂŶĐĞtŝƚŚ'ŽǀĞƌŶŵĞŶƚƵĚŝƚŝŶŐ^ƚĂŶĚĂƌĚƐ͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘ϭ /ŶĚĞƉĞŶĚĞŶƚƵĚŝƚŽƌ͛ƐZĞƉŽƌƚŽŶŽŵƉůŝĂŶĐĞĨŽƌĂĐŚDĂũŽƌ&ĞĚĞƌĂůWƌŽŐƌĂŵ͖ ZĞƉŽƌƚŽŶ/ŶƚĞƌŶĂůŽŶƚƌŽůKǀĞƌŽŵƉůŝĂŶĐĞ͖ĂŶĚZĞƉŽƌƚŽŶƚŚĞ^ĐŚĞĚƵůĞŽĨ ǆƉĞŶĚŝƚƵƌĞƐŽĨ&ĞĚĞƌĂůǁĂƌĚƐZĞƋƵŝƌĞĚďǇƚŚĞhŶŝĨŽƌŵ'ƵŝĚĂŶĐĞ͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘ϯ ^ĐŚĞĚƵůĞŽĨǆƉĞŶĚŝƚƵƌĞƐŽĨ&ĞĚĞƌĂůǁĂƌĚƐ͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘ϱ EŽƚĞƐƚŽƚŚĞ^ĐŚĞĚƵůĞŽĨǆƉĞŶĚŝƚƵƌĞƐŽĨ&ĞĚĞƌĂůǁĂƌĚƐ͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘ϲ ^ĐŚĞĚƵůĞŽĨ&ŝŶĚŝŶŐƐĂŶĚYƵĞƐƚŝŽŶĞĚŽƐƚƐ͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘ϳ ^ƵŵŵĂƌǇ^ĐŚĞĚƵůĞŽĨWƌŝŽƌƵĚŝƚ&ŝŶĚŝŶŐƐ͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘͘ϴ www.mgocpa.com Macias Gini & O’Connell LLP 2121 N. 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dǇƉĞŽĨĂƵĚŝƚŽƌ͛ƐƌĞƉŽƌƚŝƐƐƵĞĚŽŶĐŽŵƉůŝĂŶĐĞǁŝƚŚŵĂũŽƌ ƉƌŽŐƌĂŵƐ͗hŶŵŽĚŝĨŝĞĚ ŶǇĂƵĚŝƚĨŝŶĚŝŶŐƐƌĞƋƵŝƌĞĚƚŽďĞƌĞƉŽƌƚĞĚŝŶĂĐĐŽƌĚĂŶĐĞ ǁŝƚŚϮ&ZϮϬϬ͘ϱϭϲ;ĂͿ͍EŽ DĂũŽƌƉƌŽŐƌĂŵ͗ &EƵŵďĞƌ EĂŵĞŽĨ&ĞĚĞƌĂůWƌŽŐƌĂŵŽƌůƵƐƚĞƌ ϮϬ͘ϭϬϲ ŝƌƉŽƌƚ/ŵƉƌŽǀĞŵĞŶƚWƌŽŐƌĂŵ ϮϬ͘ϱϭϰ WƵďůŝĐdƌĂŶƐƉŽƌƚĂƚŝŽŶZĞƐĞĂƌĐŚ͕dĞĐŚŶŝĐĂůƐƐŝƐƚĂŶĐĞ͕ĂŶĚ dƌĂŝŶŝŶŐ ŽůůĂƌƚŚƌĞƐŚŽůĚƵƐĞĚƚŽĚŝƐƚŝŶŐƵŝƐŚďĞƚǁĞĞŶ dǇƉĞĂŶĚdǇƉĞƉƌŽŐƌĂŵƐΨϳϱϬ͕ϬϬϬ ƵĚŝƚĞĞƋƵĂůŝĨŝĞƐĂƐĂůŽǁͲƌŝƐŬĂƵĚŝƚĞĞ͍zĞƐ ^ĞĐƚŝŽŶ// &ŝŶĂŶĐŝĂů^ƚĂƚĞŵĞŶƚ&ŝŶĚŝŶŐƐ EŽŶĞƌĞƉŽƌƚĞĚ͘ ^ĞĐƚŝŽŶ/// &ĞĚĞƌĂůǁĂƌĚƐ&ŝŶĚŝŶŐƐĂŶĚYƵĞƐƚŝŽŶĞĚŽƐƚƐ EŽŶĞƌĞƉŽƌƚĞĚ͘ /dzK&W>K>dK ^ƵŵŵĂƌǇ^ĐŚĞĚƵůĞŽĨWƌŝŽƌƵĚŝƚ&ŝŶĚŝŶŐƐ zĞĂƌŶĚĞĚ:ƵŶĞϯϬ͕ϮϬϮϬ WƌŝŽƌĂƵĚŝƚĨŝŶĚŝŶŐƐǁĞƌĞŶŽƚƌĞƉŽƌƚĞĚ͘ City of Palo Alto (ID # 11886) Finance Committee Staff Report Report Type: Action Items Meeting Date: 4/6/2021 City of Palo Alto Page 1 Summary Title: FY 2022 Wastewater Collection Financial Plan and Rates Title: Staff Recommendation That the Finance Committee Recommend the City Council Adopt a Resolution Approving the Fiscal Year (FY) 2022 Wastewater Collection Utility Financial Plan Including Transfers to and From Wastewater Collection Utility Reserve Accounts and an Amendment to the Wastewater Collection Utility Reserves Management Practices; and Adopt a Resolution Adjusting Wastewater Rates by Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) From: City Manager Lead Department: Utilities RECOMMENDATION Staff requests that the Finance Committee recommend that the Council: 1.Adopt a resolution (Attachment A) approving: a.The Fiscal Year (FY) 2022 Wastewater Collection Financial Plan (linked here, Attachment C); and b.Up to a $2.2 million transfer from the Operations Reserve to the Capital Improvements Projects Reserve in FY 2021; and c.Up to a $4.35 million transfer from the Operations Reserve to the Capital Improvement Projects Reserve in FY 2022; and d.Amendments to the Wastewater Collection Utility Reserves Management Practices in Appendix C to the FY 2022 Wastewater Collection Financial Plan (linked here, Attachment D) and separately in Redline of Amended Wastewater Collection Utility Reserves Management Practices (linked here, Attachment E). 2.Adopt a resolution (Attachment B) approving: a.Adjustments to Wastewater Collection Utility Rates Via the Amendment of Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater City of Palo Alto Page 2 Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) (linked here, Attachment F). EXECUTIVE SUMMARY The FY 2022 Wastewater Collection Utility Financial Plan includes projections of the utility’s costs and revenues through FY 2026. The Financial Plan projects costs to rise over the forecast horizon due primarily to increasing treatment costs related to capital improvements and increasing operational costs at the Regional Water Quality Control Plant (RWQCP), as well as increasing collection system costs and capital. A 3% overall revenue increase is needed in FY 2022 and FY 2023 and staff projects overall revenue increases of approximately 5% annually through FY 2026 to cover current and projected costs. In FY 2022, the increase in revenues corresponds to an average residential rate increase of 4.7%, an average commercial rate increase of 1.5% and a rate decrease for restaurant customers of 2.1%. Raftelis Financial Consultants, Inc. reviewed and updated the cost of service study and made recommendations that are incorporated into the attached Financial Plan to ensure costs are equitably allocated to each customer class; the report is titled “City of Palo Alto 2021 Wastewater COS Report” (Linked Document, Attachment G). As a result of this study, customers in each customer class will experience different rate impacts than the overall rate increase as outlined in Table 1 below. BACKGROUND Every year staff presents the Finance Committee with Financial Plans for the Electric, Gas, Water, and Wastewater Collection Utilities. The Financial Plans recommend rate adjustments required to maintain the financial health of these enterprises. These Financial Plans include a comprehensive overview of the operations of each enterprise, both retrospective and prospective, and are intended to be a reference for 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 sewer system collects wastewater from Palo Alto residents and delivers it to the RWQCP for treatment. The City of Palo Alto runs the RWQCP, which also treats wastewater for five other partner agencies (Stanford, East Palo Alto Sanitary District, Los Altos Hills, Lost Altos, and Mountain View). Some of the wastewater for certain partner agencies is also transported across the City’s wastewater collection system. The Wastewater Collection Utility has two main costs: the costs of operating the collection system and Palo Alto’s share of the cost of running the RWQCP.1 Both cost components have been increasing and are expected to continue to increase. The RWQCP has been in operation since 1934. Aging equipment, new regulatory requirements, and the movement to full 1 The costs associated with the RWQCP are shared among Palo Alto and the partner agencies based on wastewater flows and the composition of the wastewater each agency sends to the treatment plant. Palo Alto’s share varies from year to year, but is roughly one third of the total cost. City of Palo Alto Page 3 sustainability will require rehabilitation, replacement, and new processes. Palo Alto has seen increases in operational costs in recent years, and debt service for the plant is expected to increase substantially in coming years as a major rehabilitation and replacement plan adopted in 2012 (Long Range Facilities Plan) is implemented. Rehabilitation and replacement of plant equipment that has been in use for over 40 years is necessary to ensure the city can provide wastewater treatment safely and in compliance with regulatory requirements for the discharge of treated wastewater 24 hours a day. A more detailed review of the capital improvement plans at the RWQCP is tentatively expected on April 20, 2021 with the Finance Committee. Collection system costs are also increasing, though not as much as treatment costs. This is primarily driven by increases in collection system capital costs: the cost of underground construction to replace aging sewer mains has nearly doubled since 2008. Other operational costs have also increased (e.g. salaries and benefits and overhead), but more slowly than treatment and collection infrastructure-related costs. This Financial Plan projects revenue losses due to COVID-19 primarily from the Restaurant and Commercial customer classes. Staff expects annual revenue loss related to COVID-19 to be highest during FY 2022 at $0.9 million and projects recovery through FY 2025. Total revenue loss included in the estimate is $2.6 million for all five utilities from FY 2021 through FY 2025. The projection also includes approximately $0.2 million due to COVID-19 related bill delinquencies. The UAC reviewed the preliminary financial forecasts at its December 2, 2020 meeting (UAC Report #11649). Since that time, staff adjusted the budget downward for each upcoming sanitary sewer main replacement project and deferred two of the projects by one year in order to lower the needed rate increases. The UAC reviewed the Wastewater Collection Financial Plan at its February 3rd, 2021 meeting (UAC Report #11882). These preliminary rates were reviewed by the Finance Committee on February 26, 2021 (Finance Committee Report #11864). DISCUSSION Staff completes an annual assessment of the financial position of the City’s wastewater collection utility to ensure adequate revenue to fund operations, in compliance with the cost of service requirements set forth in the California Constitution (Proposition 218). 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. This year, Raftelis Financial Consultants, Inc. completed a Cost of Service and Rate Study titled “City of Palo Alto 2021 Wastewater COS Report” (linked here).2 This study recommends adjustments to ensure costs are equitably allocated to each customer class. The rates presented in Table 1 below and in the attached Financial Plan incorporate the results and recommendations of the study. 2 A cost of service study is a study using industry-standard techniques to determine how the costs of running the utility should be recovered from its customers. Charges to each customer are set in proportion to the cost of serving that customer. City of Palo Alto Page 4 Proposed Actions for FY 2022 1. Increase overall revenues by 3% and adopt cost of service adjustments to the rate schedules that combined would a. increase residential monthly service charges in Rate Schedule S-1 (Residential Wastewater Collection and Disposal) by approximately 4.7%, b. increase S-2 (Commercial Wastewater Collection and Disposal) volumetric rates by approximately 1.5% and eliminate minimum monthly charges, c. decrease S-6 (Restaurant Wastewater Collection and Disposal) volumetric rates by approximately 2.1% and eliminate minimum monthly charges and d. update the S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger); 2. Transfer up to $2.2 million from the Operations Reserve to the CIP Reserve in FY 2021; and 3. Approve up to a $4.35 million transfer from the Operations Reserve to the CIP Reserve in FY 2022; 4. Amend the Wastewater Collection Utility Reserves Management Practices (Redline of Amended Wastewater Collection Utility Reserves Management Practices (Linked Document). The FY 2022 Wastewater Collection Utility Financial Plan (Linked Document) describes these proposed actions in detail. Staff proposes to adjust wastewater rates as shown in Table 1 below, effective July 1, 2021. The adjustments increase the system average rate by 3% and were made in accordance with the recommendations in the COS Study. These rate changes are included in the amended rate schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) (linked here). Residential customers pay a monthly service charge while commercial customers are charged based on average winter water usage to minimize the effects of irrigation. Restaurant customers are charged based on monthly water usage as they generally lack irrigation, but are charged higher rates due to higher grease and oil discharges necessitating more maintenance cost. City of Palo Alto Page 5 Table 1: Current and Proposed Wastewater Collection Charges Current (7/1/2019) Proposed (7/1/2021) Change $/mo. % Monthly Service Charges ($/month) S-1 (Residential) Service charge $41.37 $43.32 $1.95 4.7% Quantity Rates S-2 (Commercial) $/CCF 7.97 8.09 0.12 1.5% S-6 (Restaurant) $/CCF 12.33 12.07 (0.26) (2.1%) (1) Monthly charges for S-1 (Residential) are fixed monthly charges. (2) For S-2 (Commercial) customers, the quantity charges are based upon the average water usage for the months of January, February and March and applied in the following July. For Restaurant customers, the quantity charges are based on monthly metered water usage. Estimated bills for S-2 and S-6 customers would be $113.26 and $675.92 respectively. (3) Currently there are no customers on the S-7 (Industrial) rate schedule; however, CPAU continues to maintain the S-7 rate schedule in case there is a need for the rate schedule in the future. The attached Financial Plan updates the S-7 Industrial rates to reflect the COS adjustments. As noted above, staff has updated the COS study according to the attached memo. It was updated to reflect actual winter (January – March) water usage patterns from associated water accounts (data reflects pre-COVID usage). Also, over the past 10 years the 15 industrial customers that used to be served by the Wastewater Collection Utility have either left the system, moved industrial operations out of Palo Alto, or are now considered commercial customers rather than industrial due to changes in operations. Those customers accounted for approximately 11% of the estimated wastewater flows. With the flow changes of those customers and other changes in the non-residential flows, residential customers have increased their relative percentage of wastewater flows while non-residential customers have decreased their relative contributions to wastewater flows. This is a primary reason for the increases in rates for residential customers relative to commercial customers. The restaurant customer class pays for 5% of the total revenue both at current and proposed rates (see Table 2 below). However, because the customer class is so small, the approximately $14,000 drop in revenue required leads to a 1.4% decrease in customer class revenue and a 2.1% decrease in restaurant rates. The analysis also recommended removing the minimum charge for commercial and restaurant customer classes, as the volumetric charge is an equitable way to capture the variability in sewer usage among non-residential customers. Commercial customers will be billed volumetrically based on average water usage for the months of January, February and March, City of Palo Alto Page 6 applied through the year starting in the following July.3 New commercial customers without an applicable usage history will be conservatively presumed to have a usage of 4.8ccf per month, until a water usage history is established. Restaurant customers’ volumetric charge will be based each month on metered water us during the prior metered-read period. Meanwhile, over the past 10 years, Palo Alto’s wastewater has become more concentrated as water conservation has occurred system-wide. These changed usage patterns and strength changes together with updated costs reflect the current cost of Wastewater Collection service. Based upon the analysis, the relative changes to customer class groups are shown in Table 2 below: Table 2: Revenue Allocation by Customer Class in FY 2022 Customer Class Customer Class Revenue Difference Customer Class Percentage of Total Revenue at Current Rates Customer Class Percentage of Total Revenue at Cost of Service Average Rate Impact % (from Table 1) At Current Rates At Cost of Service Residential (S-1) $12,924,319 $13,531,403 4.7% 63% 64% 4.7% Commercial (S-2) $6,482,022 $6,467,761 (0.2%) 32% 31% 1.5% Restaurant (S-6) $1,031,313 $1,017,018 (1.4%) 5% 5% (2.1%) Industrial (S-7) $0 $0 $0 0% 0% 0% TOTAL $20,437,654 $21,016,183 2.8% 100% 100% - As a result of the COS update together with the overall revenue increase of 3%, residential customers (S-1) will see a 4.7% rate increase (on average), Commercial (S-2) a 1.5% rate increase, and Restaurant (S-6) a 2.1% rate decrease. Individual customer impacts will vary for non-residential customers depending on usage. Note that although there is a rate increase of 1.5% for commercial customers, overall revenue from this class decreases by 0.2%. This is due to the elimination of the minimum charge. FY 2022 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years Table 3 shows the projected rate adjustments included in the Wastewater Collection Utility Financial Plans and their impact on a residential wastewater bill. 3 This is done since the rainy and cool winter months are the period when water use is well correlated to sewer use, and when fluctuations in water use due to landscape needs is minimized. City of Palo Alto Page 7 Table 3: Projected Rate Adjustments and Residential Bill Impact, FY 2022 to FY 2026 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Wastewater Collection Utility Overall Rate Adjustment 3%* 3% 5% 5% 5% Residential Rate Adjustment 4.7% 3% 5% 5% 5% Estimated Bill Impact for Residential Customers ($/mo) $1.95 $1.30 $2.24 $2.35 $2.47 * The overall revenue increase proposed in FY 2022 is 3%. However, due to the COS adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY 2022. As noted above, one of the main drivers for the increase in the Wastewater Collection Utility’s costs (and therefore rates) over the next several years is the cost for wastewater treatment, which is projected to increase by about 7.9% per year as the City makes several upgrades to the RWQCP. A major project at the RWQCP, the Sludge Dewatering and Truck Loadout Facility, was completed in 2019 which allowed the retirement of the Plant’s two sewage sludge incinerators that were in operation since 1972. Future projects include secondary treatment upgrades as well as replacement of the headworks facility. Beyond FY 2026 some of the upward pressure on treatment costs are expected to be relieved as the projected growth in treatment costs decrease to approximately 3% on average annually between FY 2026 and FY 2031. Wastewater Collection operations and capital costs (excluding costs associated with treatment) are projected to remain flat on average; operations costs are expected to grow an average of 2% annually, and this plan reflects deferrals of sanitary sewer main replacements and decreasing the budget for each upcoming main replacement to lower the overall collection system CIP budget. Over the last few years, main replacement costs have been increasing for utilities due to economic activity in the Bay Area causing construction cost inflation. It is likely that this trend will continue in the short term. Staff has not observed any dip in construction costs although more information will be known once the Utilities Department issues more construction bids. Additionally, the California Construction Cost index shows 2.8% increase from December 2019 – December 2020.4 Wastewater Collection utility undertakes a larger main replacement project every other year with the next project occurring in FY 2022. The budget for the upcoming sanitary sewer main replacement will be reduced and the FY 2024 and FY 2026 main replacement projects will be deferred by one year and their budgets reduced. Undertaking a larger main replacement project every other year allows staff to continue replacing wastewater mains that are in poor condition while easing scheduling difficulties for inspection coverage due to shared staffing across water, wastewater, gas and large development services projects. Figure 1 and 2 below illustrate the increase in the Wastewater Collection Utility’s costs. The figures use FY 2016 as a comparison year because FY 2017 and FY 2018 are atypical years, due 4 https://www.dgs.ca.gov/RESD/Resources/Page-Content/Real-Estate-Services-Division-Resources-List- Folder/DGS-California-Construction-Cost-Index-CCCI City of Palo Alto Page 8 to one-time cost savings related to delayed main replacement projects. Note that Figure 1 reflects the capital funded by rate revenue in FY 2016, while the FY 2026 bar shows the capital program contribution to the CIP Reserve that will occur if Council approves the proposal in the attached Financial Plan. In the following figure, all RWQCP costs are included in “Treatment,” while “Capital” and “Operations” include only collection system costs. Figure 1: FY 2016 and FY 2026 costs ($ millions) Figure 2: Percentage of Total Cost Increase From FY 2016 to FY 2026 Attributed to Treatment, Capital, and Operations Costs Figure 1 and 2 show that 83% of the increase from FY 2016 to FY 2026 is due to treatment cost increases, 17% is due to increases in operations costs. Collection capital costs are not expected to increase on average over this time period due to the project deferrals projected to keep rate increases to a minimum. City of Palo Alto Page 9 To promote rate stability and provide continuity in collection system CIP expenditure levels, this plan establishes a consistent annual level of capital program contribution to the CIP Reserve. The CIP Reserve will then absorb annual spending fluctuations, reducing or eliminating the impact on rates. Figure 3 below shows the projected CIP Reserve balances. Staff proposes modifications to the Wastewater Collection Utility Reserves Management Practices to synchronize them with the staggered main replacement schedule, as well as annual funding based on staff’s estimate of annual CIP work for the next 48 months. Specifically, the modifications would set a new maximum CIP Reserve guideline level equal to the average annual (12 month) CIP budget, for 48 months of budgeted CIP expense.5 Staff also proposes that the Wastewater Collection Utility Reserves Management Practices be amended to provide that 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. Although this Financial Plan includes a forecast period of five years, or 60 months, an even number of years (48 months or 4 years) is used for the CIP Reserve maximum calculation, because of the staggered main replacement schedule including a larger main replacement project every other year.6 The new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level. This maximum in FY 2022 is $3.6 million and the minimum in FY 2022 is $0.7 million. Table 4 below shows the planned capital spending in row 11 fluctuating from year to year with the staggered main replacement schedule, and shows the stable capital program contributions to the CIP Reserve in rows 8 and 9. Figure 4 shows reserve balance changes for each reserve from FY 2020 and projected through FY 2026. 5 Each month is calculated based upon 1/12 of the annual budget. 6 For example, in this 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. City of Palo Alto Page 10 Figure 3: Projected Capital Reserve Balances FY 2022 to FY 2026 Figure 4: Wastewater Collection Utility Actual Reserve Levels for FY 2020 and Projected Reserve Levels through FY 2026 City of Palo Alto Page 11 Table 4: Operations, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves, Expenses, Capital Program Contribution To/(From) Reserves, and Operations Reserve Guideline Levels for FY 2021 to FY 2026 ($000) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Starting Balance (1) Operations 5,661 6,188 5,907 5,913 5,642 5,750 (2) Rate Stabilization 342 342 342 342 295 295 (3) CIP 978 3,178 2,559 3,681 3,861 2,461 Revenues (4) Total Revenue 21,404 21,452 22,359 23,707 25,127 26,606 Transfers (5) Operations (2,200) - - 47 - 295 (6) Rate Stabilization - - - (47) - (295) (7) CIP 2,200 - - - - - Capital Program Contribution (8) Operations - (4,350) (4,459) (4,593) (4,730) (4,872) (9) CIP - 4,350 4,459 4,593 4,730 4,872 Expenses (10) Total Expenses other than CIP and Debt Service (18,550) (17,254) (17,764) (19,304) (20,289) (22,901) (11) Debt Service (128) (129) (129) (129) - - (12) Planned CIP (1,231) (4,969) (3,337) (4,413) (6,130) (4,251) Ending Balance (1)+(4)+(5)+(8)+( 10)+(11)* Operations/Unassigned 6,188 5,907 5,913 5,642 5,750 4,878 (2)+(6) Rate Stabilization 342 342 342 295 295 - (3)+(7)+(9)+ (12)* CIP 3,178 2,559 3,681 3,861 2,461 3,082 Operations Reserve Guideline Levels (13) Minimum 2,868 2,756 3,126 3,224 3,105 3,867 (14) Maximum 7,170 6,889 7,815 8,060 7,763 9,667 * Note: The current year, FY 2021, differs from FY 2022 through FY 2026 in that Planned CIP (item 12) is reflected as an expense in the Operations Reserve; the proposal in this Financial Plan for FY 2022 – FY 2026 reflects Planned CIP (item 12) as an expense in the CIP Reserve and reflects the capital program contribution as an expense in the Operations Reserve. Capital Projects & Reserve Table 4 above shows the anticipated CIP planned for FY 2021 through FY 2026. Beginning in FY 2022, capital projects will be funded from CIP Reserves instead of from the Operations Reserve. Table 4 shows the capital program contribution from the Operations Reserve to the CIP reserve in rows 8 and 9. The capital program contribution would be made annually from the Operations Reserve to the CIP Reserve ($4.35 million in FY 2022, and $4.35 million in FY 2023 and future years plus annual inflationary increases) to adequately fund the CIP budget. $4.35 million is an estimate of the amount of CIP work there is in a given year, spread out over the forecast period. It was derived by calculating the approximate average annual CIP budget for FY 2022 City of Palo Alto Page 12 through FY 2025 less an allowance for unspent funds and with consideration of making sure the CIP Reserve and Operations Reserve remain within the guideline ranges throughout the forecast period and excluding $1.4 million in reappropriated dollars that are expected to be available in FY 2022. Having the annual capital contribution to the CIP Reserve in place will address uneven annual funding associated with ongoing CIP projects, and will be a source for one-time or immediately needed projects. Wastewater Bill Comparison with Surrounding Cities The annual sewer bill for a Palo Alto resident is $496.44 under current rates, 29% lower than the average neighboring community. Table 5 shows the monthly sewer bills for residential customers compared to what they would be in surrounding communities. These communities are the same six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas, and Electric industries. Table 5: Residential Monthly Equivalent Sewer Bill Comparison ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward 41.37 102.00 85.44 44.53 42.90 39.63 35.81 If Council adopts the proposed wastewater rate change, and assuming other agencies do not change their sewer rates, Palo Alto’s residential rates would remain 26% lower than the average neighboring community. Furthermore, under the attached financial plan and cost of service study, Palo Alto’s residential monthly bills would rise to $51.68 per month in FY 2026 which is still under the current neighboring community average of $58.38 per month. Staff has no information at this time as to whether or when the surrounding communities are planning wastewater rate changes. However, as most agencies are also requiring renovations to their respective treatment plants, increases at other agencies are likely. Note that as partners in the RWQCP, Mountain View and Los Altos will be affected by the same treatment cost increases as Palo Alto. Table 6 shows the monthly sewer bills for Commercial and Restaurant customers. Palo Alto is less competitive with surrounding cities with regards to commercial sewer rates but is not the most expensive jurisdiction. Palo Alto’s commercial bills are 10% higher than the neighboring community average while Palo Alto’s restaurant bills are 6% below the neighboring community average. Table 6 assumes 14 units of water for general commercial and 56 units of water for restaurants. Table 6: Non-Residential Monthly Equivalent Sewer Bill Comparison ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward City of Palo Alto Page 13 General Commercial 111.58 138.04 112.70 74.06 134.12 68.06 81.62 Restaurant 690.48 1,163.68 1,079.68 743.12 614.88 272.26 541.52 Changes from Prior Financial Forecasts Staff projects the need for ongoing annual wastewater rate increases from FY 2022 through FY 2026. Table 7 compares current rate projections to those projected in the last two year’s Financial Forecasts. The FY 2022 rate projections are lower than was projected last year for FY 2022 and FY 2023 and this is in part because of deferrals of sanitary sewer replacement projects to lower collection system costs. The FY 2022 projections reflect current information on capital improvement costs both in Palo Alto’s streets as well as at the RWQCP. Table 7: Projected Wastewater Rate Changes for FY 2022 to FY 2026 Projection FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current (FY 2022 Financial Plan) 3%* 3% 5% 5% 5% FY 2021 Financial Forecast7 5% 5% 5% 5% - FY 2020 Financial Plan 6% 6% 6% - - * The overall revenue increase proposed in FY 2022 is 3%. However, due to the COS adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY 2022. Changes to Reserve Guidelines Staff proposes modifications to the Wastewater Collection Utility Reserves Management practices to synchronize them with the staggered main replacement schedule, as well as the capital program contributions to the CIP Reserve. The new maximum and minimum CIP Reserve guideline levels as well as the funding plans are described above and in detail in the attached Financial Plan. Staff further proposes to modify the Wastewater Collection Reserves Management Practices to provide that if there are funds in the CIP 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 Period. Staff may also seek City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. COMMISSION REVIEW AND RECOMMENDATION The Finance Committee reviewed preliminary financial forecasts at its February 16, 2021 meeting (Staff Report #11864). The Utilities Advisory Commission (UAC) reviewed the 7 Presented to the Finance Committee, April 21, 2020. City of Palo Alto Page 14 Wastewater Financial Plan at its February 3, 2021 meeting (Utilities Advisory Commission Staff Report #11882). The UAC accepted staff’s recommendation and approved the proposed FY 2022 Financial Plan unanimously. The meeting minutes were not available as of the time of publishing this report. The discussion at the UAC was focused on the shifts in cost allocation between residential and non-residential customers. Some Commissioners requested more detail about cost allocation among residential and commercial customers, and staff explained how the COSA was developed to ensure the proposed rates accurately reflect the cost to serve all customer classes. There was also some interest in looking at other comparator cities to understand how bills for customers served by Palo Alto’s RWQCP compared to bills for customers served by other treatment plants. NEXT STEPS If the Finance Committee supports the proposed rate adjustments, staff will send notification of the potential rate increases to customers as required by Article XIIID of the State Constitution (added by Proposition 218). The City Council will consider the proposed Financial Plans and amended rate schedules with the FY 2022 budget, at which time the public hearing required by Article XIIID of the State Constitution will be held. RESOURCE IMPACT Staff projects normal year revenues for the Wastewater Collection Utility to increase by roughly 3% ($612,000) in FY 2022 as a result of the proposed rate changes. See the FY 2022 Wastewater Collection Utility Financial Plan (Linked Document) for a more comprehensive overview of projected cost and revenue changes for the next five years. The FY 2022 Budget is being developed concurrent with these rates and depending on final rates, adjustments to the budget may be necessary at a later time. POLICY IMPLICATIONS The proposed wastewater rate adjustments are consistent with Council-adopted Reserve Management Practices that are part of the Financial Plans. Staff developed the wastewater rate adjustments using a cost of service study and methodology that was completed in compliance with the cost of service requirements of Proposition 218. ENVIRONMENTAL REVIEW The Finance Committee’s review and recommendation to Council on the proposed FY 2022 Wastewater Collection Financial Plan and rate adjustments do not meet the definition of a project, pursuant to Section 21065 of the California Environmental Quality Act, thus no environmental review is required. Attachments: • Attachment A: Resolution Approving Financial Plan and Reserve Mgmt Practices • Attachment B: Resolution Approving FY 2022 Wastewater Rates • Attachment C: FY 2022 Wastewater Collection Utility Financial Plan • Attachment D: Appendix C of the Wastewater Collection Utility Reserves Management Practices City of Palo Alto Page 15 • Attachment E: Redline of Amended Wastewater Collection Utility Reserves Mgmt Practices • Attachment F: Rate Schedule S • Attachment G: 2021 Wastewater COS Report Attachment A 6055473 * NOT YET APPROVED * Resolution No.__________ Resolution of the Council of the City of Palo Alto Approving the FY 2022 Wastewater Collection Utility Financial Plan and Amending the Wastewater Collection Utility Reserves Management Practices R E C I T A L S A. Each year the City of Palo Alto (“City”) 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 a part of the Financial Plans. The Council of the City of Palo Alto does hereby RESOLVE, as follows: SECTION 1. The Council hereby adopts the FY 2022 Wastewater Collection Utility Financial Plan. SECTION 2. The Council hereby approves the following transfers as described in the FY 2022 Wastewater Collection Utility Financial Plan: a. Up to $2,200,000 in FY 2021 from the Operations Reserve to the Capital Improvements Projects Reserve; and b. Up to $4,350,000 in FY 2022 from the Operations Reserve to the Capital Improvements Projects Reserve. Annual capital program contributions beyond FY 2022 will be approved by Resolution annually. SECTION 3. The Council hereby approves the amendments to the Wastewater Collection Utility Reserves Management Practices as shown in Attachment D. // // Attachment A 6055473 // SECTION 4. The Council finds that the adoption of this resolution does not meet the California Environmental Quality Act’s 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 review is required. 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 Attachment B * NOT YET APPROVED * 6055474 Resolution No. _________ Resolution of the Council of the City of Palo Alto Adjusting Wastewater Rates by Amending Rate Schedules S-1 (Residential Wastewater Collection and Disposal), S-2 (Commercial Wastewater Collection and Disposal), S-6 (Restaurant Wastewater Collection and Disposal) and S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) R E C I T A L S A. 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. B. On ____, 2021, the City Council held a full and fair public hearing regarding the proposed rate increase and considered all protests against the proposals. C. As required by Article XIII D, Section 6 of the California Constitution and applicable law, notice of the ________ 2021 public hearing was mailed to all City of Palo Alto Utilities wastewater customers by _______, 2021. D. The City Clerk has tabulated the total number of written protests presented by the close of the public hearing, and determined that it was less than fifty percent (50%) of the total number of customers and property owners subject to the proposed wastewater rate amendments, therefore a majority protest does not exist against the proposal. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-1 (Residential Wastewater Collection and Disposal) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-1, as amended, shall become effective July 1, 2021. SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-2 (Commercial Wastewater Collection and Disposal) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-2, as amended, shall become effective July 1, 2021. SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-6 (Restaurant Wastewater Collection and Disposal) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-6, as amended, shall become effective July 1, 2021. Attachment B * NOT YET APPROVED * 6055474 SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger) is hereby amended to read as attached and incorporated. Utility Rate Schedule S-7, as amended, shall become effective July 1, 2021. SECTION 5. The Council finds that the revenue derived from the wastewater rates approved by this resolution do not exceed the funds required to provide wastewater service, and the revenue derived from the adoption of this resolution shall be used only for the purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. SECTION 6. 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 B * NOT YET APPROVED * 6055474 // SECTION 7. The Council finds that the adoption of this resolution changing wastewater collection 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 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2022 TO FY 2026 Attachment C WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 2 | Page FY 2022 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN FY 2022 TO FY 2026 TABLE OF CONTENTS Section 1: Definitions and Abbreviations................................................................................ 4 Section 2: Executive Summary and Recommendations ........................................................... 4 Section 2A: Overview of Financial Position .................................................................................. 4 Section 2B: Summary of Proposed Actions .................................................................................. 8 Section 3: Detail of FY 2022 Rate and Reserves Proposals ....................................................... 9 Section 3A: Rate Design ............................................................................................................... 9 Section 3B: Current and Proposed Rates ..................................................................................... 9 Section 3C: Bill Impact of Proposed Changes ............................................................................ 10 Section 3D: Proposed Reserve Transfers ................................................................................... 11 Section 4: Utility Overview .................................................................................................. 11 Section 4A: Wastewater Utility History ..................................................................................... 12 Section 4B: Customer base ........................................................................................................ 13 Section 4C: Collection System .................................................................................................... 13 Section 4D: Cost Structure and Revenue Sources ...................................................................... 14 Section 4E: Reserves Structure ................................................................................................... 14 Section 4F: Competitiveness ...................................................................................................... 15 Section 5: Utility Financial Projections ................................................................................. 16 Section 5A: FY 2016 to FY 2026 Cost and Revenue Trends ........................................................ 16 Section 5B: FY 2020 Results ....................................................................................................... 17 Section 5C: FY 2021 Projections ................................................................................................. 18 Section 5D: FY 2022 to FY 2026 Projections .............................................................................. 18 Section 5E: Risk Assessment and Reserves Adequacy ............................................................... 21 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 3 | Page Section 5F: Alternate Scenarios ................................................................................................. 23 Section 5G: Long-Term Outlook ................................................................................................. 25 Section 6: Details and Assumptions ..................................................................................... 25 Section 6A: Wastewater Treatment Costs ................................................................................. 25 Section 6B: Operations .............................................................................................................. 26 Section 6C: Capital Improvement Program (CIP) ....................................................................... 27 Section 6D: Debt Service ............................................................................................................ 31 Section 6E: Other Revenues ....................................................................................................... 32 Section 7: Communications Plan .......................................................................................... 32 Appendices ......................................................................................................................... 33 Appendix A: Wastewater Collection Financial Forecast Detail .................................................. 34 Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail .......... 36 Appendix C: Wastewater Collection Utility Reserves Management Practices .......................... 37 Appendix D: Map (CPA Wastewater Collection System - Sewer Mains Replaced or Rehabilitated since 1990) .......................................................................................................... 40 Appendix E: Sample of Wastewater Collection Outreach Materials ......................................... 41 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 4 | Page SECTION 1: DEFINITIONS AND ABBREVIATIONS CCF The standard unit of measurement for water delivered to water customers, equal to one hundred cubic feet, or roughly 748 gallons. When water usage is used to assess wastewater charges for commercial customers, it is measured in CCF. CIP Capital Improvement Program CPAU City of Palo Alto Utilities Department FOG Fats, oils, and grease. When flushed into the sewer system, these materials accumulate in parts of the sewer system and create blockages. O&M Operations and Maintenance RWQCP Regional Water Quality Control Plant, the wastewater treatment plant owned and operated by the City of Palo Alto that serves Palo Alto and several surrounding communities. UAC Utilities Advisory Commission SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City of Palo Alto’s Wastewater Collection Utility for the next five years. The 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 operations and maintenance, financing and capital program costs in the Wastewater Collection Utility (including Palo Alto’s share of wastewater treatment costs ) to rise by an average of approximately 4.3% per year from actual fiscal year (FY) 2020 to forecasted FY 2026. Staff projects wastewater collection system operations costs to grow at an average of 2.0% annually from actual FY 2020 to forecasted FY 2026. The Regional Water Quality Control Plant projects wastewater treatment costs, a share of which are allocated to Palo Alto and passed on to wastewater collection customers, to rise by an average of 7.9% annually during the same time period. Capital costs for collection declined in FY 2017 through FY 2019 as capital projects experienced delays. However, capital spending increased in FY 2020. Capital spending in FY 2021 is expected to be lower than budgeted, however, these funds will be needed in FY 2022 for sewer main replacement work. Beginning in FY 2022, a level funding amount will be transferred to the CIP Reserve each year to make more active use of the reserve. A one-time transfer from the operations reserve to the CIP Reserve in FY 2021 will allow high priority sewer mains to be replaced in FY 2022 using the funds from the CIP Reserve. This steady funding to the CIP Reserve will lead to a gradual increase in available CIP funds through the forecast period as well as stable funding for CIP projects throughout the collection system. Section 6C: Capital Improvement Program (CIP) provides more detail. Table 1 below shows the costs of the Wastewater Collection Utility. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 5 | Page As approved in the FY 2020 Wastewater Collection Financial Plan, the schedule for main replacement includes larger sewer main replacement projects every other year instead of smaller projects annually. This main replacement schedule will allow CPAU to continue to replace wastewater mains that are in poor condition, while addressing challenges in the current construction market and optimizing current staffing resources. Additionally, this plan defers the sewer main replacement project planned for FY 2024 and FY 2026 by one year and reduces the size of each planned sewer main replacement project to allow for more gradual rate increases while still prioritizing the highest priority sewer mains for replacement and rehabilitation. Table 1 shows actual costs in FY 2020 and estimated costs in FY 2021 through FY 2026. In Table 1, “Treatment” reflects Palo Alto’s share of Regional Water Quality Control Plant O&M and Capital costs. “CIP” includes all capital costs of the collection system (including debt service) for FY 2020, and FY 2021 and planned contributions from rates to the collection system CIP fund for subsequent years. “Operations” includes O&M costs for the collection system. Table 1: Wastewater Collection Expenses for FY 2020 to FY 2026 Expenses ($000) FY 2020 (actual) FY 2021 (estimated) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Treatment 10,234 10,995 11,154 11,487 12,827 13,632 16,112 Operations 6,023 6,324 6,101 6,277 6,477 6,657 6,789 CIP 5,294 1,359 4,479 4,588 4,722 4,730 4,872 TOTAL 21,550 18,677 21,733 22,352 24,025 25,019 27,774 Table 2 shows the projected overall average rate changes in the current financial plan to ensure that revenues cover rising costs and the operations and CIP reserves remain within the guideline ranges. The table also shows the projected rate changes from the FY 2020 Financial Plan. The current Financial Plan projects lower increases in FY 2022 through FY 2025. In part this is because the transfers of the CIP Reserve balance of $978K and the Rate Stabilization Reserve balance of $342K to the Operations Reserve that the FY 2020 Financial Plan projected for FY 2020 and FY 2019, respectively, were not necessary. The current Financial Plan makes use of the funds from the CIP Reserve and Rate Stabilization Reserve in future years to lessen the needed rate increases. Additionally, treatment costs were lower than budgeted in FY 2020. Also, to lower the projected rate changes further while meeting the most high priority collection system CIP needs, staff lowered CIP budgets for the collection system by delaying future main replacements and reducing the size of the main replacement budgets going forward. . In FY 2022 residential customers will see a rate increase in part as a result of a rebalancing of costs between residential and non-residential customers and in part because of the overall revenue increase needed to cover rising costs. This Financial Plan estimates revenue losses and bill delinquencies due to COVID-19 and the ongoing associated economic effects. The total assumed combined revenue reductions are approximately $400K in FY 2021 and $960K in FY 2022 and then smaller reductions through FY 2025 with a linear assumption of recovery to pre-pandemic levels by FY 2026. See Section 5D: FY 2022 to FY 2026 Projections for more detailed discussion. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 6 | Page Rate and bill impacts for individual customer classes are different from the overall percentage increases shown in Table 2 because of the results of the cost of service study conducted this year. Section 3: Detail of FY 2022 Rate and Reserves Proposals presents more detail regarding rate and bill impacts. Table 2: Proposed / Projected Wastewater Collection Rate Trajectory for FY 2022 to FY 2026 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current Plan (FY 2022 Plan) 3%* 3% 5% 5% 5% Last Plan (FY 2020 Plan) 6% 6% 6% 6% 4% * The overall revenue increase is projected to be 3% in FY 2022. However, due to the results of this year’s cost of service study, commercial and residential rates will increase while restaurant rates will decrease. The Operations Reserve was within guideline levels at year end FY 2020 and is projected to remain within guideline levels throughout the projection period (see more detail in Figure 5). The Wastewater Collection utility also has a Capital Improvement Program (CIP) Reserve that is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. Staff proposes modifications to the Wastewater Collection Utility Reserves Management Practices to synchronize them with the staggered main replacement schedule as well as annual funding based on staff’s estimate of annual CIP work for the next 48 months. Specifically, the modifications would set a new maximum CIP Reserve guideline level equal to the average annual (12 month) CIP budget, for 48 months of budgeted CIP expense.1 Staff also proposes that the Wastewater Collection Utility Reserves Management Practices be amended to provide that 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. The proposed amendment would also authorize Staff to seek City 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. Appendix C, section 5, reflects the new maximum and minimum CIP Reserve guideline levels. Although this Financial Plan includes a forecast period of five years, or 60 months, an even number of years (48 months or 4 years) is used for this calculation, because of the staggered 1 Each month is calculated based upon 1/12 of the annual budget. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 7 | Page main replacement schedule including a larger main replacement project every other year.2 The new minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level. This maximum in FY 2022 is $3.6 million and the minimum in FY 2022 is $0.7 million. Previously, the minimum and maximum CIP Reserve guideline levels were 12 and 24 months of budgeted CIP expenditure, respectively. Figure 7 shows the projected CIP Reserve balances and guideline levels for FY 2022 through FY 2026. These modifications will make full use of the CIP Reserve to manage fluctuations in capital investments while stabilizing customer rates. Staff recommends transferring the Rate Stabilization Reserve balance to the Operations Reserve in FY 2024. The Rate Stabilization Reserve is used to phase in rate increases over multiple years. Staff also recommends transferring $2.2 million from the Operations Reserve to the CIP Reserve in FY 2021 to provide sufficient funding for Sanitary Sewer Replacement 30 while keeping the CIP Reserve from falling below the minimum in FY 2022 or in any future year during the forecast period. Table 3 below shows the projected reserve transfers and Appendix C: Wastewater Collection Utility Reserves Management Practices provides more information about reserve management practices. Table 3: Transfers To/(From) Reserves for FY 2021 to FY 2026 ($000) Reserve FY 2021 FY 2022 FY 2023 to FY 2026 Operations (2,200) - 342 CIP Reserve 2,200 - - Rate Stabilization - - (342) Unassigned - - - Table 4 shows the starting and ending balance in the Operations, CIP and Rate Stabilization Reserves for FY 2021 through FY 2026. Figure 4 shows the Wastewater Collection utility reserve balances at year end FY 2020 and projected through FY 2026. Table 4 also shows the projected reserve transfer and capital program contribution over the forecast period. 2 For example, in this Financial Plan for FY 2022, the 48 month period to use to derive the annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period to use to derive the annual average would be FY 2023 through FY 2026 etc. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 8 | Page Table 4: Operations, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves, Expenses, Capital Program Contribution To/(From) Reserves, and Operations Reserve Guideline Levels for FY 2021 to FY 2026 ($000) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Starting Balance (1) Operations 5,661 6,188 5,907 5,913 5,642 5,750 (2) Rate Stabilization 342 342 342 342 295 295 (3) CIP 978 3,178 2,559 3,681 3,861 2,461 Revenues (4) Total Revenue 21,404 21,452 22,359 23,707 25,127 26,606 Transfers (5) Operations (2,200) - - 47 - 295 (6) Rate Stabilization - - - (47) - (295) (7) CIP 2,200 - - - - - Capital Program Contribution (8) Operations - (4,350) (4,459) (4,593) (4,730) (4,872) (9) CIP - 4,350 4,459 4,593 4,730 4,872 Expenses (10) Total Expenses other than CIP and Debt Service (18,550) (17,254) (17,764) (19,304) (20,289) (22,901) (11) Debt Service (128) (129) (129) (129) - - (12) Planned CIP (1,231) (4,969) (3,337) (4,413) (6,130) (4,251) Ending Balance (1)+(4)+(5)+(8) +(10)+(11)* Operations/Unassigned 6,188 5,907 5,913 5,642 5,750 4,878 (2)+(6) Rate Stabilization 342 342 342 295 295 - (3)+(7)+(9)+ (12)* CIP 3,178 2,559 3,681 3,861 2,461 3,082 Operations Reserve Guideline Levels (13) Minimum 2,868 2,756 3,126 3,224 3,105 3,867 (14) Maximum 7,170 6,889 7,815 8,060 7,763 9,667 * Note: The current year, FY 2021, differs from FY 2022 through FY 2026 in that Planned CIP (item 12) is reflected as an expense in the Operations Reserve; the proposal in this Financial Plan for FY 2022 – FY 2026 reflects Planned CIP (item 12) as an expense in the CIP Reserve and reflects the capital program contribution as an expense in the Operations Reserve. SECTION 2B: SUMMARY OF PROPOSED ACTIONS Staff proposes the following actions for the Wastewater Collection Utility in FY 2021 and 2022: 1. Increase overall revenues by 3% with the following customer class changes to reflect the cost of service adjustments: increase residential rates by 4.7%, increase commercial quantity rates by approximately 1.5%, and decrease restaurant quantity rates approximately 2.1%. This is described in more detail in Section 3B: Current and Proposed Rates; and 2. Approve up to a $4.35 million transfer from the Operations Reserve to the CIP Reserve in FY 2022. See Section 6C: Capital Improvement Program (CIP) for more details; and WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 9 | Page 3. Approve up to a $2.2 million transfer from the Operations Reserve to the CIP Reserve in FY 2021. See Section 3D: Proposed Reserve Transfers for more details; and 4. Amend the Wastewater Collection Utility Reserves Management Practices reflected in Appendix C, Section 5 and described above in Section 2A: Overview of Financial Position. SECTION 3: DETAIL OF FY 2022 RATE AND RESERVES PROPOSALS SECTION 3A: RATE DESIGN The Wastewater Collection Utility’s rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in Article XIII D of the California Constitution (Proposition 218). Current rates are structured based on staff’s annual assessment of the Wastewater Collection Utility’s financial position, and updated cost, flow (the wastewater discharge entering the wastewater treatment plant) and strength (the soluble and insoluble organic and inorganic matters that need to be removed or neutralized for the treatment process for the utility) information. The proposed rate structure for FY 2022 allocates costs amongst customer classes according to the results of a new cost study, the City of Palo Alto 2021 Wastewater COS Report, prepared by Raftelis Financial Consultants, Inc. and attached to the March 16, 2021 Finance Committee Staff Report. SECTION 3B: CURRENT AND PROPOSED RATES The current rates were adopted July 1, 2019, when the City increased sewer rates by 7%. CPAU has three sewer rate schedules applicable to current customers: one for residential customers (S-1), one for non-residential customers (other than restaurants) (S-2), and one for restaurants (S-6). Restaurants have a special rate schedule because they discharge higher concentrations of grease, oil and organic components in their sewage and, therefore, discharge sewage that is relatively expensive to treat. Residential customers are billed a monthly service charge , while commercial customers other than restaurants are billed each month based on their winter month water usage (previous January through March). This closely approximates non- irrigation water consumption, which represents actual sewer use. CPAU also maintains a rate schedule for industrial dischargers (S-7), but there are currently no customers required to be on this rate schedule. The City did not increase wastewater rates in FY 2021 but with the increases in treatment costs that are anticipated over the next five years together with needed priority sewer main replacements, CPAU proposes to increase overall revenues in FY 2022 by 3%. For FY 2023, the needed increase would also be 3% and then for FY 2024 through FY 2026, revenue is projected to increase by approximately 5% per year in order to provide needed funding for projected increases to treatment costs resulting from Regional Water Quality Control Plant improvements and upgrades, as well as ongoing collection systems capital projects and operations costs. Table 5, below, summarizes the current and proposed rates for all customer classes. Section 4F: Competitiveness discusses comparisons with neighboring communities. The analysis recommended removing the minimum charge from the commercial and restaurant customer WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 10 | Page classes as the volumetric charge is an equitable way to capture the variability in sewer usage among non-residential customers. Over the past 10 years the 15 industrial customers that used to be served by the Wastewater Collection Utility have either left the system or modified their practices or business such that their wastewater is similar to the wastewater of other customers in the commercial class. Those customers accounted for approximately 11% of the estimated wastewater flows. With the reductions in usage for this group of customers as well as additional reductions in non-residential usage of the sewer system, residential customers have increased their relative percentage of wastewater flows while non-residential customers have decreased their relative contributions to wastewater flows. This is a primary reason for the increases in rates for residential customers relative to commercial and restaurant customers. Table 5 shows the rate increases for each customer group including the cost of service adjustments. Currently there are no customers on the S-7 rate schedule; however, CPAU continues to maintain it in case there is a need for the rate schedule in the future. This Financial Plan updates the S-7 Industrial rates to reflect the cost of service adjustments. Table 5: Current and Proposed Sewer Rates Current (as of 7/1/2019) Proposed (effective 7/1/2021) Monthly Service Charges ($/month) $ Change % Change S-1 (Residential) Service charge $41.37 $43.32 $1.95 4.7% Quantity Rates: $ Change % Change S-2 (Commercial) $/CCF 7.97 8.09 0.12 1.5% S-6 (Restaurant) $/CCF 12.33 12.07 (0.26) (2.1%) For any future industrial customers, the City maintains the S-7 rate schedule that will charge the following updated charges for each individual customer: 1) Collection System Operation, Maintenance, and Infiltration Inflow: $4.02 per 100 cubic feet of metered water use. 2) Advanced Waste Treatment Operations and Maintenance Charge: $1.60 per 100 cubic feet of metered water use 3) $196.34 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4) $473.38 per 1000 lbs of SS (Suspended Solids) 5) $3,270.92 per 1000 lbs of NH3 (Ammonia) SECTION 3C: BILL IMPACT OF PROPOSED CHANGES Table 6 below shows the impact of the proposed July 1, 2020 rate changes on typical customers: WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 11 | Page Table 6: Impact of Proposed Sewer Changes Current (as of 7/1/2019) Proposed (effective 7/1/2021) Change $/mo. % Residential $41.37 $43.32 $1.95 4.7% General Commercial (14 CCF) 111.58 113.26 1.68 1.5% Restaurant (56 CCF) 690.48 675.92 (14.56) (2.1%) Based upon the results of the cost of service adjustments, some customers will see higher or lower increases in their sewer charges. In FY 2022, residential customers will experience approximately a 4.7% increase in bills. Commercial customers will experience approximately a 1.5% increase in bills and the impacts will vary due to each customer’s utilization of the system. Restaurant customers will experience bill decreases for the most part and the impacts will vary due to each customer’s utilization of the system. SECTION 3C: PROPOSED RESERVE TRANSFERS In the FY 2017 Financial Plan, staff recommended a $1.95 million transfer from the Rate Stabilization Reserve in FY 2016. This left a small amount, $342,000, which was originally to be transferred in FY 2017 to bring the Rate Stabilization Reserve balance to zero. However, because new main replacement projects were deferred in FY 2017 through FY 2019, resulting in one-time cost savings, the Operation Reserve ended within the guideline level, and the transfer was not needed. The Operations Reserve is projected to be within the guideline range in FY 2021 and FY 2022. However, as the utility experiences treatment cost increases throughout the forecast period, the Operations Reserve declines to a level closer to the minimum guideline level. Staff requests approval to transfer the remaining $342,000 in FY 2024. This transfer will enable CPAU to maintain adequate Operations and CIP Reserve levels while moderating the pace of increase in Wastewater Collection rates. Staff also requests approval to transfer $2.2 million from the Operations Reserve to the CIP Reserve in FY 2021. This is the amount needed in FY 2022 together with the FY 2022 capital contribution to the CIP Reserve to fund the reduced budget for main replacement project SSR 30 without the CIP Reserve dropping below the minimum during the forecast period. Appendix A: Wastewater Collection Financial Forecast Detail shows the impact of these transfers on reserves levels. 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 later sections. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 12 | Page SECTION 4A: WASTEWATER UTILITY HISTORY The Wastewater Utility commenced operation in 1899 to serve Palo Alto and Stanford. In its first three decades the system grew to 60 miles of sewers. Raw sewage was discharged into Mayfield Slough at the edge of the Bay. In the 1930s, at the behest of the State Department of Health, Palo Alto built the South Bay’s first wastewater treatment plant. At that time the sewer system served 20,500 Stanford and Palo Alto residents and a cannery. The plant was upgraded twice in the 1940s and 1950s to increase capacity.3 At the same time, the postwar population and industrial boom in the 1950s required rapid expansion of the sewer system. In the first half of the 1960s Palo Alto’s area doubled, as did wastewater flows, overwhelming the capacity of several of the utility’s “trunk lines,” which are the largest diameter main sewer lines carrying wastewater to the treatment plant. This prompted the City, in 1965, to perform the first of its sewer master plans to identify needed capacity improvements. At that point the Wastewater Utility’s system comprised more than 150 miles of sewer mains.4 In 1968 the City signed agreements with the Cities of Mountain View and Los Altos to build a new regional treatment plant, the RWQCP, which is still in operation today. Since 1940 the City had been providing treatment services to the East Palo Alto Sanitary District through an existing agreement and was also serving Stanford University by transporting wastewater across the City’s sewer system to the treatment plant. Both of these organizations became partners in the RWQCP as well. At the same time the Town of Los Altos Hills became the sixth partner as it signed an agreement with the City to connect the Town’s sewer system to the City’s sewer system to carry wastewater to the new RWQCP. The current agreements for the RWQCP extend through 2035.5 In the 1980s the City performed a series of studies of groundwater inflow and infiltration into the system. The studies found high rates of infiltration, estimating that as much as 40% of the water going to the RWQCP from Palo Alto’s system was groundwater and stormwater rather than wastewater.6 In some parts of Palo Alto the land surface had subsided due to groundwater pumping by the water utility, and though that practice had ceased many years earlier as the water utility switched to the Hetch Hetchy Regional Water System, parts of the city had already subsided two to five feet. This subsidence had damaged several parts of the sewer collection system, leading to reduced slopes for sewer mains that caused reductions in capacity. In response to these studies the City commenced an accelerated sewer system rehabilitation program.7 At that point the sewer system comprised over 190 miles of mains.8 A Master Plan study in 1988 recommended a variety of capacity expansions, and in the 1990s the City completed about half of them. However, a 2004 Master Plan update found that the accelerated sewer rehabilitation plan started in the early 1990s had substantially reduced infiltration, easing the capacity problems that had led the to the recommended capacity 3 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pp 2-1 through 2-2 4 Wastewater Collection and Storm Drainage, 1965, Brown and Caldwell Consulting Engineers, pp 4, 6-7, 143 5 Long Range Facilities Plan for the Regional Water Quality Control Plant, August 2012, Carollo Engineers, pg 2-2 6 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-2 7 CMR 183:90, Infrastructure Review and Update, March 1, 1990 8 Master Plan of the Wastewater Collection System, December 1988, Camp Dresser & McKee, Inc., pg 1-2 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 13 | Page increases in the 1988 study. Several of the outstanding projects were canceled and replaced with a different set of projects.9 At the same time the City updated its hydraulic model and developed greater capacity to do system planning in-house. SECTION 4B: CUSTOMER BASE The City of Palo Alto’s Wastewater Collection Utility provides sewer service to the residents and businesses of Palo Alto. It is distinct from the Wastewater Treatment Utility, which provides treatment services for surrounding communities in addition to Palo Alto. In effect, the Wastewater Collection Utility serves as a wholesale customer of the Wastewater Treatment Utility, and the rates charged by the Wastewater Collection Utility to its retail customers recover not only collection costs but also Palo Alto’s share of Wastewater Treatment Utility Costs. Nearly 27,633 customers are connected to the sewer collection system, approximately 26,034 (94%) of which are residential and 1,599 (6%) of which are non-residential. Residential customers pay a flat fee per dwelling unit for service. Non-residential customers are billed for sewer service based on their metered winter water usage. SECTION 4C: COLLECTION SYSTEM The Wastewater Collection Utility delivers all the wastewater it collects to the Regional Water Quality Control Plant (RWQCP) operated by the City of Palo Alto under a partnership agreement with several surrounding communities. Palo Alto is responsible for 35% to 40% of the wastewater sent to the RWQCP. This Financial Plan does not describe the cost of running the RWQCP in detail as this cost is contained in the Wastewater Treatment Utility; however since these costs are a major driver of CPAU’s sewer rates, Section 6A: Wastewater Treatment Costs provides some discussion of future trends in treatment costs. Treatment costs make up over half of the Wastewater Collection Utility’s expenses as shown in Table 1 above. To collect wastewater from its customers and deliver it to the RWQCP, CPAU owns roughly 18,000 sewer laterals (which collect wastewater from customers’ plumbing systems) and 217 miles of sewer mains (which transport the waste to the treatment plant). These laterals and mains, along with the associated manholes and cleanouts, represent the vast majority of infrastructure used to collect wastewater in Palo Alto. CPAU conducts a sewer rehabilitation and replacement program to replace mains over time as they deteriorate or to increase capacity. For more discussion of this program, see Section 6C: Capital Improvement Program (CIP). CIP expense accounts for less than a quarter of the utility’s expenditures. In addition to CIP, CPAU performs various maintenance activities on the sewer system. These include inspecting and repairing sewer laterals, responding to sewer overflows, regularly cleaning sections of the system heavily impacted by fats, oils, and grease (FOG), and building and replacing sewer laterals for new or redeveloped buildings. The utility also shares the costs of other operational activities (such as customer service, billing, equipment maintenance, and street restoration) with the City’s other utilities. These maintenance and operations expenses, as well 9 Wastewater Collection System Master Plan – Capacity Assessment, January 2004, MWH Americas, Inc., pg ES-3 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 14 | Page as associated administration, debt service, rent, and other costs, make up approximately another quarter of the utility’s expenses. SECTION 4D: COST STRUCTURE AND REVENUE SOURCES In FY 2020, treatment costs (capital and operations) represented approximately half of the Wastewater Collection Utility’s costs (48%), and collection system operations costs represented a third (27%), while collection system CIP costs accounted for the remainder (25%). Figure 1 shows these expenditures. The utility’s revenue in FY 2020, shown in Figure 2, came primarily from sewer charges (93%), with the remainder coming mainly from capacity and connection fees and other sources (7%). Figure 1: Cost Structure (FY 2020) Figure 2: Revenue Structure (FY 2020) SECTION 4E: RESERVES STRUCTURE CPAU maintains six reserves for its Wastewater Collection Utility to manage various types of contingencies. Below is a summary of these reserves and Appendix C: Wastewater Collection Utility Reserves Management Practices provides 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 Reappropriations: A reserve for funds dedicated to projects reappropriated by the City Council, nearly all of which are capital projects. Most City funds, including the General Fund, have a Reappropriations Reserve. • Capital Improvement Program (CIP) Reserve: The CIP reserve is used to accumulate funds for future expenditure on CIP projects and a reserve level is anticipated to be maintained in order to smooth major CIP expenditures every other year. It also acts as a contingency reserve for unexpected capital costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 15 | Page • 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, Gas, and Water) as well. • Operations Reserve: This is the primary contingency reserve for the Wastewater Collection Utility and is used to manage yearly variances from budget for operational costs. This type of reserve is used in other utility funds (Electric, Gas, and Water) as well. • Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and is normally empty. SECTION 4F: COMPETITIVENESS Table 7 shows the monthly sewer bills for residential customers compared to what they would be in surrounding communities. The annual sewer bill for a Palo Alto single family residential customer is $496.44 under current rates, which is lower than four of the six neighboring communities. These communities are the same six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas, and Electric industries. In the following tables, “Menlo Park” refers to the West Bay Sanitary District. Table 7: Residential Monthly Equivalent Sewer Bill Comparison (FY 2020 Rates) ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward 41.37 102.00 85.44 44.53 42.90 39.63 35.81 Staff does not currently have information about projected rate increases in neighboring communities. However, under the current projection in this financial plan, average bills for residential customers in FY 2026 of $51.68 per month would remain under the current neighboring community average of $58.38. Table 8 compares the sewer bills for two classes of non-residential customers to what they would be under surrounding communities’ rate schedules. Note that other communities often have specific rates for industrial customers that discharge high intensity wastewater, such as food processors or chemical or electronics manufacturers, but Palo Alto does not currently have any customers that require these special rates. Palo Alto is less competitive with surrounding cities with regards to commercial sewer rates but is not the most expensive jurisdiction. This proposal brings the commercial monthly sewer bill somewhat closer to the neighboring community average, assuming neighboring communities do not increase sewer rates. The monthly bill comparison assumes 14 units of water for general commercial and 56 units of water for restaurants. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 16 | Page Table 8: Commercial Monthly Sewer Bill Comparison (FY 2020 Rates) ($) Palo Alto Neighboring Communities Menlo Park Redwood City Santa Clara Mountain View Los Altos Hayward General Commercial 111.58 138.04 112.70 74.06 134.12 68.06 81.62 Restaurant 690.48 1,163.68 1,079.68 743.12 614.88 272.26 541.52 SECTION 5: UTILITY FINANCIAL PROJECTIONS SECTION 5A: FY 2016 TO FY 2026 COST AND REVENUE TRENDS Figure 3 shows the Wastewater Collection Utility’s actual expenses and revenues for the past five years and projections through FY 2026. Treatment plant expenses (including CIP and O&M) assigned to Palo Alto’s Wastewater Collection Utility grew, on average, by 3.9% per year from FY 2016 through FY 2020 and are projected to grow by 7.9% per year on average from FY 2021 to FY 2026. Wastewater collection CIP fluctuated greatly during this time period: reduced investment in FY 2017 to FY 2019 mainly due to delayed main replacement projects, and increased CIP costs in FY 2015 and 2016 as capital projects were completed. Collections operations costs decreased slightly during this timeframe. Wastewater collection CIP costs will continue to fluctuate from year to year as sanitary sewer replacements occur every other year rather than annually. However, to mitigate the annual fluctuations and contribute to rate stability for customers, this financial plan proposes a steady annual capital program contribution to the CIP Reserve. For more detail see Section 6C: Capital Improvement Program (CIP). Since the revenue for this utility is very stable, revenue changes closely follow rate changes. The other large revenue item of note is the continued connection and capacity fees from new construction. These fees grew dramatically between FY 2010 and FY 2015 and then plateaued. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 17 | Page Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes Actual Costs through FY 2020 and Projections through FY 2026 Note: The overall revenue increase proposed in FY 2022 is 3%. Due to the cost of service adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY 2022, commercial customers will experience a rate increase of approximately 1.5% in FY 2022, while restaurant customers will receive rate decreases for the most part. SECTION 5B: FY 2020 RESULTS Actual revenues for FY 2020 were lower than forecasted revenues in the FY 2020 Financial Plan ($21.8 million actuals vs. $21.9 million projected). This was primarily because sales revenues were nearly $0.3 million lower than forecasted while other revenue was approximately $0.2 million higher than forecasted. Treatment expenses were approximately $1.5 million lower than forecasted in the FY 2020 Financial Plan ($10.2 million vs. $11.7 million projected). Collection system capital and operating costs were approximately $0.5 million higher than expected ($11.3 million actual vs. $11.8 million projected). Table 9 summarizes key reasons for the variances from forecast. Table 9: FY 2020, Actual Results vs. FY 2020 Financial Plan Forecast ($000) Net Cost/ (Benefit) Type of Change Sales revenues lower than forecast $281 Revenue decrease Wastewater treatment costs lower than forecast $(1,499) Cost decrease Collection System Expenses (Capital and Operations) $463 Cost increase Net Cost / (Benefit) of Variances $(755) WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 18 | Page SECTION 5C: FY 2021 PROJECTIONS Staff estimates lower sales revenue for FY 2021 compared to the estimate in the FY 2021 financial forecast10 ($20.0 million current projection vs. $20.9 million projected in the FY 2021 financial forecast). Staff projects other revenue from connection and capacity fees and interest to decrease by approximately $194,000. Treatment cost projections decreased by $1.2 million, while collection system costs are estimated to be lower overall by $825,000. Table 10 summarizes key variances from the prior forecast. Table 10: FY 2021, Updated Projections vs. FY 2021 Financial Forecast ($000) Net Cost/ (Benefit) Type of Change Sales revenues lower than forecast $863 Revenue decrease Interest, connection, capacity fees and other revenues $194 Revenue decrease Treatment cost reductions $(1,228) Cost decrease Collection system cost decreases $(655) Cost decrease Net Cost / (Benefit) of Variances $(825) SECTION 5D: FY 2022 TO FY 2026 PROJECTIONS As shown in Figure 3 above (and, in more detail, in Appendix A: Wastewater Collection Financial Forecast Detail), the Wastewater Collection Utility’s total costs are projected to increase by approximately 3% per year on average for FY 2021 through FY 2026. Treatment costs make up the majority of the increase. Capital costs for treatment are increasing at the fastest rate because the treatment plant is facing the need for major upgrades in coming years, due to aging equipment and changing environmental regulations. Rehabilitation and replacement of plant equipment that has been in use for over 40 years is necessary to ensure the city can provide wastewater treatment operation safely and in compliance with regulatory requirements for the discharge of treated wastewater 24 hours a day. The costs of the plant are shared among member agencies, with members expected to see average cost increases of around 8% per year over the forecast horizon. Collection system capital expenses were lower than usual in FY 2017 to FY 2019 as sewer main replacement projects were delayed to enable staff to complete previous year projects, but a regular annual main replacement cycle resumed in FY 2020. However, underground construction costs for all utilities have increased significantly. Beginning in FY 2022, capital projects will be funded from the CIP Reserve instead of from the Operations Reserve. Having these funds in place will address uneven annual funding associated with ongoing CIP projects. 10 Presented to the Finance Committee, April 21, 2020. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 19 | Page The capital program contribution will be made annually from the Operations Reserve to the CIP Reserve ($4.35 million in FY 2022 and future years plus annual inflationary increases) to adequately fund the CIP budget. $4.35 million is an estimate of the amount of CIP work there is in a given year, spread out over the forecast period. It was derived by calculating the approximate average annual CIP budget for FY 2022 through FY 2025 less an allowance for unspent funds and not including approximately $1.4 million in FY 2022 that is expected to be funded through reappropriations from FY 2021. Having the capital program contribution in place will address uneven annual funding associated with ongoing CIP projects, and will be a source for one-time or immediately needed projects. Without this change, the relative stability of total costs, and revenues shown in Figure 3: Wastewater Collection Utility Expenses, Revenues and Rate Changes would fluctuate greatly from year to year as shown below in Figure 4: Wastewater Collection Utility Expenses, Revenues and Rate Changes. Figure 4: Wastewater Collection Utility Expenses, Revenues and Rate Changes Actual Costs through FY 2020 and Projections through FY 2026 Note: The overall revenue increase proposed in FY 2022 is 3%. Due to the cost of service adjustments, the residential customers will receive a rate increase of approximately 4.7% in FY 2022, commercial customers will experience a rate increase of approximately 1.5% in FY 2022, while restaurant customers will receive rate decreases for the most part. The fluctuations in CIP show a mismatch in many forecasted years between revenues and costs. Isolating fluctuations in capital investment in the CIP Reserve not only helps to ensure adequate funding for needed capital improvements but also shows a more realistic view of the relationship between costs and revenues as shown in Figure 3. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 20 | Page This Financial Plan estimates revenue losses and bill delinquencies due to COVID-19 and the ongoing associated economic effects. So far, the Wastewater Utility has experienced revenue losses from the wastewater sector of as much as 65% per month during April – June 2020. Restaurant revenue has increased somewhat to approximately 33% below pre-pandemic levels. However, because this revenue is approximately 5% of the overall revenue, the impact on revenues in FY 2020 was outweighed by variations in other revenue categories. For FY 2021, this plan assumes that the current trend continues at approximately 33% of usage and revenue below pre-pandemic levels. In FY 2022, revenue losses are also expected in the Commercial category as winter water use reductions are expected in that customer class. This plan assumes a 10% winter water use reduction across the commercial category in January – March 2021, which will mean approximately a 10% revenue reduction in the commercial category in FY 2022. Commercial revenue is approximately $6.5 million annually, and this revenue reduction is assumed to be $0.65 million in FY 2022. For both restaurant and commercial revenue losses due to COVID-19, this plan assumes a linear recovery pattern over the next four years with full recovery by FY 2026. This Financial Plan also takes into account the sewer bill delinquencies due to COVID-19. The current balance of delinquent bills greater than 60 days as of 12/17/2020 is $130K. This plan assumes that bill delinquencies plateau and reduce by half by the end of FY 2021. Similar to the revenue loss assumption, the plan assumes linear recovery pattern over the next four years with full recovery by FY 2026. These revenue losses and bill delinquencies total to approximately $400K in FY 2021 and $960K in FY 2022 and then smaller reductions through FY 2025 with a linear assumption of recovery to pre-pandemic levels by FY 2026. These are larger forecasted reductions than what staff forecasted in May 2020 of approximately $160K or 2% revenue loss in FY 2021, $320K or 4% revenue loss in FY 2022, $500K or 6% revenue loss in FY 2023 and then declining losses to full recovery by FY 2026. The Revenue line in Figure 3 shows that revenues exceeded costs in FY 2019, this replenished reserves. However, due to increasing treatment and collection costs, annual rate increases of 3% in FY 2022 and FY 2023 and 5% in subsequent years are required to keep reserves within the guideline ranges. Figure 5 shows the actuals for FY 2020 and projected reserve levels and Figure 6 shows the relative drop in Operations Reserve from FY 2026 through FY 2029 and the effects of rate increases to keep the reserve within the guideline levels. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 21 | Page Figure 5: Wastewater Collection Reserves Projections SECTION 5E: RISK ASSESSMENT AND RESERVES ADEQUACY The Wastewater Collection Utility currently has one contingency reserve, the Operations Reserve. The Operations Reserve remains within the guideline levels throughout the forecast period. See Figure 6 below. The five-year forecast period is through FY 2026, however, it is in the subsequent years FY 2027 through FY 2029 that the Operations Reserve dips down close to the minimum guideline level despite the assumption of 5% rate increases annually from FY 2024 through FY 2031. As costs rise steeply with infrastructure replacement needs both at the RWQCP and in the collection system, revenue struggles to keep up during that time period which results in a decreasing Operating Reserve level. This is a key reason why rates need to increase in the short-term to maintain the gradual rate trajectory and keep the operating reserve within the guideline range in the longer-term. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 22 | Page Figure 6: Operations Reserve Adequacy Staff performs an annual assessment of risks for the Wastewater Collection Utility. Table 11 summarizes the risk assessment calculation for the Wastewater Collection Utility through FY 2026. The risk assessment includes the revenue shortfall that could accrue due to: 1. the maximum observed budget-to-actual variance in one year during the past five years; and 2. an increase of 10% in treatment costs. Table 11 summarizes the risk assessment calculation for the Wastewater Collection Utility through FY 2026. The Operations Reserve is projected to be adequate to manage these levels of risk over the entire forecast period. Table 11: Wastewater Collection Risk Assessment FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Total Revenue ($000) 20,028 20,898 22,202 23,577 25,009 Max. Historical Budget-to-Actual variance 4% 4% 4% 4% 4% Budget-to-Actual Risk ($000) 801 836 888 943 1,000 Treatment Budget ($000) 11,154 11,487 12,827 13,632 16,112 Treatment Cost Contingency @10% ($000) 1,115 1,149 1,283 1,363 1,611 Total Risk Assessment Value ($000) 1,916 1,985 2,171 2,306 2,612 Projected Operations Reserve Level ($000) 5,907 5,913 5,642 5,750 4,878 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 23 | Page SECTION 5F: ALTERNATE SCENARIOS The alternate scenario proposed here is for 0% revenue increase in FY 2022. Table 12: Proposed and Alternate Wastewater Rate Trajectory for FY 2022 to FY 2026 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current Plan (FY 2022 Plan) 3%* 3% 5% 5% 5% Alternate Scenario (FY 2022 Plan) 0%* 3% 5% 5% 5% * The overall revenue increase is projected to be 3% in FY 2022 in the current plan and 0% in FY 2022 in the alternate scenario. However, due to the results of this year’s cost of service study, commercial rates will decrease relative to residential rates. The reduced revenue in this scenario equates to approximately $600K per year in FY 2022 and additional cumulative amounts in each subsequent year. In order to balance expenses and revenues, the alternate scenario assumes the capital contribution to the CIP Reserve is also reduced by approximately $600K per year to a total of $3.75 million annually. This allows the Operations Reserve to stay within the guideline levels throughout the forecast period. Figure 7: Operations Reserve Adequacy below shows the Operations Reserve year-end balances from FY 2020 through FY 2031. Further budget reductions would need to be made to the Collection CIP to accommodate the reduced funding levels while keeping the CIP Reserve within the guideline levels. A budget reduction of approximately $1 million during the five year forecast period would be needed to keep the CIP and Operations Reserves within the guideline range until year end FY 2026. An additional approximately $5.5 million in budget reductions over the 10 year forecast period would be needed to keep the CIP and Operations Reserves within the guideline range until year end FY 2031. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 24 | Page Figure 7: Operations Reserve Adequacy With the 0% overall revenue increase in the alternate scenario and incorporating the results of the cost of service analysis, the final customer rates would reflect an increase for residential customers in FY 2022 and a reduction for most non-residential customers. Table 13: Current and Proposed Sewer Rates shows the customer rates that result from this scenario. Table 13: Current and Proposed Sewer Rates Current (as of 7/1/2019) Proposed (effective 7/1/2021) Monthly Service Charges ($/month) $ Change % Change S-1 (Residential) Service charge $41.37 $42.09 $0.72 1.7% Quantity Rates: $ Change % Change S-2 (Commercial) $/CCF 7.97 7.83 (0.14) (1.8%) S-6 (Restaurant) $/CCF 12.33 11.82 (0.51) (4.1%) For any future industrial customers, the City maintains the S-7 rate schedule that will charge the following updated charges for each individual customer: 1) Collection System Operation, Maintenance, and Infiltration Inflow: $3.76 per 100 cubic feet of metered water use. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 25 | Page 2) Advanced Waste Treatment Operations and Maintenance Charge: $1.60 per 100 cubic feet of metered water use 3) $196.34 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4) $473.38 per 1000 lbs of SS (Suspended Solids) 5) $3,270.92 per 1000 lbs of NH3 (Ammonia) SECTION 5G: LONG-TERM OUTLOOK In the longer term (5 to 35 years) the primary factor that could lead to increased costs for the Wastewater Collection Utility are major upgrades at the RWQCP, a share of which will be allocated to the utility as part of treatment costs. These upgrades include replacement or rehabilitation of the parts of the facility that pump raw sewage to the main treatment works (the headworks), separate out primary sludge (the primary settling tank), process sludge (the bio- solids facility), and treat wastewater (the fixed film reactors). Upgrades to the laboratories and operational buildings are planned as well. In addition, the 72-inch regional trunk sewer line flowing into the plant needs to be evaluated and rehabilitated. In the future, nutrient limiting regulations for RWQCP discharges are anticipated from the State due to changes in San Francisco Bay. A response to the proposed regulations was addressed in the Long Range Facilities Plan in 2012 and will be more fully addressed by a capital project to upgrade the secondary treatment process, currently in design. The project is in response to aging equipment as well as the regulations, although replacing the aging equipment is needed whatever the outcome of the regulations. SECTION 6: DETAILS AND ASSUMPTIONS SECTION 6A: WASTEWATER TREATMENT COSTS Treatment expenses represent the Wastewater Collection Utility’s share of the costs of operating the RWQCP. Per the partnership agreements between Palo Alto and its partner agencies, these charges are assessed based on a formula that takes into account the total amount of wastewater delivered, the amount of organic material in it, its ammonia content, and the total suspended solids it is carrying. The Wastewater Collection Utility’s assessed share of the RWQCP’s revenue requirement is projected to be 35% for FY 2022. Mountain View is the other large agency served by the RWQCP (42% of the revenue requirement estimated for FY 2022) with the smaller agencies (Stanford, Los Altos, East Palo Alto, and Los Altos Hills) making up the remainder of the flow to the treatment plant. Based on detailed project cost projections provided by RWQCP staff, treatment costs are likely to continue to increase by an average of 5.9% per year from FY 2022 through FY 2031. Wastewater Treatment Fund costs are increasing due to major plant rehabilitation and rising salary and benefit costs as well as the attendant allocated charges for centralized city services needed to support wastewater treatment fund operations. Additional expenses include WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 26 | Page increased water and air permitting fees from the Regional Water Quality Control Board and the Bay Area Air Quality Management District. Commodity and utility rates to operate the facility are also anticipated to increase in FY 2022 for gas, and storm rates. Chemical expenses, needed to adjust water quality and meet permit requirements, are also increasing modestly per the latest chemical market conditions and procurement contract conditions. Capital projects, parts, materials and debt are increasing at an average of about 15.1% per year through 2031 to keep up with ongoing replacement of aging equipment. Larger increases to capital expenses are expected to begin in FY 2024 in the form of new debt service for major projects to implement the Plant’s capital program. Major upcoming capital projects include Primary Sedimentation Tank Rehabilitation, Outfall Line Construction, Secondary Treatment Upgrades, and Operation Center and Laboratory. Figure 8 below shows the estimated costs of treatment expenses for Palo Alto. Figure 8: Palo Alto’s Share of Wastewater Treatment Expenses (Projection & Planned CIP) SECTION 6B: OPERATIONS Operations costs include the Customer Service, Distribution Operations, Engineering, and Allocated Charges categories in Appendix A: Wastewater Collection Financial Forecast Detail. Debt service, rent, and transfers are also included in this category. Customer Service costs are primarily related to the call center and collections on delinquent accounts. The Distribution Operations category includes preventative and corrective maintenance on sewer mains and laterals, investigation of sewer overflows, regular cleaning of heavily impacted sections of the sewer system, and services shared with other utilities (such as street restoration and equipment maintenance). Allocated Charges include the costs of accounting, purchasing, legal, and other WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 27 | Page 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. The financial plan projections align as much as possible with the City’s budget assumptions, however instead of a ten-year General Fund Long Range Financial Forecast, the City presented a preliminary forecast focusing on FY 2022 based on the current economic climate and continued unknown impacts of the COVID-19 pandemic.11 This plan projects operations costs to increase by 2 to 3% per year, on average, over the forecast period. Underlying these projections are preliminary assumptions for non-salary and benefit cost categories from Palo Alto’s Office of Management and Budget. For salary and benefit assumptions, this financial plan uses the most updated wastewater utility budget annual percentage increases applied to the actual 2020 salaries and benefits which averages approximately 4% per year. SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP) The Wastewater Collection Utility’s CIP consists of the following programs: • The Sanitary Sewer Replacement/Rehabilitation (SSR) Program, under which the Wastewater Collection Utility replaces aging sewer mains. • Customer Connections, which covers the cost when the Wastewater Collection Utility installs new laterals or upgrades existing laterals at a customer’s request in response to development or redevelopment. CPAU charges a fee to these customers to cover the cost of these projects. • Ongoing Projects, which covers the cost of replacing deteriorated manholes and sewer laterals, addressing unplanned replacement needs, performing hydraulic analysis, replacing antiquated software, as well as the cost of capitalized tools and equipment. The Sanitary Sewer Replacement and Rehabilitation Program funds the replacement of deteriorating sewer mains to increase capacity or improve pipe condition in various parts of the sewer system. The sewer system consists of over 217 miles of mains, and CPAU uses a variety of tools to establish which sections need to be replaced. The 2004 Master Plan study identified wastewater mains with capacity deficiency and they have been corrected in past CIP projects. For condition assessment, maintenance statistics (such as records of the location and number of sewer overflows on the system) and video recording of sewer mains from a past video inspection of sewer main project or during regular cleaning can reveal areas with deteriorating pipe. CPAU uses a structural rating system to grade the pipe defects. The video-inspection data and maintenance records are used to plan and prioritize sewer main replacement and rehabilitation. Utilities also coordinates with the Public Works street maintenance program to avoid cutting into newly repaved streets. A major goal of the replacement program is to minimize sewer overflow and reduce groundwater and rainwater infiltration. As mains deteriorate they begin to allow roots into the pipe joints to create blockages, permitting groundwater and rainwater to infiltrate the system. Some level of infiltration is expected on any sewer system, but if there is too much, 11 Staff Report #11844 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 28 | Page the combined flow of wastewater and groundwater/rainwater can overwhelm the capacity of various parts of the sewer system. Reducing infiltration can reduce the need to expand the system to accommodate increased flow, as well as reducing unnecessary amounts of water to be treated at the treatment plant. To achieve this goal, deteriorating mains are either replaced with new HDPE pipe or rehabilitated with a plastic lining when replacement is not feasible. Staff has been replacing/rehabilitating the mains as needed according to their condition. In addition, Wastewater Operations’ routine maintenance continues to stay on schedule to minimize sewer overflows. Over the last few years, main replacement costs have been increasing for utilities due to economic activity in the Bay Area causing construction cost inflation. Utilities has not bid a sewer project since the pandemic began. However, there are no indications of a dip in construction costs. Utilities Engineering has been consistently replacing aging sewer mains since the early 90’s. The proactive replacement program keeps the collection system in good condition. Between 1990 and 2019, 75 miles or 35% of the collection system has been replaced or rehabilitated (the darker green-colored lines shown in the attached map in Appendix D: Map (CPA Wastewater Collection System - Sewer Mains Replaced or Rehabilitated since 1990). This is an average of approximately 13,654 feet (~2.6 miles), or 1.2% of the system, of sewer main being replaced or rehabilitated per year. This is a sustainable replacement rate to keep the system reliable. Staff undertakes an SSR project every other year however, the FY 2024 and FY 2026 projects are planned to be deferred in order to lower CIP budgets to relieve the upward pressure on customer rates due to the ongoing pandemic and associated economic impacts. Each SSR project has approximately a $4 to $5 million budget to cover design and construction. This project scope and frequency allows staff to continue replacing wastewater mains that are in poor condition and to reduce groundwater and rainwater infiltration through cracks or leaking joints. Staff continues to re-evaluate and re-prioritize the scope of future projects based on the structural rating system, Wastewater Operations’ feedback and available budget. Part of the assessment is to evaluate whether a slightly reduced replacement rate would jeopardize the integrity of the system, since large portions of the mains that have not been replaced or rehabilitated are located in newer sub-divisions that were developed between 1950 and 1970. The costs for Customer Connections and on-going Projects are projected to remain steady through the end of the forecast period. Actual expenses for these projects fluctuate annually depending on how many defective laterals and manholes are discovered during routine maintenance, as well as how much development and redevelopment is going on that prompts the replacement or upgrade of sewer laterals. It is worth noting that property owners pay a fee for sewer lateral replacement or expansion during redevelopment, so when the number of projects increases, so does fee revenue. Table 14 displays projected CIP spending for the 5-year financial forecast period. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 29 | Page Table 14: Projected CIP Spending Aside from Customer Connections, the CIP plan for FY 2022 to FY 2026 is funded by sewer rates and capacity fees. Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail shows the details of the plan. Figure 9 below shows the projected CIP Reserve balances from FY 2022 through FY 2026. Figure 10 below shows the projected CIP expenditures fluctuating from year to year with the staggered main replacement schedule relative to the more steady projected capital program contributions. In FY 2022, the capital program contribution to the CIP Reserve is $4.35 million. The capital program contribution would increase with inflation at a projected level of 3% annually. Appendix A: Wastewater Collection Financial Forecast Detail shows the amount of the rate-funded CIP Reserve contributions under “Uses of Funds” or considered expenses for FY 2022 through FY 2026. Project Category Current Budget* Spending, Curr. Yr Remain. Budget**Committed FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Sewer Rehab/Augmentation 2,550 (1,469) 1,081 - 4,130 300 1,950 3,850 1,650 Ongoing Projects 1,389 (328) 1,061 - 1,050 1,575 1,100 1,126 1,150 Customer Connections 346 (51) 295 - 450 450 450 450 450 TOTAL 4,285 (1,848) 2,437 - 5,630 2,325 3,500 5,426 3,250 *Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year **Equal to CIP Reserves (Reserve for Reappropriations + Reserve for Commitments). WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 30 | Page Figure 9: Projected CIP Reserve Balances FY 2022 to FY 2026 Figure 10: Projected CIP Expenditure, and Projected Capital Program Contribution, FY 2022 to FY 2026 ($000) WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 31 | Page SECTION 6D: DEBT SERVICE The Wastewater Collection Utility currently pays its share of one bond issuance, the 1999 Utility Revenue Bonds, Series A, which is due to be retired in 2024. This $17.7 million issuance refinanced various earlier Storm Drain, Wastewater Treatment, and Wastewater Collection Utility bond issuances. The Wastewater Collection Utility’s share of the issuance was roughly $1.9 million. This amount represented the second refinancing of the remaining principal of a 1990 bond issuance, which itself was a refinancing of a 1985 issuance that financed a variety of improvements to the sewer system. The cost of debt service for the Wastewater Collection Utility’s share of this bond issuance for the financial forecast period is roughly $129,000 per year as shown in Table 15 below. Table 15: Wastewater Collection Utility Debt Service ($000) FY 2022 FY 2023 FY 2024 1999 Utility Revenue Bonds, Series A 129 129 129 The 1999 Utility Revenue Bonds include two covenants stating that 1) the Wastewater Collection Utility will maintain a debt coverage ratio of 125% of debt service, and 2) that the City will maintain “Available Reserves”12 equal to five times the annual debt service. The current financial plan maintains compliance with both covenants throughout the forecast period. Table 16, below, shows compliance with the first covenant. Due to the small size of the annual debt service payment for these bonds, the Wastewater Collection Utility’s Operations Reserve alone more than satisfies the second covenant at more than 30 times annual debt service throughout the forecast period. Table 16: Debt Service Coverage Ratio ($000) FY 2022 FY 2023 FY 2024 Revenues 20,015 20,886 22,190 Expenses (Excl. CIP and Debt Service) 15,412 15,899 17,406 Net Revenues 4,604 4,987 4,784 Debt Service 129 129 129 Coverage Ratio 3581% 3864% 3701% The Wastewater Collection Utility’s reserves (but not its net revenues) are also considered security for the Storm Drain and Wastewater Treatment Utilities’ shares of the debt service on the 1999 bonds. Throughout the term of the bonds there remains a small risk that the Wastewater Collection Utility’s reserves could be called upon to make a debt service payment on behalf of one of those utilities if it cannot meet its debt service obligations. Staff does not foresee this occurring based on the current financial condition of those utilities. If the Wastewater Collection Utility’s reserves were used this way, any amounts advanced would have to be repaid by the borrowing utility. 12 Available Reserves as defined in the 1999 Utility Revenue Bonds included reserves for the Water, Wastewater Treatment, Wastewater Collection, Refuse, Storm Drain, Electric, and Gas Utilities WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 32 | Page SECTION 6E: OTHER REVENUES Other revenues are from capacity and connection fees and income from interest and transfers in. These revenues fluctuate from year to year. This plan forecasts other revenues using the average of the past five years for FY 2022 increasing by inflation annually through the forecast period. SECTION 7: COMMUNICATIONS PLAN In FY 2022, the communications strategy for the wastewater collection utility will address the following primary areas: infrastructure upgrades, increasing wastewater treatment costs, maintenance and operations related to safety, and how these necessary activities impact the rates this year. Communication about wastewater rate adjustments will highlight the important infrastructure and operations upgrades that are occurring at the Regional Water Quality Control Plant (RWQCP) as well as increased capital improvement projects (CIP) to improve our wastewater collection utility services. These infrastructure upgrades are necessary to replace aging wastewater collection mains and sanitary sewer treatment equipment at the RWQCP. This is important for functional as well as safety reasons. Staff update the utilities website with information on the progress of wastewater projects to keep customers apprised of the status and accomplishments of CIP projects. Customers can find project schedules, maps, overview of the work being done, and project manager contact information at www.cityofpaloalto.org/utilityprojects. Promotional activities about wastewater infrastructure upgrades, operations, safety, CPAU and customer responsibilities for wastewater system maintenance, include the use of bill inserts, ads in local print publications, email newsletters and social media. An important communications topic for the wastewater utility is avoiding sewer back-ups due to FOG (fats, oil and grease) and trash being dumped down drains and toilets. Safety topics are emphasized year-round. Staff continues with the outreach goal of educating customers about the utility’s gas-sewer line cross-bore inspection program, including the importance of calling CPAU prior to clearing sewer lines in the event of a sewer back-up. While print materials and website pages feature prominently, CPAU is increasing the outreach emphasis on more direct communication with customers, including through use of social media, email newsletters, digital ads and videos. Aside from the year 2020 COVID-19 shelter-in-place public health order, staff typically attend community safety and emergency preparedness events and neighborhood meetings, and we continually seek out new opportunities to do so. One example of a new residential outreach opportunity is through providing information on the Cool Blocks curriculum. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 33 | Page APPENDICES Appendix A: Wastewater Collection Financial Forecast Detail Appendix B: Wastewater Collection Utility Capital Improvement Program (CIP) Detail Appendix C: Wastewater Collection Utility Reserves Management Practices Appendix E: Map (CPA Wastewater Collection System - Sewer Mains Replaced or Rehabilitated since 1990) Appendix E: Sample of Wastewater Collection Outreach Materials WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 34 | Page APPENDIX A: WASTEWATER COLLECTION FINANCIAL FORECAST DETAIL 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 1 2 % CHANGE IN RETAIL RATE 9.0% 9.0% 0.0% 11.0% 7.0% 0.0% 3.0% 3.0% 5.0% 5.0% 5.0% 3 PROJECTED CHANGE IN RETAIL SALES REVENUE 1,317 1,421 - 1,916 1,359 - 612 630 1,082 1,136 1,193 4 5 RETAIL SALES REVENUE 15,648 17,126 17,420 19,342 20,335 19,996 20,015 20,886 22,190 23,565 24,997 6 CONNECTION AND CAPACITY FEES 794 1,047 549 594 686 752 767 787 810 835 860 7 OTHER / TRANSFERS IN 321 355 328 545 394 398 406 416 429 442 455 8 INTEREST 475 (88) 19 446 406 258 263 270 278 286 295 9 TOTAL SOURCES OF FUNDS 17,238 18,441 18,316 20,928 21,820 21,404 21,452 22,359 23,707 25,127 26,606 10 11 PURCHASES/CHARGES OF UTILITIES (TREATMENT)8,770 8,391 9,559 9,843 10,234 10,995 11,154 11,487 12,827 13,632 16,112 12 ALLOCATED CHARGES (CIP&OPERATING)1,816 1,388 634 1,414 1,122 1,002 1,005 1,022 1,047 1,078 1,123 13 CUSTOMER SERVICE (22) 345 283 304 300 308 320 332 344 354 360 14 DISTRIBUTION OPERATIONS 2,635 2,759 2,720 2,855 3,461 3,948 3,690 3,820 3,960 4,079 4,146 15 ENGINEERING (OPERATING)347 292 345 329 339 348 361 374 388 399 406 16 DEBT SERVICE 129 128 128 128 128 128 129 129 129 - - 17 RENT 293 300 310 320 332 251 256 262 270 278 287 18 OTHER/ TRANSFERS OUT 233 323 359 364 467 467 467 467 467 467 467 19 CAPITAL PROGRAM CONTRIBUTION^4,985 1,332 2,955 2,932 5,165 1,231 4,350 4,459 4,593 4,730 4,872 20 TOTAL USES OF FUNDS 19,185 15,258 17,294 18,489 21,550 18,677 21,733 22,352 24,025 25,019 27,774 21 22 INTO / (OUT OF) RESERVES (1,946) 3,183 1,022 2,439 271 2,727 (281) 6 (318) 108 (1,168) 23 24 ENDING COMMITMENTS & REAPPROPRIATIONS 11,088 1,922 1,268 5,732 4,775 4,775 4,775 4,775 4,775 4,775 4,775 25 ENDING PLANT REPLACEMENT RESERVE - - - - - - - - - - - 26 ENDING CIP RESERVE 978 978 978 978 978 3,178 2,559 3,681 3,861 2,461 3,082 27 ENDING RATE STABILIZATION RESERVE 342 342 342 342 342 342 342 342 295 295 - 28 ENDING OPERATIONS RESERVE 3,211 6,393 7,415 5,390 5,661 6,188 5,907 5,913 5,642 5,750 4,878 29 UNASSIGNED RESERVES - - - - - - - - - - - 30 31 SHORT TERM RISK ASSESSMENT VALUE 1,444 1,524 1,652 1,758 1,837 1,900 1,916 1,985 2,171 2,306 2,612 32 33 OPERATIONS RESERVE GUIDELINES 34 MIN (60 DAYS TREATMENT/O&M EXP)2,238 2,319 2,469 2,667 2,624 2,868 2,756 3,126 3,224 3,105 3,867 35 TARGET (105 DAYS TREATMENT/O&M EXP)3,916 4,059 4,322 4,668 4,592 5,019 4,823 5,470 5,642 5,434 6,767 36 MAX (150 DAYS TREATMENT/O&M EXP)5,594 5,798 6,174 6,669 6,559 7,170 6,889 7,815 8,060 7,763 9,667 37 ^Capital Program Contribution represents level amount of CIP funding from the Operations Reserve to the CIP Reserve beginning in FY 2022 Fiscal Year Wastewater Collection Financial Detail ($'000) Actual Projected WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 35 | Page WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 36 | Page APPENDIX B: WASTEWATER COLLECTION UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL Project # Project Name Reappropriated / Carried Forward from Previous Years Current Year Funding Proposed Budget Amendments Spending, Current Year Remaining in CIP Reserve Fund Commitments FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 SEWER SYSTEM REHABILITATION AND AUGMENTATION (SSR/A) PROGRAM WC-11000 SSR/A - Project 24 - - - - - - - - - - WC-12001 SSR/A - Project 25 - - - - - - - - - - WC-13001 SSR/A - Project 26 - - - - - - - - - - WC-14001 SSR/A - Project 27 - - - - - - - - - - - WC-15001 SSR/A - Project 28 692,891 (492,891) - (117,224) 82,776 - - 300,000 300,000 300,000 - WC-16001 SSR/A - Project 29 3,740,820 (1,740,820) - (1,352,249) 647,751 - - - - - - WC-17001 SSR/A - Project 30 221,000 129,000 - - 350,000 - 4,130,000 - - - WC-19001 SSR/A - Project 31 - - - - - - - 1,650,000 3,550,000 - WC-20000 SSR/A - Project 32 - - - - - - - - 1,650,000 Subtotal, Sewer Rehab./Augmentation 4,654,711 (2,104,711) - (1,469,473) 1,080,527 - 4,130,000 300,000 1,950,000 3,850,000 1,650,000 ONGOING PROJECTS WC-13002 Fusion & Gen. Equip./Tools 27,894 185,000 - (32,191) 180,703 - 50,000 50,000 50,000 50,000 50,000 WC-15002 WW System Improvements 205,952 94,048 - (171,210) 128,791 - 200,000 200,000 200,000 200,000 200,000 WC-99013 Sewer / Manhole Rehab.- 876,000 - (124,491) 751,509 - 800,000 1,325,000 850,000 875,500 900,000 Subtotal, Ongoing Projects 233,846 1,155,048 - (327,891) 1,061,003 - 1,050,000 1,575,000 1,100,000 1,125,500 1,150,000 CUSTOMER CONNECTIONS (FEE FUNDED) WC-80020 Sewer System Extensions 16,846 329,154 - (50,845) 295,155 - 450,000 450,000 450,000 450,000 450,000 Subtotal, Customer Connections 16,846 329,154 - (50,845) 295,155 - 450,000 450,000 450,000 450,000 450,000 GRAND TOTAL 4,905,403 (620,509) - (1,848,209) 2,436,685 - 5,630,000 2,325,000 3,500,000 5,425,500 3,250,000 Funding Sources Connection/Capacity Fees 750,000 - 600,000 600,000 600,000 600,000 600,000 Funded by Rates and Other Revenue (1,370,509) - 5,180,000 1,875,000 3,050,000 4,975,500 2,800,000 CIP-RELATED RESERVES DETAIL 6/30/2020 Actual 6/30/21 (Unaudited) Reappropriations & Commitments 4,905,403 2,436,685 WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 37 | Page APPENDIX C: WASTEWATER COLLECTION UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Wastewater Collection 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. Reserves The Wastewater Collection Utility’s Fund Balance is reserved for the following purposes: a) For existing contracts, as described in Section 3 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 4 (Reserve for Re-appropriations) c) For cash flow management and contingencies related to the Wastewater Collection Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve) d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve) e) For operating contingencies, as described in Section 7 (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 8 (Unassigned Reserves). Section 3. Reserve for Commitments At the end of each fiscal year the 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 4. Reserve for Re-appropriations At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re- appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 38 | Page Section 5. 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 Maximum Level Average annual (12 month)13 CIP budget, for 48 months of budgeted CIP expenses14 b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added or removed from to 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: i) 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 City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Section 6. 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 Wastewater Collection Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. 13 Each month is calculated based upon 1/12 of the annual budget. 14 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period to use to derive the annual average would be FY 2023 through FY 2026 etc. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 39 | Page Section 7. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Wastewater Collection Utility’s Fund Balance not included in the reserves described in Section 3-Section 6 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 7(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 105 days of O&M and commodity expense Maximum Level 150 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 Wastewater Collection Utility shall be designed to return the Operations Reserve to its target level within four years. 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 Wastewater Collection Utility’s Fund Balance shall be automatically included in the Unassigned Reserve described in Section 8, below. Section 8. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Wastewater Collection 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 Wastewater Collection 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. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 40 | Page APPENDIX D: MAP (CPA WASTEWATER COLLECTION SYSTEM - SEWER MAINS REPLACED OR REHABILITATED SINCE 1990) WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 41 | Page APPENDIX E: SAMPLE OF WASTEWATER COLLECTION OUTREACH MATERIALS WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 37 | Page APPENDIX C: WASTEWATER COLLECTION UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Wastewater Collection 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. Reserves The Wastewater Collection Utility’s Fund Balance is reserved for the following purposes: a)For existing contracts, as described in Section 3 (Reserve for Commitments) b)For operating and capital budgets re-appropriated from previous years, as described in Section 4 (Reserve for Re-appropriations) c)For cash flow management and contingencies related to the Wastewater Collection Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve) d)For rate stabilization, as described in Section 6 (Rate Stabilization Reserve) e)For operating contingencies, as described in Section 7 (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 8 (Unassigned Reserves). Section 3. Reserve for Commitments At the end of each fiscal year the 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 4. Reserve for Re-appropriations At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re- appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. Attachment D WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 38 | Page Section 5. 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 Maximum Level Average annual (12 month)13 CIP budget, for 48 months of budgeted CIP expenses14 b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added or removed from to 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: i) 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 City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Section 6. 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 Wastewater Collection Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. 13 Each month is calculated based upon 1/12 of the annual budget. 14 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period to use to derive the annual average would be FY 2023 through FY 2026 etc. WASTEWATER COLLECTION UTILITY FINANCIAL PLAN February 2021 39 | Page Section 7. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Wastewater Collection Utility’s Fund Balance not included in the reserves described in Section 3-Section 6 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 7(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 105 days of O&M and commodity expense Maximum Level 150 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 Wastewater Collection Utility shall be designed to return the Operations Reserve to its target level within four years. 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 Wastewater Collection Utility’s Fund Balance shall be automatically included in the Unassigned Reserve described in Section 8, below. Section 8. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Wastewater Collection 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 Wastewater Collection 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. APPENDIX A: WASTEWATER COLLECTION UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Wastewater Collection 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. Reserves The Wastewater Collection Utility’s Fund Balance is reserved for the following purposes: a)For existing contracts, as described in Section 3 (Reserve for Commitments) b)For operating and capital budgets re-appropriated from previous years, as described in Section 4 (Reserve for Re-appropriations) c)For cash flow management and contingencies related to the Wastewater Collection Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve) d)For rate stabilization, as described in Section 6 (Rate Stabilization Reserve) e)For operating contingencies, as described in Section 7 (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 8 (Unassigned Reserves). Section 3. Reserve for Commitments At the end of each fiscal year the 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 4. Reserve for Re-appropriations At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re- appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. Attachment E Section 5. 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 Resolutionbased on the levels of CIP expense budgeted for that year. Minimum Level 20% of the maximum CIP Reserve guideline level 12 months of budgeted CIP expense Maximum Level Average annual (12 month)1 CIP budget, for 48 months of budgeted CIP expenses224 months of budgeted CIP expense b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added or removed from to 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: 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)i) 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. 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 1 Each month is calculated based upon 1/12 of the annual budget. 2 For example, in the Financial Plan for FY 2022, the 48 month period to use to derive the annual average is FY 2022 through FY 2025. In the FY 2023 Financial Plan, the 48 month period to use to derive the annual average would be FY 2023 through FY 2026 etc. may also seek City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Section 6. 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 Wastewater Collection Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. Section 7. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Wastewater Collection Utility’s Fund Balance not included in the reserves described in Section 3-Section 6 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 7(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 105 days of O&M and commodity expense Maximum Level 150 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 Wastewater Collection Utility shall be designed to return the Operations Reserve to its target level within four years. 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 Wastewater Collection Utility’s Fund Balance shall be automatically included in the Unassigned Reserve described in Section 8, below. Section 8. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Wastewater Collection 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 Wastewater Collection 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. RESIDENTIAL WASTEWATER COLLECTION AND DISPOSAL UTILITY RATE SCHEDULE S-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-1-1 Effective 7-1-202119 dated 7-1-20198 Sheet No S-1-1 A. APPLICABILITY: This schedule applies to each Occupied Domestic Dwelling unit. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Service. C. RATES: Per Month Each Occupied Domestic Dwelling unit ................................................................................ $41.3743.32 D.SPECIAL NOTES: 1. Any dwelling unit being individually served by a Water, Gas, or Electric Meter will be considered continuously occupied. 2.For two or more Occupied Domestic Dwelling units served by one Water Meter, the monthlyWastewater charge will be calculated by multiplying the current Wastewater rate by thenumber of dwelling units. 3.Each developed separate lot shall have a separate service lateral to a sanitary main ormanhole. {End} Attachment F COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL UTILITY RATE SCHEDULE S-2 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-2-1 Effective 7-1-202119 dated 7-1-20198 Sheet No S-2-1 A. APPLICABILITY: This schedule applies to all commercial establishments other than those served under Utility Rate Schedule S-1 (Residential Wastewater Collection and Disposal), Rate Schedule S-6 (Restaurant Wastewater Collection and Disposal) or Rate Schedule S-7 (Commercial Establishments Wastewater Disposal – Industrial Discharger). B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Minimum Charge per connection per month ............................................................. $41.37 2. Quantity Rates, per 100 cubic feet (See Section D.1)............................................. $8.097.97 D. SPECIAL NOTES: 1. The monthly charge for the quantity rate set forth in Section C.2 of this rate schedule will be based upon the average Water usage for the months of January, February and March, and applied in the following July. If a Water Meter is identified as exclusively serving irrigation landscaping, such Meter will be exempted from Wastewater charge calculations. Customers without an applicable usage history will be rebuttably presumed to have usage of 4.8 ____ ccf per month charged at the Residentialminimum monthly charge per occupied domestic dwelling unit (Utility Rate Schedule S-1) until such time as such usage may reasonably be established by the City of Palo Alto Utilities Department. 2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City and the Customer. {End} RESTAURANT WASTEWATER COLLECTION AND DISPOSAL UTILITY RATE SCHEDULE S-6 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-6-1 Effective 7-1-202119 dated 7-1-20198 Sheet No S-6-1 A. APPLICABILITY: This schedule applies to all restaurants. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Minimum charge per connection per month ......................................................... $41.37 2. Quantity Rates, per 100 cubic feet of monthly metered Water usage ....................... $ 12.0712.33 D. SPECIAL NOTES: 1. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City and the Customer. {End} COMMERCIAL WASTEWATER COLLECTION AND DISPOSAL – INDUSTRIAL DISCHARGER UTILITY RATE SCHEDULE S-7 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No S-7-1 Effective 7-1-202119 dated 7-1-20198 Sheet No S-7-1 A. APPLICABILITY: This schedule applies to any establishment requiring sampling of industrial discharges in excess of 25,000 gallons per day, or special discharge monitoring, as defined in Rule and Regulation 23, Section CD. B. TERRITORY: This schedule applies everywhere the City of Palo Alto provides Wastewater Services. C. RATES: 1. Collection System Operation, Maintenance, and Infiltration Inflow: $4.022.15 per 100 cubic feet of metered water use. 2. Advanced Waste Treatment Operations and Maintenance Charge: $1.6051 per 100 cubic feet of metered water use 3. $196.34247.56 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4. $473.38596.62 per 1000 lbs of SS (Suspended Solids) 5. $3,270.923,983.85 per 1000 lbs of NH3 (Ammonia) 6. $ 14,781.25 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc) D. SPECIAL NOTES: 1. Water usage will be determined as defined in Rule and Regulation 23, Section CD. If a Water Meter is identified as exclusively serving irrigation landscaping, such Meter will be exempted from Wastewater charge calculations. 2. The City of Palo Alto Utilities Department may require Wastewater Metering facilities, in which case Service will be governed by terms of a special agreement between the City of Palo Alto and the Customer. 3. Charges for large discharges will be determined on the basis of sampling as outlined in Utilities Rule and Regulation 23, Section CD. However, for purposes of arriving at an accurate flow estimate, discharge Meters, if installed, can be utilized to measure outflow for billing purposes. Annual charges will be determined and allocated monthly for billing purposes. {End} 2021 Wastewater COS Report January 11, 2021 CITY OFPALO ALTO 0 CITY OF PALO ALTO ~ RAFTELIS Attachment G 445 S Figueroa Street, Suite 1925 Los Angeles, CA 90071 www.raftelis.com January 11, 2021 Mr. Eric Keniston City of Palo Alto 250 Hamilton Avenue Palo Alto, CA 94301 Subject: Wastewater Collection Utility Cost of Service and Rate Study Dear Mr. Keniston, Raftelis is pleased to provide this wastewater cost of service study report (Report) to the City of Palo Alto (City). This study involved a comprehensive review of the City’s wastewater rate structure and the calculation of cost of service-based wastewater rates. This report summarizes key findings and recommendations related to the rates necessary for the City to meet its obligations. We are confident that the calculated rates are fair and equitable for the City’s customers and compliant with Proposition 218 requirements. This report includes an executive summary, cost of service analysis based on city budget and cost projections, and rate derivation for the wastewater utility. It was a pleasure working with you and we wish to express our thanks for the support you, Ms. Lisa Bilir, Mr. Eric Wong and other City staff provided during the study. If you have any questions, please do not hesitate to call me at (626) 583-1894. Sincerely, Raftelis Sudhir Pardiwala, P.E. Michael Hicks Executive Vice President Associate Consultant ~ RAFTELIS Table of Contents 1. Background .............................................................................................. 1 1.1.1. Objectives of Study ........................................................................................................ 1 1.1.2. System Overview ........................................................................................................... 1 2. Cost of Service Methodology ........................................................................ 3 2.1.1. LOADING (Mass Balance) ........................................................................................... 3 2.1.2. Functionalization of Costs ............................................................................................. 5 2.1.3. Revenue Requirement ................................................................................................... 8 2.1.4. Unit Cost Derivation ..................................................................................................... 8 2.1.5. Allocation of Cost to Customer Classes .......................................................................... 9 3. Rate derivation ........................................................................................ 11 3.1.1. Residential Rates ......................................................................................................... 11 3.1.2. Non-Residential Rates ................................................................................................. 11 3.1.3. Proposed Rates Schedule ............................................................................................. 12 3.1.4. Customer Impacts ....................................................................................................... 12 List of Tables Table 2-1: Mass Balance Analysis ...............................................................................................................5 Table 2-2: O&M Expense Allocation – FY 2021-2022 .............................................................................7 Table 2-3: Revenue Requirement ................................................................................................................8 Table 2-4: Customer Class Data ..................................................................................................................8 Table 2-5: Unit Cost Derivations ................................................................................................................9 Table 2-6: Allocation of Costs to Customer Classes ................................................................................10 Table 3-1: Residential Rate Derivation .....................................................................................................11 Table 3-2: Non-Residential Rate Derivation for FY 2021-2022 .............................................................12 Table 3-3: S-1 Residential Customer Impacts ..........................................................................................12 Table 3-4: S-2 Commercial Customer Impacts ........................................................................................13 Table 3-5: S-6 Restaurant Customer Impacts ...........................................................................................13 This page intentionally left blank to facilitate two-sided printing. WASTEWATER COS REPORT 1 1. Background 1.1.1. OBJECTIVES OF STUDY The City of Palo Alto (City) engaged Raftelis to update the City’s cost of service (COS) methodology and wastewater rate structure to ensure continued compliance with Proposition 218. This report documents the assumptions, methodologies, analyses, and proposed rates developed in the study. The mission of the City is to provide safe, reliable, environmentally sustainable, and cost-effective services. To ensure that the City can fulfill its mission effectively this study has been prepared with the following major objectives: 1. Ensure revenue sufficiency to meet the operation and maintenance (O&M) and capital needs of the City’s wastewater utility. 2. Ensure that rates are fair, equitable, and reflect the costs of providing services. 3. Plan for rate and revenue stability to prevent rate spikes, preserve the overall financial health of the utility, and maintain adequate operating and capital reserves under varying demand conditions. Wastewater rates are designed to recover the City’s costs to collect and treat wastewater (sewage). Wastewater collection and treatment costs are increasing due to planned infrastructure upgrades at the Regional Water Quality Control Plant (RWQCP). The existing plant is past its design lifetime and requires upgrades to meet stricter environmental standards. In addition to this, the cost to replace sewer mains in the City’s wastewater collection system has also increased. 1.1.2. SYSTEM OVERVIEW The City’s sewer system collects wastewater from Palo Alto residents and delivers it to the RWQCP for treatment. The City operates the RWQCP; however, the costs of the RWQCP are shared with five other agencies that receive treatment services from the RWQCP (Stanford, East Palo Alto Sanitary District, Los Altos Hills, Los Altos, and Mountain View). The Wastewater Utility has two main costs: collection system costs and Palo Alto’s share of RWQCP costs. Both cost components have been increasing and are expected to continue to increase. The RWQCP has been in operation since 1934. Aging equipment, new regulatory requirements, and the transition towards full sustainability will require the rehabilitation or replacement of much existing RWQCP infrastructure. The City has seen increases in operational costs in recent years, and debt service for the plant is expected to increase substantially as a major rehabilitation and replacement plan adopted in 2012 (Long Range Facilities Plan) is implemented. Collection system costs are also increasing, though not as significantly as treatment costs. These increasing costs are primarily driven by increases in capital costs. The cost of underground projects to replace aging sewer mains has nearly doubled since 2008. Operational costs have also increased (e.g., salaries and benefits and overhead), but more slowly than treatment and collection infrastructure-related costs. 2 CITY OF PALO ALTO The City’s current wastewater retail customers are divided into three customer classes: S-1 Residential, S-2 Commercial, and S-6 Restaurant. S-1 Residential is the largest customer class, comprising most of the City’s retail customers. City staff provided overall revenue projections based on expense and reserve level projections. These projections recommend an increase to the overall revenue generated by wastewater rates for FY 2021 – 2022 of 3%. Additionally, in order to keep each customer’s wastewater rates in alignment with the cost of serving that customer and reflect changing system use, certain rates are recommended for small rate adjustments while keeping overall revenue levels of the enterprise stable. WASTEWATER COS REPORT 3 2. Cost of Service Methodology This section of the Report discusses the allocation of O&M expenses and capital costs to the appropriate functional categories, allocating each functional category into cost components consistent with industry standards, the determination of unit costs, and calculation of costs by customer class. To allocate the cost of service among the different customer classes, costs first need to be allocated to appropriate functional categories and each functional category must be allocated to cost causation components. The following sections describe our allocations for the City’s wastewater system. The total cost of wastewater service is analyzed by system function in order to equitably distribute costs of service to the various classes of customers. For this analysis, wastewater utility costs of service are developed consistent with the guidelines for allocating costs detailed in the Water Environment Federation (WEF) Manual of Practice No. 27, Financing and Charges for Wastewater Systems, 2018. The wastewater COS analysis consists of the following major steps, as outlined below: 1. Estimate residential and non-residential customer flow and strength through a mass balance around the treatment plant 2. Functionalize O&M and capital costs into functional categories such as collection, treatment, customer service and general 3. Allocate each functional category into cost causation components such as flow and strength 4. Develop customer class characteristics by cost causation component 5. Calculate the unit cost causation component rates by dividing the total cost in each cost causation component in Step 3 by the customer class characteristics in Step 4 6. Calculate the cost by customer class by multiplying the unit costs in Step 5 by the customer class characteristics in Step 4 2.1.1. LOADING (MASS BALANCE) Wastewater customers do not generally have meters installed on their sewer connection. This stands in contrast to water connections, which are usually metered. A wastewater COS analysis consequently requires the estimation of loadings (i.e., flow and strength) for each customer class. To determine the wastewater flows from different customer classes, Raftelis reviewed the water use records of the City from March 2019 to February 2020 and the volume of wastewater receive at the treatment plant during this period. To avoid any temporary impacts of the ongoing pandemic, Raftelis used the time period indicated above instead of the fiscal year data. In the City, there are four classes of customers: (i) Residential (S-1), (ii) Commercial (S-2), (iii) Restaurant (S-6) and Industrial Discharger (S-7). Currently there are no Industrial Discharger customers in the City. Therefore, all non- residential customers other than restaurants are classified as Commercial. 4 CITY OF PALO ALTO Loading is a combination of flow and strength. Flow is the volume of wastewater discharge, while strength is a three-component measurement (COD, TSS and NH31) of the concentration of soluble and the insoluble organic and inorganic matters that will be removed or neutralized in the treatment process. To estimate residential wastewater loading, a mass balance analysis is conducted by taking the total flow and strength of the wastewater entering the RWQCP from the City’s collection system and reducing that loading by (i) inflow and infiltration and (ii) the loading of the City’s non-residential customers. Inflow and infiltration (I&I) is water that enters the wastewater collection system via a mechanism other than intentional customer discharges via their sewer connection. Sources of I&I include rainwater, run-off, and groundwater intrusions. I&I varies among wastewater systems. Based upon the mass balance calculation using metered water use in the winter months (January, February, and March) to estimate sewer use for residential and commercial customers as well as annual water usage data to estimate sewer use for restaurant customers, Palo Alto’s I&I is estimated to represent about 29% of its total influent. The loadings for commercial customers are estimated based on metered water use in the winter months by the City’s commercial customers.2 The loadings for restaurant customers are estimated based on metered, year-round billed water use by the City’s restaurant customers.3 Table 2-1 shows the total annual units of flow and strength for each customer class based on the results of the mass balance analysis. The results were compared with industry averages to verify the calculation and assumptions used in the mass balance. Over the last several years, multiple droughts and strong conservation messages have reduced water use and wastewater flows but did not affect the amount of solids and biological materials in the discharge. Current residential wastewater flows, based on the mass balance, are 4.8 ccf (one hundred cubic feet) per month per EDU, or 46 gallons per capita per day. The 4.8 ccf number is calculated by taking 1,489,989 ccf of residential flow divided by 26,034 residential customers, divided by 12 months, and the 46 gallons per capita per day is calculated by taking 1,489,989 ccf of residential flow divided by population estimate of 66,649 and converted to gallons per day by multiplying by 748 gallons per ccf and 365 days per year. This amount of flow results in much higher concentrations as compared to the wastewater flow used in the City’s 2009 rate study. The increased concentration thus results in an increased strength of discharges into the sewage system. To ensure that the total strength loadings influent to the wastewater treatment plant match the total generated by all classes, the analysis began with the existing assumptions based on the City’s 2009 rate study for strength measurements and then increased each proportionally for each customer class in relation to reduced flows as shown below. 1 COD is Chemical Oxygen Demand, TSS is Total Suspended Solids, and NH3 is Ammonia. 2 Water consumption during winter months is used as a proxy for wastewater system use because during the wet winter months (January, February and March) water delivered to a customer is primarily for interior use of the business (and discharged to the sewer system) rather than used for landscape maintenance purposes. Because water use in March 2020 was extremely atypical as a result of the onset of the COVID-19 emergency, this analysis considered water use in January 2020, February 2020, and March 2019. 3 Restaurants have relatively low outdoor water use, but often have widely varying customer loads (and water use) during the year for seasonal and other reasons. Therefore, this analysis was based on twelve months of water usage from March 2019 through February 2020. This analysis also uses a return factor on restaurant annual water use of 95% due to the assumption that restaurants use a small amount of water for outdoor watering. WASTEWATER COS REPORT 5 Strength Assumption from 2009 Study Revised Strength Assumptions As stated above, the estimated residential wastewater flow is 4.8 ccf (one hundred cubic feet) per month per EDU, or 46 gallons per capita per day (gpcd). The results for estimated residential wastewater flow falls within what Raftelis considers likely to be a reasonable indication of indoor water use and wastewater discharge for the City. Table 2-1: Mass Balance Analysis March 2019 – February 2020 Flow COD TSS NH3 (ccf) (lbs/yr) (lbs/yr) (lbs/yr) City Influent 3,338,235 13,253,263 5,938,962 750,185 Less: I&I (29 %) 968,088 755,394 755,394 0 Net Influent 2,370,147 12,497,869 5,183,568 750,185 S-2: Commercial 800,056 3,243,257 1,096,734 244,518 S-6: Restaurant 80,102 1,432,575 507,851 13,261 Non-Residential Loading 880,158 4,675,832 1,604,586 257,779 Net Residential Loading 1,489,989 7,822,036 3,578,982 492,406 2.1.2. FUNCTIONALIZATION OF COSTS After determining the utility’s revenue requirements, the next step in a COS analysis is to functionalize its operating and capital costs. The functions of the utility are collection, treatment, customer service and general. Each of the costs of the utility can be classified into these functions. The City’s O&M budget, is categorized as follows: » Allocated Charges » Distribution System - Administration » Engineering » Operation and Maintenance » Administration » Customer Service » Rates / Field Services / Utility Billing Customer Class COD mg/l TSS, mg/l Ammonia, mg/l S-1 440 210 26 S-2 340 120 24 S-6 1,500 555 13 Customer Class COD mg/l TSS, mg/l Ammonia, mg/l S-1 841 385 53 S-2 649 220 49 S-6 2,865 1,016 27 6 CITY OF PALO ALTO » Transfers » Treatment The City’s capital costs are functionalized into collection and treatment depending on the type of project. For operating and capital costs, each function is then assigned an allocation to cost causation components, expressed as a percentage for each cost causation component. The cost causation components are: » Flow » COD » TSS » NH3 » Customer » General Here “customer” costs are costs that are incurred on a per-customer basis, while “general” components are costs that cannot be specifically allocated to one of the other cost causation components. Table 2-2 shows the O&M expenses for FY 2021-2022 including the function and allocation to each cost causation component. Raftelis allocated each of these costs based on their functions and based on discussion with City staff regarding the costs related to each of the cost causation components. The second half of Table 2-2 shows the dollar amounts for each cost causation component based on the allocation percentages shown in the first half of the table. The total collection system percent allocation, shown in the third line from the end, is the proportion of each cost causation component based on total O&M expenses. Capital costs are categorized as collection or treatment. Collection capital costs are allocated entirely to flow while treatment costs (capital and O&M) are allocated based on the current methodology that Palo Alto uses to charge its partner agencies. This methodology was developed by the City’s treatment plant staff to meet USEPA requirements. Actual projected treatment costs for the coming year are then allocated based on these percentages. All treatment costs are allocated to Flow at 34% and COD, TSS and NH3 at 22% each. WASTEWATER COS REPORT 7 Table 2-2: O&M Expense Allocation – FY 2021-2022 O&M Budget Function Flow COD TSS NH3 Customer General TOTAL Allocated Charges4 General 100.0% 100.0% Distribution System - Administration Collection 100.0% 100.0% Engineering Collection 100.0% 100.0% Operation and Maintenance Collection 100.0% 100.0% Administration General 100.0% 100.0% Customer Service Customer 100.0% 100.0% Rates / Field Services / Utility Billing Customer 100.0% 100.0% Transfers5 General 100.0% 100.0% Treatment Treatment 34.0% 22.0% 22.0% 22.0% 100.0% O&M Budget Function Flow COD TSS NH3 Customer General TOTAL Allocated Charges General $0 $0 $0 $0 $0 $1,005,426 $1,005,426 Distribution System - Administration Collection $448,262 $0 $0 $0 $0 $0 $448,262 Engineering Collection $361,475 $0 $0 $0 $0 $0 $361,475 Operation and Maintenance Collection $3,241,907 $0 $0 $0 $0 $0 $3,241,907 Administration General $0 $0 $0 $0 $0 $0 $0 Customer Service Customer $0 $0 $0 $0 $274,967 $0 $274,967 Rates / Field Services / Utility Billing Customer $0 $0 $0 $0 $45,474 $0 $45,474 Transfers General $0 $0 $0 $0 $0 $723,370 $723,370 TOTAL - COLLECTION SYSTEM $4,051,644 $0 $0 $0 $320,441 $1,728,797 $6,100,882 % O&M Allocation - Collection Only 66% 0% 0% 0% 5% 28% 100% Treatment Treatment $3,140,163 $2,031,870 $2,031,870 $2,031,870 $0 $0 $9,235,774 Grand Total $7,191,807 $2,031,870 $2,031,870 $2,031,870 $320,441 $1,728,797 $15,336,656 4 Includes allocated general and administrative salaries and benefits, utilities administration direct charges and General Fund administrative and overhead expenses to the Wastewater Collection Utility. 5 Includes rent, enterprise transfers and other transfers. 8 CITY OF PALO ALTO 2.1.3. REVENUE REQUIREMENT Revenue requirements for FY 2021-2022 are shown below. Table 2-3 shows the City’s total revenue to be recovered from rates in FY 2021-2022. This figure is calculated by subtracting revenue offsets (or miscellaneous, non-rate revenues) and adjustments from the revenue requirements, which includes O&M expenses, rate funded capital costs, and debt service payments. The City’s total revenue requirement is allocated into Operating and Capital costs, which will later be allocated into each cost causation component. Additional details are shown in subsequent sections. The O&M and capital expenses and revenue offsets data is based on the City’s financial plan for FY 2021-2022. Table 2-3: Revenue Requirement FY 2021-2022 Operating Capital Total Revenue Requirements O&M Expenses - Collection $6,100,882 $6,100,882 O&M Expenses - Treatment $9,235,774 $9,235,774 Debt Service $128,566 $128,566 Rate Funded Capital - Collection $4,350,000 $4,350,000 Rate Funded Capital - Treatment $1,917,840 $1,917,840 Subtotal Revenue Requirements $15,336,656 $6,396,406 $21,733,062 Less: Revenue Offset Interest Plus Unrealized Gain or Loss $263,125 $263,125 Other $370,730 $370,730 Connection Fees $306,499 $306,499 Capacity Fees $460,950 $460,950 Reimbursement from Other Funds $35,515 $35,515 Bad Debt $(12,288) $(12,288) Subtotal Revenue Offset $657,082 $767,449 $1,424,531 Adjustments Cash from Reserves ($707,651) ($707,651) Subtotal Adjustments $0 ($707,651) ($707,651) Revenue to be Recovered from Rates $14,691,795 $6,336,609 $21,016,183 2.1.4. UNIT COST DERIVATION Table 2-4 shows the flow, strength, and accounts data for each customer class as set forth in the mass balance in Table 2-1. This is based on customer data provided by the City for March 2019 through February 2020. Table 2-4: Customer Class Data Customer Class Flow (ccf) COD (lbs/yr) TSS (lbs/yr) NH3 (lbs/yr) Customer Count Residential 1,489,989 7,822,036 3,578,982 492,406 26,034 Non-Residential S-2: Commercial 800,056 3,243,257 1,096,734 244,518 1,437 S-6: Restaurant 80,102 1,432,575 507,851 13,261 162 TOTAL 2,370,147 12,497,869 5,183,568 750,185 27,633 Table 2-5 shows the unit cost derivation for all cost causation components. Operating expenses, which total approximately $15.3 million (from Table 2-3), are allocated based on the O&M expense allocation shown in Table WASTEWATER COS REPORT 9 2-2 and are broken into their respective categories for collection ($6.1 million) and treatment ($9.2 million). The total cost is multiplied by each cost causation component’s allocation percentage to determine the dollar amount. A similar process is used to calculate the capital expenses for each cost causation component. General costs are reallocated in proportion to the remaining costs. The final adjusted COS, after reallocating costs related to the fixed charge, is divided by each unit of service (ccf/year for flow, lbs/year for strength and number of bills for customer costs) to determine the unit cost for each cost causation component. The units of service are derived from Table 2-4. A similar process is carried out for the treatment section to derive the unit costs for each of their cost causation components. Table 2-5: Unit Cost Derivations Development Unit Cost Collection Flow COD TSS NH3 Customer General TOTAL Operating Cost $3,615,271 $0 $0 $0 $285,929 $1,542,601 $5,443,800 Capital Cost $4,418,769 $0 $0 $0 $0 $0 $4,418,769 Total COS $8,034,039 $0 $0 $0 $285,929 $1,542,601 $9,862,569 Allocation of General Costs $1,489,587 $0 $0 $0 $53,014 ($1,542,601 ) $0 Adjusted COS $9,523,626 $0 $0 $0 $338,943 $0 $9,862,569 Units of Service 2,370,147 12,497,869 5,183,568 750,185 331,596 (ccf/yr) (lbs/yr) (lbs/yr) (lbs/yr) (Bills) Unit Cost Collection $4.02 $0.00 $0.00 $0.00 $1.03 (ccf) (Bill/mo) Development Unit Cost Treatment Flow COD TSS NH3 Customer General TOTAL Operating Cost $3,140,163 $2,031,870 $2,031,870 $2,031,870 $0 $0 $9,235,774 Capital Cost $652,066 $421,925 $421,925 $421,925 $0 $0 $1,917,840 Total Cost of Service $3,792,229 $2,453,795 $2,453,795 $2,453,795 $0 $0 $11,153,614 Units of Service 2,370,147 12,497,869 5,183,568 750,185 331,596 (ccf/yr) (lbs/yr) (lbs/yr) (lbs/yr) (Bills) Unit Cost Treatment $1.60 $0.20 $0.47 $3.27 $0.00 (ccf) (lb) (lb) (lb) 2.1.5. ALLOCATION OF COST TO CUSTOMER CLASSES The next step in the COS analysis is to proportionately allocate costs to the different customer classes. The unit costs derived in Table 2-5 are multiplied by each customer class’s flow, strength, and accounts data shown in Table 2-4 to determine the cost allocation for each class. For example, to determine the Residential Flow costs, the Residential flow of 1,489,989 ccf is multiplied by the Collection and Treatment Flow unit cost of $4.02 per ccf and $1.60 per ccf, respectively, to get $8,370,990 (note there are slight differences due to rounding of more decimal places). 10 CITY OF PALO ALTO Table 2-6 shows the allocation of costs to each customer class and a comparison between the total proposed COS amount and the projected FY 2021-2022 revenue at current rates. Table 2-6: Allocation of Costs to Customer Classes Customer Class Flow COD TSS NH3 Customer Total Current Rates Revenue S-1 Residential $8,370,990 $1,535,756 $1,694,217 $1,610,622 $319,330 $13,530,914 $12,924,319 Non- Residential S-2: Commercial $4,494,839 $636,772 $519,172 $799,799 $17,626 $6,468,207 $6,482,022 S-6: Restaurant $450,026 $281,268 $240,407 $43,375 $1,996 $1,017,062 $1,031,313 Total - COS $13,315,855 $2,453,795 $2,453,795 $2,453,795 $338,943 $21,016,183 $20,437,654 3. Rate derivation This section describes the derivation of the FY 2021-2022 wastewater rates based on the COS analysis. All calculated rates are rounded up to the nearest penny. 3.1.1. RESIDENTIAL RATES S-1 Residential customers are relatively homogenous, and many agencies charge a fixed charge to residential customers for simplicity and ease of understanding. The proposed residential rates ($43.32 per residential dwelling unit) were calculated by dividing the revenue requirement for residential customers ($13,530,914) by the total number of residential dwelling units served by the wastewater utility (26,034), and dividing that by 12 to calculate the monthly cost of service rate. Residential customers are charged a fixed rate per residential dwelling unit. We propose to retain the current fixed rate structure for residential customers. Table 3-1 shows the calculation of the FY 2021-2022 Residential wastewater rate and a comparison to the current rate. Table 3-1: Residential Rate Derivation Wastewater Rates Calculation Revenue Required Dwelling Units COS Rates Current Rates Difference Monthly Service Charge S-1: Residential $13,530,914 26,034 $43.32 $41.37 4.7 % Residential monthly service charges must increase by 4.7% as updated usage and strength data reveal a gap needed to cover the cost to serve all customers from the prior study. Residential flow estimates have increased relative to commercial and restaurant flow since the prior study and this is the primary reason for the difference between current rates and the rates in accordance with the COS to the residential class. 3.1.2. NON-RESIDENTIAL RATES Commercial customers are not very homogenous in that their flow can vary significantly. We propose to retain the current water-use-based rate structure for these customers. Each S-2 Commercial customer is charged a monthly charge during each fiscal year that is based on their average winter water usage in ccf for the preceding months of January, February, and March. Winter water consumption is used because during the winter months less water is used by customers for landscape maintenance, so winter water use is more proportional to sewer use. S-6 Restaurant Customers are charged based on actual metered water usage in a billing period, since restaurants generally have minimal landscaping but have water usage that can vary dramatically from month to month based on customer volume. The S-2 Commercial and S-6 Restaurant customer class flow and strengths loadings are outlined in Table 2-1. Table 3-2 shows the calculation of the FY 2021-2022 commercial and restaurant wastewater rates and a comparison to the current rates. Table 3-2: Non-Residential Rate Derivation for FY 2021-2022 Wastewater Rates Calculation Revenue Required Water Use COS Rates Current Rates Difference Volume Charge ($/CCF) * S-2: Commercial $6,468,207 800,056 $8.09 $7.97 1.5% S-6: Restaurant $1,017,062 84,318 $12.07 $12.33 -2.1 % *Note: We recommend elimination of the minimum charge for S-2 and S-6 customers going forward. S-2 customers should be billed only a volume charge based upon the average water usage for the months of January, February and March and applied through the year starting in the following July (so their monthly rate is the same for each month of the twelve-month billing year). This is done because the “rainy and cool” winter months are the period when water use is best correlated to sewer use and when fluctuations in water use due to landscape needs is minimized. For S-6 customers, the volume charge is based each month on metered water use during the prior metered-read period. For new S-2 and S-6 customers, without an applicable usage history, the City will presume to have use of 4.8 ccf per month, the estimated residential wastewater flow per EDU, until such time as usage may reasonably be established by the City Utilities Department. 3.1.3. PROPOSED RATES SCHEDULE For FY 2021-2022, a 3% increase in overall revenues is proposed based on the City staff’s calculations of revenues based on expenses and reserve needs. As shown in Tables 3-1 and 3-2, residential and commercial rates will increase, and restaurant rates will decrease, as a result of the COS analysis which allocates costs consistent with industry methodology so that customers pay in proportion to service received. Rates for any future industrial customers will be calculated using the unit costs shown in Table 2-5 and loadings of that customer. 3.1.4. CUSTOMER IMPACTS Table 3-3 shows the customer monthly bill impacts for S-1 Residential Customers in FY 2021-2022 of the proposed COS adjustments. Table 3-3: S-1 Residential Customer Impacts Customer Class Current Bill Proposed Bill $ Difference S1: Residential $41.37 $43.32 $1.95 Table 3-4 shows the customer monthly bill impacts for S-2 Commercial customers with average winter consumption at varying ranges. Table 3-4: S-2 Commercial Customer Impacts Average Winter Usage per month Current Bill Proposed Bill $ Difference 10 CCF $79.70 $80.90 $1.20 20 CCF $159.40 $161.80 $2.40 40 CCF $318.80 $323.60 $4.80 60 CCF $478.20 $485.40 $7.20 Table 3-5 shows the customer monthly bill impacts for S-6 Restaurant customers with varying metered water usages. Table 3-5: S-6 Restaurant Customer Impacts Usage per month Current Bill Proposed Bill $ Difference 10 CCF $123.30 $120.70 ($2.60) 20 CCF $246.60 $241.40 ($5.20) 40 CCF $493.20 $482.80 ($10.40) 60 CCF $739.80 $724.20 ($15.60) City of Palo Alto (ID # 11889) Finance Committee Staff Report Report Type: Action Items Meeting Date: 4/6/2021 City of Palo Alto Page 1 Summary Title: FY 2022 Water Financial Plan and Rates Title: Staff Recommendation That the Finance Committee Recommend the City Council Adopt a Resolution Approving the Fiscal Year 2022 Water Utility Financial Plan, With no Water Rate Increase for Fiscal Year 2022 From: City Manager Lead Department: Utilities RECOMMENDATION Staff requests that the Finance Committee recommend that the Council adopt a resolution (Attachment A) approving: a. The Fiscal Year (FY) 2022 Water Utility Financial Plan (Linked Document); and b. A transfer of up to $13.24 million from the Operations Reserve to the CIP Reserve in FY 2022. EXECUTIVE SUMMARY The FY 2022 Water Utility Financial Plan (Linked Document) includes projections of the utility’s costs and revenues for FY 2021 through FY 2026. Costs are projected to rise by about 4% per year over the next several years. Capital projects were deferred in FY 2017 through FY 2020 leading to lower capital costs than budgeted. Many of these deferred capital projects are anticipated to be completed in FY 2021 and FY 2022 and a combination of funds from the Operations and CIP Reserve are available for those in the year end 2020 reserve balances. Although capital investment needs will fluctuate from FY 2021 through FY 2026, there are enough funds currently in reserves to leave rates unchanged in FY 2022 while still funding budgeted and essential capital investments. The SFPUC is projecting no increases in water supply rates until FY 2023. At that point the SFPUC projects a water supply rate increase of 8% followed by 6% in FY 2024 and 13% in FY 2025. These increases, together with capital needs of the distribution system such as one-time needed reservoir replacements, will place upward pressure on Palo Alto’s water rates. To fund these increasing supply costs while minimizing rate increases for the City’s water customers, staff expects to recommend the use of the Rate Stabilization Reserve in FY 2024 through FY 2026 to supplement water sales revenues in order to pay for costs. CITY OF PALO ALTO City of Palo Alto Page 2 Overall water sales increased approximately 3% during the months affected by the COVID-19 pandemic. Because weather was also dry during the same time period, which also tends to increase water sales, COVID-19-related sales impacts are not able to be determined with specificity. On April 21, 2020, the Finance Committee passed a motion regarding water rates to “direct Staff to provide details as to why Palo Alto’s rates are higher than cities with the same supplier at next year’s Finance Committee.” Staff prepared a report on this topic titled “Comparison of Water Rates and Average Bills Among Cities Supplied by San Francisco Public Utilities Commission” BACKGROUND Every year staff presents the UAC with Financial Plans for the Electric, Gas, Water, and Wastewater Collection Utilities. The Financial Plans recommend rate adjustments required to maintain the financial health of these enterprises. These Financial Plans include a comprehensive overview of the operations of each enterprise, both retrospective and prospective, and are intended to be a reference for UAC 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. All of the City’s potable water comes from the San Francisco Public Utilities Commission (SFPUC)’s Hetch Hetchy Regional Water System. This same system serves San Francisco and several other Bay Area cities. San Francisco runs the system, but as much as two thirds of the water is used outside of San Francisco by 26 cities, water districts, and private utilities. These agencies, including the City, are frequently referred to as the “wholesale customers” (as compared to the SFPUC’s “retail customers” in San Francisco). The Bay Area Water Supply and Conservation Agency (BAWSCA) represents the wholesale customers and negotiates with the SFPUC on their behalf. BAWSCA also ensures contract compliance through regular review of the SFPUC’s accounting and capital expenditures.1 The Water Utility has two main costs: water supply costs (primarily the cost of water delivered to Palo Alto from the Hetch Hetchy Regional Water System) and the costs of operating the distribution system (the system of pipes, pumps, reservoirs, and other infrastructure that carries water to Palo Alto customers). As discussed in previous years, both cost components have been increasing and are expected to continue to increase. The 2021 budget for operating the distribution system is 26% salary and benefits, 37% CIP, 9% debt service, and 28% other costs. For many years, the largest cost increases have been on the water supply side. This is due primarily to major capital investments the SFPUC has made since 2010, partly due to pressure 1 For a video summary of BAWSCA’s activities, see https://vimeo.com/283596665/5619ce2c11 City of Palo Alto Page 3 from wholesale customers. The Water System Improvement Program (WSIP) is a $4.8 billion capital improvement program, one of the largest in the country, to rehabilitate and seismically strengthen the lower portions of the Hetch Hetchy Regional Water System. One of the goals is to achieve the capability to return to service within 24 hours after a major earthquake. Although much of the work is complete (the program was 98.8% complete as of September 2020), some of the projects are still under construction and bond financing of WSIP projects over the next several years will continue to drive wholesale rates up. The program has greatly improved the resiliency of the Hetch Hetchy Regional Water System but has also led water supply costs to approximately double. CPAU’s operational costs for the water utility have increased at approximately 3% per year for the last five years while capital costs have fluctuated from year to year. This financial plan conservatively projects that capital and operational costs will increase on average at approximately 3% per year over the next five years. Active use of the CIP Reserve will help keep the fluctuations in capital spending from impacting the Operations Reserve or customer rates. The UAC reviewed preliminary financial forecasts at its December 2, 2020 meeting (UAC Report #11649). City of Palo Alto Page 4 DISCUSSION Staff’s annual assessment of the financial position of the City’s water utility is completed to plan for adequate revenue to fund operations, in compliance with the cost of service requirements set forth in the California Constitution (Proposition 218). 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. The current rate proposals are also based on the cost of service (COS) methodology described in the 2012 Palo Alto Water Cost of Service & Rate Study, which was updated in 2015, and the 2015 Drought Rate memorandum completed by Raftelis Financial Consultants, which was updated in 2019 and titled “Proposed FY 2020 Water Rates,” (see Attachment Q to staff report 10295.2) Staff proposes no adjustment to water rates in FY 2022. Tables 1 through 3 below illustrate the current rates that would remain unchanged under this financial plan. The rates shown below are in addition to the pass-through commodity rate that is charged to customers based on SFPUC supply charges. The pass-through commodity rate is currently $4.10 per CCF. SFPUC is not anticipated to increase its supply charges in FY 2022. Table 1: Current Water Consumption Charges in $/CCF (Effective July 1, 2019) W-1 (Residential) Volumetric Rates ($/CCF) Tier 1 Rates 2.56 Tier 2 Rates 5.97 W-2 (Construction) Volumetric Rates ($/CCF) Uniform Rate 3.61 W-4 (Commercial) Volumetric Rates ($/CCF) Uniform Rate 3.61 W-7 (Irrigation) Volumetric Rates ($/CCF) Uniform Rate 5.50 2 A cost of service study (COS) is a study using industry-standard techniques to determine how the costs of running the utility should be recovered from its customers; charges to each customer are set in proportion to the cost of serving that customer. City of Palo Alto Page 5 Table 2: Current Monthly Service Charges for W-1, W-4 and W-7 Meter Size Monthly Service Charge ($/month based on meter size) Residential (W-1) Commercial (W-4) and Irrigation (W-7) 5/8” 20.25 17.71 3/4” 20.25 23.67 1” 20.25 35.59 1 ½” 65.40 65.40 2” 101.17 101.17 3” 214.44 214.44 4” 381.37 381.37 6” 780.79 780.79 8” 1,436.57 1,436.57 10” 2,271.20 2,271.20 12” 2,986.60 2,986.60 Table 3: Current Monthly Service Charges for Fire Services (W-3) Meter Size Monthly Service Charge ($/month based on meter size) Current (Effective 7/1/19) 2” $4.17 4” $25.81 6” $74.96 8” $159.74 10” $287.27 12” $464.02 Bill Impact of Proposal There is no bill impact for water utility customers. FY 2022 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years Table 4 shows the projected rate adjustments over the next five years and their impact on the annual median residential water bill for 5/8” customers. These projected rate adjustments include the impact of projected changes to the pass-through commodity rate. City of Palo Alto Page 6 Table 4: Projected Rate Adjustments, FY 2022 to FY 2026 (5/8” meter) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Water Utility 0% 5% 5% 5% 5% Estimated Bill Impact ($/mo)1 $0 $4.52 $4.75 $4.98 $5.23 1) estimated impact on median residential water bill for customers with 5/8” meter, which is currently $90.42. Figures 1 and 2 below illustrate the projected increases in the Water Utility’s costs between FY 2021 and FY 2026. Generator rental costs of approximately $1 million per year for emergency backup power at the water pump stations are reflected in the Operations costs in Figure 1 and other than that cost item, operations costs increase by inflation. Figure 1: Projected FY 2021 and FY 2026 costs City of Palo Alto Page 7 Figure 2: Percentage of Total Cost Increase from FY 2021 to FY 2026 Attributed to Supply, Capital, and Operations Costs The “Capital” bars on Figure 1 reflect the capital program contributions to the CIP Reserve. Additionally, this financial plan includes one-time transfers to the CIP Reserve to fund seismic reservoir replacement work. There are CIP funds available for projects that were budgeted in FY 2020 and prior years that are carried forward or reappropriated to FY 2021 and will be used to offset the new CIP funding needs. The cost of water is a major driver for the increase in the water utility’s costs (and therefore rates) over the next several years. Wholesale water costs are adopted by the SFPUC, and generally have changed on an annual basis. Costs are projected to increase annually on average by 6% per year from FY 2022 to FY 2026. The SFPUC is currently engaged in a $4.8 billion Water System Improvement Program (WSIP) for regional projects. As of September 30, 2020, 43 of the 52 regional projects were complete or in close-out while 6 of the regional projects were under construction and 1 was in pre-construction.3 This has resulted and will continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed, wholesale customers must start paying the debt service costs within 3 to 4 years. For most of those costs, funded with bond financing, the costs will be 3 First Quarter FY 2020 - 2021 WSIP Regional Quarterly Report,https://www.sfwater.org/modules/showdocument.aspx?documentid=16461 City of Palo Alto Page 8 paid off over approximately 30 years. The currently estimated WSIP completion date is June 30, 2023, as adopted by the SFPUC in April of 2020. The regional WSIP project remaining in pre-construction is the Alameda Creek Recapture project where permit, design and coordination work is currently ongoing. Current major projects underway are the regional groundwater storage and recovery project and fish passage facilities within the Alameda Creek Watershed. As WSIP projects are completed, SFPUC is pursuing a suite of other capital improvement work; dam safety improvements and Mountain Tunnel repairs are rate increase drivers during the next 10-year timeframe. Future and in- progress construction work will require bond funding, and the SFPUC’s financial plans show debt service cost for the water enterprise growing by 32% between FY 2021 and FY 2026, and by 40% by FY 2028.4 Initial wholesale rate increase projections are 6% per year on average through FY 2026 to cover increasing costs, primarily debt service from ongoing capital investments. Changes in usage due to drought, or recovery from drought, can make the magnitude of future increases difficult to predict. The SFPUC’s costs to operate the Regional Water System are primarily fixed costs, so the water rate charged to wholesale customers like the City of Palo Alto is highly dependent on usage by all users of the Regional Water System. The City’s FY 2022 Water Utility Financial Plan (Linked Document) assumes that, while the drought has ended and usage has increased, consumption will not fully return to pre-drought levels. This assumption is based on CPAU’s experience following past droughts. The SFPUC is currently working on determining the wholesale revenue requirement and rate proposals for FY 2022; the long-range wholesale costs projections are subject to change. Because wholesale sales of water by the SFPUC in recent years were higher than projected during the drought and during the recent months impacted by the COVID-19 pandemic, the SFPUC has been accumulating funds in its Wholesale Customer Balancing Account. The SFPUC will use these funds to offset rate increases. The SFPUC does not anticipate needing to raise wholesale rates until FY 2023. Additionally, operations costs are projected to increase by around 4% overall over the forecast period. These increases are primarily due to inflation assumptions as well as emergency generator rental expenses of $1 million annually beginning during this time period. There remains some uncertainty in the forecasts of capital costs for the water utility in coming years. Water main replacement costs have risen substantially in recent years. The regional and even national focus on infrastructure improvement has created labor shortages, leading to higher bid prices than were seen in the past. Several factors go into main replacement cost, such as location as well as the length of main segments. Consistent with the FY 2021 Financial Plan, this plan includes larger main replacement construction projects every other year instead 4 FY 2018-19 & FY 2019-20 Adopted SFPUC Budget, https://sfwater.org/modules/showdocument.aspx?documentid=13147 City of Palo Alto Page 9 of smaller projects annually. This main replacement schedule will allow CPAU to meet its main replacement needs and addresses challenges in the current construction market while optimizing current staffing resources. Larger main replacement construction projects every other year are anticipated to attract more contractors to bid on the larger projects. Council has approved a design/build contract for the Corte Madera reservoir replacement and the project is expected to be completed in April 2022. Based on the cost of the Corte Madera reservoir replacement, the cost estimates increased for the replacement of Dahl and Park reservoirs in FY 2023 and FY 2026 by $3.5 million for each reservoir relative to the FY 2021 adopted budget levels. Although the revised main replacement schedule is important for the reasons described above, fluctuations in capital expenditures can lead to fluctuations in customer rates. To promote rate stability and provide continuity in water expenditure levels, this plan continues with the approach established in the FY 2021 Financial Plan for consistent annual contributions from the Operations Reserve to the CIP Reserve. In FY 2022, the amount proposed for the Capital Program Contribution is $8.24 million. CIP projects will then be charged to the CIP Reserve, which will experience fluctuations in its balance as a result of projects carried over from past years (but already funded) and as a result of the two-year project cycle. This should enable rate increases to remain relatively smooth. Figure 3 below shows the projected CIP Reserve balances under this Financial Plan. Table 5 below shows the planned capital spending in row 12 fluctuating from year to year with the staggered main replacement schedule and shows the stable capital program contributions to the CIP Reserve in rows 9 and 10. The Operations Reserve is shown as combined with unassigned funds, because when the Operations Reserve reaches its maximum level, any additional funds are included in the Unassigned Reserve, in accordance with the Water Utility Reserve Management Practices. The attached Financial Plan includes a plan to assign these funds to capital investment purposes. Figure 4 shows the amount of funds that are considered unassigned during the forecast period, together with reserve balance changes for each reserve from FY 2020 and projected through FY 2026. City of Palo Alto Page 10 Figure 3: Projected Capital Reserve Balances FY 2021 to FY 2026 Figure 4: Actual Reserve Levels for FY 2020 and Projections through FY 2026 City of Palo Alto Page 11 Table 5: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves, Capital Program Contribution To/(From) Reserves, and Operations Reserve Guideline Levels Projected for FY 2021 to FY 2026 ($000) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Starting Balance (1) Operations/Unassigned 19,841 20,684 14,353 9,252 11,718 11,585 (2) Rate Stabilization 9,069 9,069 9,069 9,069 5,000 3,000 (3) CIP 5,726 10,310 10,608 11,615 7,274 11,122 Revenues (4) Total Revenue 49,015 48,563 50,281 52,632 55,470 57,678 (5) Transfers In 249 254 259 264 269 275 Transfers (6) Operations/Unassigned - (5,000) (3,500) 4,069 2,000 (500) (7) Rate Stabilization - - - (4,069) (2,000) (3,000) (8) CIP - 5,000 3,500 - - 3,500 Capital Program Contribution (9) Operations/Unassigned (8,000) (8,240) (8,487) (8,742) (9,004) (9,274) (10) CIP 8,000 8,240 8,487 8,742 9,004 9,274 Expenses (11) Total Expenses other than CIP (39,936) (41,414) (43,150) (44,634) (47,733) (48,935) (12) Planned CIP (3,416) (12,942) (10,980) (13,083) (5,156) (21,295) (13) Transfers Out (484) (494) (504) (1,124) (1,134) (1,145) Ending Balance (1)+(4)+(5)+(6) +(9)+(11)+(13) Operations/Unassigned 20,684 14,353 9,252 11,718 11,585 9,684 (2)+(7) Rate Stabilization 9,069 9,069 9,069 5,000 3,000 - (3)+(8)+(10)+ (12)* CIP 10,310 10,608 11,615 7,274 11,122 2,602 Operations Reserve Guideline Levels (14) Minimum 6,644 6,889 7,176 7,522 8,033 8,232 (15) Maximum 13,289 13,778 14,352 15,044 16,066 16,464 * Planned CIP (item 12) is reflected as an expense in the CIP Reserve and does not include CIP funded through reappropriations or commitments from prior years. Capital Projects & Reserve Higher bid cost and delays in project schedules resulted in a deferment of main replacement projects in FY 2017 through FY 2020, temporarily lowering CIP expenditures. This resulted in the Operations Reserve being filled to the maximum guideline level. The capital budget includes one-time seismic water system upgrades and/or replacements for the Corte Madera, Park and Dahl reservoirs to improve earthquake resistance. This work will improve protection from water loss at these reservoirs in a seismic event. This plan updates the transfer proposals due to the project cost increases. Specifically, the proposed transfers from the Operations Reserve to the CIP Reserve, in addition to the $3 million transfer that occurred in FY 2020, are $5 million in FY City of Palo Alto Page 12 2022, $3.5 million in FY 2023, and $3.5 million in FY 2026 (see line 8 in Table 5). This Financial plan includes the request for up to the $5 million in FY 2022 for these one-time costs in addition to the $8.24 million in capital program contributions; staff will request Council approval for the remaining transfers in future Financial Plans once the year-end FY 2021 reserve balances are known. The Operations Reserve levels are projected to be sufficient to support this funding need. At year end FY 2020, an estimated nearly $6 million was considered unassigned (above the maximum guideline level in the Operations Reserve); the intended use of these funds is for the reservoir replacements. Table 5 above shows the anticipated CIP Reserve transfers in FY 2021 through FY 2026. There is also approximately $11.3 million in CIP that was budgeted in 2020 or prior years that is reappropriated or carried forward from previous years and is currently in the CIP Reappropriations and CIP Commitments Reserves. See Appendix B of the Water Utility Financial Plan (Linked Document) for detailed information. Rate Stabilization Reserve The Rate Stabilization Reserve is projected to be used to buffer rate increases needed to pay for a series of large wholesale supply rate increases that are anticipated to begin annually in FY 2023. In June 2020, Council approved a transfer of $5 million from the Operations Reserve to the Rate Stabilization Reserve, bringing the balance in the reserve to $9.07 million. The FY 2021 Financial Plan also contemplated a $3.5 million additional transfer from the Operations Reserve to the Rate Stabilization Reserve in FY 2021. However, the cost of one-time reservoir replacements has increased and instead of transferring additional funds to the Rate Stabilization Reserve, this plan recommends transferring an additional $5 million from the Operations Reserve to the CIP Reserve to fund reservoir replacement work. Depending upon the reserve balances and updated cost projections available at year end FY 2021, the next financial plan will recommend further transfers. Beginning in FY 2024, CPAU expects to transfer funds annually from the Rate Stabilization Reserve to the Operations Reserve to minimize water rate increases. The use of the Rate Stabilization Reserve balances in this way, together with the cost and revenue projections in this Financial Plan is expected to allow CPAU water rates to increase by 5% or less annually over the next five years. This Financial Plan projects that the Rate Stabilization Reserve will be exhausted by the end of FY 2026. Water Bill Comparison with Surrounding Cities Table 6 compares water bills for residential customers to those in surrounding communities as of January 2021 (under current the City’s current water rates). Palo Alto customers have some of the highest monthly bills of the group, although bills for smaller water users are lower than in some surrounding communities. It is unclear at this time what water rate changes may be implemented in surrounding communities for FY 2022. The average calculated in the following table is the mean of the six surrounding communities listed. These communities are the same City of Palo Alto Page 13 six that Palo Alto compares itself to in the annual budget across Water, Wastewater, Gas and Electric industries. Table 6: Residential Monthly Water Bill Comparison Usage (CCF/month) Residential monthly bill comparison ($/month)* As of January, 2021 Palo Alto Menlo Park Mountain View Hayward Redwood City Santa Clara Los Altos Average of Surrounding Communities 4 $46.89 $52.42 $38.34 $39.20 $54.04 $44.62 $42.99 $45.27 (Winter median) 7 $70.28 $77.50 $59.37 $60.62 $76.09 $63.91 $60.84 $66.39 (Annual median) 9 $90.42 $94.23 $73.39 $74.90 $90.79 $76.77 $72.73 $80.47 (Summer median) 14 $140.77 $136.31 $108.44 $112.51 $138.94 $108.92 $101.62 $117.79 25 $251.54 $229.06 $227.65 $205.02 $267.39 $179.65 $169.20 $212.99 *Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for Santa Clara and 100% for Hayward. Los Altos does not receive water supply from SFPUC. The report titled “Comparison of Water Rates and Average Bills Among Cities Supplied by San Francisco Public Utilities Commission” (Linked Document) discusses reasons why Palo Alto’s rates are higher than surrounding cities. In summary, Palo Alto’s higher water rates can in part be explained by the comparison to agencies with different water sources. Redwood City and Hayward are the only other utilities from Table 6 that obtain 100% of their potable water from SFPUC; the gap between Palo Alto, Redwood City and Hayward’s water bills has narrowed over the years. A key cost difference between Hayward and Palo Alto is water infrastructure investment costs. Palo Alto’s consistently high-water infrastructure investments over the last four decades have led to a reliable water system that is resilient to seismic risks. However, the cost to fund that water infrastructure contribute to Palo Alto’s higher costs compared to Hayward. Water usage differences are also significant contributors to bill and rate differences between Palo Alto, Redwood City and Hayward. Palo Alto has a higher percentage of residential use compared with Hayward. Additionally, Hayward’s non-residential usage is increasing while Palo Alto’s is decreasing. These consumption differences put more upward pressure on Palo Alto’s residential rates relative to Hayward’s. Changes from Last Year’s Financial Forecast Table 7 compares current rate projections to those projected in the Financial Plans from the last two years. The proposed rate changes are the same as the FY 2021 Financial Plan. City of Palo Alto Page 14 Table 7: Projected Water Rate Trajectory for FY 2022 to FY 2026 Projection FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current 0% 5% 5% 5% 5% Last year (FY 2021 Financial Plan) 0% 5% 5% 5% - Two years ago (FY 2020 Financial Plan) 3% 6% 6% - - Table 8 shows the proposed water rate increases broken out into the needed increases to commodity revenues, to cover the costs of purchasing water from SFPUC, and the distribution revenue increases to pay for the upkeep of Palo Alto’s water distribution system. Table 8: Proposed Commodity and Distribution Water Revenue Changes FY 2022 to FY 2026 Projection FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Commodity Revenue (SFPUC Purchases) 0% 8% 6% 12%* 6% Distribution Revenue 0% 3% 4% 0% 4% Total Revenue 0% 5% 5% 5% 5% *SFPUC’s projected increase in FY 2025 is 13%, however, this financial plan uses rate stabilization reserves and holds distribution revenue increases to 0% in FY 2025 to hold the overall forecasted impact to customers at no more than 5% annually. This plan uses the Rate Stabilization Reserve and CIP Reserve to stabilize rates while anticipating a series of large wholesale water rate increases and funding needed water CIP budgets. COMMISSION REVIEW AND RECOMMENDATION The Finance Committee reviewed preliminary financial forecasts at its February 16, 2021 meeting (Staff Report #11864). The Utilities Advisory Commission (UAC) reviewed the Water Financial Plan at its March 3, 2021 meeting (Utilities Advisory Commission Staff Report #11885). The UAC accepted staff’s recommendation and approved the proposed FY 2022 Financial Plan unanimously. The meeting minutes were not available as of the time of publishing this report. UAC Commissioners asked questions about historical and projected operations costs, reasons for Palo Alto’s higher bills in comparison with neighboring cities, and Commissioners expressed some interest in whether there would be drought surcharges as a potential response to a future drought. NEXT STEPS Assuming the Finance Committee supports staff’s recommendation, no notification of rate increases would be necessary because the current rates would not increase. The City Council City of Palo Alto Page 15 will consider the proposed Financial Plans and amended rate schedules with the FY 2022 budget. RESOURCE IMPACT Normal year sales revenues for the Water Utility will not be impacted by this proposal to maintain the current rates for FY 2022. The FY 2022 Budget is being developed concurrent with these rates and, depending on the final rates, adjustments to the budget may be necessary later. See the FY 2022 Water Financial Plan (Linked Document) for a more comprehensive overview of projected cost and revenue changes for the next five years. The benchmarking analysis in the report “Comparison of Water Rates and Average Bills Among Cities Supplied by the San Francisco Public Utilities Commission” (linked here) does not involve resource impacts beyond those already expended. Should Palo Alto pursue further analysis or changes to utilities operating practices, it could require additional staff time or consultant expenditure that would be absorbed within existing budgets. POLICY IMPLICATIONS Maintaining the current rates for FY 2022 is consistent with Reserve Management Practices and exemptions included in the Financial Plans and described above, and the rates were developed using a cost of service study and methodology consistent with the cost of service requirements of Proposition 218. The attached report titled “Comparison of Water Rates and Average Bills Among Cities Supplied by San Francisco Public Utilities Commission” (Linked Document) implements Finance Committee policy direction to evaluate differences between Palo Alto customer water bills and those of neighboring agencies; a Finance Committee motion on 4/21/2020 directed staff “to provide details as to why our rates are higher for cities with the same supplier at next year’s Finance Committee” with meeting minutes available here. Additionally, the report is consistent with Utilities Strategic Plan Priority 4 (Finance and Resource Optimization) specifically the Key Performance Indicator (KPI) that states “Maintain average (e.g.) median) or below residential and commercial utility bills as compared to surrounding utilities and communities.” While this KPI refers to the total utility bill (which is lower in Palo Alto than in surrounding communities), examining how Palo Alto’s water bills compare to those of neighboring agencies helps provide information that can be used to maintain compliance with this KPI and improve on it. And, of course, Palo Alto’s utilities staff strives to maintain a low cost of utility services compared to surrounding communities in all services, not just for the utility bill overall, and this analysis provides information that can be used to help make progress toward that goal for the water utility. ENVIRONMENTAL REVIEW The Finance Committee’s review and recommendation to Council on the FY 2022 Water Financial Plan and rate adjustments does not meet the definition of a project requiring City of Palo Alto Page 16 California Environmental Quality Act (CEQA) review under Public Resources Code Section 21065 thus no environmental review is required. Attachments: • Attachment A: Resolution • FY 2022 Water Utility Financial Plan • Comparison of Water Rates and Average Bills • Appendix B • Attachment C - Water Benchmarking Report Attachment A 6055486 * NOT YET APPROVED * Resolution No.__________ Resolution of the Council of the City of Palo Alto Approving the FY 2022 Water Utility Financial Plan 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. The City 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. The Council of the City of Palo Alto does hereby RESOLVE, as follows: SECTION 1. The Council hereby approves the FY 2022 Water Utility Financial Plan. SECTION 2. The Council hereby approves a transfer from the Operations Reserve to the Capital Improvement Projects Reserve of up to $13,240,000 in FY 2022 as described in the FY 2022 Water Utility Financial Plan. Annual capital program contributions beyond FY 2022 will be approved by Resolution annually. // // // // // // // // Attachment A 6055486 // SECTION 3. The Council finds that the adoption of this resolution 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 review is required. 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 WATER UTILITY FINANCIAL PLAN March 2021 1 | Page FY 2022 WATER UTILITY FINANCIAL PLAN FY 2022 TO FY 2026 WATER UTILITY FINANCIAL PLAN March 2021 2 | Page FY 2022 WATER UTILITY FINANCIAL PLAN FY 2022 TO FY 2026 TABLE OF CONTENTS Section 1: Definitions and Abbreviations................................................................................ 4 Section 2: Executive Summary and Recommendations ........................................................... 4 Section 2A: Overview of Financial Position .................................................................................. 4 Section 2B: Summary of Proposed Actions .................................................................................. 7 Section 3: Detail of FY 2022 Rate and Reserves Proposals ....................................................... 8 Section 3A: Rate Design ............................................................................................................... 8 Section 3B: Current and Proposed Rates ..................................................................................... 8 Section 3C: Proposed Reserve Transfers .................................................................................... 11 Section 4: Utility Overview .................................................................................................. 12 Section 4A: Water Utility History ............................................................................................... 13 Section 4B: Customer Base ........................................................................................................ 14 Section 4C: Distribution System ................................................................................................. 14 Section 4D: Cost Structure and Revenue Sources ...................................................................... 14 Section 4E: Reserves Structure ................................................................................................... 15 Section 4F: Competitiveness ...................................................................................................... 15 Section 5: Utility Financial Projections ................................................................................. 16 Section 5A: Load Forecast .......................................................................................................... 16 Section 5B: FY 2016 to FY 2020 Cost and Revenue Trends ........................................................ 18 Section 5C: FY 2020 Results ....................................................................................................... 19 Section 5D: FY 2021 Projections ................................................................................................ 19 Section 5E: FY 2022 – FY 2026 Projections ................................................................................ 20 Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 23 Section 5G: Alternate scenario .................................................................................................. 24 Section 5H: Long-Term Outlook ................................................................................................. 24 WATER UTILITY FINANCIAL PLAN March 2021 3 | Page Section 6: Details and Assumptions ..................................................................................... 25 Section 6A: Water Purchase Costs ............................................................................................. 25 Section 6B: Operations .............................................................................................................. 27 Section 6C: Capital Improvement Program (CIP) ....................................................................... 28 Section 6D: Debt Service ............................................................................................................ 33 Section 6E: Other Revenues ....................................................................................................... 34 Section 6F: Sales Revenues ........................................................................................................ 34 Section 7: Communications Plan .......................................................................................... 35 Appendices ......................................................................................................................... 35 Appendix A: Water Utility Financial Forecast Detail ................................................................. 37 Appendix B: Water Utility Capital Improvement Program (CIP) Detail ..................................... 39 Appendix C: Water Utility Reserves Management Practices ..................................................... 40 Appendix D: Description of Water Utility Operational Activities ............................................... 43 Appendix E: Sample of Water Utility Outreach Communications ............................................. 44 WATER UTILITY FINANCIAL PLAN March 2021 4 | Page SECTION 1: DEFINITIONS AND ABBREVIATIONS BAWSCA Bay Area Water Supply and Conservation Agency CCF The standard unit of measurement for water delivered to water customers, equal to one hundred cubic feet, or roughly 748 gallons. CIP Capital Improvement Program CPAU City of Palo Alto Utilities Department O&M Operations and Maintenance RFC Raftelis Financial Consultants, Inc. SFPUC San Francisco Public Utilities Commission SFWD San Francisco Water Department UAC Utilities Advisory Commission WSIP The SFPUC’s Water System Improvement Program to seismically strengthen the transmission lines of the Hetch Hetchy Regional Water System. SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City’s Water Utility for FY 2022 through FY 2026. This Financial Plan provides for revenues to cover the costs of operating the utility safely over that period 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 Staff expects overall costs in the Water Utility to rise on average by about 4% per year from fiscal year (FY) 2022 to 2026. Operations cost projections rise on average by about 3% annually through the projection period. Water supply costs are based on current SFPUC projections and are the largest individual component of the utility’s costs. The cost of the City’s SFPUC water supply is increasing over the forecast period due to increasing debt service for a series of major capital projects on the Hetch Hetchy Regional Water System. However, the SFPUC’s water supply rates will remain relatively flat through FY 2022 as SFPUC returns to customers reserves it accumulated in prior years, with rates rising steeply after FY 2022. See Section 6A: Water Purchase Costs for more information. Capital costs were lower than budgeted in FY 2020. In FY 2021 and 2022 many of the budgeted capital projects that were deferred from previous years are anticipated to be completed and reserve funds are available for the majority of those costs. The water utility plans for a main replacement construction project every other year. Actual capital costs vary from year to year, however, this financial plan continues with a stable annual capital contribution from the Operations Reserve to the Capital Improvement Program Reserve (CIP Reserve). This contribution began in FY 2021 with the adoption of the FY 2021 Water Financial Plan and it promotes rate stability and continuity in water expenditure levels. Section 6C: Capital Improvement Program (CIP) provides more detail. Table 1 below shows the costs for the Water Utility from FY 2020 through FY 2026. The “CIP” row in Table 1 includes capital funding needed in FY 2020 and planned contributions from rates to the CIP Reserve for FY 2021 through FY 2026 and does not include the additional one-time transfers from the Operations Reserve to the CIP Reserve shown in Table WATER UTILITY FINANCIAL PLAN March 2021 5 | Page 4. This differs from planned CIP which is shown in line 12 of Table 4 and is reflected as an expense in the CIP Reserve. Table 1: 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 Water Purchases 21,773 21,847 21,592 22,867 23,839 26,412 27,266 Operations 18,836 18,573 20,316 20,787 21,918 22,456 22,814 CIP 3,265 8,000 8,240 8,487 8,742 9,004 9,274 TOTAL 43,875 48,420 50,148 52,141 54,500 57,872 59,354 This proposed Financial Plan projects that the Water Utility will need the rate increases shown in Table 2 in order for revenues to cover costs and reserves to remain within guideline levels. Water supply costs are projected to increase beginning in FY 2023, water sales are projected to decline somewhat, and little or no increase is expected in non-sales revenue (e.g., interest, connection fees). Overall water sales increased approximately 3% during the months affected by the pandemic. Because weather was also dry during the same time period, which also tends to increase water sales, COVID-19-related sales impacts are not able to be determined with specificity. Section 5E: FY 2022 – FY 2026 Projections contains additional detail. Table 2 also shows rate projections from the last two Financial Plans for FY 2020 and FY 2021; the proposed rate increases have not changed from the FY 2021 Financial Plan, however they are lower than the proposed rate increases in the FY 2020 Plan. Table 2: Proposed and Projected Water Revenue Changes for FY 2022 to FY 2026 Projection FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current 0% 5% 5% 5% 5% FY 2021 Plan 0% 5% 5% 5% - FY 2020 Plan 3% 6% 6% - - Table 3 shows the proposed water rate increases broken out into the needed increases to commodity revenues, to cover the costs of purchasing water from SFPUC and separately the distribution revenue increases to pay for the upkeep of Palo Alto’s water distribution system. Table 3: Proposed Commodity and Distribution Water Revenue Changes FY 2022 to FY 2026 Projection FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Commodity Revenue (SFPUC Purchases) 0% 8% 6% 12%* 6% Distribution Revenue 0% 3% 4% 0% 4% Total Revenue 0% 5% 5% 5% 5% *SFPUC’s projected water supply rate increase in FY 2025 is 13%, however, this Financial Plan uses the Rate Stabilization Reserves and holds distribution revenue increases to 0% in FY 2025 to forecast an overall impact to customers of no more than 5% annually. WATER UTILITY FINANCIAL PLAN March 2021 6 | Page The Water Utility’s Rate Stabilization Reserve can be used to smooth rate increases over several years. In June 2020, Council approved a transfer of $5 million from the Operations Reserve to the Rate Stabilization Reserve, bringing the balance in the reserve to $9.07 million at FY 2020 year end. The use of the Rate Stabilization Reserve, together with the cost and revenue projections in this Financial Plan allow projected CPAU water rates to increase by 5% or less annually over the next five years. This Financial Plan projects that the Rate Stabilization Reserve will be exhausted by the end of FY 2026. The Water Utility also has a Capital Improvement Program (CIP) Reserve that is used to manage cash flow for capital projects and acts as a reserve for capital contingencies. In FY 2021, the water utility began funding the CIP Reserve with an annual capital program contribution as well as one- time transfers for one-time reservoir upgrade projects. The annual capital program contribution began at a level of $8 million in FY 2021 and this plan proposes $8.24 million in FY 2022 based upon an estimate of the amount of CIP work there is each year, spread out over the forecast period. Having these funds in place will address uneven annual funding associated with ongoing CIP projects, and will be a source for one-time or immediately needed projects. Figure 11 shows the projected CIP Reserve balances and guideline levels for FY 2022 through FY 2026. This plan updates the transfer proposals due to the project cost increases for reservoir replacements. Specifically, the proposed transfers from the Operations Reserve to the CIP Reserve, in addition to the $3 million transfer that occurred in FY 2020, are $5 million in FY 2022, $3.5 million in FY 2023, and $3.5 million in FY 2026 (see line 8 in Table 4). Staff will request Council approval for the transfers beyond FY 2022 in future Financial Plans once the year-end FY 2021 reserve balances are known. At year end FY 2020, an estimated nearly $6 million was considered unassigned (above the maximum guideline level in the Operations Reserve); the intended use of these funds is for the reservoir replacements. Higher bid cost and delays in project schedules resulted in a deferment of main replacement projects in FY 2017 through FY 2019, temporarily lowering costs. This resulted in the Operations Reserve being filled to the maximum guideline level, with surplus reserves available to phase in rate increases more slowly over the forecast period. The maximum guideline level for the Operations Reserve equals 120 days of operations and maintenance and commodity expense. Table 4 shows the starting and ending balances for the Operations & Unassigned Reserves combined, Rate Stabilization Reserve, and CIP Reserve, minimum and maximum Operations Reserve guideline levels and projected reserve transfers over the forecast period. See Section 3D: Proposed Reserve Transfers for more details. WATER UTILITY FINANCIAL PLAN March 2021 7 | Page Table 4: Operations & Unassigned, Rate Stabilization and CIP Reserves Starting and Ending Balances, Revenues, Transfers To/(From) Reserves and Capital Program Contribution To/(From) Reserves Projected for FY 2021 to FY 2026 ($000) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Starting Balance (1) Operations/Unassigned 19,841 20,684 14,353 9,252 11,718 11,585 (2) Rate Stabilization 9,069 9,069 9,069 9,069 5,000 3,000 (3) CIP 5,726 10,310 10,608 11,615 7,274 11,122 Revenues (4) Total Revenue 49,015 48,563 50,281 52,632 55,470 57,678 (5) Transfers In 249 254 259 264 269 275 Transfers (6) Operations/Unassigned - (5,000) (3,500) 4,069 2,000 (500) (7) Rate Stabilization - - - (4,069) (2,000) (3,000) (8) CIP - 5,000 3,500 - - 3,500 Capital Program Contribution (9) Operations/Unassigned (8,000) (8,240) (8,487) (8,742) (9,004) (9,274) (10) CIP 8,000 8,240 8,487 8,742 9,004 9,274 Expenses (11) Total Expenses other than CIP (39,936) (41,414) (43,150) (44,634) (47,733) (48,935) (12) Planned CIP (3,416) (12,942) (10,980) (13,083) (5,156) (21,295) (13) Transfers Out (484) (494) (504) (1,124) (1,134) (1,145) Ending Balance (1)+(4)+(5)+(6)+(9)+(11)+(13) Operations/Unassigned 20,684 14,353 9,252 11,718 11,585 9,684 (2)+(7) Rate Stabilization 9,069 9,069 9,069 5,000 3,000 - (3)+(8)+(10)+ (12)* CIP 10,310 10,608 11,615 7,274 11,122 2,602 Operations Reserve Guideline Levels (14) Minimum 6,644 6,889 7,176 7,522 8,033 8,232 (15) Maximum 13,289 13,778 14,352 15,044 16,066 16,464 * Planned CIP (item 12) is reflected as an expense in the CIP Reserve and does not include CIP funded through reappropriations or commitments SECTION 2B: SUMMARY OF PROPOSED ACTIONS Staff proposes the following action for the Water Utility in FY 2022: 1. A transfer of up to $13.24 million from the Operations Reserve to the CIP Reserve in FY 2022. See Section 6C: Capital Improvement Program (CIP) for more details. WATER UTILITY FINANCIAL PLAN March 2021 8 | Page SECTION 3: DETAIL OF FY 2022 RATE AND RESERVES PROPOSALS SECTION 3A: RATE DESIGN The Water Utility’s rates are evaluated and implemented in compliance with the cost of service requirements and procedural rules set forth in Article XIII D of the California Constitution (Proposition 218) and applicable statutory law. The City structured current rates based on staff’s assessment of the financial position of the Water Utility, and updated current rates using the methodology from the March 2012 Palo Alto Water Cost of Service & Rate Study by Raftelis Financial Consultants, Inc. (RFC) (Staff Report 2676), RFC’s 2015 Memorandum: Proposed Water Rates updating the 2012 Study and analyzing drought rates (Staff Report 5951), as well as RFC’s 2019 Memorandum updating the 2012 study (Staff Report 10295). Staff plans to update the cost of service study in 1 to 2 years, unless any major changes occur to the utility’s operations or customer base that would necessitate an earlier study. Before conducting any new cost of service study, staff will review current rates and the scope of the study with the Utilities Advisory Commission (UAC) and Council to determine the City’s policy priorities. SECTION 3B: CURRENT AND PROPOSED RATES The current rates and surcharges became effective on July 1, 2019. CPAU has five rate schedules: separately metered residential customers (W-1), commercial and master-metered multi-family residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire hydrant rental meters used for construction (W-2). All customers pay a monthly service charge based on the size of their inlet meter. This charge represents meter reading, billing, and other customer service costs, and also the cost of maintaining the capability to deliver a peak flow for that customer based on their meter size. All customers are also charged for each CCF (one hundred cubic feet) of water used. Separately metered residential customers are charged on a tiered basis, with the first 0.2 CCF per day (6 CCF for a 30 day billing period) charged at the first tier price per CCF, and all additional units charged a higher tier price per CCF. Commercial customers, including most multi-family customers, pay a uniform price for each CCF used. A separate rate per CCF exists for separately metered irrigation service. For July 1, 2021, staff is proposing no rate increase. Water rates are composed of two general types of costs: commodity and distribution. Commodity costs are mainly volumetric in nature and charged by the San Francisco Public Utilities Commission (SFPUC). In May 2020, the SFPUC provided a rate notice letter that their W-25 wholesale rate for agencies with long-term contracts would remain at $4.10/CCF in FY 2021 and also estimated it would remain at $4.10/CCF in FY 2022. The SFPUC will not determine its final wholesale customer rate for FY 2022 until May or June, 2021. If SFPUC’s final rate for FY 2022 does increase, the City must notify customers 30 days in advance of the pass-through rate increase. The May 2020 rate notice contemplates no rate increase until FY 2024 when 15.2% rate increase would be needed as well as an additional 11.1% increase in FY 2025. However, this assumes that the wholesale customer balancing account is fully drained before any wholesale customer rate increases occur. SFPUC also issued a 10-year WATER UTILITY FINANCIAL PLAN March 2021 9 | Page financial plan in February 2020 that illustrates a possible rate trajectory with generally smaller annual rate increases that begin in FY 2023 instead of FY 2024, which assumes the use of the balancing account to smooth the needed rate increases. This Financial Plan uses the SFPUC’s 10- year financial plan rate trajectory. Distribution rates cover all the costs to deliver water within the City, such as operations, maintenance, metering, billing, and capital improvements. Prior to 2021, the distribution costs would fluctuate depending on capital improvement spending. However, in June 2020 the Council approved a steady amount of funding to the capital reserve beginning in FY 2021 and the amount to be transferred to the CIP Reserve is approved annually by Council. With this change, the CIP Reserve now reflects actual fluctuations in CIP expenditures (money spent on actual projects in a given year). Previously, CIP expenditures were reflected in the Operations Reserve. Table 4 (row 12) shows planned CIP expenditures and the CIP Reserve balance is calculated by taking the starting balance for the CIP Reserve (row 3), adding the one-time transfers (row 8) and capital program contributions (row 10) and subtracting planned CIP expenditures (row 12). Section 5E: FY 2022 – FY 2026 Projections contains a more detailed description of this change. In this way, although CIP expenditures fluctuate from year to year, the capital program contribution to the CIP reserve is projected to remain fairly constant over the next five years, increasing by 3% per year on average. The exception to this is the one-time reservoir replacement costs that will be funded through one-time transfers from the Operations Reserve. More detail regarding reserve transfers is in Section 3C: Proposed Reserve Transfers. Operations costs are discussed in Section 6B: Operations, below. Customers have a separate commodity rate for purchased water from SFPUC relative to the rest of the distribution-related portion of the volumetric rates. This charge passes-through future SFPUC rate increases to customers. All customers will pay this separate commodity cost for each unit of water in addition to the volumetric rate that is applicable for their customer class. The rates shown below are in addition to the pass-through commodity rate that is charged to customers based on SFPUC supply charges. The pass-through commodity rate is currently $4.10 per CCF. SFPUC is not anticipated to increase its supply charges in FY 2022. This automatically adjusting pass-through charge is effective July 1, 2019 through July 1, 2024 pursuant to Resolution 9844 “Resolution of the Council of the City of Palo Alto Adopting a Water Rate Increase and Amending Utility Rate Schedules W-1, W-2, W-3, W-4 and W-7, June 17, 2019.” WATER UTILITY FINANCIAL PLAN March 2021 10 | Page Table 5 shows the current consumption charges, which, like the rates in Table 6 and Table 7, are not proposed to change for FY 2022. Table 5: Water Consumption Charges ($/CCF) W-1 (Residential) Volumetric Rates ($/CCF) Tier 1 Rates 2.56 Tier 2 Rates 5.97 W-2 (Construction) Volumetric Rates ($/CCF) Uniform Rate 3.61 W-4 (Commercial) Volumetric Rates ($/CCF) Uniform Rate 3.61 W-7 (Irrigation) Volumetric Rates ($/CCF) Uniform Rate 5.50 WATER UTILITY FINANCIAL PLAN March 2021 11 | Page Table 6 shows the current monthly service charges for rate schedule W-1, W-4 and W-7. Table 6: Current Monthly Service Charges for W-1, W-4 and W-7 Meter Size Monthly Service Charge ($/month based on meter size) Residential (W-1) Commercial (W-4) and Irrigation (W-7) 5/8” 20.25 17.71 3/4” 20.25 23.67 1” 20.25 35.59 1 ½” 65.40 65.40 2” 101.17 101.17 3” 214.44 214.44 4” 381.37 381.37 6” 780.79 780.79 8” 1,436.57 1,436.57 10” 2,271.20 2,271.20 12” 2,986.60 2,986.60 Table 7 shows the current monthly service charges for rate schedule W-3 Table 7: Current Monthly Service Charges for Fire Services (W-3) Meter Size Monthly Service Charge ($/month based on meter size) Current (7/1/19) 2” $4.17 4” $25.81 6” $74.96 8” $159.74 10” $287.27 12” $464.02 SECTION 3C: PROPOSED RESERVE TRANSFERS In the FY 2021 Financial Plan, Council approved a $5 million transfer from the Operations Reserve to the Rate Stabilization Reserve in FY 2020, which brought the balance in the Rate Stabilization Reserve to $9.07 at year-end FY 2020. The Rate Stabilization Reserve will be used to offset the costs of a series of large wholesale supply rate increases that are anticipated to begin annually in FY 2023. The use of the Rate Stabilization Reserve in this way allows projected CPAU water rates to increase by 5% or less annually over the next five years. Funds from the Rate Stabilization Reserve will be drawn down annually beginning in FY 2024 to minimize the need for a rate increase triggered by increasing costs. See Table 4 above, row 7, for a summary of the reserve transfers into and out of the Rate Stabilization Reserve. SFPUC projects wholesale rate increases WATER UTILITY FINANCIAL PLAN March 2021 12 | Page from $4.10 per CCF currently to $4.43 per CCF in FY 2023, $4.70 per CCF in FY 2024, and $5.33 per CCF in FY 2025 with annual increases continuing beyond FY 2025. The Water Utility Reserves Management Practices state that if there are funds in the Rate Stabilization Reserve at the end of any fiscal year, any subsequent Water Utility Financial Plan must result in the withdrawal of all funds from this reserve by the end of the Financial Planning Period. This Financial Plan recommends withdrawing the funds from the Rate Stabilization Reserve for the purpose of rate stabilization in FY 2024 through FY 2026, the end of the Financial Planning Period. In the FY 2021 Financial Plan, Council approved an $8 million capital program contribution to the CIP Reserve from the Operations Reserve in FY 2021. This amount is an estimate of the amount of CIP work there is in a given year, spread out over the forecast period. This Financial Plan recommends an $8.24 million capital program contribution to the CIP Reserve in FY 2022. Table 4 above shows the proposed capital program contributions in row 10. Having these funds in place will address uneven annual funding associated with ongoing CIP projects, and will be a source for one-time or immediately needed projects. Additionally, in the FY 2021 Financial Plan, Council approved one-time transfers from the Operations Reserve to the CIP Reserve to fund reservoir replacement costs for the remaining Corte Madera reservoir replacement costs and the Dahl and Park reservoir replacement costs. These one-time transfers totaled $8 million ($3 million in FY 2020, $1.5 million in FY 2021 and $3.5 million in FY 2022). The $3 million transfer in FY 2020 was completed and brought the balance in the CIP Reserve at year end FY 2020 to $5.726 million. Based upon the costs for the Corte Madera work, staff estimates that the Park and Dahl reservoirs will each cost $3.5 million more than anticipated last year. This Financial Plan recommends adding $3.5 million in one-time transfers in FY 2023 and FY 2026, the years when construction is planned for the remaining two tank replacements. Based on the projected CIP Reserve balance at year end FY 2021 being at the maximum guideline level, staff recommends waiting until FY 2022 to transfer the $5 million in one-time transfers (instead of $1.5 million in FY 2021 and $3.5 million in FY 2022) in order to re- evaluate once the reserve balances are known at the end of FY 2021. Projected one-time spending needs for reservoir replacement are shown in Appendix B on the line labeled “WS-09000 Seismic Water System”. The one-time transfers to the CIP Reserve to pay for the reservoir replacement costs allows the CIP Reserve to remaining within guideline levels and sufficiently fund budgeted CIP as fluctuating annual amounts of capital investment occur going forward. Table 4 shows the proposed capital program contributions in row 8. In addition, the funds will help to stabilize rate fluctuations for customers that may otherwise result from fluctuations in capital spending. Section 4E: Reserves Structure and Appendix A: Water Utility Financial Forecast Detail shows details of reserves levels. SECTION 4: UTILITY OVERVIEW WATER UTILITY FINANCIAL PLAN March 2021 13 | Page This section provides an overview of the utility and its operations. It provides general background information and helps readers better understand the forecasts in Section 5: Utility Financial Projections and Section 6: Details and Assumptions. SECTION 4A: WATER UTILITY HISTORY The Water Utility was established on May 9, 1896, two years after the city was incorporated. Voters of the 750-person community approved a $40,000 bond to buy local, private water companies who operated one or more shallow wells to serve the nearby residents. The city grew and the well system expanded until nine wells were in operation in 1932. Palo Alto began receiving water from the San Francisco Water Department (SFWD) in 1937 to supplement these sources. A 1950 engineering report noted, “the capricious alternation of well waters and the San Francisco Water Department water…has made satisfactory service to the average customer practically impossible”. By 1950, only eight wells were still in operation. Despite this, groundwater production increased in the 1950’s leading to lower groundwater tables and water quality concerns. In 1962, a survey of water softening costs to CPAU customers determined that CPAU should purchase 100% of its water supply needs from the SFWD. CPAU signed a 20-year contract with SFWD, and CPAU’s wells were placed in standby condition. The SFWD later became known as the SFPUC. Since 1962 (except for some very short periods) CPAU’s entire supply of potable water has come from the SFPUC. As the city grew, so did the number of mains in the water system, while existing sections of the system continued to age. In the mid-1980s, the number of breaks in cast iron mains installed during the 1940s and earlier started to accelerate. In FY 1994, to combat deterioration of older sections of the system, CPAU performed an analysis of cost-effective system improvements and increased the rate of main replacement from one mile per year to three. CPAU began a plan to replace 75 miles of deficient mains within 25 years. In 1999, a study of system reliability concluded that the distribution system needed major upgrades to provide adequate water supply during a natural disaster. This ultimately resulted in the $40 million Emergency Water Supply and Storage Project, completed in 2013, which involved a new underground reservoir in El Camino Park, the siting and construction of several emergency supply wells, and the upgrade of several existing wells and the Mayfield pump station. Upon completion, the city began to focus reliability efforts on its system of water storage reservoirs and transmission lines in the Foothills. At the same time that CPAU was evaluating the reliability of its own system, the SFPUC, in consultation with BAWSCA members, was evaluating the reliability of the Hetch Hetchy Regional Water System, which crosses two major fault lines between the Sierras and the Bay Area. That evaluation concluded that major upgrades to the system were required. This planning process culminated in the SFPUC’s $4.8 billion Water System Improvement Project (WSIP), which is ongoing. This has resulted and will continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed, wholesale customers must start paying the debt service costs within 3 to 4 years. The majority of those costs, funded with bond financing, will be paid off over approximately 30 years. The SFPUC WATER UTILITY FINANCIAL PLAN March 2021 14 | Page continues to evaluate its aging system for other needed infrastructure improvements; future major improvements include dam safety and Mountain Tunnel repairs. SECTION 4B: CUSTOMER BASE CPAU’s Water Utility provides water service to the residents and businesses of Palo Alto, plus a handful of residential customers not in Palo Alto (primarily in Los Altos Hills). Approximately 20,100 customers are connected to the water system. Approximately 16,200 (81%) of these are separately metered residential customers and approximately 3,900 (19%) of these are commercial, master-metered residential, irrigation and fire service customers. Judging from seasonal consumption patterns, between 35% and 50% of Palo Alto’s water is used for irrigation, and that consumption is heavily weather dependent. It also varies significantly by season. As a result of these two factors, there is significant variability in the amount of water that is demanded from the system month to month and year to year. SECTION 4C: DISTRIBUTION SYSTEM To deliver water to its customers, CPAU owns and operates roughly 236 miles of mains (which transport the water from the SFPUC meters at the city’s borders to the customer’s service laterals and meters), eight wells (to be used in emergencies), five water storage reservoirs (also for emergency purposes) and several tanks used to moderate pressure and deal with peaks in flow and demand (due to fire suppression, heavy usage times, etc.). These represent the vast majority of the infrastructure used to distribute water in Palo Alto. SECTION 4D: COST STRUCTURE AND REVENUE SOURCES As shown in Figure 1, water purchase costs accounted for 47% of the Water Utility’s costs in FY 2020, Operational costs represented 40%, and capital investment was responsible for the remaining 13%. Staff projects these percentage distributions to remain similar over the forecast period. Figure 1: Cost Structure (FY 2020) 47% 40% 13% Supply Operations Capital WATER UTILITY FINANCIAL PLAN March 2021 15 | Page The Water Utility’s revenue is primarily from sales of water and the remainder from capacity and connection fees, interest on reserves, and other sources. Appendix A: Water Utility Financial Forecast Detail shows more detail on the utility’s cost and revenue structures. Approximately 16% of the utility’s revenues come from fixed service charges, though most of its costs are fixed. SECTION 4E: RESERVES STRUCTURE CPAU maintains six reserves for its Water Utility to manage various types of contingencies. The descriptions below summarize these reserves; see Appendix C: Water 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 Reappropriations: A reserve for funds dedicated to projects reappropriated by the City Council, nearly all of which are capital projects. Most City funds, including the General Fund, have a Reappropriations Reserve. • Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate funds for future expenditure on CIP projects, as well as to manage cash flow for ongoing capital projects. This reserve can also act as a contingency reserve for the CIP. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Rate Stabilization Reserve: This reserve is intended to be empty unless the city anticipates one or more large rate increases 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, Gas, and Wastewater Collection) as well. • Operations Reserve: This is the primary contingency reserve for the Water Utility, and is used to manage yearly variances from the budget for operational water supply costs. This type of reserve is used in other utility funds (Electric, Gas, and Wastewater Collection) as well. • Unassigned Reserve: This reserve is for any funds not assigned to the other reserves and is normally empty. SECTION 4F: COMPETITIVENESS Table 8 shows the current water bills for single-family residential customers compared to what they would be under surrounding communities’ rate schedules. CPAU is among the highest monthly bills of the group, although bills for smaller water users are less than in some Figure 2: Revenue Structure (FY 2020) 93% 7% Sales of Water Other Revenue WATER UTILITY FINANCIAL PLAN March 2021 16 | Page surrounding communities. These comparison cities are the cities CPAU compares itself to in the annual budget across all industries. Table 8: Single-Family Residential Monthly Water Bill Comparison Usage (CCF/month) Residential monthly bill comparison ($/month)* As of January 2021 Palo Alto Menlo Park Mountain View Hayward Redwood City Santa Clara Los Altos 4 $46.89 $52.42 $38.34 $39.20 $54.04 $44.62 $42.99 (Winter median) 7 $70.28 $77.50 $59.37 $60.62 $76.09 $63.91 $60.84 (Annual median) 9 $90.42 $94.23 $73.39 $74.90 $90.79 $76.77 $72.73 (Summer median) 14 $140.77 $136.31 $108.44 $112.51 $138.94 $108.92 $101.62 25 $251.54 $229.06 $227.65 $205.02 $267.39 $179.65 $169.20 * Based on the FY 2013 BAWSCA survey, the fraction of SFPUC as the source of potable water supply was 100% for Palo Alto, 95% for Menlo Park, 100% for Redwood City, 87% for Mountain View, 10% for Santa Clara and 100% for Hayward. Los Altos does not receive water supply from SFPUC. SECTION 5: UTILITY FINANCIAL PROJECTIONS SECTION 5A: LOAD FORECAST Figure 4 shows 40 years of water consumption history. Average water use has trended downward over time even as Palo Alto’s population has grown. Significant water use reductions over the 40- year history were in response to requests to reduce water use in the 1976-77 and 1988-92 drought periods. During these periods, customers invested in efficient equipment and modified behavior to achieve water reduction goals. Reductions in usage achieved during these drought periods endured even after those periods. More recently, water sales decreased substantially during the 2007-2009 recession and drought and during the 2014-2017 drought. Usage has started to return to pre-drought levels, though the level at which usage will finally plateau is unknown. WATER UTILITY FINANCIAL PLAN March 2021 17 | Page Figure 3: Historical Water Consumption Figure 4 shows the financial plan forecast of water consumption through FY 2026, as denoted by the dotted line. Figure 4: Forecast Water Consumption During the recent drought, the State mandated a 24% water use restriction for Palo Alto until May 2016. Customers continue to conserve, but water usage has been increasing. In FY 2020 consumption was influenced by both dry weather and COVID-19 impacts to residents and businesses. This forecast is based on consumption levels in FY 2018 through FY 2020 and assumes a continuation of the long-term usage declines over time. WATER UTILITY FINANCIAL PLAN March 2021 18 | Page SECTION 5B: FY 2016 TO FY 2020 COST AND REVENUE TRENDS Figure 5 and the tables in Appendix A: Water Utility Financial Forecast Detail show how costs have changed during the last five years as well as how staff projects they will change over the next five years. The annual expenses for the water utility rose substantially between 2016 and 2020. The increases were related to both water purchase costs and operations costs. Water purchase costs increased 24% from $17.6 million in FY 2016 to $21.8 million in FY 2020. Section 6A: Water Purchase Costs contains a more in-depth discussion of water purchase costs. Operations costs increased by about 21% from FY 2016 to FY 2020 while CIP costs have generally increased but fluctuated down in certain years. For example, in FY 2017, a water main replacement project that CPAU put out for bid resulted in very few contractors competing, and project bids that were higher than budgeted. This led to delays due to the changing market conditions and rising CIP costs. Section 6B: Operations contains more detail regarding operations costs and Section 6C: Capital Improvement Program (CIP) provides more detail regarding CIP costs. Note that in Figure 5, Capital Investment in the projected years reflects one-time transfers as well as the annual capital program contribution to the CIP Reserve. WATER UTILITY FINANCIAL PLAN March 2021 19 | Page Figure 5: Water Utility Expenses, Revenues, and Rate Changes: Actual Expenses through FY 2020 and Projections through FY 2026 SECTION 5C: FY 2020 RESULTS Actual sales revenues for FY 2020 were higher than projected ($47.1 million vs. $45.5 million). Operating costs and capital funding needs were lower during FY 2020, mainly due to deferrals of capital spending, and lower than expected water purchase costs due to low non-revenue water. Table 8 summarizes the variances from forecast. Table 9: FY 2020, Actual Results vs. Financial Plan Forecast Net Cost/ (Benefit) ($000) Type of change Higher sales revenues $(1,643) Higher revenues Capital deferrals $(13,679) Cost savings Water purchases lower than expected $(404) Cost savings Operating Expensehigher than expected $226 Cost increase Net Cost / (Benefit) of Variances $(15,501) SECTION 5D: FY 2021 PROJECTIONS Estimated sales revenues are expected to be higher than forecasted in the FY 2021 Financial Plan by about $1.8 million while other revenue is expected to be lower than forecasted by $1.4 million. Total revenue is expected to be $0.4 million higher than forecasted. The higher sales revenue is WATER UTILITY FINANCIAL PLAN March 2021 20 | Page in part because the sales decreases forecasted in the FY 2021 Financial Plan, which were made in light of the COVID-19 pandemic and related economic impacts, have not materialized. Water purchase costs are expected to be higher than anticipated in the FY 2021 Financial Plan due to updated sales forecasts. The FY 2021 Financial Plan estimated the CIP funding needed for FY 2021 to be $5.8 million while the current estimated CIP funding needed for FY 2021 is $3.5 million, a difference of approximately $2.3 million. Operations & Maintenance expense decreases are anticipated from lower than expected budgets. Table 10 summarizes the changes from the FY 2021 forecast. Table 10: FY 2021 Change in Projected Results, 2021 Forecast vs 2022 Forecast ($000) Net Cost/ (Benefit) Type of Change Sales Revenue ($1,826) Revenue increase Other Revenue (Including Interest Income) $1,394 Revenue decrease Water Purchases $858 Cost increase Capital Program Funding ($2,344) Cost decrease Operations & Maintenance Costs ($869) Cost decrease Net Cost / (Benefit) of Variances ($2,787) SECTION 5E: FY 2022 – FY 2026 PROJECTIONS Figure 5 above shows that on average the costs for the Water Utility are increasing through the rest of the forecast period, though mainly after FY 2022 based on current estimates from the SFPUC. Water supply costs are the largest component and are generally projected to grow by about 6 percent on average over the forecast period FY 2022 – FY 2026. Operations and capital costs are also expected to increase at the same rate of inflation used in the City’s preliminary financial projections (3% to 5% per year). While future CIP costs have been revised upwards to reflect the higher construction costs seen in recent projects, there is still uncertainty with regard to the utility’s future costs for main replacement. See Section 6: Details and Assumptions for more detail on the costs that make up these projections, as well as the various assumptions underlying the projections. This Financial Plan addresses revenue losses due to COVID-19 and the ongoing associated economic effects. So far, the Water Utility has experienced sales and revenue losses in the commercial customer class and sales and revenue increases from residential customers. From March 2020 through December 2020, months impacted by the COVID-19 pandemic, commercial water sales were approximately 12% lower than the same months in 2018 and 13% lower than the same months in 2019. However, these reductions in water sales were offset by the increases in residential water sales. The resulting total water sales were 3% higher during March through December 2020 than during the same months in 2019 and 2018. Because weather was also dry during the same time period, which also tends to increase water sales, COVID-19-related sales impacts are not able to be determined with specificity. Staff will continue to monitor water sales and will recommend adjustments in next year’s financial plan as needed. As shown in Figure 5, above the Water Utility requires rate increases of between 0% and 5% per year through FY 2026 to provide sufficient revenues to fund annual expenses. This forecast assumes the use of the Rate Stabilization Reserve annually beginning in FY 2024 to spread the series of large water supply rate increases expected from the SFPUC over multiple years. In addition, the CIP Reserve is used to WATER UTILITY FINANCIAL PLAN March 2021 21 | Page provide capital funding going forward as well as stabilize rates by stabilizing fluctuations from year to year in capital spending. Annually, beginning in FY 2021, a fixed funding amount began to be provided from the Operations Reserve to the CIP Reserve to fund capital improvements. The proposed amount for FY 2022 is $8.24 million as shown in Table 3, rows 9 and 10. This amount is an estimate of the amount of CIP work there is in a given year, spread out over the forecast period. It was derived by calculating the approximate average annual CIP budget for FY 2022 through FY 2026 less an allowance for unspent funds and excluding the one-time reservoir replacement costs. The reservoir replacement costs will be funded through the one-time transfers of $5 million in FY 2022, $3.5 million in FY 2023 and $3.5 million in FY 2026 from the Operations Reserve to the CIP Reserve. Table 3 shows these transfers in row 8. This approach provides 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 isolates 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 in that reserve. Without the capital program contribution to the CIP Reserve, the relative stability of total costs, and revenues shown in Figure 5 would fluctuate greatly from year to year as shown below in Figure 6. WATER UTILITY FINANCIAL PLAN March 2021 22 | Page Figure 6: Water Utility Expenses, Revenues, and Rate Changes: Actual Expenses through FY 2020 and Projections through FY 2026 Note that the fluctuations in CIP show a mismatch in many forecasted years between revenues and costs. Isolating fluctuations in capital investment in the CIP Reserve not only helps provide adequate funding for needed capital improvements but also shows a more realistic view of the relationship between costs and revenues as shown in Figure 5. Figure 7 shows reserves trends based on these cost and revenue projections. The figure shows credit to the Rate Stabilization Reserve in FY 2020 and the contributions from the Rate Stabilization Reserve to the Operations Reserve in FY 2024 through FY 2026. Staff expects the Operations Reserve, the main contingency reserve, to be within the target range by the end of FY 2023 and for the remainder of the forecast period, and that this reserve will be adequate to meet all identified risks, as discussed in Section 5F: Risk Assessment and Reserves Adequacy. In addition, the Unassigned Reserve reflects reserve funds in the Operations Reserve above the maximum guideline level. These funds will be needed for the reservoir replacement projects. These excess reserves will be utilized by the end of FY 2023 and must be used before Rate Stabilization Reserve funds are utilized. WATER UTILITY FINANCIAL PLAN March 2021 23 | Page Figure 7: Water Utility Reserves Actual Year End Reserve Levels for FY 2020 and Projections through FY 2026 SECTION 5F: RISK ASSESSMENT AND RESERVES ADEQUACY The Water Utility’s main contingency reserve is the Operations Reserve, and this Financial Plan proposes using funds and raising rates slowly such that reserves remain well within the guideline levels throughout the forecast period, as shown in Figure 8. Staff will consider funds in the Operations Reserve in excess of the maximum to be unassigned. The Operations Reserve is projected to exceed both the minimum reserve level and the short term risk assessment level throughout the forecast period. WATER UTILITY FINANCIAL PLAN March 2021 24 | Page Figure 8: Operations Reserve Adequacy Table 10 summarizes the risk assessment calculation for the Water Utility through FY 2026. The risk assessment includes the revenue shortfall that could accrue due to lower than forecasted sales revenue. Table 11: Water Risk Assessment ($000) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Total non-commodity revenue $26,322 $26,782 $28,142 $28,728 $29,769 Max. revenue variance, previous ten years 13% 13% 13% 13% 13% Risk of revenue loss $2,374 $2,416 $2,539 $2,592 $2,685 Total Risk Assessment value $2,374 $2,416 $2,539 $2,592 $2,685 SECTION 5G: ALTERNATE SCENARIO There is no alternate scenario presented in this Financial Plan. SECTION 5H: LONG-TERM OUTLOOK CPAU has put its Water Utility on strong footing by investing in its distribution system infrastructure and emergency water facilities over the last 20 years. The Water System Master Plan, completed in FY 2016 evaluated the current state of the distribution system and determined the necessary rate of main replacement in the next 20 years. This study factored in seismically vulnerable mains as well as deteriorating mains. In addition, CPAU’s water supplier, the SFPUC, WATER UTILITY FINANCIAL PLAN March 2021 25 | Page has replaced and seismically strengthened its water transmission infrastructure, which will benefit Palo Alto and all Hetch Hetchy Regional Water System customers over the long term. The opportunities for CPAU’s Water Utility to obtain additional supplies over the long term may be in alternative water supplies such as recycled water, groundwater, and water from Valley Water. These alternatives have been analyzed in the past, and were analyzed again most recently in the 2017 Water Integrated Resource Plan1. Some of these alternatives may provide cost savings or increased drought protection. For example, in November, 2019, the City of Palo Alto entered into an agreement with Valley Water and the City of Mountain View that will provide (1) funding for a salt removal facility at the Regional Water Quality Control Plant in Palo Alto to improve the quality of non-potable recycled water used in Palo Alto and Mountain View, (2) a transfer of treated wastewater from Palo Alto to Valley Water for use in the county south of Mountain View, and (3) Palo Alto and Mountain View will have a future option to request new potable or non-potable water supply from Valley Water if needed. Climate change may begin to present challenges for the Water Utility over the next 20 to 40 years. Availability of water from SFPUC’s Regional Water System may change with changing seasonal precipitation patterns. Water consumption patterns may change. Consumption could increase due to drier weather or decrease as customers become even more focused on water conservation. Droughts may become more frequent. The risk of wildfire in the foothills could increase, possibly threatening utility infrastructure or placing greater demands on it. Sea level rise could result in greater exposure of utility infrastructure to inundation, possibly resulting in higher maintenance and replacement costs. As part of the Sustainability/Climate Action Plan, CPAU is currently working on a Climate Change Adaptation Roadmap that will begin to assess some of these risks. SECTION 6: DETAILS AND ASSUMPTIONS SECTION 6A: WATER PURCHASE COSTS CPAU purchases all of its potable water supplies from the SFPUC, which owns and operates the Hetch Hetchy Regional Water System. CPAU is one of several agencies that purchase water from the SFPUC, all of whom are members of the Bay Area Water Supply and Conservation Agency (BAWSCA). Palo Alto uses roughly 7% of the water delivered by the SFPUC to BAWSCA member agencies. In January 2021, the SFPUC provided an informal estimate for FY 2022 wholesale water rates to remain at $4.10 per CCF. The Hetch Hetchy Regional Water System begins with a system of reservoirs and tunnels in the high Sierra in Yosemite County and water is transported by a gravity-fed pipeline to the Bay Area. Currently, the SFPUC is in the midst of a $4.8 billion bond-financed capital improvement program (the Water System Improvement Program, or WSIP) to seismically retrofit the facilities that transport water to the Bay Area. As of September 30, 2020, 98.8% of the WSIP regional projects 1 2017 Water Integrated Resource Plan: https://www.cityofpaloalto.org/civicax/filebank/documents/56088 WATER UTILITY FINANCIAL PLAN March 2021 26 | Page are complete.2 This has resulted and will continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto. After each WSIP project is completed, wholesale customers must start paying the debt service costs within 3 to 4 years. The currently estimated WSIP completion date is June 30, 2023, as adopted by the SFPUC in April of 2020. In large part because of these WSIP-related debt service costs, the SFPUC’s wholesale water rate has already increased from $1.43 per CCF in FY 2009 to $4.10 per CCF in FY 2021, and is forecast to increase to $5.59 per CCF by FY 2026 (these projections are subject to change based on future SFPUC budget estimates). Figure 9 shows the SFPUC’s actual wholesale water rate since FY 2009 and a projection through FY 2026 and beyond. Note that the wholesale water rate decreased in FY 2014, but the apparent rate decrease is due to a debt the BAWSCA agencies owed to SFPUC being directly paid by the BAWSCA agencies via bond financing. This cost is in addition to the wholesale water rate and adds about $0.35 to $0.45 per CCF to the wholesale rate. Parts of SFPUC’s system not included in the WSIP will also need rehabilitation after the WSIP is completed, and some of these projects are already included in the SFPUC’s rate projections, such as additional Transmission, Supply & Storage and Treatment system upgrade projects, and dam safety work slated to occur during the next 10 years. The SFPUC is also conducting condition assessments of other “up-country” facilities, located in the Sierras, in the coming years. Current estimates are that $1.8 billion will be needed between FY 2019 and FY 2028 primarily for these non-WSIP projects, but if these assessments identify other facilities that need replacement, it may result in additional rate increases as new debt is issued to finance the projects. Total deliveries from the Regional Water System were higher than the five year average in FY 2020. Although reservoir storage in the Regional Water System is at normal levels, precipitation was well below average in water year 2020 and has continued to be low at the beginning of water year 2021. If sales continue to trend higher than average, a rate increase is unlikely in FY 2022, however, if precipitation continues at below average levels, the SFPUC may call for voluntary water conservation measures. 2 First Quarter FY 2020 - 2021 WSIP Regional Quarterly Report,https://www.sfwater.org/modules/showdocument.aspx?documentid=16461 WATER UTILITY FINANCIAL PLAN March 2021 27 | Page Figure 9: Historical and Projected SFPUC Wholesale Water Rate During FY 2017 through FY 2020, the balancing account for SFPUC’s wholesale customers built up an over-collection of revenue due to wholesale customer revenues exceeding costs. There are several reasons contributing to this: SFPUC sold more wholesale water than its sales projection used for rate setting, there were cost savings in the wholesale revenue requirement due to the SFPUC’s debt refinancing, and BAWSCA’s annual review of the wholesale revenue requirement resulted in credits applied to the balancing account. These balancing account funds will be refunded approximately between FY 2021 and FY 2024, which allows some rate stabilization of SFPUC’s wholesale rates. If it weren’t for this rate stabilization effect of the balancing account, Palo Alto would pay higher rates in FY 2022 for water purchased from SFPUC. SECTION 6B: OPERATIONS CPAU’s Water Utility operations include the following activities: • Administration, a category that includes charges allocated to the Water Utility for administrative services provided by the General Fund and for Utilities Department administration, as well as debt service and other potential transfers. Additional detail on Water Utility debt service is provided in Section 6D: Debt Service • Customer Service • Engineering work for maintenance activities (as opposed to capital activities) • Operations and Maintenance of the distribution system; and • Resource Management Appendix D: Description of Water Utility Operational Activities includes detailed descriptions of the work associated with each of these activities. From FY 2016 to FY 2020, overall operations costs increased 5% per year on average (see Figure 10). Operations and Maintenance costs and Resource Management costs were the primary reasons for the increase, driven primarily by increases in salaries and benefits. Transfers have WATER UTILITY FINANCIAL PLAN March 2021 28 | Page varied from year to year, but staff expect transfers to remain relatively low and stable through the forecast period. The financial plan projections align as much as possible with the City’s budget assumptions; instead of a ten-year General Fund Long Range Financial Forecast, the City presented a preliminary forecast focusing on FY 2022 based on the current economic climate and continued unknown impacts of the COVID-19 pandemic.3 This plan projects operations costs to increase by 2 to 3% per year, on average, over the forecast period. Underlying these projections are preliminary assumptions for non-salary and benefit cost categories from Palo Alto’s Office of Management and Budget. For salary and benefit assumptions, this financial plan uses estimated budget annual percentage increases applied to the actual 2020 salaries and benefits which is 8% in FY 2022 and an average of 3% per year in FY 2023 through FY 2026. These percentage estimates may change as the budget is refined and finalized this fiscal year. Figure 10: Historical and Projected Operational Costs SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP) The Water Utility’s CIP consists of the following types of projects: 3 Staff Report #11844 WATER UTILITY FINANCIAL PLAN March 2021 29 | Page • One-time projects, or large, non-recurring replacement of system assets (such as reservoir rehabilitation). • Water main replacement, which represents the ongoing replacement of aging water mains and the services associated with those mains, as well as seismically vulnerable mains located in areas where soil is prone to liquefaction. • Ongoing projects, which represent the cost of replacing aging and under-recording meters and degraded boxes and covers, minor replacements of various types of distribution system equipment, and the cost of capitalized tools and equipment. • Customer connections, which represents the cost when the Water Utility installs new services or upgrades existing services at a customer’s request in response to development or redevelopment. CPAU charges a fee to these customers to cover the cost of these projects. Table 11 shows the FY 2021 projected budget and the five year CIP spending plan, although these figures are preliminary pending ongoing budget discussions. Table 12: Budgeted Water Utility CIP Spending ($000) This budget does not include allocated overhead, which is estimated to be $0.97 million in 2021 and escalating at 2-4% annually thereafter as shown in the table below. Allocated overhead is shown below and added to the capital budget as a capital expenditure. Table 13: Allocated Overhead FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Allocated Overhead $967,539 $1,006,627 $1,033,504 $1,064,510 $1,096,445 $1,121,882 The water main replacement program funds the replacement of deteriorating water mains or water mains in liquefaction zones. The water system consists of over 236 miles of mains, approximately 2,000 fire hydrants, and over 20,000 metered service connections spanning 9 pressure zones over a 26 square mile service area. In recent years, CPAU has already replaced many miles of the most leak-prone and deteriorated pipes. CPAU is currently pursuing a pipe replacement program of mains that are subject to recurring breaks based on maintenance history and 13.5 miles of mains that were identified in the 2015 water system study. CPAU also coordinates with the Public Works street maintenance program to avoid cutting into newly repaved streets. The main replacement schedule in this financial plan will allow CPAU to replace these mains on schedule. Costs for the water main replacement program are increasing for a variety of reasons: Project Category Current Budget* Spending, Curr. Yr Remain. Budget**Committed FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 One Time Projects 8,153 (50) 8,103 - 500 7,000 500 600 7,000 Water Main Replacement 3,659 (162) 3,497 - 8,925 425 8,925 425 9,350 Ongoing Projects 2,426 (718) 1,708 - 2,085 2,083 2,183 2,611 3,387 Customer Connections - (375) (375) - 877 905 932 961 989 TOTAL 14,238 (1,305) 12,933 - 12,388 10,413 12,540 4,596 20,726 *Includes unspent funds from previous years carried forward or reappropriated into the current fiscal year **Equal to CIP Reserves (Reserve for Reappropriations + Reserve for Commitments). WATER UTILITY FINANCIAL PLAN March 2021 30 | Page • Fire Code regulations now mandate fire sprinklers for new residential units. To accommodate increased fire flows, new main replacement projects require larger diameter pipe. • CPAU has switched to high-density polyethylene (HDPE) for its mains. Installation costs for this material are slightly higher, though lifecycle costs are lower, and the material performs better. Joints in distribution mains are the most likely place for failure, and sections of HDPE pipe can be fused together rather than connected with fittings. In the long run, this will reduce losses and maintenance costs. • To take full advantage of HDPE’s fusibility, CPAU is now replacing the services along with the water mains with new HDPE services. In the past, the existing services were reconnected, regardless of the material. This new practice costs more in the short run, but will provide long term benefits. • Lastly, costs have escalated after the recession. The regional and even national focus on infrastructure improvement has created labor shortages in the construction market, leading to higher bids than were seen in the past. These factors have created some uncertainty in future water main replacement costs. As bids for recent projects have consistently come in higher over the last few years, future main replacement project budgets have been increased to reflect expected bid estimates. If the cost of water main replacement continues to rise at its current levels, budgets may need to be revised further. In 1993, the long term water main replacement program focused on replacing the oldest and most degraded parts of the system. Roughly 26% of the system has been replaced, and the rate of water leaks has decreased 50%. CPAU initiated a master planning process in FY 2015 that was completed in FY 2016 to evaluate the current state of the distribution system and determine the necessary rate of main replacement in the next 20 years. This study factored in seismically vulnerable mains as well as deteriorating mains. Mains with recurring maintenance issues are added to projects as they are identified. Preparing for the future, CPAU is in the process of evaluating the utility’s asbestos cement pipe (ACP) mains. Over half the mains in the system are ACP. The ACP pipe has performed very well, but CPAU wants to verify its life expectancy and plan for its future replacement in 20 to 30 years. This financial plan addresses these challenges in a way that will allow CPAU to meet its main replacement needs. This financial plan includes approximately $8.5 million every other year for main replacement construction. In prior years main replacement construction was planned at approximately $5.7 million annually. Staff anticipates that larger main replacement construction projects every other year will attract more contractors to bid on the larger projects. Included in the one-time project budget are seismic water system upgrades and/or replacement for the Park and Dahl reservoirs to improve earthquake resistance. This work will improve protection from water loss at these reservoirs in a seismic event. If an earthquake caused a significant water leak, this could lead to loss of water for firefighting, loss of water storage for drinking, property damage from flooding or mudslides, and environmental damages. Staff estimates the construction work and design for the replacement for Dahl and Park reservoirs will cost approximately $7 million each in FY 2023 and FY 2026. One project not included in this forecast is protecting the large water transmission line in the foothills from seismic events. To date the concrete cylinder pipe has performed well and is not in WATER UTILITY FINANCIAL PLAN March 2021 31 | Page need of immediate replacement. Once the storage issues are addressed, the focus will be to address the transmission main replacement. It could cost between $15 million and $20 million, which would likely require bond financing and would substantially affect the financial forecast. Ongoing Projects and Customer Connections are projected to cost approximately $3 million in FY 2021 and increase to approximately $4.3 million per year through the end of the forecast period. Actual expenses for these projects fluctuate annually depending on how many defective meters are discovered and replaced during routine maintenance, as well as how much development and redevelopment is going on that prompts the replacement or upgrade of water services. Property owners pay a fee for water service replacement or expansion during redevelopment, so when the number of projects go up (meaning higher costs for this activity), so does fee revenue. Aside from customer connections, the CIP plan for FY 2022 to FY 2026 is funded by revenue from utility rates and capacity fees. Appendix B: Water Utility Capital Improvement Program (CIP) Detail shows the details of the plan. Figure 11 below shows the projected CIP Reserve balances from FY 2022 through FY 2026. Figure 12 below shows the projected CIP expenditure fluctuating from year to year with the staggered main replacement schedule, relative to the more steady capital program contributions to the CIP Reserve. In FY 2022, the capital program contribution to the CIP Reserve is $8.24 million. The capital program contribution increases with inflation at a projected level of 3%. Appendix A: Water Utility Financial Forecast Detail shows the amount of the capital program contributions under “Expenses” for FY 2021 through FY 2026. WATER UTILITY FINANCIAL PLAN March 2021 32 | Page Figure 11: Projected CIP Reserve Balances FY 2021 to FY 2026 Figure 12: Projected CIP Expenditure,and Projected Capital Program Contribution, FY 2021 to FY 2026 WATER UTILITY FINANCIAL PLAN March 2021 33 | Page SECTION 6D: DEBT SERVICE The Water Utility’s annual debt service is roughly $3.2 million per year. This is associated with two bond issuances, one requiring payments through 2026, the other through 2035. CPAU is in compliance with all covenants on both bonds. The first bond is the 2009 Water Revenue Bond, Series A, issued for $35 million to finance construction of the Emergency Water Supply and Storage project (the El Camino Reservoir, new wells, and rehabilitation of existing wells and tanks) which will be retired by 2035. As part of the ‘Build America’ bond program, there is an interest payment subsidy from the Federal Government of 35%. There is always the possibility that the federal government will choose to stop offering this subsidy. The automatic federal spending cuts under the Budget Control Act (BCA) of 2011 have already reduced the subsidy by $50,000 per year, and if planned cuts through 2021 proceed without amendment, staff estimates that the subsidy would be reduced by over $200,000 per year by 2021. The Bipartisan Budget Act of 2013, which relieved some of the discretionary spending cuts in the 2011 BCA, did not affect automatic cuts to the subsidy, and actually extended the automatic cuts through 2023. The second bond issuance is the 2011 Utility Revenue Refunding Bond, Series A, which is to be retired in 2026. This $17.2 million issuance refinanced an earlier Water and Gas Utility bond issuance, the 2002 Utility Revenue Bonds, Series A, which was issued to finance various capital improvements for both systems. The Water Utility’s share of the issuance was roughly $7.8 million. Table 14 shows the cost of debt service for the Water Utility’s share of these bond issuances for the financial forecast period: WATER UTILITY FINANCIAL PLAN March 2021 34 | Page Table 14: Water Utility Debt Service ($000) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 2009 Water Revenue Bonds, Series A (net of grants) 2,132 2,151 2,151 2,151 2,151 2011 Utility Revenue Bonds, Series A 657 658 658 658 658 Total 2,790 2,810 2,810 2,810 2,810 Both the 2009 and 2011 Bonds include the following covenants: 1) net revenues plus Available Reserves shall at least equal 125% of the maximum annual debt service, and 2) Available Reserves shall be at least 5 times the maximum annual debt service. Note that “Available Reserves,” as defined for both bonds, include the reserves for the Gas and Electric systems, not just the Water system. This Financial Plan maintains compliance with these covenants throughout the forecast period, as shown in Appendix A: Water Utility Financial Forecast Detail. SECTION 6E: OTHER REVENUES The Water Utility receives most of its revenues from sales of water. The next largest source in FY 2020 was service connection fee revenue, which was higher than forecasted and represented 37% of revenue from sources other than water sales; interest income represented 28% of revenue from sources other than water sales, capacity fees and grants each represented approximately 13% of revenue from sources other than water sales. The remainder consisted of a variety of miscellaneous charges and transfers. Revenues from connection and capacity fees have more than doubled over the past 10 years since FY 2010. Connection and capacity fee revenue is reflected in the Operations Reserve. Connection fees are charged to new developments that need new or replacement service connections, while capacity fees are charged to development that put additional demands on the water distribution system. Revenue from these sources fluctuate from year to year. Over the past two years, capacity fees have been lower than the average of the last five years while service connection fees have been higher than the average of the past five years. In total, Staff is forecasting revenue from these sources to increase at an average of 2% per year in subsequent years. Other revenue sources are projected to stay stable through the forecast period, though interest income fluctuates depending on changes in interest rates. Some uncertainty also exists related to the Federal government’s commitment to continuing to pay the interest subsidy on the Build America Bonds. SECTION 6F: SALES REVENUES Staff based the sales revenue projections on the load forecast in Section 5A: Load Forecast and the projected rate changes shown in Figure 5. Except where stated otherwise, these load forecasts are based on normal precipitation. Precipitation can vary substantially, and this can affect revenues substantially. In dry years customers use more water, increasing revenues, and in wet years they use less. It is difficult to predict customer usage recovery post-drought and WATER UTILITY FINANCIAL PLAN March 2021 35 | Page during the ongoing pandemic. Staff will continue to monitor these patterns and adjust projections accordingly in subsequent financial plans. SECTION 7: COMMUNICATIONS PLAN The Fiscal Year (FY) 2022 Water Utility communications strategy covers these primary areas: efficiency services and utility bill savings; capital improvement, operations and maintenance for infrastructure safety and reliability; sustainable water resources management; and cost containment measures. The City of Palo Alto Utilities (CPAU) communication methods include use of the utilities website, utility bill inserts, messaging on utility bills, email newsletters, print and digital ads in local publications, social media, and community messaging platforms. In FY 2022, CPAU is proposing no increase in water utility rates. FY 2021 year-end Operations Reserves are projected to be above guideline levels and within guideline levels by year end FY 2022. CPAU will utilize the capital reserve to promote reserve health and provide sufficient funds for critical capital investments. The focus of communications for water utility rates will continue to be on cost drivers for future rate increases which are expected to resume in 2023; what CPAU is doing to keep costs down; and the value of our customers’ investment through their rates. Future projections for FY 2023-2026 indicate that a 5% annual increase will be necessary to maintain adequate reserves within a healthy margin while paying for wholesale rate increases. One of the main reasons for future water utility rate increases includes the continual need for infrastructure upgrades along the local water distribution system to replace or maintain the water pipes, mains, and service connections. This necessary maintenance helps prevent leaks, which cost the utility and rate payers money, and prevents damage to infrastructure which could exacerbate safety and reliability concerns in the long term. Market economics have continued to drive up labor and material costs for construction projects. Additionally, CPAU must pay for commodity water rate increases from the City’s water supplier, the San Francisco Public Utilities Commission (SFPUC). Any increased supply costs are passed on to CPAU customers. As a not for profit public utility, CPAU must recover its costs primarily through revenue generated by rates. Staff maintain a dedicated webpage at cityofpaloalto.org/ratesoverview to provide an overview on all utility rates, including information on costs, utilities supply resources, infrastructure projects, and the value of what customers get for what they pay. While print materials and website pages feature prominently, CPAU is increasing the outreach emphasis on more direct communication with customers, including through use of social media, email newsletters, digital ads and videos. Aside from the 2020-2021 COVID-19 shelter-in-place public health order, staff typically attend community outreach events, safety and emergency preparedness fairs, and neighborhood meetings to share information on our programs. One example of a new residential outreach opportunity is through providing information on the Cool Blocks curriculum. For the water utility, CPAU will continue its outreach on making water conservation a way of life, regardless of drought or rain conditions, which is in line with the State of California’s current outreach campaign. CPAU promotes available water use efficiency rebates, incentives and easy water-saving behaviors. Messaging reinforces the importance of water use efficiency, and that although rates may increase in the future, efficient usage can help customers avoid seeing a WATER UTILITY FINANCIAL PLAN March 2021 36 | Page significant water cost increase on the utility bill. The City is also exploring opportunities to expand water reuse, such as through recycled water, to further reduce demands on potable water supplies. APPENDICES Appendix A: Water Utility Financial Forecast Detail Appendix B: Water Utility Capital Improvement Program (CIP) Detail Appendix C: Water Utility Reserves Management Practices Appendix D: Description of Water Utility Operational Activities Appendix E: Sample of Water Utility Outreach Communications APPENDIX A: WATER UTILITY FINANCIAL FORECAST DETAIL 1 FISCAL YEAR FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 2 3 WATER SUPPLY 4 Purchases (CCF)4,127,085 4,172,038 4,859,576 4,600,987 4,757,199 4,775,311 4,713,232 4,651,960 4,591,484 4,531,795 4,472,882 5 Sales (CCF)3,858,825 3,852,185 4,609,893 4,411,473 4,670,827 4,567,464 4,508,087 4,449,481 4,391,638 4,334,547 4,278,198 6 7 BILL AND RATE CHANGES 8 Variable Charge (Supply)9%7%-6%0%0%0%0%8%6%12%6% 9 Residential Variable Charge (Distribution)5%-2%-4%0%-2%3%0%3%6%3%5% 10 System Average Rate 7%2%1%-1%0%0%0%5%6%7%6% 11 Average Customer Bill (projected)1%0%0%5%5%5%5% 12 13 STARTING RESERVES 14 Reappropriations (Non-CIP)- - - - 258,000 70,000 70,000 70,000 70,000 70,000 70,000 15 Commitments (Non-CIP)347,000 177,273 177,273 284,034 442,000 796,000 796,000 796,000 796,000 796,000 796,000 16 Restricted for Debt Service 3,316,000 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 17 Emergency Plant Replacement - - - - - - - - - - - 18 Reappropriations & Commitments 9,656,000 10,530,000 13,266,000 11,326,000 15,090,505 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000 19 Capital Reserve 4,000,000 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 10,310,423 10,608,451 11,615,464 7,274,334 11,122,468 20 Rate Stabilization Reserve 6,567,000 1,877,437 4,069,437 4,069,437 4,069,437 9,069,437 9,069,437 9,069,437 9,069,437 5,000,000 3,000,000 21 Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,000 12,438,456 13,351,122 13,288,922 13,778,100 9,251,924 11,717,950 11,585,196 22 Unassigned - - 7,056,052 7,182,707 8,213,544 6,489,877 7,395,474 574,713 - - - 23 TOTAL STARTING RESERVES 35,549,836 33,216,828 43,289,806 42,589,274 46,498,038 49,798,533 55,226,256 49,192,700 45,098,826 39,154,284 40,869,664 24 25 REVENUES 26 Net Sales 36,136,644 41,657,382 44,078,960 44,134,246 47,136,524 45,296,544 44,805,547 46,484,471 48,774,319 51,549,436 53,678,788 27 Other Revenues and Transfers In 3,258,936 5,829,851 4,116,200 5,218,976 3,927,307 3,967,324 4,011,255 4,055,483 4,121,960 4,189,677 4,273,851 28 TOTAL REVENUES 39,395,579 47,487,233 48,195,160 49,353,223 51,063,831 49,263,868 48,816,802 50,539,954 52,896,278 55,739,112 57,952,639 29 30 EXPENSES 31 Water Purchases 17,626,020 20,075,322 21,957,711 21,210,399 21,773,295 21,846,978 21,592,454 22,867,082 23,839,493 26,412,042 27,265,840 32 Operating Expenses 5.8% -54.7% 33 Administration 34 Allocated Charges 2,953,291 3,151,373 2,809,112 2,626,526 2,799,878 2,846,356 2,961,349 3,040,417 3,131,630 3,225,578 3,300,412 35 Rent 1,803,087 1,720,711 1,775,774 1,832,599 1,904,070 1,942,151 1,980,994 2,030,519 2,091,435 2,154,178 2,218,803 36 Debt Service 3,222,606 3,219,316 3,222,669 3,220,858 3,220,638 3,222,843 3,223,563 3,224,553 3,224,553 3,224,553 3,224,553 37 Transfers and Other Adjustments (377,200) (256,608) 393,607 438,322 474,953 484,452 494,141 504,024 1,124,104 1,134,386 1,144,874 38 Subtotal, Administration 7,601,785 7,834,792 8,201,161 8,118,304 8,399,539 8,495,802 8,660,047 8,799,513 9,571,721 9,738,695 9,888,642 39 Resource Management 592,744 868,038 922,558 963,976 1,159,106 1,174,522 1,245,228 1,280,531 1,318,946 1,358,515 1,381,066 40 Operations and Mtc 5,038,570 5,290,549 5,725,236 5,964,589 7,010,251 7,104,188 8,527,598 8,768,929 9,031,997 9,302,957 9,459,246 41 Engineering (Operating)282,472 355,852 354,597 383,877 401,902 408,051 427,719 439,417 452,600 466,178 475,781 42 Customer Service 2,076,559 1,616,008 1,625,332 1,620,421 1,865,571 1,887,771 2,017,272 2,075,874 2,138,150 2,202,295 2,232,687 43 Allowance for Unspent Budget - - - (427,929) - (496,841) (561,933) (577,703) (595,034) (612,885) (623,757) 44 Subtotal, Operating Expenses 15,592,128 15,965,239 16,828,885 16,623,240 18,836,369 18,573,494 20,315,932 20,786,560 21,918,380 22,455,754 22,813,665 45 Capital Program Contribution^9,082,021 4,110,131 8,169,097 11,791,292 3,265,168 8,000,000 8,240,000 8,487,200 8,741,816 9,004,070 9,274,193 46 TOTAL EXPENSES 42,300,170 40,150,692 46,955,693 49,624,930 43,874,831 48,420,472 50,148,386 52,140,842 54,499,689 57,871,866 59,353,698 47 48 ENDING RESERVES 49 Reappropriations (Non-CIP)- - - 258,000 70,000 70,000 70,000 70,000 70,000 70,000 70,000 50 Commitments (Non-CIP)177,273 177,273 284,034 442,000 796,000 796,000 796,000 796,000 796,000 796,000 796,000 51 Restricted for Debt Service 3,299,194 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 3,260,000 52 Emergency Plant Replacement - - - - - - - - - - - 53 Reappropriations & Commitments 10,530,000 13,266,000 11,326,000 15,090,505 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000 11,036,000 54 Capital Reserve 2,726,096 2,726,096 2,726,096 2,726,096 5,726,096 10,310,423 10,608,451 11,615,464 7,274,334 11,122,468 2,601,935 55 Rate Stabilization Reserve 1,877,437 4,069,000 4,069,437 4,069,437 9,069,437 9,069,437 9,069,437 9,069,437 5,000,000 3,000,000 - 56 Operations Reserve 14,606,828 12,734,948 13,741,000 12,438,456 13,351,122 13,288,922 13,778,100 9,251,924 11,717,950 11,585,196 9,684,137 57 Unassigned - 7,056,052 7,182,707 8,213,544 6,489,877 7,395,474 574,713 - - - - 58 TOTAL ENDING RESERVES 33,216,828 43,289,369 42,589,274 46,498,038 49,798,533 55,226,256 49,192,700 45,098,826 39,154,284 40,869,664 27,448,072 ^ Capital Program Contribution represents levelized amount of CIP funding for the CIP Reserve beginning in FY 2021 Appendix A (continued) 1 FISCAL YEAR FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 2 3 REVENUES 4 Net Sales 82%92%88%91%89%92%92%92%92%92%92%93% 5 Other Revenues and Transfers In 18%8%12%9%11%8%8%8%8%8%8%7% 6 TOTAL REVENUES 100%100%100%100%100%100%100%100%100%100%100%100% 7 8 EXPENSES 9 Water Purchases 39%42%50%47%43%50%45%43%44%44%46%46% 10 Operating Expenses 11 Administration 12 Allocated Charges 6%7%8%6%5%6%6%6%6%6%6%6% 13 Rent 6%4%4%4%4%4%4%4%4%4%4%4% 14 Debt Service 8%8%8%7%6%7%7%6%6%6%6%5% 15 Transfers and Other Adjustments 0%-1%-1%1%1%1%1%1%1%2%2%2% 16 Subtotal, Administration 20%18%20%17%16%19%18%17%17%18%17%17% 17 Resource Management 1%1%2%2%2%3%2%2%2%2%2%2% 18 Operations and Mtc 13%12%13%12%12%16%15%17%17%17%16%16% 19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1%1% 20 Customer Service 5%5%4%3%3%4%4%4%4%4%4%4% 21 Allowance for Unspent Budget 0%0%0%0%-1%0%-1%-1%-1%-1%-1%-1% 22 Subtotal, Operating Expenses 39%37%40%36%33%43%38%41%40%40%39%38% 23 Capital Program Contribution 21%21%10%17%24%7%17%16%16%16%16%16% 24 TOTAL EXPENSES 100%100%100%100%100%100%100%100%100%100%100%100% 25 26 RISK ASSESSMENT DETAIL 27 Distribution Revenue Variance 1,684,153 1,826,395 1,877,534 1,877,534 1,638,217 2,443,814 2,396,824 2,374,493 2,415,969 2,538,630 2,591,503 2,685,422 28 10% CIP Program Contingency 858,037 908,202 411,013 816,910 1,179,129 326,517 - - - - - - 29 Total Risk Asssessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,770,331 2,396,824 2,374,493 2,415,969 2,538,630 2,591,503 2,685,422 30 Projected Operations Reserve 11,663,836 14,606,828 12,734,948 13,741,000 12,438,456 13,351,122 13,288,922 13,778,100 9,251,924 11,717,950 11,585,196 9,684,137 31 Operations Reserve, % of Risk Value 459%534%556%510%441%482%554%580%383%462%447%361% 32 33 OPERATIONS RESERVE 34 Min (60 days of non-capital expenses)5,230,611 5,145,323 6,320,551 6,375,879 6,219,228 6,675,561 6,644,461 6,889,050 7,175,941 7,521,842 8,033,062 8,232,247 35 Target (90 days of non-capital expenses)9,395,240 8,698,557 9,527,750 10,058,439 9,328,842 10,013,342 9,966,692 10,333,575 10,763,912 11,282,763 12,049,594 12,348,371 36 Max (120 days of non-capital expenses)13,559,870 12,251,790 12,734,948 13,741,000 12,438,456 13,351,122 13,288,922 13,778,100 14,351,882 15,043,684 16,066,125 16,464,495 37 Risk Assessment Value 2,542,190 2,734,598 2,288,548 2,694,444 2,817,346 2,770,331 2,396,824 2,374,493 2,415,969 2,538,630 2,591,503 2,685,422 38 39 DEBT SERVICE COVERAGE RATIO 40 Net Revenues (125% of Debt Service)878%931% 1020% 1104% 1075% 1161% 1154% 1200% 1254% 1319% 1415% 1453% 41 Available Reserves (5x Debt Service)*9.9 9.2 12.4 12.1 13.2 14.2 15.9 14.0 12.7 10.9 11.4 7.2 42 *For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of other utilities to meet its debt covenants. WATER UTILITY FINANCIAL PLAN March, 2021 39 | Page APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL Project # Project Name Reappropriated / Carried Forward from Previous Years Current Year Funding Proposed Budget Amendments Spending, Current Year Remaining in CIP Reserve Fund Commitments FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 ONE TIME PROJECTS WS-07000 Regulation Station Imp.681,394 - - (710) 680,684 - - - - - WS-07001 Water Recycling Facilities 391,020 - - - 391,020 - - - - - - WS-08001 Water Reservoir Coating - - - - - - - - - WS-09000 Seismic Water System 5,080,313 2,000,000 - (49,007) 7,031,306 - 500,000 7,000,000 500,000 600,000 7,000,000 Subtotal, One-time Projects 6,152,727 2,000,000 - (49,717) 8,103,010 - 500,000 7,000,000 500,000 600,000 7,000,000 WATER MAIN REPLACEMENT PROGRAMWS-12001 WMR- Project 26 - - 5 5 - - - - - - WS-13001 WMR - Project 27 3,096,590 - - (111,236) 2,985,354 - - - - - WS-14001 WMR - Project 28 562,516 - - (51,178) 511,338 - 8,500,000 - - - - WS-15002 WMR - Project 29 - - - - - - 425,000 425,000 8,500,000 - - WS-16001 WMR - Project 30 - - - - - - - - 425,000 425,000 8,500,000 WS-19001 WMR - Project 31 - - - - - - - - - - 850,000 Subtotal, Water Main Replacement Prog.3,659,106 - - (162,409) 3,496,697 - 8,925,000 425,000 8,925,000 425,000 9,350,000 ONGOING PROJECTSWS-80014 Services/Hydrants - - - (42,059) (42,059) 400,000 400,000 400,000 412,000 424,000 WS-80015 Water Meters 1 701,450 - (45,274) 656,177 546,364 562,755 579,638 600,000 1,688,757 WS-02014 W-G-W Utility GIS Data 810,730 (810,730) - (42,994) (42,994) 483,958 498,477 513,431 528,800 544,000 WS-13002 Equipment/Tools - 50,000 - (34,792) 15,208 100,000 50,000 50,000 50,000 50,000 WS-11003 Dist. Sys. Improvements 292,356 269,469 - (294,110) 267,715 277,553 285,880 294,456 305,000 314,000 WS-11004 Supply Sys. Improvements - 749,469 - (12,121) 737,348 277,553 285,880 345,131 715,000 366,000 WS-19000 Mayfield Reservoir 363,253 - - (246,351) 116,902 - - - - Subtotal, Ongoing Projects 1,466,340 959,658 - (717,701) 1,708,297 - 2,085,428 2,082,992 2,182,656 2,610,800 3,386,757 CUSTOMER CONNECTIONS (FEE FUNDED) WS-80013 Water System Extensions 72,365 (72,365) - (374,993) (374,993) 877,250 904,595 931,955 960,500 989,000 Subtotal, Customer Connections 72,365 (72,365) - (374,993) (374,993) - 877,250 904,595 931,955 960,500 989,000 GRAND TOTAL 11,350,538 2,887,293 - (1,304,820)12,933,011 - 12,387,678 10,412,587 12,539,611 4,596,300 20,725,757 Funding Sources Connection/Capacity Fees 1,860,946 - 1,815,524 1,845,990 1,895,819 1,939,875 - Other Utility Funds (Asset Mgmt, GIS Systems)313,242 - 322,640 332,320 342,286 352,533 350,000 Utility Rates 2,887,293 - 10,249,514 8,234,277 10,301,506 2,303,892 20,375,757 CIP-RELATED RESERVES DETAIL 6/30/2020Actual 6/30/21(Unaudited) Reappropriations & Commitments 11,350,538 12,933,011 WATER UTILITY FINANCIAL PLAN March, 2021 40 | Page APPENDIX C: WATER UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices shall be used when developing the Water 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, for the Water Utility Financial Plan delivered in conjunction with the FY 2015 budget, FY 2015 to FY 2021 is 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. Reserves The Water Utility’s Fund Balance is reserved for the following purposes: a) For existing contracts, as described in Section 3 (Reserve for Commitments) b) For operating and capital budgets re-appropriated from previous years, as described in Section 4 (Reserve for Re-appropriations) c) For cash flow management and contingencies related to the Water Utility’s Capital Improvement Program (CIP), as described in Section 5 (CIP Reserve) d) For rate stabilization, as described in Section 6 (Rate Stabilization Reserve) e) For operating contingencies, as described in Section 7 (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 8 (Unassigned Reserves). Section 3. Reserve for Commitments At the end of each fiscal year the Reserve for Commitments will be set to an amount equal to the total remaining spending authority for all contracts in force for the Water Utility at that time. Section 4. Reserve for Re-appropriations At the end of each fiscal year the Reserve for Re-appropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets, if any, that will be re- appropriated to the following fiscal year in accordance with Palo Alto Municipal Code Section 2.28.090. Section 5. 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: WATER UTILITY FINANCIAL PLAN March, 2021 41 | Page 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 Maximum Level Average annual (12 month)4 CIP budget, for 48 months of budgeted CIP expenses5 b) Changes in Reserves: Staff is authorized to transfer funds between the CIP Reserve and the Reserve for Commitments when funds are added or removed from to 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 City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Section 6. 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 Water Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the next Financial Planning Period. The Council may approve exceptions to this requirement, when proposed by staff to provide greater rate stabilization to customers. 4 Each month is calculated based upon 1/12 of the annual budget. 5 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. WATER UTILITY FINANCIAL PLAN March, 2021 42 | Page Section 7. Operations Reserve The Operations Reserve is used to manage normal variations in costs and as a reserve for contingencies. Any portion of the Water Utility’s Fund Balance not included in the reserves described in Section 3-Section 6 above will be included in the Operations Reserve unless this reserve has reached its maximum level as set forth in Section 7(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 Water Utility shall be designed to return the Operations Reserve to its target level within four years. 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 Water Utility’s Fund Balance shall be automatically included in the Unassigned Reserve described in Section 8, below. Section 8. Unassigned Reserve If the Operations Reserve reaches its maximum level, any further additions to the Water 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 Water 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 2021, 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. WATER UTILITY FINANCIAL PLAN March, 2021 43 | Page APPENDIX D: DESCRIPTION OF WATER UTILITY OPERATIONAL ACTIVITIES This appendix describes the activities associated with the various operational activities referred to in Section 6B: Operations of this Financial Plan. Administration: Accounting, purchasing, legal, and other administrative functions provided by the City’s General Fund staff, as well as shared communications services, CPAU administrative overhead, and billing system maintenance costs. This category also includes Water Utility debt service and rent paid to the General Fund for the land associated with reservoirs and various other facilities. Customer Service: This category includes the Water 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 water services. Engineering (Operating): The Water Utility’s engineers focus primarily on the CIP, but a small portion of their time is spent assisting with distribution system maintenance. Operations and Maintenance: This category includes the costs of a variety of distribution system maintenance activities, including: • investigating reports of damaged mains or services and performing emergency repairs; • testing and operating valves; • monitoring water quality and reservoir levels; • monitoring the status of the different pressure zones; • flushing water at hydrants and other closed end points of the system; • building and replacing water 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 tanks 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) Resource Management: This category includes water procurement, contract management, water resource planning, interaction with BAWSCA, the SFPUC, and Valley Water, and tracking of legislation and regulation related to the water industry. March, 2021 44 | Page APPENDIX E: SAMPLE OF WATER UTILITY OUTREACH COMMUNICATIONS City of Palo Alto Page 1 Comparison of Water Rates and Average Bills Among Cities Supplied by San Francisco Public Utilities Commission Executive Summary Palo Alto purchases all its potable water from the San Francisco Public Utilities Commission (SFPUC). Typically, Palo Alto compares its average water bills to neighboring communities, some of which utilize other water sources such as groundwater that do not have the same cost as water from the SFPUC. In spring 2020 the Finance Committee expressed interest in understanding how Palo Alto’s water rates compare to other cities that have the same water supply as Palo Alto as well as gaining a detailed understanding of reasons why Palo Alto’s rates are higher than others in this group. There are eight Bay Area cities that obtain 100% of their potable water supply from the SFPUC. Palo Alto’s single-family residential and commercial rates are second to lowest among this group. Hayward has lower single-family residential rates while Redwood City has lower commercial rates relative to Palo Alto. Within this group, the utilities with the largest number of customers have the lowest rates. Redwood City has the most similar number of customers to Palo Alto in the group. The gap between Palo Alto, Redwood City and Hayward’s water bills has narrowed over the years. This gap is partially explained by differences in rate design and operating costs. Hayward’s costs are lower than Palo Alto’s and so are its single-family residential water bills. However, the cost differences are small relative to the bill differences. A key cost difference between Hayward and Palo Alto is water infrastructure investment costs. Palo Alto’s consistently high water infrastructure investments over the last four decades have led to a reliable water system that is resilient to seismic risks. However, the costs to fund that water infrastructure contribute to Palo Alto’s higher costs compared to Hayward. Water usage differences are also significant contributors to bill and rate differences between Palo Alto, Redwood City and Hayward. Palo Alto has a higher percentage of residential use compared with Hayward. Additionally, Hayward’s non-residential usage is increasing while Palo Alto’s is decreasing. These consumption differences put more upward pressure on Palo Alto’s residential rates relative to Hayward’s. Background Staff regularly compares Palo Alto’s water rates and average bills to those of Redwood City, Mountain View, Menlo Park (Bear Gulch District of California Water Service Company), Hayward, and Santa Clara. This comparison group was selected to show how Palo Alto’s total utility bills (including water, electric, gas, and wastewater rates) compare to neighboring communities that Palo Alto residents might instinctively compare themselves to. Palo Alto’s City of Palo Alto Page 2 single-family residential water bills are 9% higher than the rates in this comparison group and 4- 7% higher than commercial water rates among this comparison group. On April 21, 2020, the Finance Committee passed a motion to “direct Staff to provide details as to why Palo Alto’s rates are higher than cities with the same supplier at next year’s Finance Committee.” Within the comparison group listed above, only Redwood City and Hayward receive 100% of their potable supply from SFPUC like Palo Alto. Discussion Staff completed an analysis of this question that relied primarily on data from Comprehensive Annual Financial Reports and Bay Area Water Supply and Conservation Agency (BAWSCA) Annual Reports1 to outline the main factors that contribute to Palo Alto’s rates being higher than neighboring cities with the same supplier. The key insights are as follows: Palo Alto Has Some of the Lowest Rates Among Cities Supplied 100% by SFPUC There are 16 total BAWSCA utilities that receive 100% of their potable supply from the San Francisco Regional Water System (SFPUC).2 Of those, seven have a different organizational structure than Palo Alto; six are water districts and one is an investor-owned utility. Among Palo Alto and the eight other remaining cities, Palo Alto has the second to lowest single-family residential average bills.3 Coincidentally, the only other city in this group with lower single- family residential average bills is Hayward, one of the Palo Alto’s comparison cities. The only other city in this group with lower commercial average bills is Redwood City, also one of the Palo Alto’s comparison cities. Redwood City’s single-family bills at a usage level of 9 CCF (hundred cubic feet) per month are similar to Palo Alto’s while its commercial bills are lower than Palo Alto’s at a usage level of 300 CCF per month. Figure 1 and 2 below summarize the average bills in this comparison group. 1 Other sources include budgets (operating and capital), Urban Water Management Plans, and Financial Plans/Rate Studies where available. 2 BAWSCA Annual Report Table 2A, Brisbane, Burlingame, California Water Service, East Palo Alto, Estero MID, Guadalupe Valley MID, Hillsborough, Menlo Park, Mid-Peninsula WD, Millbrae, North Coast CWD, Palo Alto, Redwood City, Westborough WD, Purissima Hills, Hayward. 3 Comparison calculated at 9 CCF per month per customer. City of Palo Alto Page 3 Figure 1: Single-Family Residential Monthly Average Bills at 9 CCF Among Cities With The Same Supplier (current rates October 2020) Figure 2: Commercial Monthly Average Bills at 300 CCF Among Cities With The Same Supplier (current rates October 2020) Palo Alto has lower single-family residential average bills at 9 CCF than Redwood City and lower commercial bills than Hayward (at usage levels above approximately 250 CCF/month).4 4 Redwood City provided a 3% credit to all customers billed in the months of July, August, September and October due to the ongoing pandemic. The credit is not reflected in these charts. City of Palo Alto Page 4 The Largest Cities Supplied 100% by SFPUC Have the Lowest Rates For cities supplied by the SFPUC for 100% of their potable water supply, the larger cities have lower rates and bills. Figure 3: Single-Family Residential Bill at 9 CCF Compared to Number of Customers for Cities Supplied 100% by SFPUC Palo Alto, Redwood City, and Hayward benefit from economies of scale (relative to the other cities supplied 100% by SFPUC). Palo Alto has more than twice as many customers as most of the comparison cities in this group. Hayward has almost twice as many customers as Palo Alto. Redwood City is the most similar in size to Palo Alto among the cities supplied 100% by SFPUC. This report focuses on Hayward and Redwood City to detail some of the other key differences that contribute to making their water bills at average usage levels lower than Palo Alto’s for single-family residential and commercial customers, respectively. City of Palo Alto Page 5 Rate Design Contributes to the Differences in Rates and Bills Palo Alto’s monthly water service charges for single-family residential and commercial customer groups are in between those of Redwood City and Hayward (Table 1). Table 1: Service Charges (Monthly Equivalent for 5/8” Meter) Single-Family Residential Commercial Palo Alto $20.25 $17.71 Redwood City $29.52 $29.52 Hayward $14.00 $14.00 Figures 4 and 5 summarize the single-family residential and commercial quantity rates. Hayward has three tiers, Redwood City has four tiers and Palo Alto has two tiers for single- family residential customers. Hayward and Redwood City each have a small first tier that provides for 4 CCF of usage per month at the lowest rate per CCF. Palo Alto’s first tier provides for 6 CCF of usage but at a higher rate. Hayward and Redwood City’s lowest first tier together with Hayward’s low monthly service charge contribute to Hayward and Redwood City’s lower bills for low-use customers. Figure 4: Single-Family Residential Volumetric Rates Redwood City and Palo Alto have uniform volumetric rates for commercial customers. Hayward has a tiered rate with a lower tier for usage up to 100 CCF per month. There is no true average commercial usage because the customer class is heterogenous. However, this report uses 300 City of Palo Alto Page 6 CCF as the quantity for bill comparisons; a large restaurant could use this much water. Figure 5: Commercial Volumetric Rates Palo Alto, Redwood City and Hayward each have different rate designs including the number of tiers, width of each tier and amounts charged for monthly service. Each city’s pricing structure is specific to their customers and cost factors. These differences in rate design contribute to Palo Alto’s higher bills. The Gap Between Palo Alto, Redwood City and Hayward’s Residential Water Bills Has Narrowed Over the Years Figures 6 through 8 show how monthly single-family residential bills compare at low, medium and high usage levels across Palo Alto, Hayward and Redwood City annually since 2005.5 Hayward and Redwood City’s single-family residential bills have grown faster than Palo Alto’s bills which has narrowed the gap over the years. Because several factors go into calculating a water bill, the difference between cities varies by customer class, by quantity of water used and over time. At low usage (4 CCF/month), Hayward’s single-family residential water bills are lower than Palo Alto’s and have been lower than Palo Alto’s bills for approximately 15 years. 5 Redwood City and Hayward bill single-family residential customers bimonthly while Palo Alto bills customers monthly; these charts show a monthly bill equivalent for Hayward and Redwood City. City of Palo Alto Page 7 Figure 6: Single-Family Monthly Residential Bill Comparison at 4 CCF of Water Usage Figure 7: Single-Family Monthly Residential Bill Comparison at 9 CCF of Water Usage At 9 CCF, Palo Alto’s bills used to be higher than Redwood City’s but since 2017 have reached parity with Redwood City. Hayward’s water bills have consistently been lower than Palo Alto’s. The dollar difference between Palo Alto and Hayward’s single-family monthly bill at 9 CCF has remained approximately the same throughout this time period. However, the percentage difference between Palo Alto and Hayward’s bills has declined substantially; Palo Alto’s bills in this category are now approximately 24% higher than Hayward’s while Palo Alto’s bills used to be approximately 60% higher than Hayward’s. City of Palo Alto Page 8 At higher usage of 25 CCF/month, Hayward’s single-family residential bills are lower than Palo Alto’s; Redwood City’s single-family residential bills were lower than Palo Alto’s until around 2017 when Redwood City began charging more for higher single-family residential use (including lowering breakpoints between volumetric tiers for single-family residential customers). Figure 8 shows these differences. Figure 8: Single-Family Monthly Residential Bill Comparison at 25 CCF of Water Usage Bill comparisons can be dynamic across years and usage levels. For simplicity, this report uses 9 CCF per month for comparisons of single-family residential bills across cities. For more reference information about each of the cities see Attachments A and B. Attachment A shows a map of the service areas and Attachment B shows a table comparing water utility characteristics. Hayward and Redwood City’s rates have been growing at a rate faster than Palo Alto’s over the years, so the gap between Palo Alto, Hayward and Redwood City’s rates have narrowed. Differences in Operating Costs Explain Some of the Gap Focusing on operating costs can provide key insights but does not explain the majority of the differences in average bills among Palo Alto and neighboring cities with the same water supply. Average operating cost as well as growth in operating costs over the past decade only explains some of the gap between Palo Alto, Hayward and Redwood City. Dividing operating revenue for the water utility by the volume of water purchased from SFPUC, derives a proxy for average cost per CCF as shown in Table 2. City of Palo Alto Page 9 Table 2: Average Cost (FY 2019) and Average Bills (FY 2020) Palo Alto Redwood City Redwood City Difference to Palo Alto Hayward Hayward Difference to Palo Alto $ % $ % Average Operating Cost of Water per CCF* $9.90 $11.41 $1.51 15.3% $9.33 -$0.57 -5.8% Average Single-Family Residential bill at 9 CCF/month $90.42 $90.79 $0.37 0.4% $72.90 -$17.52 -19.4% Average Commercial bill at 300 CCF/month $2,330.71 $2,234.52 -$17.52 -4.1% $2,367 $36.29 1.6% * Operating Revenue ($) / Water Purchases from SFPUC (CCF) Hayward’s average cost of water per CCF is 5.8% lower than Palo Alto’s. Hayward’s average single-family residential bills are also lower. However, the cost differences are small relative to the single-family residential bill differences. Redwood City’s average cost of water per CCF is 15.3% higher than Palo Alto’s and Redwood City’s single-family residential bills are also higher. The cost differences are greater than the bill differences between Redwood City and Palo Alto. From 2009-2018, Palo Alto’s single-family residential bills have increased on average by 7.8% annually. Hayward and Redwood City have experienced even more upward pressure with average bills rising by 10-10.9% annually during the same time period. Purchased water costs across these cities grew at 13% annually during this same time period and is a key reason why rates have increased.6 However, this factor is similar across the three cities and does not explain the differences in the average bills or the different growth in rates. Table 3 illustrates average annual cost trends. 6 A key cost driver for purchased water costs is the Water Supply Improvement Program, an approximately $4.8 billion dollar capital improvement program designed to improve reliability and improve seismic safety of the SFPUC Regional Water System. City of Palo Alto Page 10 Table 3: Average Annual Changes FY 2009-2018 Palo Alto Redwood City Hayward Single-Family Residential Bill (9 CCF) 7.8% 10.0% 10.9% Operating Cost* / CCF Water Purchased 6.3% 6.6% 8.4% Purchased Water Cost / CCF Water Purchased** 13.1% 13.6% 12.5% * Other than Purchased Water and Depreciation Expense ** Average annual changes include minor variations due to different timing across datasets leading to slight percentage differences Operating cost (other than purchased water costs) grew on average in each city over the same time period but not as much as bills. Because operating expense is not increasing as quickly as average bills, operating expense is not a key driver of growth in Palo Alto’s rates and bills relative to the other cities. Understanding operating cost differences explains only part of the reason for the bill differences across cities. Purchased water cost is an important cost driver increasing rates in Palo Alto, Redwood City and Hayward. However, it is not driving the differences in bills across the cities. Other operating costs are not a key driver of growth in bills in Palo Alto, Hayward, and Redwood City. Palo Alto’s Water Infrastructure Investments Increase Water Rates Relative To Hayward Palo Alto began consistently investing in water infrastructure in the 1990s when leak rates rose significantly. This investment has helped greatly and Palo Alto has low leak rates. Palo Alto’s consistent investments in water infrastructure, including emergency wells and reservoir have made the water distribution system resilient to water emergencies and seismic events. Palo Alto and Redwood City have more capital assets serving water customers relative to Hayward per CCF of water purchased. Palo Alto and Redwood City each have nearly $40 in water-related capital assets for each CCF of water that enters the system. Hayward has approximately $23 in water-related capital assets for each CCF of water that enter Hayward’s system. Palo Alto and Redwood City’s water rates reflect these higher infrastructure investments. Figure 9 shows this difference by combining acquisition and construction costs with interest and principal on long term debt. City of Palo Alto Page 11 Figure 9: Three Year Moving Average of Acquisition and Construction of Capital Assets and Interest and Principal on Long Term Debt per CCF Purchased Palo Alto and Redwood City’s customers fund more water system capital investment annually than Hayward. Palo Alto and Redwood City’s water costs are between approximately $2.00 and $2.50 per CCF while Hayward’s water capital costs are approaching $1.00 per CCF. On a 9 CCF monthly bill, this difference is approximately $9.00 to $13.50. This is a primary factor contributing to Palo Alto and Redwood City’s higher bills relative to Hayward’s. Usage Differences Contribute to Bill Differences Table 4 summarizes the usage for residential customers in 2010 and 2019. Palo Alto and Redwood City both have a higher portion of residential water use than Hayward and the portion of residential water use is increasing over time for Redwood City and Palo Alto. Table 4: Residential Potable Water Usage 2010 2019 Change (2010 to 2019) Palo Alto 58% 63% 5% Redwood City 68% 70% 2% Hayward 61% 55% -6% Source: BAWSCA Annual Surveys Because Palo Alto’s residential customer class collectively uses a larger percentage of the city’s water, this customer class is responsible for paying for a larger portion of the costs. Hayward’s single-family residential customers on average use 6.4 CCF per month while Palo Alto’s average is 10.9, or 70% more than Hayward. This high consumption contributes to Palo Alto’s higher residential bills. City of Palo Alto Page 12 Similarly, Redwood City’s lower portion of usage among non-residential customers relieves upward pressure on Redwood City’s non-residential rates and average bills relative to Palo Alto. Additionally, Hayward’s non-residential customer class increased its water consumption by 10% since 2010 while Palo Alto’s non-residential customer class decreased its water consumption by 8% over the same time period. Hayward’s growth in the non-residential sector means that the sector collectively is responsible for paying a larger portion of the costs which relieves some of the upward pressure on residential rates relative to Palo Alto. Palo Alto’s residents use more water on average and this contributes to their higher bills. Hayward’s higher portion of usage and increasing usage among non-residential customers relieves upward pressure on Hayward’s single-family residential rates and bills relative to Palo Alto. Attachments: Attachment A: Map of Service Areas Attachment B: Water Utility Characteristics City of Palo Alto Page 13 Attachment A Map of Service Areas City of Palo Alto Page 14 Attachment B Water Utility Characteristics Utility Customers SFPUC Water Purchased (MGD), % Potable Supply Miles of Main Single-Family Residential Average Monthly Use (CCF) Single-Family Residential % of Demand Palo Alto 20,126 9.43, (100%) 236 10.9 41% Redwood City 23,623 8.08, (100%) 262 7.8 45% Hayward 38,648 13.98, (100%) 340 6.4 36% Mountain View 17,489 7.21, (86%) 176 6.8 26% Cal Water – Bear Gulch 18,559 9.48, (92%) 318 19.7 84% Santa Clara 25,293 3.03, (19%) 335 9.1 21% WATER UTILITY FINANCIAL PLAN March, 2021 39 | Page APPENDIX B: WATER UTILITY CAPITAL IMPROVEMENT PROGRAM (CIP) DETAIL Project # Project Name Reappropriated / Carried Forward from Previous Years Current Year Funding Proposed Budget Amendments Spending, Current Year Remaining in CIP Reserve Fund Commitments FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 ONE TIME PROJECTS WS-07000 Regulation Station Imp.681,394 - - (710) 680,684 - - - - - WS-07001 Water Recycling Facilities 391,020 - - - 391,020 - - - - - - WS-08001 Water Reservoir Coating - - - - - - - - - WS-09000 Seismic Water System 5,080,313 2,000,000 - (49,007) 7,031,306 - 500,000 7,000,000 500,000 600,000 7,000,000 Subtotal, One-time Projects 6,152,727 2,000,000 - (49,717) 8,103,010 - 500,000 7,000,000 500,000 600,000 7,000,000 WATER MAIN REPLACEMENT PROGRAMWS-12001 WMR- Project 26 - - 5 5 - - - - - - WS-13001 WMR - Project 27 3,096,590 - - (111,236) 2,985,354 - - - - - WS-14001 WMR - Project 28 562,516 - - (51,178) 511,338 - 8,500,000 - - - - WS-15002 WMR - Project 29 - - - - - - 425,000 425,000 8,500,000 - - WS-16001 WMR - Project 30 - - - - - - - - 425,000 425,000 8,500,000 WS-19001 WMR - Project 31 - - - - - - - - - - 850,000 Subtotal, Water Main Replacement Prog.3,659,106 - - (162,409) 3,496,697 - 8,925,000 425,000 8,925,000 425,000 9,350,000 ONGOING PROJECTSWS-80014 Services/Hydrants - - - (42,059) (42,059) 400,000 400,000 400,000 412,000 424,000 WS-80015 Water Meters 1 701,450 - (45,274) 656,177 546,364 562,755 579,638 600,000 1,688,757 WS-02014 W-G-W Utility GIS Data 810,730 (810,730) - (42,994) (42,994) 483,958 498,477 513,431 528,800 544,000 WS-13002 Equipment/Tools - 50,000 - (34,792) 15,208 100,000 50,000 50,000 50,000 50,000 WS-11003 Dist. Sys. Improvements 292,356 269,469 - (294,110) 267,715 277,553 285,880 294,456 305,000 314,000 WS-11004 Supply Sys. Improvements - 749,469 - (12,121) 737,348 277,553 285,880 345,131 715,000 366,000 WS-19000 Mayfield Reservoir 363,253 - - (246,351) 116,902 - - - - Subtotal, Ongoing Projects 1,466,340 959,658 - (717,701) 1,708,297 - 2,085,428 2,082,992 2,182,656 2,610,800 3,386,757 CUSTOMER CONNECTIONS (FEE FUNDED) WS-80013 Water System Extensions 72,365 (72,365) - (374,993) (374,993) 877,250 904,595 931,955 960,500 989,000 Subtotal, Customer Connections 72,365 (72,365) - (374,993) (374,993) - 877,250 904,595 931,955 960,500 989,000 GRAND TOTAL 11,350,538 2,887,293 - (1,304,820)12,933,011 - 12,387,678 10,412,587 12,539,611 4,596,300 20,725,757 Funding Sources Connection/Capacity Fees 1,860,946 - 1,815,524 1,845,990 1,895,819 1,939,875 - Other Utility Funds (Asset Mgmt, GIS Systems)313,242 - 322,640 332,320 342,286 352,533 350,000 Utility Rates 2,887,293 - 10,249,514 8,234,277 10,301,506 2,303,892 20,375,757 CIP-RELATED RESERVES DETAIL 6/30/2020Actual 6/30/21(Unaudited) Reappropriations & Commitments 11,350,538 12,933,011 City of Palo Alto Page 1 Comparison of Water Rates and Average Bills Among Cities Supplied by San Francisco Public Utilities Commission Executive Summary Palo Alto purchases all its potable water from the San Francisco Public Utilities Commission (SFPUC). Typically, Palo Alto compares its average water bills to neighboring communities, some of which utilize other water sources such as groundwater that do not have the same cost as water from the SFPUC. In spring 2020 the Finance Committee expressed interest in understanding how Palo Alto’s water rates compare to other cities that have the same water supply as Palo Alto as well as gaining a detailed understanding of reasons why Palo Alto’s rates are higher than others in this group. There are eight Bay Area cities that obtain 100% of their potable water supply from the SFPUC. Palo Alto’s single-family residential and commercial rates are second to lowest among this group. Hayward has lower single-family residential rates while Redwood City has lower commercial rates relative to Palo Alto. Within this group, the utilities with the largest number of customers have the lowest rates. Redwood City has the most similar number of customers to Palo Alto in the group. The gap between Palo Alto, Redwood City and Hayward’s water bills has narrowed over the years. This gap is partially explained by differences in rate design and operating costs. Hayward’s costs are lower than Palo Alto’s and so are its single-family residential water bills. However, the cost differences are small relative to the bill differences. A key cost difference between Hayward and Palo Alto is water infrastructure investment costs. Palo Alto’s consistently high water infrastructure investments over the last four decades have led to a reliable water system that is resilient to seismic risks. However, the costs to fund that water infrastructure contribute to Palo Alto’s higher costs compared to Hayward. Water usage differences are also significant contributors to bill and rate differences between Palo Alto, Redwood City and Hayward. Palo Alto has a higher percentage of residential use compared with Hayward. Additionally, Hayward’s non-residential usage is increasing while Palo Alto’s is decreasing. These consumption differences put more upward pressure on Palo Alto’s residential rates relative to Hayward’s. Background Staff regularly compares Palo Alto’s water rates and average bills to those of Redwood City, Mountain View, Menlo Park (Bear Gulch District of California Water Service Company), Hayward, and Santa Clara. This comparison group was selected to show how Palo Alto’s total utility bills (including water, electric, gas, and wastewater rates) compare to neighboring communities that Palo Alto residents might instinctively compare themselves to. Palo Alto’s City of Palo Alto Page 2 single-family residential water bills are 9% higher than the rates in this comparison group and 4- 7% higher than commercial water rates among this comparison group. On April 21, 2020, the Finance Committee passed a motion to “direct Staff to provide details as to why Palo Alto’s rates are higher than cities with the same supplier at next year’s Finance Committee.” Within the comparison group listed above, only Redwood City and Hayward receive 100% of their potable supply from SFPUC like Palo Alto. Discussion Staff completed an analysis of this question that relied primarily on data from Comprehensive Annual Financial Reports and Bay Area Water Supply and Conservation Agency (BAWSCA) Annual Reports1 to outline the main factors that contribute to Palo Alto’s rates being higher than neighboring cities with the same supplier. The key insights are as follows: Palo Alto Has Some of the Lowest Rates Among Cities Supplied 100% by SFPUC There are 16 total BAWSCA utilities that receive 100% of their potable supply from the San Francisco Regional Water System (SFPUC).2 Of those, seven have a different organizational structure than Palo Alto; six are water districts and one is an investor-owned utility. Among Palo Alto and the eight other remaining cities, Palo Alto has the second to lowest single-family residential average bills.3 Coincidentally, the only other city in this group with lower single- family residential average bills is Hayward, one of the Palo Alto’s comparison cities. The only other city in this group with lower commercial average bills is Redwood City, also one of the Palo Alto’s comparison cities. Redwood City’s single-family bills at a usage level of 9 CCF (hundred cubic feet) per month are similar to Palo Alto’s while its commercial bills are lower than Palo Alto’s at a usage level of 300 CCF per month. Figure 1 and 2 below summarize the average bills in this comparison group. 1 Other sources include budgets (operating and capital), Urban Water Management Plans, and Financial Plans/Rate Studies where available. 2 BAWSCA Annual Report Table 2A, Brisbane, Burlingame, California Water Service, East Palo Alto, Estero MID, Guadalupe Valley MID, Hillsborough, Menlo Park, Mid-Peninsula WD, Millbrae, North Coast CWD, Palo Alto, Redwood City, Westborough WD, Purissima Hills, Hayward. 3 Comparison calculated at 9 CCF per month per customer. City of Palo Alto Page 3 Figure 1: Single-Family Residential Monthly Average Bills at 9 CCF Among Cities With The Same Supplier (current rates October 2020) Figure 2: Commercial Monthly Average Bills at 300 CCF Among Cities With The Same Supplier (current rates October 2020) Palo Alto has lower single-family residential average bills at 9 CCF than Redwood City and lower commercial bills than Hayward (at usage levels above approximately 250 CCF/month).4 4 Redwood City provided a 3% credit to all customers billed in the months of July, August, September and October due to the ongoing pandemic. The credit is not reflected in these charts. City of Palo Alto Page 4 The Largest Cities Supplied 100% by SFPUC Have the Lowest Rates For cities supplied by the SFPUC for 100% of their potable water supply, the larger cities have lower rates and bills. Figure 3: Single-Family Residential Bill at 9 CCF Compared to Number of Customers for Cities Supplied 100% by SFPUC Palo Alto, Redwood City, and Hayward benefit from economies of scale (relative to the other cities supplied 100% by SFPUC). Palo Alto has more than twice as many customers as most of the comparison cities in this group. Hayward has almost twice as many customers as Palo Alto. Redwood City is the most similar in size to Palo Alto among the cities supplied 100% by SFPUC. This report focuses on Hayward and Redwood City to detail some of the other key differences that contribute to making their water bills at average usage levels lower than Palo Alto’s for single-family residential and commercial customers, respectively. City of Palo Alto Page 5 Rate Design Contributes to the Differences in Rates and Bills Palo Alto’s monthly water service charges for single-family residential and commercial customer groups are in between those of Redwood City and Hayward (Table 1). Table 1: Service Charges (Monthly Equivalent for 5/8” Meter) Single-Family Residential Commercial Palo Alto $20.25 $17.71 Redwood City $29.52 $29.52 Hayward $14.00 $14.00 Figures 4 and 5 summarize the single-family residential and commercial quantity rates. Hayward has three tiers, Redwood City has four tiers and Palo Alto has two tiers for single- family residential customers. Hayward and Redwood City each have a small first tier that provides for 4 CCF of usage per month at the lowest rate per CCF. Palo Alto’s first tier provides for 6 CCF of usage but at a higher rate. Hayward and Redwood City’s lowest first tier together with Hayward’s low monthly service charge contribute to Hayward and Redwood City’s lower bills for low-use customers. Figure 4: Single-Family Residential Volumetric Rates Redwood City and Palo Alto have uniform volumetric rates for commercial customers. Hayward has a tiered rate with a lower tier for usage up to 100 CCF per month. There is no true average commercial usage because the customer class is heterogenous. However, this report uses 300 City of Palo Alto Page 6 CCF as the quantity for bill comparisons; a large restaurant could use this much water. Figure 5: Commercial Volumetric Rates Palo Alto, Redwood City and Hayward each have different rate designs including the number of tiers, width of each tier and amounts charged for monthly service. Each city’s pricing structure is specific to their customers and cost factors. These differences in rate design contribute to Palo Alto’s higher bills. The Gap Between Palo Alto, Redwood City and Hayward’s Residential Water Bills Has Narrowed Over the Years Figures 6 through 8 show how monthly single-family residential bills compare at low, medium and high usage levels across Palo Alto, Hayward and Redwood City annually since 2005.5 Hayward and Redwood City’s single-family residential bills have grown faster than Palo Alto’s bills which has narrowed the gap over the years. Because several factors go into calculating a water bill, the difference between cities varies by customer class, by quantity of water used and over time. At low usage (4 CCF/month), Hayward’s single-family residential water bills are lower than Palo Alto’s and have been lower than Palo Alto’s bills for approximately 15 years. 5 Redwood City and Hayward bill single-family residential customers bimonthly while Palo Alto bills customers monthly; these charts show a monthly bill equivalent for Hayward and Redwood City. City of Palo Alto Page 7 Figure 6: Single-Family Monthly Residential Bill Comparison at 4 CCF of Water Usage Figure 7: Single-Family Monthly Residential Bill Comparison at 9 CCF of Water Usage At 9 CCF, Palo Alto’s bills used to be higher than Redwood City’s but since 2017 have reached parity with Redwood City. Hayward’s water bills have consistently been lower than Palo Alto’s. The dollar difference between Palo Alto and Hayward’s single-family monthly bill at 9 CCF has remained approximately the same throughout this time period. However, the percentage difference between Palo Alto and Hayward’s bills has declined substantially; Palo Alto’s bills in this category are now approximately 24% higher than Hayward’s while Palo Alto’s bills used to be approximately 60% higher than Hayward’s. City of Palo Alto Page 8 At higher usage of 25 CCF/month, Hayward’s single-family residential bills are lower than Palo Alto’s; Redwood City’s single-family residential bills were lower than Palo Alto’s until around 2017 when Redwood City began charging more for higher single-family residential use (including lowering breakpoints between volumetric tiers for single-family residential customers). Figure 8 shows these differences. Figure 8: Single-Family Monthly Residential Bill Comparison at 25 CCF of Water Usage Bill comparisons can be dynamic across years and usage levels. For simplicity, this report uses 9 CCF per month for comparisons of single-family residential bills across cities. For more reference information about each of the cities see Attachments A and B. Attachment A shows a map of the service areas and Attachment B shows a table comparing water utility characteristics. Hayward and Redwood City’s rates have been growing at a rate faster than Palo Alto’s over the years, so the gap between Palo Alto, Hayward and Redwood City’s rates have narrowed. Differences in Operating Costs Explain Some of the Gap Focusing on operating costs can provide key insights but does not explain the majority of the differences in average bills among Palo Alto and neighboring cities with the same water supply. Average operating cost as well as growth in operating costs over the past decade only explains some of the gap between Palo Alto, Hayward and Redwood City. Dividing operating revenue for the water utility by the volume of water purchased from SFPUC, derives a proxy for average cost per CCF as shown in Table 2. City of Palo Alto Page 9 Table 2: Average Cost (FY 2019) and Average Bills (FY 2020) Palo Alto Redwood City Redwood City Difference to Palo Alto Hayward Hayward Difference to Palo Alto $ % $ % Average Operating Cost of Water per CCF* $9.90 $11.41 $1.51 15.3% $9.33 -$0.57 -5.8% Average Single-Family Residential bill at 9 CCF/month $90.42 $90.79 $0.37 0.4% $72.90 -$17.52 -19.4% Average Commercial bill at 300 CCF/month $2,330.71 $2,234.52 -$17.52 -4.1% $2,367 $36.29 1.6% * Operating Revenue ($) / Water Purchases from SFPUC (CCF) Hayward’s average cost of water per CCF is 5.8% lower than Palo Alto’s. Hayward’s average single-family residential bills are also lower. However, the cost differences are small relative to the single-family residential bill differences. Redwood City’s average cost of water per CCF is 15.3% higher than Palo Alto’s and Redwood City’s single-family residential bills are also higher. The cost differences are greater than the bill differences between Redwood City and Palo Alto. From 2009-2018, Palo Alto’s single-family residential bills have increased on average by 7.8% annually. Hayward and Redwood City have experienced even more upward pressure with average bills rising by 10-10.9% annually during the same time period. Purchased water costs across these cities grew at 13% annually during this same time period and is a key reason why rates have increased.6 However, this factor is similar across the three cities and does not explain the differences in the average bills or the different growth in rates. Table 3 illustrates average annual cost trends. 6 A key cost driver for purchased water costs is the Water Supply Improvement Program, an approximately $4.8 billion dollar capital improvement program designed to improve reliability and improve seismic safety of the SFPUC Regional Water System. City of Palo Alto Page 10 Table 3: Average Annual Changes FY 2009-2018 Palo Alto Redwood City Hayward Single-Family Residential Bill (9 CCF) 7.8% 10.0% 10.9% Operating Cost* / CCF Water Purchased 6.3% 6.6% 8.4% Purchased Water Cost / CCF Water Purchased** 13.1% 13.6% 12.5% * Other than Purchased Water and Depreciation Expense ** Average annual changes include minor variations due to different timing across datasets leading to slight percentage differences Operating cost (other than purchased water costs) grew on average in each city over the same time period but not as much as bills. Because operating expense is not increasing as quickly as average bills, operating expense is not a key driver of growth in Palo Alto’s rates and bills relative to the other cities. Understanding operating cost differences explains only part of the reason for the bill differences across cities. Purchased water cost is an important cost driver increasing rates in Palo Alto, Redwood City and Hayward. However, it is not driving the differences in bills across the cities. Other operating costs are not a key driver of growth in bills in Palo Alto, Hayward, and Redwood City. Palo Alto’s Water Infrastructure Investments Increase Water Rates Relative To Hayward Palo Alto began consistently investing in water infrastructure in the 1990s when leak rates rose significantly. This investment has helped greatly and Palo Alto has low leak rates. Palo Alto’s consistent investments in water infrastructure, including emergency wells and reservoir have made the water distribution system resilient to water emergencies and seismic events. Palo Alto and Redwood City have more capital assets serving water customers relative to Hayward per CCF of water purchased. Palo Alto and Redwood City each have nearly $40 in water-related capital assets for each CCF of water that enters the system. Hayward has approximately $23 in water-related capital assets for each CCF of water that enter Hayward’s system. Palo Alto and Redwood City’s water rates reflect these higher infrastructure investments. Figure 9 shows this difference by combining acquisition and construction costs with interest and principal on long term debt. City of Palo Alto Page 11 Figure 9: Three Year Moving Average of Acquisition and Construction of Capital Assets and Interest and Principal on Long Term Debt per CCF Purchased Palo Alto and Redwood City’s customers fund more water system capital investment annually than Hayward. Palo Alto and Redwood City’s water costs are between approximately $2.00 and $2.50 per CCF while Hayward’s water capital costs are approaching $1.00 per CCF. On a 9 CCF monthly bill, this difference is approximately $9.00 to $13.50. This is a primary factor contributing to Palo Alto and Redwood City’s higher bills relative to Hayward’s. Usage Differences Contribute to Bill Differences Table 4 summarizes the usage for residential customers in 2010 and 2019. Palo Alto and Redwood City both have a higher portion of residential water use than Hayward and the portion of residential water use is increasing over time for Redwood City and Palo Alto. Table 4: Residential Potable Water Usage 2010 2019 Change (2010 to 2019) Palo Alto 58% 63% 5% Redwood City 68% 70% 2% Hayward 61% 55% -6% Source: BAWSCA Annual Surveys Because Palo Alto’s residential customer class collectively uses a larger percentage of the city’s water, this customer class is responsible for paying for a larger portion of the costs. Hayward’s single-family residential customers on average use 6.4 CCF per month while Palo Alto’s average is 10.9, or 70% more than Hayward. This high consumption contributes to Palo Alto’s higher residential bills. City of Palo Alto Page 12 Similarly, Redwood City’s lower portion of usage among non-residential customers relieves upward pressure on Redwood City’s non-residential rates and average bills relative to Palo Alto. Additionally, Hayward’s non-residential customer class increased its water consumption by 10% since 2010 while Palo Alto’s non-residential customer class decreased its water consumption by 8% over the same time period. Hayward’s growth in the non-residential sector means that the sector collectively is responsible for paying a larger portion of the costs which relieves some of the upward pressure on residential rates relative to Palo Alto. Palo Alto’s residents use more water on average and this contributes to their higher bills. Hayward’s higher portion of usage and increasing usage among non-residential customers relieves upward pressure on Hayward’s single-family residential rates and bills relative to Palo Alto. Attachments: Attachment A: Map of Service Areas Attachment B: Water Utility Characteristics City of Palo Alto Page 13 Attachment A Map of Service Areas City of Palo Alto Page 14 Attachment B Water Utility Characteristics Utility Customers SFPUC Water Purchased (MGD), % Potable Supply Miles of Main Single-Family Residential Average Monthly Use (CCF) Single-Family Residential % of Demand Palo Alto 20,126 9.43, (100%) 236 10.9 41% Redwood City 23,623 8.08, (100%) 262 7.8 45% Hayward 38,648 13.98, (100%) 340 6.4 36% Mountain View 17,489 7.21, (86%) 176 6.8 26% Cal Water – Bear Gulch 18,559 9.48, (92%) 318 19.7 84% Santa Clara 25,293 3.03, (19%) 335 9.1 21% 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. City of Palo Alto Page 3 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. City of Palo Alto Page 5 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: City of Palo Alto Page 7 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). City of Palo Alto Page 8 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. City of Palo Alto Page 9 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. City of Palo Alto Page 10 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 City of Palo Alto Page 13 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. City of Palo Alto Page 14 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. GAS UTILITY FINANCIAL PLAN January 2021 14 | Page 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 GAS UTILITY FINANCIAL PLAN January 2021 15 | Page 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 GAS UTILITY FINANCIAL PLAN January 2021 16 | Page 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. GAS UTILITY FINANCIAL PLAN January 2021 17 | Page 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 GAS UTILITY FINANCIAL PLAN January 2021 18 | Page 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 GAS UTILITY FINANCIAL PLAN January 2021 19 | Page 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. GAS UTILITY FINANCIAL PLAN January 2021 20 | Page 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. GAS UTILITY FINANCIAL PLAN January 2021 21 | Page 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. GAS UTILITY FINANCIAL PLAN January 2021 22 | Page 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. GAS UTILITY FINANCIAL PLAN January 2021 23 | Page 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 GAS UTILITY FINANCIAL PLAN January 2021 24 | Page 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. GAS UTILITY FINANCIAL PLAN January 2021 25 | Page 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. GAS UTILITY FINANCIAL PLAN January 2021 26 | Page 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 GAS UTILITY FINANCIAL PLAN January 2021 27 | Page 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. GAS UTILITY FINANCIAL PLAN January 2021 28 | Page 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: GAS UTILITY FINANCIAL PLAN 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. GAS UTILITY FINANCIAL PLAN 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 GAS UTILITY FINANCIAL PLAN 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. GAS UTILITY FINANCIAL PLAN 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 January 2021 40 | Page 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. GAS UTILITY FINANCIAL PLAN January 2021 42 | Page 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 GAS UTILITY FINANCIAL PLAN January 2021 43 | Page 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 City of Palo Alto (ID # 11887) Finance Committee Staff Report Report Type: Action Items Meeting Date: 4/6/2021 City of Palo Alto Page 1 Summary Title: FY 2022 Electric Financial Plan and Rates Title: Staff and the Utilities Advisory Commission Request the Finance Committee Recommend the City Council Adopt a Resolution Approving the Fiscal Year 2022 Electric Financial Plan and Reserve Transfers, and Amending Utility Rate Schedules E-EEC-1 (Export Electricity Compensation), E-NSE-1 (Net Surplus Electricity Compensation), E-2-G (Residential Master-metered and Small Non-residential Green Power Electric Service), E-4-G (Medium Non-residential Green Power Electric Service, and E-7-G (Large Non- residential Electric 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): 1. Approving the Fiscal Year (FY) 2022 Electric Financial Plan (Linked Document, Attachment B); 2. Approving a transfer of up to $5 million from the Capital Improvement Project (CIP) Reserve to the Distribution Operations Reserve at the end of FY 2021; 3. Approving a transfer of up to $1 million from the Supply Operations Reserve to the Electric Special Projects (ESP) reserve at the end of FY 2021; 4. Approving an allocation of up to $1.19 million from the Cap and Trade Program Reserve at the end of FY 2021 to be spent on local decarbonization programs; 5. Updating the Export Electricity Compensation (E-EEC-1) rate to reflect current projections of avoided cost, effective July 1, 2021; (Linked Document, Attachment C) 6. Updating the Net Surplus Electricity Compensation (E-NSE-1) rate to reflect current projections of avoided cost, effective July 1, 2021; (Linked Document, Attachment C) and 7. Updating the Palo Alto Green program pass-through premium charge on the Residential Master-Metered and Small Non-Residential Green Power Electric Service (E-2-G), the Medium Non-Residential Green Power Electric Service (E-4-G), and the Large Non- Residential Green Power Electric Service (E-7-G) rate schedules to reflect current costs, CITY OF PALO ALTO City of Palo Alto Page 2 effective July 1, 2021. (Linked Document, Attachment C) Executive Summary The FY 2022 Electric Utility Financial Plan includes projections of the utility’s costs and revenues through FY 2026. Staff projects costs for the Electric Utility to increase steadily through the forecast period. Revenue increases between 0% to 5% are projected to be necessary to keep revenues in line with expenses over the next five years. Rising transmission costs are the primary contributor to the increases. A lack of precipitation, if it continues through the winter, may necessitate utilizing funds from the Hydroelectric Rate Stabilization Reserve starting in FY 2021. Operations costs are expected to increase at or near the inflation rate (2% to 3% per year) through the forecast period. Projected capital expenses are higher due to the rebuilding of existing underground districts, substation, the Foothills rebuild, and line voltage upgrades. The City is also evaluating the cost and scope of other system resiliency projects, such as pole replacements, which may increase costs as well as rates in the future. Electric loads have been gradually decreasing and are expected to continue to decrease in the long-term, mainly due to declining consumption in the commercial sector, putting gradual upward pressure on rates. This decline has been exacerbated by the COVID pandemic. Consumption is currently 5% to 10% below long-term consumption trends. Current models suggest that pandemic economic recovery will take place through 2021 and 2022, with electric consumption stabilizing on the long run average by 2023. Based on the relative health of the various Electric reserve funds, staff is recommending no rate increase for FY 2022, however this will likely result in reserves falling close to the minimum guideline levels over the next two to three years. Background Every year staff presents the Finance Committee and UAC with Financial Plans for its Electric, Gas, Water, 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 City 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 Finance Committee reviewed the preliminary financial forecasts at its February 16, 2021 meeting (Staff Report #118641). The UAC reviewed Staff’s FY 2022 Electric Financial Plan, proposed transfers and rate changes at its March 3, 2021 meeting. 1 https://www.cityofpaloalto.org/civicax/filebank/documents/80154 City of Palo Alto Page 3 Discussion Staff’s annual assessment of the financial position of the City’s electric utility is completed in compliance 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 Electric Utility Financial Plan includes the following proposed actions: 1. Approving the Fiscal Year (FY) 2022 Electric Financial Plan (Linked Document, Attachment B); 2. Approving a transfer of up to $5 million from the Capital Improvement Project (CIP) Reserve to the Distribution Operations Reserve at the end of FY 2021; 3. Approving a transfer of up to $1 million from the Supply Operations Reserve to the ESP reserve at the end of FY 2021; 4. Approving an allocation of up to $1.19 million from the Cap and Trade Program Reserve at the end of FY 2021, to be spent on local decarbonization programs; 5. Updating the Export Electricity Compensation (E-EEC-1) rate to reflect current projections of avoided cost, effective July 1, 2021; (Linked Document, Attachment C) 6. Updating the Net Surplus Electricity Compensation (E-NSE-1) rate to reflect current projections of avoided cost, effective July 1, 2021; (Linked Document, Attachment C) and 7. Updating the Palo Alto Green program pass-through premium charge on the Residential Master-Metered and Small Non-Residential Green Power Electric Service (E-2-G), the Medium Non-Residential Green Power Electric Service (E-4-G), and the Large Non- Residential Green Power Electric Service (E-7-G) rate schedules to reflect current costs, effective July 1, 2021. (Linked Document, Attachment C) The transfer from the CIP Reserve will help fund CIP projects, keep the Distribution Operations reserve above minimum guideline levels and balance year to year changes in capital investment. The transfer to the Electric Special Projects reserve will work towards repaying the remaining $5 million of a $10 million short-term loan taken from the ESP reserve in FY 2018, during the last drought. Repaying the full $5 million in FY 2021, which was part of last year’s financial plan, is not recommended as the Supply Operations Reserve would likely go below the minimum guideline level in FY 2023 as a result. Instead, staff anticipates repaying the remaining balance in $1 million installments between FY 2021 and FY 2025. The City maintains a Cap and Trade Program Reserve within the Electric fund to hold revenues from the sale of carbon allowances freely allocated by the California Air Resources Board to the City of Palo Alto Page 4 City’s electric utility. Cap and Trade Program revenues are restricted to support specifically carbon reducing activities, including local decarbonization. In accordance with Council’s August 2020 direction, (Staff Report #11556)2 the City has also exchanged certain types of renewable energy to take advantage of market conditions to reduce supply costs, fund electric utility programs and capital investment, and raise funds for local decarbonization. The revenues received from these REC exchanges are kept in the Electric Supply Reserve. With this Financial Plan, and as described in Staff Report #11556, staff is allocating Cap and Trade funds equivalent to 1/3 of the FY 2021 REC Exchange program revenues, or $1.19 million, for future local decarbonization projects. Table 1 below shows the effects of the proposed transfers on reserve funds, as well as changes to the CIP min/max guidelines. The attached Electric Financial Plan (Linked Document, Attachment B) discusses these reserve changes in greater detail: 2 https://www.cityofpaloalto.org/civicax/filebank/documents/78046 City of Palo Alto Page 5 Table 1: Reserves Starting and Ending Balances, Revenues, Expenses, Transfers To/(From) Reserves, Operations and Capital 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 Supply Operations 29,429 25,213 20,120 19,588 23,351 28,131 2 Distribution Operations 9,064 10,808 10,729 10,282 11,415 13,836 3 CIP 5,880 880 880 880 880 9,880 4 Electric Special Projects 46,665 47,665 36,649 30,649 31,649 32,649 5 Hydro Stabilization 15,400 15,400 15,400 15,400 15,400 15,400 6 Low Carbon Fuel Standard 6,340 4,080 3,186 2,164 1,092 524 7 Cap and Trade Program - 1,189 2,190 5,749 9,316 12,866 Revenues 8 Supply 112,482 114,293 118,332 124,988 124,256 124,120 9 Distribution 55,588 59,194 68,325 74,410 77,929 77,179 Transfers 10 Supply Operations (2,189) (2,000) (4,560) (4,567) (4,550) (3,700) 11 Distribution Operations 5,000 - - - (9,000) (3,000) 12 CIP (5,000) - - - 9,000 3,000 13 Electric Special Projects 1,000 1,000 1,000 1,000 1,000 - 14 Hydro Stabilization - - - - - - 15 Low Carbon Fuel Standard - - - - - - 16 Cap and Trade Program 1,189 1,000 3,560 3,567 3,550 3,700 Capital Program Contribution 17 Distribution Operations - - - - - - 18 CIP Reserve Expenses 19 Supply Expenses (114,509) (117,385) (114,305) (116,658) (114,925) (116,756) 20 Distribution Non-CIP Expenses (36,826) (40,645) (48,033) (41,578) (52,581) (53,466) 21 Planned CIP (22,018) (18,628) (20,739) (31,700) (13,926) (21,284) 22 ESP funded - (12,016) (7,000) - - - 23 Hydro funded - - - - - - 24 LCFS funded (2,260) (893) (1,022) (1,072) (568) (453) Ending Reserve Balance 1+8+10+19 Supply Operations 25,213 20,120 19,588 23,351 28,131 31,795 2+9+11+17+20+21 Distribution Operations 10,808 10,729 10,282 11,415 13,836 13,265 3+12+18 CIP 880 880 880 880 9,880 12,880 4+13+22 Electric Special Projects 47,665 36,649 30,649 31,649 32,649 32,649 5+14+23 Hydro Stabilization 15,400 15,400 15,400 15,400 15,400 15,400 6+15+24 Low Carbon Fuel Standard 4,080 3,186 2,164 1,092 524 71 7+16 Cap and Trade Program 1,189 2,190 5,749 9,316 12,866 16,566 Operations Reserve Guidelines (Supply) 25 Minimum 17,508 17,981 18,461 19,177 18,892 19,193 26 Maximum 35,017 35,962 36,922 38,353 37,784 38,385 Operations Reserve Guidelines (Distribution) 27 Minimum 9,462 9,513 9,803 10,084 10,257 10,472 28 Maximum 15,128 15,152 15,654 16,138 16,402 16,750 CIP Reserve Guidelines 29 Minimum 5,005 4,700 4,232 3,803 3,635 3,499 30 Maximum 25,025 23,502 21,162 19,017 18,173 19,406 Due to the continuing COVID-19 pandemic and economic hardships created by it, the Utilities Department has chosen to propose a 0% rate increase option for FY 2022 and no more than 5% rate increases afterwards. Under this scenario, utility reserves are projected to drop to near their minimum guideline levels. Possible program and service cuts may be needed to make up the difference if the utility’s financial position ends up being worse than forecasted, but under City of Palo Alto Page 6 the assumptions used in this financial plan, existing reserves are anticipated to make up for revenue shortfalls due to the pandemic’s impacts. Table 2 below shows the new proposed rate trajectory and compares current rate projections to those projected in last year’s Financial Plan. Table 1: Projected Electric Rates, FY 2021 to FY 2025 Projection FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current 0% 5% 5% 2% 1% Last Year 0% 5% 5% 3% 0% FY 2022 Financial Plan’s Projected Rate Adjustments for the Next Five Fiscal Years Table 3 shows the projected rate adjustments over the next five years and their impact on the annual median residential electric bill (453 kwh per month in winter, 365 kwh per month in summer). Table 3: Projected Rate Adjustments, FY 2022 to FY 2026 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Electric Utility 0% 5% 5% 2% 1% Estimated Bill Impact ($/mo)* - $3.04 $3.19 $1.34 $0.68 * Estimated impact on median residential electric bill, which is currently $60.70 for CY 2020 The rate increases are related to several factors: increasing transmission costs, the need for substantial additional capital investment in the electric distribution system, potential low hydro supply, and increasing operations costs due to larger contracting needs to complete electric distribution system maintenance work. Revenues have also declined as customer usage has decreased, requiring larger rate increases to cover fixed expenses and offset the shortfalls. Historically, total electric utility costs (excluding short-term drought impacts) were roughly $120 million per year, allowing the electric utility to go without a rate increase from July 1, 2009 to July 1, 2016. Over the period from FY 2016 to FY 2018, though, annual costs (net of energy supply related revenue, like surplus energy sales) increased to roughly $140 million per year (costs were unusually low in FY 2019 due to some one-time savings from surplus energy sales). Costs are currently projected to increase to roughly $160 million by FY 2026 (net of surplus energy sales). Figure 1 shows the overall utility’s costs (net of surplus sales revenues) in FY 2016, FY 2022, and FY 2026. Costs for the electric supply portfolio have decreased slightly between FY 2016 and FY 2022, but much of this is due to surplus electric supply revenues that are not expected to continue indefinitely as well as the fact that customer sales have declined by 1.5% to 2% annually during this time. Assuming normal hydro conditions going forward, as well as a continuing trend of load loss, costs are projected to increase by about 1% annually for the foreseeable future. I I I I I I I I I I I I City of Palo Alto Page 7 Costs for managing the distribution system (e.g.), maintenance, capital investment, customer service, billing, etc.) have increased as well, growing by about 3% per year on average in the past, and projected to grow by nearly 2-4% per year going forward. FY 2022 capital costs are higher due to the introduction of a large Smart Grid Technologies project, but these costs have been approved by Council to come from the Electric Special Projects Reserve and will not impact rates. Comparisons are difficult as FY 2016 capital costs were very low relative to normal years. Overall, costs are projected to increase by 2% per year over the forecast horizon, but declining loads will necessitate rate increases greater than this to maintain financial health. Figure 1: Electric Utility Costs, FY 2016 Actual vs. FY 2022 and FY 2026 Projections Figure 2 shows electric distribution costs specifically. Capital costs have increased by about 4% per year on average over the last five years but are skewed in this graph due to a large ($17 million) Smart Grid Technology project budgeted for FY 2022 as well as very low spending during FY 2016. Going forward, increased costs are related to greater capital investment in the distribution system (e.g.), underground district rebuilds, as well as substation upgrades). In the last few years, the City has experienced a higher number of outages in underground districts due to aging equipment and infrastructure. Distribution system operational spending is projected to increase by about 3% annually. Some of this is due to projected increases in costs of labor and materials. While there are higher than anticipated staff vacancies, external contracts will be used to enable staff to complete necessary electric system maintenance. 180 160 140 -II) 120 C .2 100 ·-~ 80 V). 60 40 20 FY 2016 FY 2022 Fy 2026 {Projected} {Projected} ■ Electric Distribution ■ Electric Supply City of Palo Alto Page 8 Figure 2: Electric Distribution Costs, FY 2016 vs. FY 2022 and FY 2026 Projections While net electric supply portfolio costs stayed relatively stable from FY 2016 to FY 2022, this was mainly due to surplus energy revenues and decreasing loads driving down generation cost. Transmission cost increases and, to a lesser extent, operational overhead costs have increased by 8% annually in the same timeframe, as shown in Figure 3. In the future, staff forecasts that increased costs will continue largely come from transmission costs. These increases are due to rehabilitation and replacement of the existing statewide electric transmission system as well as expansion of that system to accommodate new generation, mostly renewable. Staff works to contain transmission costs through partner agencies, including the Transmission Agency of Northern California (TANC) and Northern California Power Agency (NCPA), and through direct partnerships with other local utilities (the Bay Area Municipal Transmission group, BAMx). These groups intervene in transmission proceedings at the Federal Energy Regulatory Commission (FERC) and the California Independent System Operator (CAISO), and have achieved some reductions in long-term transmission costs. Staff is beginning to look at strategies to achieve cost savings in electric supply and will discuss these strategies in greater detail in future meetings. 90 80 70 _ 60 Vl C 50 0 40 ~ 30 20 10 FY 2016 FY 2022 (Projected) Fy 2026 (Projected) ■ Debt Service □ Operations [SI Capital Investment Ci t y o f P a l o A l t o Pa g e 9 Fi g u r e 3 : E l e c t r i c S u p p l y C o s t s , F Y 2 0 1 6 A c t u a l v s . F Y 2 0 2 2 a n d F Y 2 0 2 6 P r o j e c t i o n s St a f f a l s o r e c o g n i z e s t h e i m p o r t a n c e o f m a n a g i n g o p e r a t i n g c o s t s a n d m a x i m i z i n g e f f i c i e n c y i n or d e r to m i n i m i z e r a t e i n c r e a s e s . A s d i s c u s s e d a b o v e , s t a f f i s w o r k i n g o n c o s t c o n t a i n m e n t me a s u r e s r e l a t e d t o t r a n s m i s s i o n a n d r e n e w a b l e e n e r g y c o s t s . U t i l i t y c o n s u m e r s a l s o s e e s o m e lo n g -te r m c o s t s a v i n g s f r o m C i t y -wi d e e f f o r t s t o m a n a g e p e r s o n n e l c o s t s . A s r e fl e c t e d i n t h e Ut i l i t i e s S t r a t e g i c P l a n , s t a f f i s e x p l o r i n g a d d i t i o n a l w a y s t o e f f e c t i v e l y u s e a v a i l a b l e r e s o u r c e s , pa r t i c u l a r l y a c r o s s D i v i s i o n s . El e c t r i c B i l l C o m p a r i s o n w i t h S u r r o u n d i n g C i t i e s Fo r t h e m e d i a n c o n s u m p t i o n l e v e l , th e a n n u a l r e s i d e n t i a l e l ec t r i c b i l l f o r c a l e n d a r y e a r 2 0 2 0 wa s $ 7 2 8 u n d e r c u r r e n t C P A U r a t e s , a b o u t 3 7 % l o w e r t h a n t h e a n n u a l b i l l f o r a P G & E c u s t o m e r wi t h t h e s a m e c o n s u m p t i o n a n d a p p r o x i m a t e l y 1 9 % h i g h e r t h a n t h e a n n u a l b i l l f o r a C i t y o f Sa n t a C l a r a c u s t o m e r . T h e b i l l c a l c u l a t io n s f o r P G & E c u s t o m e r s a r e b a s e d o n P G & E C l i m a t e Zo n e X , w h i c h i n c l u d e s m o s t s u r r o u n d i n g c o m p a r i s o n c o m m u n i t i e s . Ta b l e 4 pr e s e n t s s a m p l e m e d i a n r e s i d e n t i a l b i l l s f o r P a l o A l t o , P G & E , a n d t h e C i t y o f S a n t a C l a r a (S i l i c o n V a l l e y P o w e r ) f o r s e v e r a l u s a g e le v e l s . R a t e s u s e d t o c a l c u l a t e t h e m o n t h l y b i l l s s h o w n be l o w w e r e i n e f f e c t a s o f J a n u a r y 1 , 2 0 2 1 . Ov e r t h e n e x t s e v e r a l y e a r s l o w u s a g e c u s t o m e r s i n P G & E t e r r i t o r y a r e e x p e c t e d t o c o n t i n u e t o se e h i g h e r p e r c e n t a g e r a t e i n c r e a s e s t h a n h i g h u s a g e c u s t o m e rs a s P G & E c o m p r e s s e s i t s t i e r s fr o m t h e h i g h l y e x a g g e r a t e d l e v e l s t h a t h a v e b e e n i n p l a c e s i n c e t h e e n e r g y c r i s i s . 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J ................................................. ................................................ ................................................ .............................................. .,, .................................................. _ ............................................... . . _ .. ~--·---~--·---~--·---~--·---~--·---~--·---~--·---. 0 lO 0 ,;;j-0 N (sUOJll!IAI) S lO N 0 N > u.. N N 0 N >-u.. lO .-I 0 N >-u.. -0 Q) .... u Q) ·o I,_ 0.. -0 Q) .... u Q) ·o I,_ 0.. -0 ro Q) ..c I,_ Q) > 0 Elli) C 0 V) V) E V) C ro I,_ I- ll C .Q .... ro I,_ Q) C Q) (.9 f@ City of Palo Alto Page 10 Table 4: Residential Monthly Electric Bill Comparison (Effective 1/1/2021, $/mo.) Season Usage (kwh) Palo Alto PG&E Santa Clara Winter 300 41.27 74.96 36.96 453 (Median) 69.22 113.19 56.50 650 107.37 174.55 81.66 1200 213.89 347.48 151.91 Summer 300 41.27 77.09 36.96 (Median) 365 52.18 97.53 45.27 650 107.37 187.14 81.66 1200 213.89 360.08 151.91 Table 5 shows the average monthly electric bill for commercial customers for various usage levels. Table 5: Commercial Monthly Electric Bill Comparison (1/1/2021, $/mo.) Usage (kwh/mo) Palo Alto PG&E Santa Clara 1,000 177 272 185 160,000 24,795 30,804 20,239 500,000 77,477 80,675 63,096 2,000,000 273,431 308,918 252,172 Net Energy Metering Buyback Rates The City operates two Net Energy Metering (NEM) programs. Solar customers served by the City of Palo Alto's (CPAU) original NEM program, also called NEM 1, are compensated at retail rates for electricity they export to the grid, and solar customers served by the NEM successor program, or NEM 2 (effective after the City reached its NEM 1 cap at the end of 2017), are compensated at the Export Electricity Compensation (E-EEC-1) rate for exported electricity. Customers on the NEM 1 program who have chosen to have the value of any annual net generation they produced over the past 12 months credited back to their account do so under the Net Metering Net Surplus Electricity Compensation (E-NSE-1) rate, which is calculated using the utility’s avoided costs from the prior year. The Net Surplus Electricity Compensation rate represents the value of the City’s avoided costs or value of customer-generated electricity in Palo Alto during the prior calendar year, including compensation for the energy, avoided capacity charges, avoided transmission and ancillary service charges, avoided transmission and distribution (T&D) losses, and renewable energy credits (RECs), or environmental attributes. Under the City’s NEM successor program, participating solar customers in Palo Alto are billed at the current retail rate for electricity drawn from the grid, and receive a credit for electricity they export to the grid at the Export Electricity Compensation (E-EEC-1) buyback rate. This buyback rate also reflects the avoided cost or value of customer-generated electricity in Palo Alto, City of Palo Alto Page 11 calculated on a forward-looking basis for the upcoming fiscal year. As shown in the table below, the current avoided cost for solar generation in Palo Alto is 10.78 cents/kWh, which is slightly higher than the avoided cost on the current NEM buyback rate (10.09 cents/kWh). This increase in the overall avoided cost is driven by a small increase in the value of the energy and in the City’s avoided transmission charges. Table 6: NEM Compensation Rates – Current vs. Proposed Rate Current $/kWh Proposed $/kWh Export Electricity (E-EEC-1) $0.1009 $0.1078 Net Surplus Electricity (E-NSE-1) $0.0877 $0.0992 Palo Alto Green (PAG) Program The PaloAltoGreen (PAG) program provides CPAU’s commercial customers an opportunity to voluntarily pay a premium to receive renewable electricity credits to match their energy usage. Under this program, CPAU staff purchase and retire Green-e certified renewable energy certificates (RECs) in the wholesale market on behalf of PAG customers. This enables participating commercial customers to claim credit for the REC purchases in order to satisfy their corporate sustainability goals and meet federal “green certification” requirements. The PAG charge is a pass-through charge; the revenue collected through the PAG rate premium is intended to fully recover the costs of administering the program. The PAG program has very low overhead costs (e.g., the cost of hiring an auditor to carry out an annual Green-e verification process for the program), so the vast majority of the program cost is the purchase cost of the RECs. In the past year there has been a significant increase in the wholesale cost of Green-e certified RECs in the Western US market (from approximately $1.50/REC to $6/REC). As such, the PAG rate premium needs to be raised from $2 per 1,000 kWh block (2 cents/kWh) to $6 per 1,000 kWh block (6 cents/kWh). This change will be reflected on the Residential Master- Metered and Small Non-Residential Green Power Electric Service (E-2-G), the Medium Non- Residential Green Power Electric Service (E-4-G), and the Large Non-Residential Green Power Electric Service (E-7-G) rate schedules. Timeline The City Council will consider adopting the Financial Plan and rate amendments 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. Stakeholder Engagement The UAC reviewed preliminary financial forecasts at its December 2, 2020 meeting (Staff Report City of Palo Alto Page 12 #116493), and the Finance Committee reviewed the preliminary forecasts at its February 16, 2021 meeting (Staff Report #118644). The UAC reviewed staff’s recommendation on the FY 2022 Electric Financial Plan, proposed transfers and rate increases at its March 3, 2021 meeting. At that meeting, Commissioners inquired whether staffing issues were still a concern with regards to projected CIP work. Staff responded that CPAU had consultants on contract, were looking at possibly outsourcing project design work, and that additional field crews were being hired to fill out in-house crews. The UAC approved staff’s recommendation 6-0, Commissioner Scharff absent. If approved, the Finance Committee’s recommendation on the FY 2022 Electric rate changes and transfers will be presented to City Council in June during the budget adoption process. Resource Impact The FY 2022 Budget is being developed concurrently with these rates and depending on the final recommendations from the Finance Committee, adjustments to the budget may be required. The attached FY 2022 Electric Financial Plan provides a more comprehensive overview of projected costs and revenue changes for the next five years. Environmental Review The Finance Committee’s review and recommendation to Council on the FY 2022 Electric Financial Plans 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 • Attachment B: FY22 Electric Financial Plan • Attachment C: Electricity Compensation Rates 3 https://cityofpaloalto.org/civicax/filebank/documents/79340 4 https://www.cityofpaloalto.org/civicax/filebank/documents/80154 Attachment A * NOT YET APPROVED * 6055487 Resolution No. _________ Resolution of the Council of the City of Palo Alto Approving the Fiscal Year 2022 Electric Utility Financial Plan and Reserve Transfers and Amending Utility Rate Schedules E-EEC-1 (Export Electricity Compensation), E-NSE-1 (Net Surplus Electricity Compensation Rate), E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service), E-4-G (Medium Non- Residential Green Power Electric Service), and E-7-G (Large Non-Residential Green Power Electric 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 Electric Utility Financial Plan. SECTION 2. The Council hereby approves the following transfers as described in the FY 2022 Electric Utility Financial Plan: 1. Approve a transfer of up to $5 million from the Capital Improvement Project Reserve to the Distribution Operations Reserve; 2. Approve a transfer of up to $1 million from the Supply Operations Reserve to the Electric Special Project reserve; Attachment A * NOT YET APPROVED * 6055487 3. Approve an allocation of up to $1.189 million from the Cap and Trade Program Reserve for local decarbonization programs. SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-EEC-1 (Export Electricity Compensation) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-EEC-1, as amended, shall become effective July 1, 2021. SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-NSE-1 (Net Surplus Electricity Compensation Rate) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-NSE-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 E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-2-G, 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 E-4-G (Medium Non-Residential Green Power Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-4-G, 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 E-7-G (Large Non-Residential Green Power Electric Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule E-7-G, as amended, shall become effective July 1, 2021. SECTION 8. The Council makes the following findings: a. 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. b. 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 * 6055487 // SECTION 9. The Council finds that approving the Financial Plan 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 electric 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 ELECTRIC UTILITY FINANCIAL PLAN FY 2022 TO FY 2026 Attachment B 2 | Page FY 2022 ELECTRIC 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 .................................................................................. 8 Section 3: Detail of FY 2021 Rate and Reserves Proposals ....................................................... 8 Section 3A: Rate Design ............................................................................................................... 8 Section 3B: Current and Proposed Rates ..................................................................................... 8 Section 3C: Bill Impact of Proposed Rate Changes .................................................................... 10 Section 3D: Proposed Reserve Transfers ................................................................................... 11 Section 4: Utility Overview .................................................................................................. 12 Section 4A: Electric Utility History ............................................................................................. 12 Section 4B: Customer Base ........................................................................................................ 15 Section 4C: Distribution System ................................................................................................. 15 Section 4D: Cost Structure and Revenue Sources ...................................................................... 16 Section 4E: Reserves Structure ................................................................................................... 17 Section 4F: Competitiveness ...................................................................................................... 18 Section 5: Utility Financial Projections ................................................................................. 19 Section 5A: Load Forecast .......................................................................................................... 19 Section 5B: FY 2015 to FY 2019 Cost and Revenue Trends ........................................................ 21 Section 5C: FY 2019 Results ....................................................................................................... 22 Section 5D: FY 2020 Projections ................................................................................................ 23 Section 5E: FY 2021 – FY 2025 Projections ................................................................................ 23 Section 5F: Risk Assessment and Reserves Adequacy ............................................................... 25 3 | Page Section 5G: Long-Term Outlook ................................................................................................. 31 Section 5H: Alternative Rate Projections ................................................................................... 33 Section 6: Details and Assumptions ..................................................................................... 33 Section 6A: Electricity Purchases ............................................................................................... 33 Section 6B: Operations .............................................................................................................. 35 Section 6C: Capital Improvement Program (CIP) ....................................................................... 36 Section 6D: Debt Service ............................................................................................................ 37 Section 6E: Equity Transfer ........................................................................................................ 38 Section 6F: Wholesale Revenues and Other Revenues .............................................................. 38 Section 6G: Sales Revenues ....................................................................................................... 39 Section 7: Communications Plan .......................................................................................... 40 Appendices ......................................................................................................................... 42 Appendix A: Electric Utility Financial Forecast Detail ................................................................ 43 Appendix B: Electric Utility Reserves Management Practices ................................................... 47 Appendix C: Description of Electric utility Operational Activities .............................................. 52 Appendix D: Samples of Recent Electric Utility Outreach Communications .............................. 53 4 | Page SECTION 1: DEFINITIONS AND ABBREVIATIONS CAISO California Independent System Operator CARB California Air Resources Board CIP Capital Improvement Program CPAU City of Palo Alto Utilities Department CPUC California Public Utilities Commission CVP Central Valley Project GWh a gigawatt-hour, equal to 1,000 MWh or 1,000,000 kWh. Commonly used for discussing total monthly or annual electric load for the entire city, or the monthly or annual output of an electric generator. kWh a kilowatt-hour, the standard unit of measurement for electricity sales to customers. kW a kilowatt, a unit of measurement used in reference a customer’s peak demand (the highest 15 minute average consumption level in a month), which is used for billing large and mid-size commercial customers. kV a kilovolt, one thousand volts, a unit of measurement of the voltage at which a section of the distribution system operates. The transmission system operates at 115-500 kV, and this is lowered to 60 kV in the sub-transmission section of the Electric Utility’s distribution section, then 12 kV or 4 kV in the rest of the distribution system, and finally 120, 240, or 480 volts at the electric outlet. MWh a megawatt-hour, equal to 1,000 kWh. Commonly used for measuring wholesale electricity purchases. MW a megawatt, equal to 1,000 kW. Commonly used when discussing maximum electricity demand for all customers in aggregate. PG&E Pacific Gas and Electric REC Renewable Energy Certificate RPS Renewable Portfolio Standard Sub-transmission System: The section of the Electric Utility’s distribution system that operates at 60 kV and which interfaces with PG&E’s transmission system. Transmission System: Sections of the electric grid that operate at high voltages, generally 115 kV or more. The voltage at the intersection of the Electric Utility’s distribution system and PG&E’s transmission system is 115 kV. The Electric Utility does not own or operate any transmission lines. UCC Utility Control Center SCADA Supervisory Control and Data Acquisition system, the system of sensors, communications, and monitoring stations that enables system operators to monitor and operate the system remotely. WAPA, or Western: Western Area Power Administration, the agency that markets power from CVP hydroelectric generators and other hydropower owned by the Bureau of Reclamation. 5 | Page SECTION 2: EXECUTIVE SUMMARY AND RECOMMENDATIONS This document presents a Financial Plan for the City’s Electric Utility for the next FY 2022 - 2026. This Financial Plan describes how revenues will 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 The Electric Utility’s costs are projected to increase by about 2% per year on average from FY 2021 - 2026, as shown in Table 1. The majority of cost is related to electric supply purchases, which are increasing mainly due to increased transmission costs, and after the projected drop in consumption in FY 2021 due to the COVID crisis, are projected to grow at an estimated 2.5% per year on average. Operations and maintenance costs are about one third of total costs and are projected to increase by about 2% per year on average due to both inflationary as well as salary and benefits increases. Capital improvement costs are projected to rise steeply in the short term as the Smart Grid technology project gets underway, then stabilize to between $18 to $20 million a year thereafter. Ongoing projects will include rebuilds of existing underground districts as well as substation improvements and voltage conversion projects. Table 1: Electric Utility Expenses for FY 2020 to FY 2026 Expenses ($000) FY 2020 (act) FY 2021 (est) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Power Supply Purchases 90,646 93,402 96,219 98,071 102,284 104,443 106,133 Operations 52,497 60,020 60,762 63,245 64,965 61,611 62,543 Capital Projects 15,540 22,018 30,643 27,739 31,700 13,926 21,284 TOTAL 158,682 175,440 187,624 189,055 198,949 179,980 189,960 Due to the continuing COVID-19 pandemic and economic hardships created by it, the Utilities Department has chosen to propose a 0% rate increase option for FY 2022 and no more than 5% rate increases afterwards. Under this scenario, utility reserves are projected to drop to near their minimum guideline levels. Possible program and service cuts may be needed to make up the difference, but existing reserves are currently anticipated to make up for revenue shortfalls. Table 2 below shows the new proposed rate trajectory and compares current rate projections to those projected in last year’s Financial Plan. Table 2: Projected Electric Rates, FY 2021 to FY 2025 Projection FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Current 0% 5% 5% 2% 1% Last Year 0% 5% 5% 3% 0% 6 | Page The Electric Utility maintains several reserves for the purposes of rate stabilization, such as the Hydro Stabilization reserve, which is used to mitigate against both dry and wet hydro conditions. The Electric Utility also has a CIP Reserve which is used to manage cash flow for capital projects, 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. Per Council approval, $10 million was transferred from the Electric Special Projects (ESP) Reserve in FY 2018 to the Operations Reserve to mitigate higher supply costs due to the drought, the costs of new renewable energy projects coming online and increasing transmission charges. Any transfers from the ESP Reserve require Council approval. $5 million was repaid in FY 2020, and staff anticipates repaying the remaining balance in $1 million installments between FY 2021 and FY 2025. During this time, withdrawals from the ESP Reserve for the Smart Grid Technologies project will also occur. In addition, in accordance with Council policy, staff will also fund the Cap and Trade Program Reserve with unspent revenues from the sale of carbon allowances freely allocated to the electric utility, as directed in Staff Report #11556 .1 Because of the possible economic impacts which may arise because of the ongoing COVID pandemic, staff is presenting all of these transfers as ‘up to’ amounts. If ending FY 2021 reserves are adversely impacted and/or FY 2022 outlooks for the Electric Utility change, staff may recommend transferring smaller amounts, or forgoing some of all of the transfers, as needed to keep the Operations Reserves within guideline ranges, to the greatest extent possible. 1 https://www.cityofpaloalto.org/civicax/filebank/documents/78046 7 | Page Table 3: Reserves Starting and Ending Balances, Revenues, Expenses, Transfers To/(From) Reserves, Operations and Capital 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 Supply Operations 29,429 25,213 20,120 19,588 23,351 28,131 2 Distribution Operations 9,064 10,808 10,729 10,282 11,415 13,836 3 CIP 5,880 880 880 880 880 9,880 4 Electric Special Projects 46,665 47,665 36,649 30,649 31,649 32,649 5 Hydro Stabilization 15,400 15,400 15,400 15,400 15,400 15,400 6 Low Carbon Fuel Standard 6,340 4,080 3,186 2,164 1,092 524 7 Cap and Trade Program - 1,189 2,190 5,749 9,316 12,866 Revenues 8 Supply 112,482 114,293 118,332 124,988 124,256 124,120 9 Distribution 55,588 59,194 68,325 74,410 77,929 77,179 Transfers 10 Supply Operations (2,189) (2,000) (4,560) (4,567) (4,550) (3,700) 11 Distribution Operations 5,000 - - - (9,000) (3,000) 12 CIP (5,000) - - - 9,000 3,000 13 Electric Special Projects 1,000 1,000 1,000 1,000 1,000 - 14 Hydro Stabilization - - - - - - 15 Low Carbon Fuel Standard - - - - - - 16 Cap and Trade Program 1,189 1,000 3,560 3,567 3,550 3,700 Capital Program Contribution 17 Distribution Operations - - - - - - 18 CIP Reserve Expenses 19 Supply Expenses (114,509) (117,385) (114,305) (116,658) (114,925) (116,756) 20 Distribution Non-CIP Expense (36,826) (40,645) (48,033) (41,578) (52,581) (53,466) 21 Planned CIP (22,018) (18,628) (20,739) (31,700) (13,926) (21,284) 22 ESP funded - (12,016) (7,000) - - - 23 Hydro funded - - - - - - 24 LCFS funded (2,260) (893) (1,022) (1,072) (568) (453) Ending Reserve Balance 1+8+10+19 Supply Operations 25,213 20,120 19,588 23,351 28,131 31,795 2+9+11+17+20+21 Distribution Operations 10,808 10,729 10,282 11,415 13,836 13,265 3+12+18 CIP 880 880 880 880 9,880 12,880 4+13+22 Electric Special Projects 47,665 36,649 30,649 31,649 32,649 32,649 5+14+23 Hydro Stabilization 15,400 15,400 15,400 15,400 15,400 15,400 6+15+24 Low Carbon Fuel Standard 4,080 3,186 2,164 1,092 524 71 7+16 Cap and Trade Program 1,189 2,190 5,749 9,316 12,866 16,566 Operations Reserve Guidelines (Supply) 25 Minimum 17,508 17,981 18,461 19,177 18,892 19,193 26 Maximum 35,017 35,962 36,922 38,353 37,784 38,385 Operations Reserve Guidelines (Distribution) 27 Minimum 9,462 9,513 9,803 10,084 10,257 10,472 28 Maximum 15,128 15,152 15,654 16,138 16,402 16,750 CIP Reserve Guidelines 29 Minimum 5,005 4,700 4,232 3,803 3,635 3,499 30 Maximum 25,025 23,502 21,162 19,017 18,173 19,406 8 | Page SECTION 2B: SUMMARY OF PROPOSED ACTIONS Staff proposes the following actions for the Electric Utility in FY 2021: 1. Approve a transfer of up to $5 million from the Capital Improvement Project (CIP) Reserve to the Distribution Operations Reserve; 2. Approve a transfer of up to $1 million from the Supply Operations Reserve to the Electric Special Projects (ESP) reserve; and 3. Approve an allocation of up to $1.189 million from the Supply Operations to the Cap and Trade Reserve. Staff proposes the following actions for the Electric Utility in FY 2022: 1. No increase to retail electric rates effective July 1, 2021; 2. Update the Export Electricity Compensation (EEC-1) rate to reflect current projections of avoided cost, effective July 1, 2021; 3. Update the Net Surplus Electricity Compensation Rate (E-NSE) rate to reflect current projections of avoided cost, effective July 1, 2021; and 4. Update the Palo Alto Green program pass-through premium charge on the Residential Master-Metered and Small Non-Residential Green Power Electric Service (E-2-G), the Medium Non-Residential Green Power Electric Service (E-4-G), and the Large Non- Residential Green Power Electric Service (E-7-G) rate schedules to reflect current costs, effective July 1, 2021. SECTION 3: DETAIL OF FY 2022 RATE AND RESERVES PROPOSALS SECTION 3A: RATE DESIGN The Electric Utility’s rates are evaluated and implemented in compliance with cost of service requirements set forth in the California Constitution and applicable statutory law. This Financial Plan is based on staff’s assessment of the financial position of the Electric Utility, and updated using the methodology from the “City of Palo Alto Electric Cost of Service and Rate Study”2 drafted by EES Consulting, Inc. in 2015/16. The COSA is also based on design guidelines adopted by Council on September 15, 2015 (Staff Report 6061). SECTION 3B: CURRENT AND PROPOSED RATES The City adopted the current rates effective July 1, 2019, when CPAU increased electric rates by 8%. As the Utilities Department is currently not recommending a rate change for FY 2022, the current rates are the same as proposed rates, and are reflected in Table 4 below: 2 Staff Report 6857 http://www.cityofpaloalto.org/civicax/filebank/documents/52274 9 | Page Table 4: Current and Proposed Electric Rates Current Rates Proposed Rates (7/1/2020) Change $ % E-1 (Residential) Tier 1 Energy ($/kWh) 0.13757 0.13757 No Change -% Tier 2 Energy ($/kWh) 0.19367 0.19367 - -% Minimum Bill ($/day) 0.3283 0.3283 - -% E-2 & E-2-G (Small Non-Residential) Summer Energy ($/kWh) 0.20853 0.20853 - -% Winter Energy ($/kWh) 0.14624 0.14624 - -% Minimum Bill ($/day) 0.8359 0.8359 - -% E-4 & E-4-G (Medium Non-Residential) Summer Energy ($/kWh) 0.12848 0.12848 - -% Winter Energy ($/kWh) 0.09946 0.09946 - -% Summer Demand ($/kW) 28.91 28.91 - -% Winter Demand ($/kW) 18.97 18.97 - -% Minimum Bill ($/day) 17.2742 17.2742 - -% E-7 & E-7-G (Large Non-Residential) Summer Energy ($/kWh) 0.11432 0.11432 - -% Winter Energy ($/kWh) 0.07738 0.07738 - -% Summer Demand ($/kW) 30.69 30.69 - -% Winter Demand ($/kW) 17.05 17.05 - -% Minimum Bill ($/day) 42.3648 42.3648 - -% Net Energy Metering Buyback Rates The City operates two Net Energy Metering (NEM) programs. Solar customers served by the City of Palo Alto's (CPAU) original NEM program, also called NEM 1, are compensated at retail rates for electricity they export to the grid, and solar customers served by the NEM successor program, or NEM 2 (effective after the City reached its NEM 1 cap at the end of 2017), are compensated at the Export Electricity Compensation (EEC-1) rate for exported electricity. Customers on the NEM 1 program who have chosen to have the value of any annual net generation they produced over the past 12 months credited back to their account do so under the Net Metering Net Surplus Electricity Compensation (E-NSE) rate, which is calculated using the utility’s avoided costs from the prior year. The Net Surplus Electricity Compensation rate represents the value of the City’s avoided cost or value of customer-generated electricity in Palo Alto, including compensation for the energy, avoided capacity charges, avoided transmission and ancillary service charges, avoided transmission and distribution (T&D) losses, and renewable energy credits (RECs), or environmental attributes. Under the City’s NEM successor program, participating solar customers in Palo Alto are billed at the current retail rate for electricity drawn from the grid, and receive a credit for electricity they 10 | Page export to the grid at the Export Electricity Compensation (EEC-1) buyback rate. This buyback rate also reflects the avoided cost or value of customer-generated electricity in Palo Alto, calculated on a forward-looking basis for the upcoming fiscal year. As shown in the table below, the current avoided cost for solar generation in Palo Alto is 10.78 cents/kWh, which is slightly higher than the avoided cost on the current NEM buyback rate (10.09 cents/kWh). As the table indicates, this increase in the overall avoided cost is driven by a small increase in the value of the energy and in the City’s avoided transmission charges. Table 5: NEM Buyback Rates – Current vs. Proposed Rate Current $/kWh Proposed $/kWh Export Electricity (E-EEC) $0.1009 $0.1078 Net Surplus Electricity (E-NSE) $0.0877 $0.0992 Palo Alto Green (PAGreen) Program The PaloAltoGreen (PAG) program provides CPAU’s commercial customers an opportunity to voluntarily pay a premium to receive renewable electricity credits to match their energy usage. Under this program, CPAU staff purchase and retire Green-e certified renewable energy certificates (RECs) in the wholesale market on behalf of PAG customers. This enables participating commercial customers to claim credit for the REC purchases in order to satisfy their corporate sustainability goals and meet federal “green certification” requirements. The PAG charge is a pass-through charge; the revenue collected through the PAG rate premium is intended to fully recover the costs of administering the program. The PAG program has very low overhead costs (e.g., the cost of hiring an auditor to carry out an annual Green-e verification process for the program), so the vast majority of the program cost is the purchase cost of the RECs. In the past year there has been a significant increase in the wholesale cost of Green-e certified RECs in the Western US market (from approximately $1.50/REC to $6/REC). As such, the PAG rate premium needs to be raised from $2 per 1,000 kWh block (2 cents/kWh) to $6 per 1,000 kWh block (6 cents/kWh). This change will be reflected on the Residential Master-Metered and Small Non-Residential Green Power Electric Service (E-2-G), the Medium Non-Residential Green Power Electric Service (E-4-G), and the Large Non-Residential Green Power Electric Service (E-7- G) rate schedules. SECTION 3C: BILL IMPACT OF PROPOSED RATE CHANGES As no rate change is proposed for July 1, 2021, there is no table showing the impact of rate changes. For more on comparisons of rates with surrounding agencies, see Section 4F: Competitiveness below. 11 | Page SECTION 3D: PROPOSED RESERVE TRANSFERS In FY 2018, Council approved a $10 million loan from the Electric Special Projects (ESP) reserve, and this financial plan includes full repayment by FY 2025. The pace of payback may be moderated based upon the general financial health of the electric fund. $5 million was repaid in FY 2020, and this financial plan assumes repayment of the remaining $5 million in $1 million installments by FY 2025. In addition, and based upon the actual ending balances of the Supply and Distribution Operations Reserves for FY 2021, staff requests withdrawing up to $5 million from the Capital Improvement (CIP) Reserve to both fund CIP projects and keep the Distribution Operations fund above minimum guideline levels. Staff further intends to add funds in the CIP reserve in future years, to keep its balance within guideline levels and to fund contingencies such as projected higher future CIP needs and costs. The City maintains a Cap and Trade Program Reserve within the Electric fund to hold revenues from the sale of carbon allowances freely allocated by the California Air Resources Board to the City’s electric utility. Cap and Trade Program revenues are provided to the electric utility to support a wide variety of carbon reducing activities, including local decarbonization. In accordance with Council policy, staff will fund the Cap and Trade Program Reserve with unspent revenues from the sale of carbon allowances freely allocated to the electric utility, as directed in Staff Report #11556 .3 In accordance with Council’s August 2020 direction, (Staff Report #11556)4 the City has also exchanged certain types of renewable energy to take advantage of market conditions to reduce supply costs, fund electric utility programs and capital investment, and raise funds for local decarbonization. The revenues received from these REC exchanges are kept in the Electric Supply Reserve. With this Financial Plan, and as described in Staff Report #11556, staff is allocating Cap and Trade funds equivalent to 1/3 of the FY 2021 REC Exchange program revenues, or $1.189 million, for future local decarbonization projects. Figure 8 (for Supply Fund Reserves) and Figure 9 (for Distribution Fund Reserves) in Section 5E: FY 2022 – FY 2026 Projections show the impact of these transfers on reserves levels. Table 5 shows the projected balance of each of the Electric Utility reserves for the period covered by this Financial Plan. See also: Appendix A: Electric Utility Financial Forecast Detail 3 https://www.cityofpaloalto.org/civicax/filebank/documents/78046 12 | Page Table 5: End of Fiscal Year Electric Utility Reserve Balances for FY 2019 to FY 2025 Ending Reserve Balance ($000) FY 2020 (Act.) FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Re-appropriations - - - - - - - Commitments 3,519 3,519 3,519 3,519 3,519 3,519 3,519 Low Carbon Fuel Standard (LCFS) 6,340 4,080 3,186 2,164 1,092 524 71 Cap and Trade - 1,189 2,190 5,749 9,316 12,866 16,566 Underground Loan 727 727 727 727 727 727 727 Public Benefits 1,905 2,664 3,435 4,275 5,101 5,861 6,575 Special Projects 46,665 47,665 36,649 30,649 31,649 32,649 32,649 Hydro Stabilization 15,400 15,400 15,400 15,400 15,400 15,400 15,400 Capital 5,880 880 880 880 880 9,880 12,880 Rate Stabilization - - - - - - - Distribution and Supply Operations 38,494 36,192 30,832 29,629 33,771 39,372 42,368 Unassigned - - - - - - - TOTAL 118,928 112,314 96,817 92,991 101,454 120,798 130,754 SECTION 4: UTILITY OVERVIEW This section provides an overview of the utility and its operations. It is intended as general background information to help readers better understand the forecasts in Section 5: Utility Financial Projections and Section 6: Details and Assumptions. SECTION 4A: ELECTRIC UTILITY HISTORY On January 16, 1900, Palo Alto began operating its own electric system. One of the earliest sources of Palo Alto's electricity was a steam engine, which was later replaced by a diesel engine in 1914 due to rising fuel oil costs. As the population and the demand for electricity continued to grow, CPAU connected to PG&E’s system in the early 1920s. Power from PG&E proved more economical than the diesel engines, and by the late 1920s CPAU was using its own diesel engines only during peak demand periods. At that time CPAU owned 45 miles of distribution lines and the City used 9.7 GWh annually, less than 1% of today’s annual consumption. The diesel engines remained in operation until 1948, when they were retired. From 1950 to 1970 electric consumption in Palo Alto grew dramatically, just as it did throughout the rest of the country. In 1970 total annual sales were 602 GWh, twenty times the sales in 1950 (30 GWh). Some of that growth was related to a development boom in Palo Alto, which doubled the number of customers. Some was related to the proliferation of electric appliances, as evidenced by the fact that residential customers were using three times more electricity in 1970 than they had been in 1950. But the most notable factor was the growth of industry in Palo Alto during that time. By 1970, commercial customers were using 20 times more electricity per 13 | Page customer than they had been in 1950. These decades also saw several other notable events, including: • 1964: CPAU entered into a favorably priced 40-year contract with the Federal Bureau of Reclamation to purchase power from the Central Valley Project (CVP), a contract which later was managed by the Western Area Power Administration (WAPA) an office of the Department of Energy created in the 1970s to market power from various hydroelectric projects operated by the Federal Government, including the CVP. • 1965: The City began a long-term program to underground its overhead utility lines (Ordinance 2231). • 1968: Palo Alto joined several other small municipal utilities to form the Northern California Power Agency (NCPA), a joint action agency intended to make the group less vulnerable to actions by private utilities and to enable investment in energy supply projects. Palo Alto’s first new power plant investment in over 50 years came in the mid-80s. Palo Alto joined other NCPA members to invest in the construction and operation of the Calaveras Hydroelectric Project on the Stanislaus River in the Sierra-Nevada Mountains. The project commenced operation in 1990. The 1980s also saw an increased focus on infrastructure maintenance. In 1987 the UCC was built to house the terminals for a new SCADA system, which enabled utility staff to monitor the distribution system in real time, improving response time to outages. CPAU also commenced a preventative maintenance and planned replacement program for its underground system in the early 1990s. In the early 1990s the CPUC issued a ruling to deregulate the electric industry in California, and in 1996 the State legislature passed Assembly Bill 1890, which, among other things, created the California Independent System Operator (CAISO) to operate the transmission system and the Power Exchange to facilitate wholesale energy transactions. This restructuring was anticipated to bring lower costs to consumers, and while CPAU was not required to participate in the industry restructuring, in 1997 the Council approved a Direct Access Program for the Electric Utility5 that enabled CPAU to sell electricity outside its service territory and allowed customers within CPAU’s service territory to choose other providers. The utility unbundled its electric rates, creating separate supply and distribution components, which would enable customers to receive only distribution service while purchasing the electricity itself from another provider. The energy crisis in 2000 to 2001 led to the suspension of direct access by the CPUC in September 2001 as wholesale energy prices skyrocketed. The Electric Utility was less impacted than other utilities by the 2000 to 2001 energy crisis thanks to the Calaveras project and its contract with WAPA for CVP hydropower. In 2001 CPAU began planning for the impacts associated with the new terms of its contract with WAPA, set to take effect in 2005. The previous contract had provided 90% of Palo Alto’s power supply at favorable rates, and PG&E, as a party to the contract, had provided supplemental power 5 Implementation of Direct Access for Electric Utility Customers, CMR:460:97, December 1, 1997 14 | Page to balance the monthly and annual variability of CVP generation. The new contract would provide only a third of Palo Alto’s requirement, and the monthly and annual variability in CVP generation would be passed directly to Palo Alto. As a result, electric supply costs would increase and CPAU needed to more actively manage its supply portfolio. CPAU began purchasing power from marketers and also investigated building a power plant in Palo Alto or partnering in the development of a gas-fired power plant elsewhere. Climate change was also becoming more of a concern to the community, and gradually CPAU shifted its focus to the procurement of renewable energy. In 2002 the Council adopted a goal of achieving 20% of its energy supply from renewables by 2015. Subsequently the City signed its first contract for renewable power, a contract for energy from a wind generator commencing deliveries in 2005. In 2011 the renewable energy goal was increased to at least 33% by 2015, and in 2013 the City adopted a plan to make its electric supply 100% carbon neutral, which it achieves through the combination of its carbon- free hydroelectric supplies, purchases of long-term renewable energy supplies, and short-term renewable energy purchases (RECs) to meet the balance of its needs. 15 | Page SECTION 4B: CUSTOMER BASE The City of Palo Alto’s Electric Utility provides electric service to the residents, businesses, and other electric customers in Palo Alto. There are roughly 29,800 customers connected to the electric system, 25,700 (86%) of which are residential and 4,100 (14%) of which are non- residential. Residential customers consumed 152 gigawatt-hours (GWh) in FY 2020, approximately 18% of the electricity sold, while non-residential customers consumed 82% or 703 GWh. Residential customers use electricity primarily for lighting, refrigeration, electronics, and air conditioning.6 Non-residential customers use the majority of their electricity for cooling, ventilation, lighting, office equipment (offices), cooking (restaurants), and refrigeration (grocery stores).7 As shown in Figure 1, Large customer loads represent the biggest proportion of sales for the Electric Utility. The proportion of sales to large vs. small customers is greater than for the City’s other utilities. For example, the largest customers (the 70 customers on the E-7 rate schedule) account for around 43% of CPAU’s sales. The next largest customer group (the 890 non- residential customers on the E-4 rate schedule) represents another 33% of sales. In total, that means that about 3% of customers account for nearly three quarters of the electric load. SECTION 4C: DISTRIBUTION SYSTEM The Electric Utility receives electricity at a single connection point with PG&E’s transmission system. From there the electricity is delivered to customers through nearly 472 miles of distribution lines, of which 211 miles (45%) are overhead lines and 261 miles (55%) are underground. The Electric Utility also maintains nine substations, roughly 2,000 overhead line transformers, around 1,100 underground and substation transformers, and the associated electric services (which connect the distribution lines to the customers’ homes and businesses). These lines, substations, transformers, and services, along with their associated poles, meters, and other associated electric equipment, represent the vast majority of the infrastructure used to deliver electricity in Palo Alto. 6 Source: Residential Appliance Saturation Survey, California Energy Commission, 2010 7 Source: Statewide Commercial End Use Study, California Energy Commission report, 2006. Figure 1: Customer Consumption By Class (FY 2020) 18% 6% 33% 43%Residential Small Comm. Med. Comm. Large Comm. 16 | Page SECTION 4D: COST STRUCTURE AND REVENUE SOURCES As shown in Figure 2, electric commodity purchases accounted for roughly 57% of the Electric Utility’s costs in FY 2020. Operational costs represented roughly 33%, and capital investment was responsible for the remaining 10%. CPAU’s non- hydro long-term commodity supply is heavily dependent on long-term contracts which have little variability in price. On average, costs for these long-term contracts are not predicted to increase as quickly as operations and CIP costs, and will steadily become a smaller proportion of the Electric Utility’s costs. Staff projects commodity supply costs to be approximately 56% of total costs in FY 2026. While average year purchase costs for the electric utility are predictable due to its long-term contracts, variability in hydroelectric generation can result in increased or decreased costs. This is by far the largest source of variability the utility faces. Figure 3 shows the difference in costs under high, projected, and low hydroelectric generation scenarios for FY 2020. Additional costs associated with a very low generation scenario can range from $9-11 million per year. For the current hydroelectric risk assessment see Section 5F: Risk Assessment and Reserves Adequacy. As shown in Figure 4 the Electric Utility receives 79% of its revenue from sales of electricity and the remainder from connection fees, interest on reserves, cost recovery transfers from other funds for shared services provided by the electric utility, accounting entries that reflect things such as CPAU’s participation in a pre-funding program associated with its contract with WAPA, revenues from Figure 2: Cost Structure (FY 2020) 57% 33% 10% Commodity Supply Operations Capital Figure 3: Hydroelectric Variability (FY 2020) 0% 50% 100% 150% 200% Low Hydro Average High Hydro Surplus Hydro (sales) Market Power/RECs Hydro Renewables Load Figure 4: Revenue Structure (FY 2020) 79% 21% Sales of Electricity Other Revenue 17 | Page sales of surplus hydroelectric energy during wet years, as well as LCFS and Cap and Trade revenues. Appendix A: Electric Utility Financial Forecast Detail shows more detail on the utility’s cost and revenue structures. As discussed in Section 4B: Customer Base, nearly three quarters of the utility’s electricity sales are to the 960 largest customers, which provide a similar share of the utility’s revenue stream. About 25% of the utility’s revenue comes from peak demand charges on large non-residential customers. Due to moderate weather and the prevalence of natural gas heating, however, loads (and therefore revenues) are very stable for this utility, without the large seasonal air conditioning or winter heating loads seen at some other utilities. SECTION 4E: RESERVES STRUCTURE CPAU maintains several reserves for its Electric Utility to manage various types of contingencies and for ease of reporting. It also maintains two funds, the Supply Fund and the Distribution Fund, to manage costs associated with electricity supply and electricity distribution, respectively. The City established this separation of supply and distribution costs as the City prepared to allow its customers a choice of electricity providers (referred to as “Direct Access”) in the late 1990s and early 2000s. Though the 2000/2001 energy crisis halted these plans, CPAU continues to maintain separate funds to facilitate separation of supply and distribution costs in the rates. This could be important if California ever decides to broadly reintroduce Direct Access, and is useful for rate design as the nature of utility services evolves in response to higher penetrations of distributed generation. Thus, individual reserves may reside within a particular fund (for instance, Electric Special Projects is under Electric Supply) or be included within both funds (there are both Supply and Distribution Reserves for Commitments). The summary below describes the various reserves, but see Appendix B: Electric Utility Reserves Management Practices for more detailed definitions and guidelines for reserve management: • Reserves for Commitments: Reserves equal to the utility’s outstanding contract liabilities for the current fiscal year. Most City funds, including the General Fund, have a Commitments Reserve. • Reserves for Reappropriations: Reserves 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. This is currently an important reserve for all utility funds, but changes in budgeting practices will change that in future years, as described in Section 3C (Reserves Management Practices). • Electric Special Projects (ESP) Reserve: This reserve was formerly called the Calaveras Reserve, which was accumulated during deregulation of California’s electric system to fund the stranded costs associated primarily with the Calaveras hydroelectric resource and the California-Oregon Transmission Project. When that reserve was no longer needed for that purpose, the reserve was renamed and the purpose was changed to fund projects with significant impact that provide demonstrable value to electric ratepayers. 18 | Page • Hydroelectric Stabilization Reserve: This contingency reserve is used for managing additional costs due to below average hydroelectric generation, or to hold surpluses resulting from above average hydroelectric generation. • Underground Loan Reserve: This reserve is an accounting tool used to offset receivables associated with loans made through the underground loan program. It is adjusted according to principal payments made on those loans. • Cap and Trade Program Reserve: This reserve tracks unspent or unallocated revenues from the sale of carbon allowances freely allocated by the California Air Resources Board to the electric 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. • Low Carbon Fuel Standard (LCFS) Reserve: This reserve tracks revenues earned via the sale of Low Carbon Fuel Credits allocated by the California Air Resources Board to the City, in accordance with California’s Low Carbon Fuel Standard program. • Public Benefits Reserve: CPAU’s electric rates include a separate charge called the “Public Benefits Charge” which generates revenue to be used for energy efficiency, demand-side renewable energy, research and development, and low-income energy efficiency services. Any funds not expended in the current year are added to the Public Benefits Reserve for use in future years. • Capital Improvement Program (CIP) Reserve: The CIP reserve can be used to accumulate funds for future expenditure on CIP projects, as well as to manage cash flow for ongoing capital projects. This reserve can also act as a contingency reserve for unforeseen capital expenses. This type of reserve is used in other utility funds (Water, Gas, and Wastewater Collection) as well. • Supply and Distribution Rate Stabilization Reserves: These reserves are 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 (Gas, Wastewater Collection, and Water) as well. • Supply and Distribution Operations Reserves: These are the primary contingency reserves for the Electric Utility, and are used to manage yearly variances from budget for operational costs and electric supply costs (aside from variances related to hydroelectric generation). This type of reserve is used in other utility funds (Gas, Wastewater Collection, and Water) as well. • Unassigned Reserves (Supply/Distribution): As in the other utility funds, these reserves are for any financial resources not assigned to the other reserves and are normally empty. SECTION 4F: COMPETITIVENESS For the median consumption level the annual residential electric bill for calendar year 2020 was $728 under current CPAU rates, about 37% lower than the annual bill for a PG&E customer with the same consumption and approximately 19% higher than the annual bill for a City of Santa Clara customer. The bill calculations for PG&E customers are based on PG&E Climate Zone X, which includes most surrounding comparison communities. 19 | Page Table 6 presents sample median residential bills for Palo Alto, PG&E, and the City of Santa Clara (Silicon Valley Power) for several usage levels. Rates used to calculate the monthly bills shown below were in effect as of January 1, 2021. Over the next several years low usage customers in PG&E territory are expected to continue to see higher percentage rate increases than high usage customers as PG&E compresses its tiers from the highly exaggerated levels that have been in place since the energy crisis. This is likely to make the bill for the median Palo Alto consumer look even more favorable compared to most PG&E customers. Even with the compressed tiers, bills for high usage Palo Alto consumers are likely to remain substantially lower than the bills for high usage PG&E customers. Table 6: Residential Monthly Electric Bill Comparison (Effective 1/1/2021, $/mo.) Season Usage (kwh) Palo Alto PG&E Santa Clara Winter 300 41.27 74.96 36.96 453 (Median) 69.22 113.19 56.50 650 107.37 174.55 81.66 1200 213.89 347.48 151.91 Summer 300 41.27 77.09 36.96 (Median) 365 52.18 97.53 45.27 650 107.37 187.14 81.66 1200 213.89 360.08 151.91 Table 7 shows the average monthly electric bill for commercial customers for various usage levels. Table 7: Commercial Monthly Electric Bill Comparison (1/1/2021, $/mo.) Usage (kwh/mo) Palo Alto PG&E Santa Clara 1,000 177 272 185 160,000 24,795 30,804 20,239 500,000 77,477 80,675 63,096 2,000,000 273,431 308,918 252,172 SECTION 5: UTILITY FINANCIAL PROJECTIONS SECTION 5A: LOAD FORECAST Figure 5 shows a 36-year history of Palo Alto electricity consumption. Average electricity consumption grew from 1986 to 1998, then returned to 1986 levels by 2002. Since then electricity consumption has declined slowly as a result of a continuing focus on energy efficiency, as well as the adoption of more stringent appliance efficiency standards and energy standards in building codes. In recent years, some larger commercial customers have relocated operations or shifted to more commercial type usage. It is unknown how long this trend may continue, or what 20 | Page the longer term impacts of COVID and work-from home policies might mean for commercial utilization in Palo Alto. Figure 5: Historical Electricity Consumption Figure 6 shows the forecast of electricity consumption through FY 2026. The solid black straight line is the long term average trend of usage. The small-dash red line estimates the estimated drop in consumption due to the ongoing COVID response and is what was used for the current 0% scenario. Staff worked with Northern California Power Agency to incorporate UCLA’s Anderson School GDP forecast to estimate the impact of the COVID-19 pandemic. Based upon the forecast and the electricity load impact to date, the UCLA GDP forecast was added to capture the effect of the large and sharp COVID-19 recession through December of 2022. After this, the assumption is that sales will resume to at a level slightly below the long-term trend line. However, these projections will be revised if continuing sales patterns indicate further declines or increases, or changes in customer mix occur. 21 | Page Figure 6: Forecasted Electricity Consumption SECTION 5B: FY 2016 TO FY 2020 COST AND REVENUE TRENDS As shown in Figure 7 and the tables in Appendix A: Electric Utility Financial Forecast Detail, the annual expenses for the Electric Utility remained fairly stable between FY 2015 and FY 2017 but increased in FY 2018. On the capital side, the large Upgrade Downtown CIP project got underway in FY 2018, which was a much larger project than usual. Electric supply costs increased as new renewable projects came online, and transmission costs rose and have continued to rise as improvements are made to the overall California grid. Section 6A: Electricity Purchases discusses the factors influencing Electric Utility expenses. Since FY 2012, total expenses for the utility have included the costs of renewable resources coming online. In FY 2014 through FY 2015 commodity costs were higher due to lower than average output from hydroelectric resources. Transmission costs have increased, as projected in prior financial plans. Better than average hydro conditions in FY 2019 led to lower than expected generation expenses as well as better than expected surplus energy revenues. Commodity costs have increased, on average, by about 4.6% per year over this timeframe. Operations costs have increased by about 2% annually on average. Revenues have increased on average by about 6% per year over this period, although FY 2018 sales revenues were lower than projected due to declining sales, and FY 2020 sales have been impacted by COVID. Actual Projection 22 | Page Figure 7: Electric Utility Expenses, Revenues, and Rate Changes: Actual Costs through FY 2019 and Projections through FY 2025 SECTION 5C: FY 2020 RESULTS FY 2020 saw lower sales than expected with the onset of the COVID pandemic, but other revenues (such as surplus energy sales) came in higher, offsetting the loss. Net purchase costs came in slightly higher than budget, and while O&M costs came in lower than projected, administrative and overhead costs came in higher. The net effect to the Operating Reserves were that they were $400,000 lower than estimated in the FY 2021 financial Plan. Table 8 FY 2020, Actual Results vs. Financial Plan Forecast ($000) Net Cost/(Benefit) Type of change Sales revenues lower than forecast $983 Revenue decrease Surplus sales, interest, and other income higher than expected (1,068) Revenue increase Higher net purchase cost 435 Cost increase Higher operating expense 50 Cost increase Net Cost / (Benefit) of Variances $400 23 | Page SECTION 5D: FY 2021 PROJECTIONS Last year, staff recommended (and Council approved) no rate change for July 1, 2020. Sales are still declining but not as fast as projected earlier, and staff is estimating $4.8 million higher sales for FY 2021. Purchase costs are projected to increase by about $5.4 million, mainly due to poor projected hydro conditions. Other revenues are projected to be about $2.7 million higher, primarily from increasing EMA/Market sales (sales of surplus energy) as well as REC sales revenue. A revised operations cost outlook increased projected expenses by about $3.6 million compared to the FY 2020 Financial Plan, mainly from revised administration costs as FY 2020 actuals were higher. Programs funded by the City’s LCFS budget increased as well. With the increased sales outlook, net purchase costs are expected to be $5.4 million higher. Table 9 FY 2021, Change in Projected Results, 2022 Forecast vs. 2021 Forecast ($000) Net Cost/(Benefit) Type of change Modified reserve transfers (5,156) Operations Reserve increase Sales revenues higher than forecasted (4,834) Revenue increase Wholesale and other revenues higher than forecast (2,690) Revenue increase Purchased electricity costs higher than forecasted 5,440 Cost increase Operations costs 3,630 Cost decrease Net Cost / (Benefit) of Variances to Ops Reserve ($3,610) SECTION 5E: FY 2022 – FY 2026 PROJECTIONS As shown in Figure 7 above, staff projects costs for the Electric Utility to increase at a fairly steady rate through the forecast period. Revenue increases between 0% to 5% are projected to keep revenues in line with expenses over the next five years. Rising electricity purchase costs are the primary contributor to the increases. Electricity purchase costs are increasing substantially, as transmission costs rise to make improvements to the California grid. Operations costs are expected to increase at or near the inflation rate (2-3%/year) through the forecast period. Projected capital expenses are higher due to the rebuilding of existing underground districts, substation and line voltage upgrades. The City is also evaluating the cost and scope of other system resiliency projects, such as pole replacements, which may increase costs as well as rates in the future. The forecast also assumes the Smart Grid project to bring advanced metering to the Electric, Gas and Water utilities will start with $12 million in FY 2022 and additional $7 million in FY 2023. Funding for this project will come out of the Electric Special Projects reserve, as can be seen in Figure 8 below and in Appendix A: Electric Utility Financial Forecast detail. Reserves trends based on these revenue projections are shown in Figure 8 (for Supply Fund Reserves) and Figure 9 (for Distribution Fund Reserves), below. 24 | Page Figure 8: Electric Utility Reserves (Supply Fund): Actual Reserve Levels through FY 2020 and Projections through FY 2026 25 | Page Figure 9: Electric Utility Reserves (Distribution Fund): Actual Reserve Levels through FY 2020 and Projections through FY 2026 SECTION 5F: RISK ASSESSMENT AND RESERVES ADEQUACY The Electric Utility currently has two primary contingency reserves, the Supply Operations Reserve and the Distribution Operations Reserve. In the past, the Supply and Distribution funds had Rate Stabilization Reserves (RSR) but both have been drawn to zero, as approved in prior financial plans. In addition, the Electric Utility has a Hydro Stabilization reserve, an Electric Special Projects reserve and a Capital reserve, which can be utilized with prior Council approval. This Financial Plan maintains reserves above the reserve minimum for the Distribution Operations Reserve throughout the forecast period. Reserve levels also exceed the short-term risk assessment level for the Distribution Fund. The Supply Operations Reserve is also currently within guideline levels. There are a variety of risks associated with the Supply Fund as are shown in Table 10. Because of the high range of uncertainty in energy price predictions more than three years in the future, this risk assessment is only performed for the first two fiscal years of the forecast period. It is important to note that the likelihood of all of these adverse scenarios occurring simultaneously and to the degree described in Table 10 is very low. 26 | Page Table 10: Electric Supply Fund Risk Assessment Categories of Electric Supply Cost Uncertainties Estimates of Adverse Outcomes (M$) Estimates of Adverse Outcomes (M$) FY 2022 FY 2023 1. Load Net Revenue 3.1 3.2 2. Hydro Production: Western & Calaveras 4.8 4.6 3. Renewable Production: Landfill & Wind & Solar 1.8 1.8 4. Carbon Neutral Cost 0.9 0.9 5. REC Sales 1.5 1.8 6. Market Price 0.3* 0.8** 7. Resource Adequacy 1.6 1.4 8. Transmission/CAISO 3.7~ 3.9~ 9. Plant Outage 1.0 1.0 10. Western Cost 1.6 1.6 11. Legislative & Regulatory 0.0 0.0 12. Supplier Default 0.2† 0.2† Electric Supply Fund Risks $ 20.5 million $ 21.0 million Of the risks faced by the Electric Utility’s Supply Fund, the risk of a dry year with very low hydroelectric output is normally the largest, accounting for nearly one-third ($4.8 million) of all the adverse cost uncertainty. Since the utility’s costs for its hydroelectric resources are almost entirely fixed, costs do not decline when the output of those resources are low, but the utility needs to buy power to replace the lost output. The converse happens when hydroelectric output is higher than average. Of the remaining risks for FY 2022, $3.7 million is related to potential transmission cost increases (above staff’s current forecast). $3.1 million is related to the potential that total load (and the associated retail sales revenue) may be lower than projected, $1.8 million is associated with uncertainty around renewables production, and $1.6 million is associated with possible decreases in Resource Adequacy capacity sales revenues (and/or increases in Resource Adequacy capacity purchase costs). As shown in Figure 10, staff projects the Supply Operations Reserve to remain slightly above the minimum guideline levels, dropping to its lowest in FY 2023 but recovering to target levels by FY 2026. Figure 11 shows that the combined Hydro Stabilization, Supply Rate Stabilization and 27 | Page Supply Operations Reserves are projected to be above what is needed for the risk assessment level. Figure 10: Electric Supply Operations Reserve Adequacy 28 | Page Figure 11: Adequacy of Supply Operations and Hydro Stabilization Reserves, Combined Table 11 summarizes the risk assessment calculation for the Distribution Operations Reserve through FY 2026. As shown in Figure 12, the Distribution Operations Reserve is also projected to drop near to the minimum reserve guidelines in FY 2023, but is projected to recover to near target levels over the course of the forecast period. The risk assessment includes the revenue shortfall that could accrue due to: 1. Lower than forecasted sales revenue; and 2. An increase of 10% of planned system improvement CIP expenditures for the budget year. 29 | Page Table 11: Electric Distribution Fund Risk Assessment ($000) FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 Total non-commodity revenue $55,969 $62,474 $67,870 $71,707 $71,475 Max. revenue variance, previous ten years 8% 8% 8% 8% 8% Risk of revenue loss $4,417 $4,931 $5,357 $5,659 $5,641 CIP Budget $30,643 $27,739 $21,700 $13,926 $21,284 CIP Contingency @10% $3,064 $2,774 $2,170 $1,393 $2,128 Total Risk Assessment value $7,482 $7,705 $7,527 $7,052 $7,770 Figure 12: Electric Distribution Operations Reserve Adequacy The Electric Utility also has a Capital Improvement Program (CIP) Reserve that acts as a reserve for short term capital contingencies or as a place to set aside funds for large, one-time projects that the Utilities would otherwise need to debt-fund. In the future, staff would also like to use this reserve to manage cash flow for capital projects on an ongoing basis as well. 30 | Page Figure 13 below reflects the maximum and minimum CIP Reserve guideline levels, starting in FY 2021. Because of the fluctuating annual dollar amounts and timing of CIP projects budgeted to occur during the forecast period, as well as the potential for new ongoing projects to be included in the CIP plan in later years, four years of budgeted CIP is used to calculate the reserve maximum levels. The minimum CIP Reserve level is 20% of the maximum CIP Reserve guideline level. Because of constrained operating conditions resulting from the COVID epidemic and a desire not to raise rates too quickly, the 2022 Financial Plan doesn’t anticipate funding the CIP Reserve from the Distribution Operations Reserve until FY 2025 ($9 million). In future years, the CIP Reserve will reflect actual fluctuations in CIP expenditures (money spent on actual projects in a given year). CIP expenditures are currently reflected in the Operations Reserve. Staff is anticipating, once the CIP Reserve has an adequate ending balance, to annually fund the CIP reserve with an amount based on average anticipated CIP spending for that year (currently estimated at $18 to $19 million annually, but subject to change as new projects are added), and have any cost savings or over-runs be reflected in the CIP Reserve instead of the Operations Reserve, as described above. This will allow for better transparency and accounting of CIP related funds, will address uneven annual funding associated with ongoing CIP projects, and offer a funding source for one- time or immediately needed projects. Having the reserve guidelines in place will ensure the reserve has sufficient funding for budgeted CIP as fluctuating annual amounts of capital investment occur going forward. Figure 13 shows the projected CIP Reserve balances and guideline levels for FY 2021 through FY 2026, as well as the prior reserve and guidelines in FY 2020. Because of constrained financial conditions, the CIP reserve is projected to be below the minimum guideline for a few years, until reserve funding can take place. 31 | Page Figure 13: Electric CIP Reserve Adequacy SECTION 5G: LONG-TERM OUTLOOK This forecast covers the period from FY 2022 through FY 2026, but various long-term developments may create new costs for the utility over the next 10 to 35 years. While it is challenging to accurately forecast the impact these events will have on the utility’s costs, it is worth noting them as future milestones and keeping them in mind for long-term planning purposes. For the supply portfolio, the 2020s will see a number of notable events. The contract with Western for power from the CVP will expire in 2024. Determining the future relationship with Western after 2024 will be important in the years leading up to the contract expiration, especially because this resource represents nearly 40% of the electric portfolio and is the utility’s largest source of carbon-free electricity. The utility’s three earliest and lowest cost renewable contracts will also begin expiring around that time, with the first contract expiring in 2021 and the last in 2028. These three contracts, plus one more expiring in 2030, currently provide 17% to 18% of the energy for the utility’s supply portfolio at prices under $65 per megawatt-hour (MWh). It is difficult to know what renewable energy prices will be when those contracts expire. Although 32 | Page recent prices have been in that range (or even lower), and costs may decrease in the future, current renewable projects also benefit from a wide range of tax and other incentives that may or may not be available in the 2020s and beyond. However, staff is in the process of procuring a replacement for the contract expiring in 2021 at a lower price than any of the City’s current renewable contracts. The costs of the Calaveras hydro project will also change in the 2020s, with debt service costs dropping by half in 2025 as some of the debt is paid off, and all debt retired by the end of 2032 . Some additional debt may be issued to fund the costs of relicensing the project, but this is not anticipated to be as high as the current debt service. The project will only be 40 years old at that time, and hydroelectric projects can last for 70-100 years before major rebuilding is needed. Calaveras debt service represents roughly 70% of the annual costs of that project (and nearly 7% of the utility’s total costs), so when the debt is retired, the project could be a low-cost asset for the utility, providing carbon-free energy equal to around 13% of the Electric Utility’s supply needs in an average year. Another factor that may affect the utility’s supply costs in the long run is carbon allowance revenue. Currently the Electric Utility receives $3 to $5 million per year in revenue from allocated carbon allowances under the State’s cap-and-trade program. It uses that revenue to pay for energy efficiency programs and to purchase renewable energy to support the utility’s Carbon Neutral Plan. Staff expects that revenue source to continue through 2020. However, discussions at the state level are ongoing and will determine whether or not these allocations continue till 2030, as well as any further restrictions CARB may wish to enact on usage of allocation sales revenues. If the Electric Utility no longer received these allowances or was limited in how it could spend revenues, it would have to fund these programs from sales revenues. Transmission costs are also continuing to rise. If the State continues to increase mandates or incentives for renewable energy development, integrating these new projects into the transmission grid will be an ever-increasing challenge, some costs of which will be borne by Palo Alto. The planned expansion of the CAISO to a larger regional grid control area may result in additional transmission costs that could further increase CPAU’s transmission costs. In addition to the costs of new transmission lines that will need to be built, flexible resources will be required to balance rapid changes in wind or solar output throughout the day. Palo Alto will likely bear some of the costs of these new lines and resources. CPAU is also currently investigating installing a second transmission interconnection for Palo Alto, which could be funded by the Electric Special Projects Reserve. Over the next several years the Electric Utility will continue to execute its usual monitoring, repair, and replacement routine for the distribution system, but will also begin the rollout of various smart grid technologies. The utility continues to monitor the growth of electric vehicle ownership and gas-to-electric fuel switching in Palo Alto. In the next 10 to 20 years, these factors may begin to create notable increases in electric consumption and have a variety of impacts on the distribution system. As housing stock is turned over, however, stricter building codes may 33 | Page help to counteract load growth, as may increasing numbers of rooftop solar installations. The utility has already started to take some of these factors into account in its long-term planning processes but will need to continue to incorporate them into its planning methodologies. Over the long term, electricity may replace natural gas and petroleum almost entirely as part of the City’s efforts to combat climate change. Many, if not most, vehicles would use electricity, though hydrogen is another potential fuel source under development and other technologies might be developed. Staff are undertaking initial analysis of these types of scenarios in the context of the Sustainability and Climate Action Plan (S/CAP) development process. These types of scenarios require careful planning for the associated load growth to make sure the distribution system does not end up overloaded, or conversely, to avoid over investment, and the evaluation of changes to utility distribution system management to accommodate integration of the various technologies involved in electrification. SECTION 5H: ALTERNATIVE RATE PROJECTIONS Staff has no alternative projections at this time. SECTION 6: DETAILS AND ASSUMPTIONS SECTION 6A: ELECTRICITY PURCHASES As shown in Figure 14 the utility gets roughly 50% of its energy from hydroelectric projects in a normal year (FY FY2015 was dry). Contracts with renewable sources made up just over 30% of the portfolio in FY 2016, and 50% in FY 2017. Staff expects contracts with renewable sources to continue at approximately 50% of the portfolio for the forecast period. The remainder comes from unspecified market sources. Under the City’s Carbon Neutral Plan, CPAU purchases RECs corresponding to the amount of market energy it purchases. 34 | Page Figure 14: Electricity Supply by Source Figure 15 shows the historical and projected costs for the electric supply portfolio,8 as well as average and actual hydroelectric generation.9 Electric supply costs increased in FY 2013, FY 2014, and FY 2015 due to the drought, which reduced the amount of generation from hydroelectric resources. Costs decreased slightly in FY 2016 due to better than expected market purchase costs, and FY 2017 and FY 2018 had lower hydroelectric costs. Renewable energy costs assumed a larger portion of cost as various renewable projects came online to fulfill the City’s carbon neutral and RPS goals, although some of the older, higher priced contracts will start expiring as early as FY 2022. The current market outlook is that newer renewables projects should come in at lower costs. Transmission charges are also projected to increase as new transmission lines are built throughout California to accommodate new renewable projects. In total, electric supply costs are projected to increase to about $87 million by FY 2026, at which point all currently contracted renewable projects will be online. Supply costs are only projected to change slightly in subsequent years. 8 Costs are shown net of wholesale revenues, and cannot be directly compared with the electric supply purchase figures shown in Appendix A: Electric Utility Financial Forecast Detail. 9 Average hydroelectric generation based on the current E-HRA tariff. 35 | Page Figure 15: Electric Supply Portfolio Costs, Historical and Projected SECTION 6B: OPERATIONS CPAU’s Electric Utility operations include the following activities: • Administration, including financial management of charges allocated to the Electric Utility for administrative services provided by the General Fund and for Utilities Department administration, as well as debt service and other transfers. Additional detail on Electric Utility debt service is provided in Section 6D (Debt Service) • Customer Service • Engineering work for maintenance activities (as opposed to capital activities) • Operations and Maintenance of the distribution system; and • Resource Management Appendix C: Description of Electric utility Operational Activities includes detailed descriptions of the work associated with each of these activities. From FY 2016 to FY 2020, overall Operations costs have risen annually by about 4% on average. Starting in FY 2021 and continuing for several years, Operations and Maintenance costs are 36 | Page increased mainly due to the introduction of a contract line crew to help while the Utility is understaffed. These costs may be reduced depending on how much work is needed and may be phased out as longer-term employees are gained. Demand side management costs are increasing in FY 2021 to reflect new and ongoing costs related to Low Carbon Fuel Standard rebates. Revenues from the same program will offset most of these costs. Figure 21: Historical and Projected Electric Utility Operational Costs SECTION 6C: CAPITAL IMPROVEMENT PROGRAM (CIP) Staff projects CIP spending for FY 2022 through FY 2026 to be consistent with last year’s forecast, though there is a slight shift in the funding by project category. There will be a reduction in funding for Undergrounding as current projects are completed and delayed; there will be an increase in funding for Underground Rebuilding and 4/12kV Conversion as improvements are made to the system in portions of the Crescent Park/Duveneck/St. Francis/Community Center/Leland Manor/Garland neighborhoods to facilitate rebuild of the Hopkins Substation; and increase in funding for replacement of distribution system and substation facilities that are at the end of their useful life. Other significant projects still slated to continue are deteriorated wood pole replacements, substation physical security upgrades, pole relocations to facilitate the Caltrain Railway Electrification project, Smart Grid upgrades, and ongoing capital investment in 37 | Page the electric distribution system to maintain/improve reliability. This forecast assumes that the utility finances smart grid projects (along with funding from the water and gas funds), the Foothill fire mitigation rebuilds, and the 115kV electric interconnection from the Electric Special Projects Reserve, but it would also be possible to use bond financing. The full deployment of the smart grid project has tentatively been moved out to start in FY 2023. Excluding the one-time projects listed above, the CIP plan for FY 2022 to FY 2026 is primarily funded by utility rates, but other sources of funds include connection fees (for Customer Connections), phone and cable companies (primarily for undergrounding), and other funds (for smart grid, foothill rebuilds, electric interconnection). The details of the CIP budget will be available in the Proposed FY 2022 Utilities Capital Budget. Figure 17 shows the FY 2022 projected budget and the five year CIP spending plan, although these figures are preliminary pending budget discussions starting in May. The ‘committed’ column represents funds committed to contracts for which work has not yet been completed or invoices paid. Figure 22: Electric Utility CIP Spending ($000) SECTION 6D: DEBT SERVICE The Electric Utility’s annual debt service is $100,000 per year. The Electric Utility currently makes payment on one bond issuance, the 2007 Electric Utility Clean Renewable Energy Tax Credit Bonds, Series A. This $1.5 million bond issuance was to fund a portion of the construction costs of solar demonstration projects at the Municipal Services Center, Baylands Interpretive Center, and Cubberley Community Center. The capacity of these projects totaled 250 kW. In exchange for funding part of the construction costs, the Electric Utility receives the RECs from these projects. The bonds were Clean Renewable Energy Bonds (CREBs), meaning they are interest free (the investors receive a tax credit from the federal government). This bond issuance is secured by the net revenues of the Electric Utility. Debt service for this bond continues through 2021, and for the financial forecast period is as follows: Table 15: Electric Utility Debt Service ($000) FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 2007 Clean Renewable Energy Bonds 100 100 - - - Project Category Current Budget * Spending, Curr. Yr. Remain. Budget **Committed FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 One Time Projects 4,456 (310) 4,146 265 4,000 2,000 2,000 11,000 - Reliability 3,531 (1,923) 1,609 1,042 4,020 5,690 4,040 3,000 2,563 Undergrounding 1,548 (35) 1,513 126 - 56 3,750 250 - 4/12 Kv Conversion 1,830 (7) 1,823 - 166 50 120 2,120 1,820 Underground Rebuild 4,955 (24) 4,931 17 2,110 250 400 4,050 461 Ongoing 3,766 (1,051) 2,715 1,169 5,830 4,445 3,805 3,605 3,672 Customer Connections 2,400 (1,515) 885 352 2,550 2,700 2,400 2,400 2,472 Total 22,486 (4,863) 17,623 2,971 18,676 15,191 16,515 26,425 10,987 * Includes unspent funds from previous years carried forward or re-appropriated into the current fiscal year.** Equal to CIP Reserves (Reserve for Re-appropriations + Reserve for Commitments) 38 | Page The 2007 bonds include a covenant stating that the Electric Utility will maintain a debt coverage ratio of 125% of debt service. The current Financial Plan maintains compliance with these covenants throughout the forecast period, as shown in Appendix C. The Electric Utility also pledges reserves and net revenue as security for the bond issuances listed in Table 16, even though the Electric Utility is not responsible for the debt service payments. The Electric 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 16: Other Issuances Secured by Electric Utility’s Revenues or Reserves Bond Issuance Responsible Utilities Annual Debt Service ($000) Secured by Electric Utility’s: Net Revenues Reserves 1999 Utility Revenue Bonds, Series A Storm Drain Wastewater Collection Wastewater Treatment $1,207 No Yes 2009 Water Revenue Bonds (Build America Bonds) Water $1,977* No Yes 2011 Utility Revenue Refunding Bonds, Series A Gas Water $1,457 No Yes *Net of Federal interest subsidy SECTION 6E: EQUITY TRANSFER The City calculates the equity transfer from its Electric Utility based on a methodology adopted by Council in 2009, which has remained unchanged since then.10 Each year it is calculated according to the 2009 Council-adopted methodology and does not require additional Council action. SECTION 6F: WHOLESALE REVENUES AND OTHER REVENUES The Electric Utility receives most of its revenues from sales of electricity, but about one quarter comes from other sources. Of these other sources, about 50% to 60% represents wholesale revenues of surplus energy sales. These revenues may offset electric supply purchase costs, smooth rate increases, or fund reserves or other costs. Of the remaining revenues, the largest revenue sources are interest on reserves, connection fees for new or replacement electric services, and carbon allowance revenues associated with the State’s cap-and-trade program. In FY 2020 these sources represented roughly 33% of revenue from sources other than electricity sales. The remaining FY 2020 revenues consisted of a variety of one-time transfers. Revenues from connection fees have increased since FY 2009 varying from year to year. Connection fee revenues are collected to offset costs incurred in setting up new connections and are pass-through in nature. Revenue from connection fees decreased slightly during the recession, but has increased substantially since then, peaking in FY 2016 declining somewhat in 10 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. 39 | Page FY 2017 and FY 2018, then hitting a new high in FY 2019. Staff forecasts slightly lower revenue from this source in 2021 with revenue leveling out in subsequent years. Staff projects carbon allowance and interest income revenues to stay relatively stable through the forecast period. However, both of these revenue sources are subject to some uncertainty. This forecast assumes the program State’s cap-and-trade program will remain in place but with declining returns through 2030. This scenario may be pessimistic, but matches what has transpired for free allowances in the gas fund. The forecast for interest income assumes current interest rates continue and there are no major reserve reductions aside from what is anticipated in this Financial Plan. If interest rates rise, interest income could increase, and if reserves decrease (due to drought or a withdrawal from the ESP reserve for a major project), interest income would decrease. SECTION 6G: SALES REVENUES The load forecast in Section 5A: Load Forecast and the projected rate changes shown in Figure 7 provide the basis for sales revenue projections. As discussed in Section 5A, sales revenues for this utility have been decreasing due to load reduction but are helped by the mild climate in Palo Alto. Palo Alto is a built-out City, so the opportunities for increased load growth are limited to the existing footprint of commercial structures and incremental growth in population. As utilization of existing spaces changes, and energy efficiency measures continue, Palo Alto could see greater load loss. Increased loads from electric vehicles and the electrification of households may increase loads somewhat. 40 | Page SECTION 7: COMMUNICATIONS PLAN The fiscal year (FY) 2022 Electric Utility communications strategy covers these primary areas: efficiency services and utility bill savings; capital improvement, operations and maintenance for infrastructure safety and reliability; renewables and carbon neutral portfolio; beneficial electrification; and cost containment measures. The City of Palo Alto Utilities (CPAU) communication methods include use of the utilities website, utility bill inserts, messaging on utility bills, email newsletters, print and digital ads in local publications, social media, and community message boards. In FY 2022, CPAU is proposing no increase in electric utility rates. Communications will focus on helping customers with efficiency services, rate assistance and bill payment relief programs to help them navigate a challenging economic situation during the COVID-19 pandemic. They will also highlight CPAU’s decision to defer rate increases as a benefit of the organization’s management of its financial portfolio, including use of reserves for situations such as what we could not anticipate but observed in 2020. While the cost of transmission fees, capital investment, construction and contract labor costs have increased, CPAU is able to insulate customers against significant rate increases because of its financial portfolio management. Staff anticipates that rate increases around 5% each year beyond FY 2022 will be required in order to keep the reserves within a healthy margin. CPAU continues to make cost containment an ongoing priority and part of an annual cycle, consistent with the Utilities Strategic Plan. CPAU’s electric utility rates remain lower than the neighboring community average, such as for investor-owned utilities like PG&E. The average Palo Alto resident’s monthly electric bill is around 34% lower than the PG&E average. Keeping costs low is one of the benefits CPAU offers its customers as a public utility provider. CPAU customers also benefit from local control and policy setting, and community values-driven programs and services, including the decision to go carbon neutral in 2013. Palo Alto’s renewable energy purchase agreements contribute to our utility’s long-term energy security and commitment to sustainability. Power purchase agreements have allowed CPAU to procure long- term renewable electric supplies at low costs. CPAU will highlight these environmental attributes and value in our communications. Programs such as the Home Efficiency Genie and commercial energy efficiency audits help residents and businesses better understand energy usage, activities and/or upgrades they can implement to improve efficiency and keep utility costs low. In 2020, we began offering a virtual Genie in-home assessment and webinars about home energy and water efficiency to help customers keep utility costs low while working and studying from home during the pandemic shelter-in-place order. CPAU is exploring additional opportunities to help customers electrify homes, buildings, and personal transportation. Rebates for residential appliances such as heat pump water heaters and electric vehicle charging stations for multi-family and non-profit facilities are incentivizing more and more customers to take action. Staff are piloting programs to explore electrification technologies in other applications as well. These efforts are in line with 41 | Page the City’s Sustainability and Climate Action Plan goals to reduce greenhouse gas emissions. CPAU launched an upgraded version of its online utility account services portal in 2020, which provides customers with direct access and more information about utility account and consumption data. 42 | Page APPENDICES Appendix A: Electric Utility Financial Forecast Detail Appendix B: Electric Utility Reserves Management Practices Appendix C: Description of Electric utility Operational Activities Appendix D: Samples of Recent Electric Utility Outreach Communications 6053706 APPENDIX A: ELECTRIC UTILITY FINANCIAL FORECAST DETAIL 6053706 (page intentionally left blank) 6053706 1 FISCAL YEAR FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 2 3 ELECTRIC LOAD 160 162 4 Purchases (MWh)977,292 945,703 925,329 905,071 879,913 818,593 835,246 870,922 875,208 867,019 858,859 5 Sales (MWh)937,157 917,687 899,997 884,322 854,760 796,450 812,790 846,966 851,449 843,454 835,431 6 7 BILL AND RATE CHANGES 8 System Average Rate ($/kWh)0.1156$ 0.1249$ 0.1413$ 0.1487$ 0.1624$ 0.1624$ 0.1624$ 0.1707$ 0.1799$ 0.1843$ 0.1837$ 9 Change in System Average Rate 0%10%13%5%9%0%0%5%5%2%0% 10 Change in Average Residential Bill 3%11%11%6%8%-1%-1%5%5%2%-1% 11 12 STARTING RESERVES 13 Reappropriations (Non-CIP)- - - - - - - - - - - 14 Commitments (Non-CIP)3,102,055 3,777,205 2,970,955 3,725,000 3,910,695 3,518,525 3,518,525 3,518,525 3,518,525 3,518,525 3,518,525 15 Low Carbon Fuel Standard (LCFS) Reserve - - - - - 6,340,000 4,079,577 3,186,120 2,163,917 1,091,927 524,278 16 Cap and Trade Program 1,189,129 2,189,551 5,749,259 9,315,900 12,866,019 17 Underground Loan Reserve 730,000 729,000 730,147 730,147 726,659 726,659 726,659 726,659 726,659 726,659 726,659 18 Public Benefits Reserves 2,574,000 1,839,000 681,330 681,330 809,700 1,904,547 2,664,195 3,434,974 4,274,785 5,101,307 5,861,122 19 Electric Special Projects Reserve 51,837,855 51,837,855 51,837,855 41,837,855 41,664,855 46,664,855 47,664,855 36,649,107 30,649,107 31,649,107 32,649,107 20 Hydro Stabilization Reserve 17,000,000 11,400,000 11,400,000 11,400,000 11,400,000 15,400,000 15,400,000 15,400,000 15,400,000 15,400,000 15,400,000 21 Capital Reserves - - 879,964 879,964 879,964 5,879,964 879,964 879,964 879,964 879,964 9,879,964 22 Rate Stabilization Reserves 14,410,840 9,010,840 9,010,840 9,010,840 - - - - - - - 23 Operations Reserves 22,497,607 21,850,187 29,912,981 18,600,000 45,244,167 38,493,671 36,021,324 30,848,860 29,870,224 34,765,907 41,967,828 24 Unassigned - - - 244,354 - - - - - - - 25 TOTAL STARTING RESERVES 112,152,357 100,444,086 107,424,072 87,109,490 104,636,040 118,928,221 112,144,228 96,833,761 93,232,441 102,449,297 123,393,502 26 27 REVENUES 28 Net Sales 108,312,917 114,624,726 127,172,308 131,471,245 137,026,501 129,362,400 132,016,388 144,585,888 153,177,157 155,480,812 153,468,878 29 Wholesale Revenues 4,301,366 16,188,920 18,106,327 21,060,071 20,686,925 24,172,722 26,268,047 26,065,562 29,160,236 28,622,338 28,722,008 30 Other Revenues and Transfers In 11,714,494 11,225,911 13,373,312 19,914,635 15,260,935 16,958,432 15,201,708 16,006,051 17,060,870 18,081,320 19,108,217 31 TOTAL REVENUES 124,328,776 142,039,557 158,651,947 172,445,951 172,974,361 170,493,554 173,486,143 186,657,501 199,398,263 202,184,470 201,299,104 32 33 EXPENSES 34 Electric Supply Purchases 75,705,000 80,467,136 94,629,654 89,625,027 90,645,768 93,402,295 96,218,872 98,071,366 102,283,824 104,443,425 106,132,953 35 Operating Expenses 36 Administration 37 Allocated Charges 4,934,195 3,990,822 6,374,241 4,568,027 6,146,498 6,269,614 6,395,499 6,524,037 6,654,904 6,788,290 6,937,026 38 Rent 4,997,101 5,121,102 5,284,977 5,454,097 5,666,805 6,798,087 6,974,837 7,156,183 7,342,244 7,533,142 7,729,004 39 Debt Service 8,885,994 8,953,893 8,867,395 8,464,883 7,170,631 8,061,159 8,068,219 8,900,247 8,914,853 4,898,677 4,896,047 40 Transfers and Other Adjustments 11,798,865 13,052,376 13,632,059 13,342,321 10,200,181 13,859,349 14,460,996 14,618,796 14,996,752 15,004,867 15,013,144 41 Subtotal, Administration 30,616,155 31,118,193 34,158,672 31,829,328 29,184,115 34,988,209 35,899,551 37,199,262 37,908,752 34,224,975 34,575,221 42 Resource Management 2,083,812 1,985,620 1,873,954 2,082,405 2,849,071 2,915,597 2,999,304 3,091,930 3,174,074 3,252,752 3,337,994 43 Demand Side Management 3,643,924 4,271,786 3,889,846 3,655,547 2,733,047 6,813,274 5,597,849 6,226,330 6,735,444 6,579,673 6,835,735 44 Operations and Mtc 11,523,881 11,811,016 11,528,747 11,606,585 13,450,568 13,753,878 14,120,144 14,519,515 14,882,486 15,234,376 15,454,139 45 Engineering (Operating)1,592,024 1,656,522 1,790,942 1,838,799 2,051,303 2,093,560 2,138,697 2,185,640 2,231,923 2,278,475 2,321,056 46 Customer Service 1,540,884 2,190,993 2,291,246 2,180,400 2,228,469 2,281,952 2,351,324 2,428,904 2,496,527 2,560,731 2,589,553 47 Allowance for Unspent Budget - - - - - (1,413,087) (1,172,410) (1,203,369) (1,232,103) (1,260,236) (1,285,146) 48 Subtotal, Operating Expenses 51,000,680 53,034,130 55,533,407 53,193,063 52,496,573 61,433,382 61,934,458 64,448,212 66,197,103 62,870,747 63,828,552 49 Capital Program Contribution 9,331,367 11,558,306 18,803,467 10,770,456 15,539,840 22,017,870 30,643,280 27,739,243 31,700,480 13,926,093 21,284,122 50 TOTAL EXPENSES 136,037,047 145,059,572 168,966,528 153,588,546 158,682,181 176,853,547 188,796,610 190,258,821 200,181,407 181,240,265 191,245,628 51 52 ENDING RESERVES 53 Reappropriations (Non-CIP)- - 9,063,000 - - - - - - - - 54 Commitments (Non-CIP)3,777,205 2,970,955 8,637,000 3,910,695 3,518,525 3,518,525 3,518,525 3,518,525 3,518,525 3,518,525 3,518,525 55 Low Carbon Fuel Standard (LCFS) Reserve - - - - 6,340,000 4,079,577 3,186,120 2,163,917 1,091,927 524,278 71,297 56 Cap and Trade Program 1,189,129 2,189,551 5,749,259 9,315,900 12,866,019 16,565,994 57 Underground Loan Reserve 729,000 730,147 730,147 726,659 726,659 726,659 726,659 726,659 726,659 726,659 726,659 58 Public Benefits Reserves 1,839,000 681,330 681,330 809,700 1,904,547 2,664,195 3,434,974 4,274,785 5,101,307 5,861,122 6,574,538 59 Electric Special Projects Reserve 51,837,855 51,837,855 41,837,855 41,664,855 46,664,855 47,664,855 36,649,107 30,649,107 31,649,107 32,649,107 32,649,107 60 Hydro Stabilization Reserve 11,400,000 11,400,000 11,400,000 11,400,000 15,400,000 15,400,000 15,400,000 15,400,000 15,400,000 15,400,000 15,400,000 57 Capital Reserve - 879,964 879,964 879,964 5,879,964 879,964 879,964 879,964 879,964 9,879,964 12,879,964 58 Rate Stabilization Reserve 9,010,840 9,010,840 9,010,840 - - - - - - - - 59 Operations Reserve 21,850,187 29,912,981 18,600,000 45,244,167 38,493,671 36,021,324 30,848,860 29,870,224 34,765,907 41,967,828 45,060,895 60 Unassigned - - 244,354 - - - - - - - - 61 TOTAL ENDING RESERVES 100,444,086 107,424,072 101,084,490 104,636,040 118,928,221 112,144,228 96,833,761 93,232,441 102,449,297 123,393,502 133,446,979 62 6053706 1 FISCAL YEAR FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 2 3 REVENUES 4 Net Sales 87%81%80%76%79%76%76%78%77%77%77% 5 Other Revenues and Transfers In 13%19%20%24%21%24%24%22%23%23%23% 6 TOTAL REVENUES 100%100%100%100%100%100%100%100%100%100%100% 7 8 EXPENSES 9 Commodity Purchases 54%42%50%53%53%52%46%45%46%49%48% 10 Operating Expenses 11 Administration 12 Allocated Charges 4%3%4%3%4%4%3%3%3%4%4% 13 Rent 4%4%3%4%4%4%4%4%4%4%4% 14 Debt Service 7%6%5%6%5%5%4%5%5%3%3% 15 Transfers and Other Adjustments 9%9%8%9%6%8%8%8%8%8%8% 16 Subtotal, Administration 23%21%20%21%18%20%19%20%20%19%18% 17 Resource Management 2%1%1%1%2%2%2%2%2%2%2% 18 Operations and Mtc 8%8%7%8%8%8%7%8%8%8%8% 19 Engineering (Operating)1%1%1%1%1%1%1%1%1%1%1% 20 Customer Service 1%2%1%1%1%1%1%1%1%1%1% 21 Allowance for Unspent Budget 0%0%0%0%0%-1%-1%-1%-1%-1%-1% 22 Subtotal, Operating Expenses 35%34%31%32%31%31%30%31%31%31%30% 23 Capital Program Contribution 7%8%11%7%10%11%16%15%11%8%11% 24 TOTAL EXPENSES 96%83%91%92%95%94%92%90%89%88%89% 25 26 RISK ASSESSMENT DETAIL (SUPPLY FUND) 27 FISCAL YEAR FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 28 1. Load Net Revenue 652,853 1,208,477 29 2. Hydro Production: Western & Calaveras 9,050,313 3,397,119 30 3. Renewable Production: Landfill & Wind & 743,945 539,073 31 4. Carbon Neutral Cost 303,022 114,983 32 5. Market Price 775,584 1,138,589 33 6. Local Capacity 408,388 446,695 34 7. Transmission/CAISO 3,741,647 2,806,120 35 8. Plant Outage 1,000,000 1,000,000 36 9. Western Cost 2,704,738 2,973,619 37 10. Regulatory & Legal - - 38 11. Supplier Default - - 39 TOTAL 19,380,490 13,624,674 40 Supply Operations + Hydro Stabilization Reserves, % of Risk Assessment 172% 303% 41 42 RISK ASSESSMENT DETAIL (DISTRIBUTION FUND) 43 FISCAL YEAR FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 44 Distribution Revenue Variance 3,260,213 3,182,718 3,742,109 3,915,276 4,447,787 4,432,418 4,417,304 4,930,733 5,356,652 5,659,448 5,641,151 45 10% CIP Program Contingency 933,137 1,155,831 1,880,347 1,077,046 1,553,984 2,001,787 3,064,328 2,773,924 2,170,048 1,392,609 2,128,412 46 Total Risk Asssessment Value 4,193,350 4,338,548 5,622,455 4,992,321 6,001,771 6,434,205 7,481,632 7,704,657 7,526,700 7,052,057 7,769,564 47 Projected Operations Reserve 21,850,187 29,912,981 18,600,000 45,244,167 38,493,671 36,191,535 30,831,986 29,628,922 33,771,081 39,672,192 42,667,847 48 Operations Reserve, % of Risk Value 521% 689% 331% 906% 641% 562% 412% 385% 449% 563% 549% 49 44 SUPPLY OPERATIONS RESERVE 45 Min (60 days of non-capital expenses)14,498,215 15,472,236 17,841,143 16,831,022 16,953,628 17,508,370 17,981,164 18,461,032 19,176,632 18,891,837 19,192,697 46 Target (90 days of non-capital expenses)21,747,322 23,208,354 26,761,715 25,246,533 25,430,442 26,262,555 26,971,747 27,691,548 28,764,949 28,337,756 28,789,046 47 Max (120 days of non-capital expenses)28,996,429 30,944,472 35,682,287 33,662,044 33,907,256 35,016,739 35,962,329 36,922,065 38,353,265 37,783,675 38,385,394 48 49 DISTRIBUTION OPERATIONS RESERVE 50 Min (60 days of non-capital expenses)8,513,675 9,755,012 8,008,309 7,869,900 8,621,917 9,462,487 9,512,586 9,802,609 10,084,238 10,256,803 10,471,541 51 Target (90 days of non-capital expenses)10,708,963 11,918,803 10,309,464 10,096,233 11,071,856 12,295,398 12,332,333 12,728,321 13,111,059 13,329,457 13,610,674 52 Max (120 days of non-capital expenses)12,904,252 14,082,593 12,610,618 12,322,566 13,521,795 15,128,308 15,152,079 15,654,034 16,137,881 16,402,112 16,749,808 53 Risk Assessment Value 4,193,350 4,338,548 5,622,455 4,992,321 6,001,771 6,434,205 7,481,632 7,704,657 7,526,700 7,052,057 7,769,564 54 55 DEBT SERVICE COVERAGE RATIO 56 Net Revenues (125% of Debt Service)1326%1391%1593%1587%1896%1821%1860%1726%1790%3315%3371% 57 Available Reserves (5x Debt Service)*10.9 11.7 9.4 11.9 16.1 13.5 11.6 10.1 11.0 24.0 26.0 58 *For the purposes of debt covenants, the unrestricted reserves of other utilities may be counted toward the available reserves for meeting this measure. A ratio below 5x means that this utility is relying on the reserves of other utilities to mee ELECTRIC UTILITY FINANCIAL PLAN June 2018 47 | Page APPENDIX B: ELECTRIC UTILITY RESERVES MANAGEMENT PRACTICES The following reserves management practices are used when developing the Electric 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 Electric Supply Fund Balance is reserved for the following purposes: a) For existing contracts, as described in Section 4 (Reserve for Commitments) b) For operating budgets reappropriated from previous years, as described in Section 5 (Reserve for Reappropriations) c) For special projects for the benefit of the Electric Utility ratepayers, as described in Section 6 (Electric Special Projects Reserve) d) For year to year balancing of costs associated with the Electric Utility’s hydroelectric resources, as described in Section 7 (Hydroelectric Stabilization Reserve) e) For rate stabilization, as described in Section 1.d) (Rate Stabilization Reserves) f) For operating contingencies, as described in Section 12 (Operations Reserves) g) 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 13 (Unassigned Reserves). Section 3. Distribution Fund Reserves The Electric Distribution Fund Balance is reserved for the following purposes: a) For existing contracts, as described in Section 4 (Reserves for Commitments) b) For operating and capital budgets reappropriated from previous years, as described in Section 5 (Reserves for Reappropriations) c) As an offset to underground loan receivables, as described in Section 8 (Underground Loan Reserve) d) To hold Public Benefit Program funds collected but not yet spent, as described in Section 9 (Public Benefits Reserve) e) For cash flow management and contingencies related to the Electric Utility’s Capital Improvement Program (CIP), as described in Section 10 (CIP Reserve) f) For rate stabilization, as described in Section 11.d) (Rate Stabilization Reserves) g) For operating contingencies, as described in Section 12 (Operations Reserves) h) 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 14 (Unassigned Reserves). ELECTRIC UTILITY FINANCIAL PLAN June 2018 48 | Page Section 4. Reserves for Commitments At the end of each fiscal year the Electric Supply Fund and Electric Distribution Fund Reserves for Commitments will be set to an amount equal to the total remaining spending authority for all contracts in force for the Electric Supply Fund and Electric Distribution Fund, respectively, at that time. Section 5. Reserves for Reappropriations At the end of each fiscal year the Electric Supply Fund and Electric Distribution Fund Reserves for Reappropriations will be set to an amount equal to the amount of all remaining capital and non-capital budgets that will be reappropriated to the following fiscal year for each Fund in accordance with Palo Alto Municipal Code Section 2.28.090. Section 6. Electric Special Projects Reserve The Electric Special Projects Reserve (ESP Reserve) will be managed in accordance with the policies and timelines set forth in Resolution 9206 (Resolution of the Council of the City of Palo Alto Approving Renaming the Calaveras Reserve to the Electric Special Project Reserve and Adoption of Electric Special Project Reserve Guidelines). These policies and timelines are included from Resolution 9206 as amended to refer to the reserves structure set forth in these Reserves Management Practices: a) The purpose of the ESP Reserve is to fund projects that benefit electric ratepayers; b) The ESP Reserve funds must be used for projects of significant impact; c) Projects proposed for funding must demonstrate a need and value to electric ratepayers. The projects must have verifiable value and must not be speculative, or high-risk in nature; d) Projects proposed for funding must be substantial in size, requiring funding of at least $1 million; e) Set a goal to commit funds by the end of FY 2017; f) Any uncommitted funds remaining at the end of FY 2022 will be transferred to the Electric Supply Operations Reserve and the ESP Reserve will be closed; Section 7. Hydroelectric Stabilization Reserve The Hydroelectric Stabilization Reserve is used to manage the supply cost impacts associated with variations in generation from hydroelectric resources. Staff will manage the Hydroelectric Stabilization Reserve as follows: a) Projected Hydro Output: Near the end of each fiscal year, staff will determine the actual and expected hydro output for that fiscal year, compare that to the long-term average annual output level (495,957 MWh as of March 2018), and multiply the difference by the average of the monthly round-the-clock forward market prices for each month of the current fiscal year. b) Changes in Reserves. Staff is authorized to transfer the amount described in Sec. 7(a) from the Operations Reserve to the Hydroelectric Stabilization Reserve for hydro output deviations above long-term average levels, or transfer this amount from the Hydroelectric Stabilization Reserve to the Operations Reserve for hydro output deviations below long-term average levels. c) Implementation of HRA. The level of the Hydroelectric Stabilization Reserve after the transfers described above shall be the basis for staff’s determination, with Council ELECTRIC UTILITY FINANCIAL PLAN June 2018 49 | Page approval, of whether to implement the Hydro Rate Adjuster (Electric Rate E-HRA) for the following fiscal year. d) Reserve Guidelines. Staff will manage the Hydroelectric Stabilization Reserve according to the following guideline levels: Minimum Level $3 million Target Level $19 million Maximum Level $35 million Section 8. Underground Loan Reserve At the end of each fiscal year, the Underground Loan Reserve will be adjusted by the principal payments made against outstanding underground loans. Section 9. Public Benefits Reserve The Public Benefits Reserve will be increased by the amount of unspent Public Benefits Revenues remaining at the end of each fiscal year. Expenditure of these funds requires action by the City Council. Section 10. 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 Maximum Level Average annual (12 month)11 CIP budget, for 48 months of budgeted CIP expenses12 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 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. c) Minimum Level: i) 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. 11 Each month is calculated based upon 1/12 of the annual budget. 12 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. ELECTRIC UTILITY FINANCIAL PLAN June 2018 50 | Page 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 or return them to ratepayers in the funds to ratepayers, or designate a specific use of funds for CIP investments that will be made by the end of the next Financial Planning period. Staff may also seek City Council to approve holding funds in this reserve in excess of the maximum level if they are held for a specific future purpose related to the CIP. Section 11. Rate Stabilization Reserves Funds may be added to the Electric Supply or Distribution Fund’s Rate Stabilization Reserves by action of the City Council and held to manage the trajectory of future year rate increases. Withdrawal of funds from either Rate Stabilization Reserve requires action by the City Council. If there are funds in either Rate Stabilization Reserve at the end of any fiscal year, any subsequent Electric Utility Financial Plan must result in the withdrawal of all funds from this Reserve by the end of the Financial Planning Period. The Council may approve exceptions to this requirement, when proposed by staff to provide greater rate stabilization to customers. Section 12. Operations Reserves The Electric Supply Fund and Electric Distribution Fund Operations Reserves are used to manage normal variations in the costs of providing electric service and as a reserve for contingencies. Any portion of the Electric Utility’s Fund Balance not included in the reserves described in Section 4 to 11 above will be included in the appropriate Operations Reserve unless the reserve has reached its maximum level as set forth in Section 12 (e) below. Staff will manage the Operations Reserves according to the following practices: a) The following guideline levels are set forth for the Electric Supply Fund 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 Supply Fund O&M and commodity expense Target Level 90 days of Supply Fund O&M and commodity expense Maximum Level 120 days of Supply Fund O&M and commodity expense b) The following guideline levels are set forth for the Electric Distribution Fund Operations Reserve. These guideline levels are calculated for each fiscal year of the Financial Planning Period based on the levels of O&M expense forecasted for that year in the Financial Plan. Minimum Level 60 days of Distribution Fund O&M expense Target Level 90 days of Distribution Fund O&M expense Maximum Level 120 days of Distribution Fund O&M expense c) Minimum Level: If, at the end of any fiscal year, the funds remaining in the Supply Fund or Distribution Fund’s 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 ELECTRIC UTILITY FINANCIAL PLAN June 2018 51 | Page 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 an alternative plan that takes longer than one year to replenish the reserve. d) Target Level: If, at the end of any fiscal year, either Operations Reserve is higher or lower than the target level, any Financial Plan created for the Electric Utility shall be designed to return both Operations Reserves to their target levels by the end of the forecast period. e) Maximum Level: If, at any time, either Operations Reserve reaches its maximum level, no funds may be added to this Reserve. Any further increase in that fund’s Fund Balance shall be automatically included in the Unassigned Reserve described in Section 13, below. Section 13. Unassigned Reserves If the Operations Reserve in either the Electric Supply Fund or the Electric Distribution Fund reaches its maximum level, any further additions to that fund’s Fund Balance will be held in the Unassigned Reserve. If there are any funds in either 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 Electric 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 2016, and the next Financial Planning Period is FY 2017 through FY 2021, the Financial Plan shall include a plan to return or assign the funds in the Unassigned Reserve by the end of FY 2017. Staff may present an alternative plan that retains these funds or returns them over a longer period of time. Section 14. Intra-Utility Transfers between Supply and Distribution Funds Transfers between Electric Distribution Fund Reserves and Electric Supply Fund Reserves are permitted if consistent with the purposes of the two reserves involved in the transfer. Such transfers require action by the City Council. Section 15. Low Carbon Fuel Standard (LCFS) Reserve This reserve tracks revenues earned via the sale of Low Carbon Fuel Credits allocated by the California Air Resources Board to the City, as well as expenses incurred, in accordance with California’s Low Caron Fuel Standard program. At the end of each fiscal year, the LCFS Reserve will be adjusted by the net of revenues and expenses associated with California’s LCFS program. Section 16. Cap and Trade Program Reserve This reserve tracks unspent or unallocated revenues from the sale of carbon allowances freely allocated by the California Air Resources Board to the electric 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. ELECTRIC UTILITY FINANCIAL PLAN June 2018 52 | Page APPENDIX C: DESCRIPTION OF ELECTRIC UTILITY OPERATIONAL ACTIVITIES This appendix describes the activities associated with the various cost categories referred to in this Financial Plan. Customer Service: This category includes the Electric 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 electric services. Resource Management: This category includes supply portfolio management, energy procurement, rate setting, and tracking of legislation and regulation related to the electric industry. Operations and Maintenance: This category includes the costs of a variety of distribution system maintenance activities, including: • monitoring the substations and performing routine maintenance; • performing preventative maintenance on the system; • monitoring the system’s status from the UCC using SCADA; • maintaining the SCADA system; • investigating outages and other customer complaints and performing emergency repairs; • clearing vegetation near overhead power lines; and • testing and replacing meters to ensure accurate sales metering. Administration: Accounting, purchasing, legal, and other administrative functions provided by the City’s General Fund staff, as well as shared communications services, Utilities Department administrative overhead and billing system maintenance costs. Demand Side Management: Includes the cost of administering energy efficiency programs and the direct cost of rebates paid. Includes solar rebates. Engineering (Operating): The Electric Utility’s engineers focus primarily on the CIP, but a small portion of their time is spent assisting with distribution system maintenance. APPENDIX D: SAMPLES OF RECENT ELECTRIC UTILITY OUTREACH COMMUNICATIONS EXPORT ELECTRICITY COMPENSATION UTILITY RATE SCHEDULE E-EEC-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. E-EEC-1 Sheet No.E-EEC-1 dated 7-1-20169 Effective 7-1-202119 A. APPLICABILITY:This Rate Schedule applies in conjunction with the otherwise applicable Rate Schedules for eachCustomer class. This Rate Schedule may not apply in conjunction with any time-of-use Rate Schedule.This Rate Schedule applies to Customer-Generators as defined in Rule and Regulation 2 who are eithernot eligible for Net Energy Metering or who are eligible for Net Energy metering but elect to takeService under this Rate Schedule. B.TERRITORY:Applies to locations within the service area of the City of Palo Alto.This Rate Schedule appliesanywhere the City of Palo Alto provides Electric Service. C. RATE:The following buyback rate shall apply to all electricity exported to the grid.Per kWh Export electricity compensation rate $0.107809 D. SPECIAL CONDITIONS1.Metering equipment: Electricity delivered by CPAU to the Customer-Generator or received byCPAU from the Customer-Generator shall be measured using a Meter capable of registering theflow of electricity in two directions (aka “bidirectional meter”). The electrical powermeasurements will be used for billing the Customer-Generator. CPAU shall furnish, install andown the appropriate Meter. 2.Billing:a.CPAU shall measure during the billing period, in kilowatt-hours, the electricity deliveredand received after the Customer-Generator serves its own instantaneous load.b. CPAU shall bill the Customer-Generator consumption charges for the electricity deliveredby CPAU to the Customer-Generator based on the Customer-Generator’s applicable RateSchedule. c.In the event the electricity generated exceeds the electricity consumed and therefore isreceived by CPAU, the Customer will receive a credit for all electricity received by CPAUat the buyback Rate designated in section C above. {End} Attachment C NET METERING NET SURPLUS ELECTRICITY COMPENSATION UTILITY RATE SCHEDULE E-NSE-1 CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No. E-NSE-1 Sheet No.E-NSE-1 dated 07-01-20196 Effective 7-1-202119 A. APPLICABILITY: This Rate Schedule applies to eligible residential and small commercial Net Energy Metering Customers who, at the end of an annual settlement period, as described in Rule 29, are Net Surplus Customer-Generators of electricity who elect to receive monetary compensation as such preference is indicated on the net surplus electricity election form. This Rate Schedule only applies to Customers who participate in Net Energy Metering, and does not apply to Customers that take Service under the City’s Net Energy Metering Successor Rate, as each of these terms are defined in Rule and Regulation 2. B. TERRITORY: This Rate Schedule applies anywhere the City of Palo Alto provides Electric Service. C. RATES: Per kWh Net Surplus Electricity Compensation rate $0.09928771 D. SPECIAL CONDITIONS 1. Net Surplus Electricity Compensation Rate eligibility shall be determined as specified in Rule 29. Net surplus electricity, as specified in Rule 29, if applicable, will be multiplied by the above compensation rate to determine the Customer’s annual net surplus electricity compensation stated in dollars. 2. Additional terms, conditions and definitions govern Net Energy Metering Service and Interconnection, as described in Rule 29. {End} RESIDENTIAL MASTER-METERED AND SMALL NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-2-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-2-G-1 Sheet No E-2-G-1 dated 7-1-20189 Effective 7-1-202119 A. APPLICABILITY: This Rate Schedule applies to the following Customers receiving Electric Service from the City of Palo Alto Utilities under the Palo Alto Green Program: 1. Small non-residential Customers receiving Non-Demand Metered Electric Service; and 2. Customers with Accounts at Master-Metered multi-family facilities. B. TERRITORY: This rate schedule applies everywhere the City of Palo Alto provides Electric Service. C. UNBUNDLED RATES: 1. 100% Renewable Option: Per kilowatt-hour (kWh) Commodity Distribution Public Benefits Palo Alto Green Charge Total Summer Period $0.11855 $0.08551 $0.00447 $0.00620 $0.21453053 Winter Period 0.08502 0.05675 0.00447 0.00620 $0.152241 4824 Minimum Bill ($/day) 0.8359 2. 1000 kWh Block Purchase Option: Per kilowatt-hour (kWh) Commodity Distribution Public Benefits Total Summer Period $0.11855 $0.08551 $0.00447 $0.20853 Winter Period 0.08502 0.05675 0.00447 0.14624 Minimum Bill ($/day) 0.8359 Palo Alto Green Charge (per 1000 kWh block) $62.00 RESIDENTIAL MASTER-METERED AND SMALL NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-2-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-2-G-2 Sheet No E-2-G-2 dated 7-1-20189 Effective 7-1-202119 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. 2. Seasonal Rate Changes The Summer Period is effective May 1 to October 31 and the Winter Period is effective from November 1 to April 30. When the billing period includes use in both the Summer and Winter Periods, usage will be prorated based upon the number of days in each seasonal period, and the charges based on the applicable rates therein. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Palo Alto Green Program Description and Participation Palo Alto Green provides for either the purchase of enough renewable energy credits (RECs) to match 100% of the energy usage at the facility every month, or for the purchase of 1000 kilowatt-hour (kWh) blocks. These REC purchases support the production of renewable energy, increase the financial value of power from renewable sources, and create a transparent and sustainable market that encourages new development of wind and solar power. Customers choosing to participate shall fill out a Palo Alto Green Power Program application provided by the Customer Service Center. Customers may request at any time, in writing, a change to the number of blocks they wish to purchase under the Palo Alto Green Program. RESIDENTIAL MASTER-METERED AND SMALL NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-2-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-2-G-3 Sheet No E-2-G-3 dated 7-1-20189 Effective 7-1-202119 4. Maximum Demand Meter Whenever the monthly use of energy has exceeded 8,000 kWh for three consecutive months, a maximum Demand Meter will be installed as promptly as is practicable and thereafter continued in service until the monthly use of energy has fallen below 6,000 kWh for twelve consecutive months, whereupon, at the option of the City, it may be removed. The maximum Demand in any month will be the maximum average power in kilowatts taken during any 15-minute interval in the month, provided that if the Customer-s load is intermittent or subject to fluctuations, the City may use a 5-minute interval. A thermal-type Demand Meter which does not reset after a definite time interval may be used at the City's option. The billing Demand to be used in computing charges under this schedule will be the actual maximum Demand in kilowatts for the current month. An exception is that the billing Demand for Customers with Thermal Energy Storage (TES) will be based upon the actual maximum Demand of such Customers between the hours of noon and 6 pm on weekdays. {End} MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-4-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-1 Sheet No E-4-G-1 dated 7-1-20189 Effective 7-1-202119 A. APPLICABILITY: This Rate Schedule applies to Demand metered Secondary Electric Service for Customers with a maximum Demand below 1,000 kilowatts (kW) who receive power under the Palo Alto Green Program. This Rate Schedule applies to three-phase Electric Service and may include Service to Master-metered multi-family facilities or other facilities requiring Demand metered Service, as determined by the City. B. TERRITORY: The Rate Schedule applies everywhere the City of Palo Alto provides Electric Service. C. UNBUNDLED RATES: 1. 100% Renewable Option: Commodity Distribution Public Benefits Palo Alto Green Charge Total Summer Period Demand Charge (per kW) $4.41 $24.50 $28.91 Energy Charge (per kWh) 0.10536 0.01865 0.00447 0.00620 0.134048 Winter Period Demand Charge (per kW) $2.75 $16.22 $18.97 Energy Charge (per kWh) 0.07634 0.01865 0.00447 0.00620 0.105146 Minimum Bill ($/day) 17.2742 MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-4-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-2 Sheet No E-4-G-2 dated 7-1-20189 Effective 7-1-202119 2. 1000 kWh Block Purchase Option: Commodity Distribution Public Benefits Total Summer Period Demand Charge (per kW) $4.41 $24.50 $28.91 Energy Charge (per kWh) 0.10536 0.01865 0.00447 0.12848 Palo Alto Green Charge (per 1000 kWh block) $26.00 Winter Period Demand Charge (per kW) $2.75 $16.22 $18.97 Energy Charge (per kWh) 0.07634 0.01865 0.00447 0.09946 Palo Alto Green Charge (per 1000 kWh block) $26.00 Minimum Bill ($/day) 17.2742 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. 2. Seasonal Rate Changes The Summer Period is effective May 1 to October 31 and the Winter Period is effective from November 1 to April 30. When the billing period includes use both in 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 therein. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Maximum Demand Meter Whenever the monthly use of energy has exceeded 8,000 kilowatt-hours for three consecutive months, a Maximum Demand Meter will be installed as promptly as is practicable and thereafter continued in Service until the monthly use of energy has dropped below 6,000 kilowatt-hours for twelve consecutive months, whereupon, at the option of the City, it may be removed. MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-4-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-3 Sheet No E-4-G-3 dated 7-1-20189 Effective 7-1-202119 The Maximum Demand in any month will be the maximum average power in kilowatts taken during any 15-minute interval in the month, provided that if the Customer’s load is intermittent or subject to fluctuations, the City may use a 5-minute interval. A thermal-type Demand Meter, which does not reset after a definite time interval, may be used at the City's option. The Billing Demand to be used in computing charges under this schedule will be the actual Maximum Demand in kilowatts for the current month. An exception is that the Billing Demand for Customers with Thermal Energy Storage (TES) will be based upon the actual Maximum Demand of such Customers between the hours of noon and 6 PM on weekdays. 4. Power Factor For new or existing Customers whose Demand is expected to exceed or has exceeded 300 kilowatts for three consecutive months, the City has the option of installing applicable Metering to calculate a Power Factor. The City may remove such Metering from the Service of a Customer whose Demand has dropped below 200 kilowatts for four consecutive months. When such Metering is installed, the monthly Electric bill will include a “Power Factor Adjustment”, if applicable. The adjustment will be applied to a Customer’s bill prior to the computation of any primary voltage discount. The Power Factor Adjustment is applied by increasing the total energy and Demand charges for any month by 0.25 percent or (1/4) for each one percent (1%) that the monthly Power Factor of the Customer’s load was less than 95%. The monthly Power Factor is the average Power Factor based on the ratio of kilowatt-hours to kilovolt-ampere hours consumed during the month. Where time-of-day Metering is installed, the monthly Power Factor shall be the Power Factor coincident with the Customer's Maximum Demand. 5. Changing Rate Schedules Customers may request a rate schedule change at any time to any applicable full-service rate schedule as is applicable to their kilowatt-Demand and kilowatt-hour usage profile. 6. Palo Alto Green Program Description and Participation MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-4-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-4 Sheet No E-4-G-4 dated 7-1-20189 Effective 7-1-202119 Palo Alto Green provides for either the purchase of enough renewable energy credits (RECs) to match 100% of the energy usage at the facility every month, or for the purchase of 1000 kilowatt-hour (kWh) blocks. These REC purchases support the production of renewable energy, increase the financial value of power from renewal sources, and creates a transparent and sustainable market that encourages new development of wind and solar. Customers choosing to participate shall fill out a Palo Alto Green Power Program application provided by the Customer Service Center. Customers may request at any time, in writing, a change to the number of blocks they wish to purchase under the Palo Alto Green Program. 7. Primary Voltage Discount Where delivery is made at the same voltage as that of the line from which the Service is supplied, a discount of 2.5 percent for available line voltages above 2 kilovolts will be offered, but the City is not required to supply Service at a particular line voltage where it has, or will install, ample facilities for supplying at another voltage equally or better suited to the Customer's electrical requirements, as determined in the City’s sole discretion. The City retains the right to change its line voltage at any time after providing reasonable advance notice to any Customer receiving the discount in this section. The Customer then has the option to change the system so as to receive Service at the new line voltage or to accept Service (without voltage discount) through transformers to be supplied by the City subject to a maximum kilovolt-ampere size limitation. 8. Standby Charge a. Applicability: The standby charge, subject to the exemptions in subsection D(8)(e), applies to Customers that have a non-utility generation source interconnected on the Customer’s side of the City’s revenue Meter and that occasionally require backup power from the City due to non-operation of the non-utility generation source. MEDIUM NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-4-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-4-G-5 Sheet No E-4-G-5 dated 7-1-20189 Effective 7-1-202119 b. Standby Charges: Commodity Distribution Total Standby Charge (per kW of Reserved Capacity) Summer Period $0.69 $15.23 $15.92 Winter Period $0.63 $9.04 $9.67 c. Meters: A separate Meter is required for each non-utility generation source. d. Calculation of Maximum Demand Credit: (1) In the event the Customer’s Maximum Demand (as defined in Section D.3) occurs when one or more of the non-utility generators on the Customer’s side of the City’s revenue Meter are not operating, the Maximum Demand will be reduced by the sum of the Maximum Generation of those non-utility generators, but in no event shall the Customer’s Maximum Demand be reduced below zero. (2) If the non-utility generation source does not operate for an entire billing cycle, the standby charge does not apply and the Customer shall not receive the Maximum Demand credit described in this Section. e. Exemptions: (1) The standby charge shall not apply to backup generators designed to operate only in the event of an interruption in utility Service and which are not used to offset Customer electricity purchases. (2) The standby charge shall not apply if the Customer meets the definition of an “Eligible Customer-generator” as defined in California Public Utilities Code Section 2827(b)(4), as amended. (3) The applicability of these exemptions shall be determined at the discretion of the Utilities Director. {End} LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-G-1 Sheet No E-7-G-1 dated 7-1-20198 Effective 7-1-202119 A. APPLICABILITY: This Rate Schedule applies to Demand metered Service for large non-residential Customers who choose Service under the Palo Alto Green Program. A Customer may qualify for this Rate Schedule if the Customer’s Maximum Demand is at least 1,000KW per month per site, who have sustained this Demand level at least 3 consecutive months during the last twelve months. B. TERRITORY: The Rate Schedule applies everywhere the City of Palo Alto provides Electric Service. C. UNBUNDLED RATES: 1. 100% Renewable Option: Commodity Distribution Public Benefits Palo Alto Green Charge Total Summer Period Demand Charge ( per kW) $5.03 $25.66 $30.69 Energy Charge (per kWh) 0.10932 0.00053 0.00447 0.00620 0.1163212032 Winter Period Demand Charge (per kW) $2.89 $14.16 $17.05 Energy Charge (per kWh) 0.07238 0.00053 0.00447 0.00620 0.0793808338 Minimum Bill ($/day) 49.1139 LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-G-2 Sheet No E-7-G-2 dated 7-1-20198 Effective 7-1-202119 2. 1000 kWh Block Purchase Option: Commodity Distribution Public Benefits Total Summer Period Demand Charge (per kW) $5.03 $25.66 $30.69 Energy Charge (per kWh) 0.10932 0.00053 0.00447 0.11432 Palo Alto Green Charge (per 1000 kWh block) $62.00 Winter Period Demand Charge (per kW) $2.89 $14.16 $17.05 Energy Charge (per kWh) 0.07238 0.00053 0.00447 0.07738 Palo Alto Green Charge (per 1000 kWh block) $62.00 Minimum Bill ($/day) 49.1139 D. SPECIAL NOTES: 1. Calculation of Charges 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. 2. Seasonal Rate Changes The Summer Period is effective May 1 to October 31 and the Winter Period is effective from November 1 to April 30. When the billing period includes use both in 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 therein. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Maximum Demand Meter Whenever the monthly use of energy has exceeded 8,000 kilowatt-hours for three consecutive months, a Maximum Demand Meter will be installed as promptly as is practicable and thereafter continued in Service until the monthly use of energy has dropped below 6,000 kilowatt-hours for twelve consecutive months, whereupon, at the option of the City, it may be removed. LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-G-3 Sheet No E-7-G-3 dated 7-1-20198 Effective 7-1-202119 The Maximum Demand in any month will be the maximum average power in kilowatts taken during any 15-minute interval in the month, provided that if the Customer’s load is intermittent or subject to fluctuations, the City may use a 5-minute interval. A thermal-type Demand Meter which does not reset after a definite time interval may be used at the City's option. The Billing Demand to be used in computing charges under this schedule will be the actual Maximum Demand in kilowatts for the current month. An exception is that the Billing Demand for Customers with Thermal Energy Storage (TES) will be based upon the actual Maximum Demand of such Customers between the hours of noon and 6 PM on weekdays. 4. Request for Service Qualifying Customers may request Service under this schedule for more than one Account or one Meter if the Accounts are at one site. A site, for the purposes of this Rate Schedule, consists of one or more Accounts which cover contiguous parcels of land with no intervening public right-of-ways (e.g. streets) and which have a common billing address. 5. Power Factor For new or existing Customers whose Demand is expected to exceed or has exceeded 300 kilowatts for three consecutive months, the City has the option of installing applicable Metering to calculate a Power Factor. The City may remove such Metering from the Service of a Customer whose Demand has dropped below 200 kilowatts for four consecutive months. When such Metering is installed, the monthly Electric bill shall include a “Power Factor Adjustment”, if applicable. The adjustment shall be applied to a Customer’s bill prior to the computation of any primary voltage discount. The power factor adjustment is applied by increasing the total energy and Demand charges for any month by 0.25 percent or (1/4) for each one percent (1%) that the monthly Power Factor of the Customer’s load was less than 95%. The monthly Power Factor is the average Power Factor based on the ratio of kilowatt-hours to kilovolt-ampere hours consumed during the month. Where time-of-day Metering is installed, the monthly Power Factor shall be the Power Factor coincident with LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-G-4 Sheet No E-7-G-4 dated 7-1-20198 Effective 7-1-202119 the Customer's Maximum Demand. 6. Changing Rate Schedules Customers may request a rate schedule change at any time to any applicable full service rate schedule as is applicable to their kilowatt-Demand and kilowatt-hour usage profile 7. Palo Alto Green Program Description and Participation Palo Alto Green provides for either the purchase of enough renewable energy credits (RECs) to match 100% of the energy usage at the facility every month, or for the purchase of 1000 kilowatt-hour (kWh) blocks. These REC purchases support the production of renewable energy, increase the financial value of power from renewal sources, and creates a transparent and sustainable market that encourages new development of wind and solar. Customers choosing to participate shall fill out a Palo Alto Green Power Program application provided by the Customer Service Center. Customers may request at any time, in writing, a change to the number of blocks they wish to purchase under the Palo Alto Green Program. 8. Primary Voltage Discount Where delivery is made at the same voltage as that of the line from which the Service is supplied, a discount of 2 1/2 percent for available line voltages above 2 kilovolts will be offered, but the City is not required to supply Service at a qualified line voltage where it has, or will install, ample facilities for supplying at another voltage equally or better suited to the Customer's Electrical requirements, as determined in the City’s sole discretion. The City retains the right to change its line voltage at any time after providing reasonable advance notice to any Customer receiving the discount in this section. The Customer then has the option to change the system so as to receive Service at the new line voltage or to accept Service (without voltage discount) through transformers to be supplied by the City subject to a maximum kilovolt-ampere size limitation. 9. Standby Charge a. Applicability: The standby charge, subject to the exemptions in subsection D(9)(e), applies to Customers that have a non-utility generation source interconnected on the Customer’s side of the City’s revenue Meter and that LARGE NON-RESIDENTIAL GREEN POWER ELECTRIC SERVICE UTILITY RATE SCHEDULE E-7-G CITY OF PALO ALTO UTILITIES Issued by the City Council Supersedes Sheet No E-7-G-5 Sheet No E-7-G-5 dated 7-1-20198 Effective 7-1-202119 occasionally require backup power from the City due to non-operation of the non-utility generation source. b. Standby Charges: Commodity Distribution Total Standby Charge (per kW of Reserved Capacity) Summer Period $0.84 $12.55 $13.39 Winter Period $0.72 $6.04 $6.76 c. Meters: A separate Meter is required for each non-utility generation source. d. Calculation of Maximum Demand Credit: (1) In the event the Customer’s Maximum Demand (as defined in Section D.3) occurs when one or more of the non-utility generators on the Customer’s side of the City’s revenue Meter are not operating, the Maximum Demand will be reduced by the sum of the Maximum Generation of those non-utility generators, but in no event shall the Customer’s Maximum Demand be reduced below zero. (2) If the non-utility generation source does not operate for an entire billing cycle, the standby charge does not apply and the Customer shall not receive the Maximum Demand credit described in this Section. e. Exemptions: (1) The standby charge shall not apply to backup generators designed to operate only in the event of an interruption in utility Service and which are not used to offset Customer electricity purchases. (2) The standby charge shall not apply if the Customer meets the definition of an “Eligible Customer-generator” as defined in California Public Utilities Code Section 2827(b)(4), as amended. (3) The applicability of these exemptions shall be determined at the discretion of the Utilities Director. {End}