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HomeMy WebLinkAbout2023-03-21 Finance Committee Agenda PacketFINANCE COMMITTEE Regular Meeting Tuesday, March 21, 2023 Community Meeting Room & Hybrid 5:30 PM Amended Agenda Amended Agenda Items Appear Below In Red Pursuant to AB 361 Palo Alto City Council meetings will be held as “hybrid” meetings with the option to attend by teleconference/video conference or in person. To maximize public safety while still maintaining transparency and public access, members of the public can choose to participate from home or attend in person. Information on how the public may observe and participate in the meeting is located at the end of the agenda. Masks are strongly encouraged if attending in person. The meeting will be broadcast on Cable TV Channel 26, live on YouTube https://www.youtube.com/c/cityofpaloalto, and streamed to Midpen Media Center https://midpenmedia.org. VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235) Meeting ID: 992 2730 7235    Phone: 1(669)900‐6833 PUBLIC COMMENTS Public comments will be accepted both in person and via Zoom for up to three minutes or an amount of time determined by the Chair. All requests to speak will be taken until 5 minutes after the staff’s presentation. Written public comments can be submitted in advance to city.council@CityofPaloAlto.org and will be provided to the Council and available for inspection on the City’s website. Please clearly indicate which agenda item you are referencing in your subject line. PowerPoints, videos, or other media to be presented during public comment are accepted only by email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received, the  Clerk will have them shared at public comment for the specified item. To uphold strong cybersecurity management practices, USB’s or other physical electronic storage devices are not accepted. CALL TO ORDER PUBLIC COMMENT  Members of the public may speak to any item NOT on the agenda. ACTION ITEMS 1.Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024 Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W‐1 (General Residential Water Service), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4 (Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7 (Non‐Residential Irrigation Water Service) Supplemental Memo, Presentation 2.The Utilities Advisory Commission and Staff Request That the Finance Committee Recommend the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Proposed Reserve Transfers and Increasing 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) (Continued from March 7, 2023) Supplemental Memo, Presentation 3.Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfers and Amending 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) Presentation 4.Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E‐HRA (Hydro Rate Adjuster), E‐1 (Residential Electric Service), E‐2 (Residential Master‐Metered and Small Non‐Residential Electric Service), E‐2‐G (Residential Master‐Metered and Small Non‐Residential Green Power Electric Service), E‐ 4 (Medium Non‐Residential Electric Service), E‐4‐G (Medium Non‐Residential Green Power Electric Service), E‐4 TOU (Medium Non‐Residential Time of Use Electric Service), E‐7 (Large Non‐Residential Electric Service), E‐7‐G (Large Non‐Residential Green Power Electric Service), E‐7 TOU (Large Non‐Residential Time of Use Electric Service), E‐NSE (Net Metering Net Surplus Electricity Compensation), and E‐EEC (Export Electricity Compensation) and 2) Discuss and Potential Direction for an Electric Rebate in 2023 Supplemental Memo, Presentation 5.Recommendation to the City Council to Approve and Authorize the City Manager or Their Designee to Execute a Third Phase Agreement with Northern California Power Agency for the Purchase of up to 87,600 Megawatt Hours per Year of Geothermal Energy from Calpine Corporation's Geysers Power Company, LLC Over a Term of up to 12 Years for a Total Not to Exceed Amount of $76.2 Million FUTURE MEETINGS AND AGENDAS Members of the public may not speak to the item(s) ADJOURNMENT AMENDED AGENDA ITEMS 1.Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024 Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W‐1 (General Residential Water Service), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4 (Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7 (Non‐Residential Irrigation Water Service) Supplemental Memo, Presentation 2.The Utilities Advisory Commission and Staff Request That the Finance Committee Recommend the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Proposed Reserve Transfers and Increasing 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) (Continued from March 7, 2023) Supplemental Memo, Presentation 3.Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfers and Amending 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) Presentation 4.Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E‐HRA (Hydro Rate Adjuster), E‐1 (Residential Electric Service), E‐2 (Residential Master‐Metered and Small Non‐Residential Electric Service), E‐2‐G (Residential Master‐Metered and Small Non‐Residential Green Power Electric Service), E‐ 4 (Medium Non‐Residential Electric Service), E‐4‐G (Medium Non‐Residential Green Power Electric Service), E‐4 TOU (Medium Non‐Residential Time of Use Electric Service), E‐7 (Large Non‐Residential Electric Service), E‐7‐G (Large Non‐Residential Green Power Electric Service), E‐7 TOU (Large Non‐Residential Time of Use Electric Service), E‐NSE (Net Metering Net Surplus Electricity Compensation), and E‐EEC (Export Electricity Compensation) and 2) Discuss and Potential Direction for an Electric Rebate in 2023 Supplemental Memo, Presentation PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1. Written public comments may be submitted by email to city.council@cityofpaloalto.org. 2. For in person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers and deliver it to the Clerk prior to discussion of the item. 3. Spoken public comments using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom‐ based meeting. Please read the following instructions carefully. 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. Or download the Zoom application onto your smart phone from the Apple App Store or Google Play Store and enter in the Meeting ID below. 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. 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. When called, please limit your remarks to the time limit allotted. A timer will be shown on the computer to help keep track of your comments. 4. 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 Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. CLICK HERE TO JOIN    Meeting ID: 992‐2730‐7235   Phone: 1‐669‐900‐6833 Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public programs, services and meetings in a manner that is readily accessible to all. Persons with disabilities who require materials in an appropriate alternative format or who require auxiliary aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at (650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service. 1 Regular Meeting March 21, 2023 Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for public inspection at www.CityofPaloAlto.org. FINANCE COMMITTEERegular MeetingTuesday, March 21, 2023Community Meeting Room & Hybrid5:30 PMAmended AgendaAmended Agenda Items Appear Below In RedPursuant to AB 361 Palo Alto City Council meetings will be held as “hybrid” meetings with theoption to attend by teleconference/video conference or in person. To maximize public safetywhile still maintaining transparency and public access, members of the public can choose toparticipate from home or attend in person. Information on how the public may observe andparticipate in the meeting is located at the end of the agenda. Masks are strongly encouraged ifattending in person. The meeting will be broadcast on Cable TV Channel 26, live onYouTube https://www.youtube.com/c/cityofpaloalto, and streamed to Midpen MediaCenter https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)Meeting ID: 992 2730 7235    Phone: 1(669)900‐6833PUBLIC COMMENTSPublic comments will be accepted both in person and via Zoom for up to three minutes or anamount of time determined by the Chair. All requests to speak will be taken until 5 minutesafter the staff’s presentation. Written public comments can be submitted in advance tocity.council@CityofPaloAlto.org and will be provided to the Council and available for inspectionon the City’s website. Please clearly indicate which agenda item you are referencing in yoursubject line. PowerPoints, videos, or other media to be presented during public comment are accepted only by email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received, the  Clerk will have them shared at public comment for the specified item. To uphold strong cybersecurity management practices, USB’s or other physical electronic storage devices are not accepted. CALL TO ORDER PUBLIC COMMENT  Members of the public may speak to any item NOT on the agenda. ACTION ITEMS 1.Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024 Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W‐1 (General Residential Water Service), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4 (Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7 (Non‐Residential Irrigation Water Service) Supplemental Memo, Presentation 2.The Utilities Advisory Commission and Staff Request That the Finance Committee Recommend the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Proposed Reserve Transfers and Increasing 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) (Continued from March 7, 2023) Supplemental Memo, Presentation 3.Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfers and Amending 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) Presentation 4.Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E‐HRA (Hydro Rate Adjuster), E‐1 (Residential Electric Service), E‐2 (Residential Master‐Metered and Small Non‐Residential Electric Service), E‐2‐G (Residential Master‐Metered and Small Non‐Residential Green Power Electric Service), E‐ 4 (Medium Non‐Residential Electric Service), E‐4‐G (Medium Non‐Residential Green Power Electric Service), E‐4 TOU (Medium Non‐Residential Time of Use Electric Service), E‐7 (Large Non‐Residential Electric Service), E‐7‐G (Large Non‐Residential Green Power Electric Service), E‐7 TOU (Large Non‐Residential Time of Use Electric Service), E‐NSE (Net Metering Net Surplus Electricity Compensation), and E‐EEC (Export Electricity Compensation) and 2) Discuss and Potential Direction for an Electric Rebate in 2023 Supplemental Memo, Presentation 5.Recommendation to the City Council to Approve and Authorize the City Manager or Their Designee to Execute a Third Phase Agreement with Northern California Power Agency for the Purchase of up to 87,600 Megawatt Hours per Year of Geothermal Energy from Calpine Corporation's Geysers Power Company, LLC Over a Term of up to 12 Years for a Total Not to Exceed Amount of $76.2 Million FUTURE MEETINGS AND AGENDAS Members of the public may not speak to the item(s) ADJOURNMENT AMENDED AGENDA ITEMS 1.Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024 Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W‐1 (General Residential Water Service), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4 (Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7 (Non‐Residential Irrigation Water Service) Supplemental Memo, Presentation 2.The Utilities Advisory Commission and Staff Request That the Finance Committee Recommend the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Proposed Reserve Transfers and Increasing 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) (Continued from March 7, 2023) Supplemental Memo, Presentation 3.Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfers and Amending 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) Presentation 4.Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E‐HRA (Hydro Rate Adjuster), E‐1 (Residential Electric Service), E‐2 (Residential Master‐Metered and Small Non‐Residential Electric Service), E‐2‐G (Residential Master‐Metered and Small Non‐Residential Green Power Electric Service), E‐ 4 (Medium Non‐Residential Electric Service), E‐4‐G (Medium Non‐Residential Green Power Electric Service), E‐4 TOU (Medium Non‐Residential Time of Use Electric Service), E‐7 (Large Non‐Residential Electric Service), E‐7‐G (Large Non‐Residential Green Power Electric Service), E‐7 TOU (Large Non‐Residential Time of Use Electric Service), E‐NSE (Net Metering Net Surplus Electricity Compensation), and E‐EEC (Export Electricity Compensation) and 2) Discuss and Potential Direction for an Electric Rebate in 2023 Supplemental Memo, Presentation PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1. Written public comments may be submitted by email to city.council@cityofpaloalto.org. 2. For in person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers and deliver it to the Clerk prior to discussion of the item. 3. Spoken public comments using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom‐ based meeting. Please read the following instructions carefully. 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. Or download the Zoom application onto your smart phone from the Apple App Store or Google Play Store and enter in the Meeting ID below. 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. 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. When called, please limit your remarks to the time limit allotted. A timer will be shown on the computer to help keep track of your comments. 4. 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 Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. CLICK HERE TO JOIN    Meeting ID: 992‐2730‐7235   Phone: 1‐669‐900‐6833 Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public programs, services and meetings in a manner that is readily accessible to all. Persons with disabilities who require materials in an appropriate alternative format or who require auxiliary aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at (650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service.  2 Regular Meeting March 21, 2023 Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for public inspection at www.CityofPaloAlto.org.   FINANCE COMMITTEERegular MeetingTuesday, March 21, 2023Community Meeting Room & Hybrid5:30 PMAmended AgendaAmended Agenda Items Appear Below In RedPursuant to AB 361 Palo Alto City Council meetings will be held as “hybrid” meetings with theoption to attend by teleconference/video conference or in person. To maximize public safetywhile still maintaining transparency and public access, members of the public can choose toparticipate from home or attend in person. Information on how the public may observe andparticipate in the meeting is located at the end of the agenda. Masks are strongly encouraged ifattending in person. The meeting will be broadcast on Cable TV Channel 26, live onYouTube https://www.youtube.com/c/cityofpaloalto, and streamed to Midpen MediaCenter https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)Meeting ID: 992 2730 7235    Phone: 1(669)900‐6833PUBLIC COMMENTSPublic comments will be accepted both in person and via Zoom for up to three minutes or anamount of time determined by the Chair. All requests to speak will be taken until 5 minutesafter the staff’s presentation. Written public comments can be submitted in advance tocity.council@CityofPaloAlto.org and will be provided to the Council and available for inspectionon the City’s website. Please clearly indicate which agenda item you are referencing in yoursubject line.PowerPoints, videos, or other media to be presented during public comment are accepted onlyby email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received,the  Clerk will have them shared at public comment for the specified item. To uphold strongcybersecurity management practices, USB’s or other physical electronic storage devices are notaccepted.CALL TO ORDERPUBLIC COMMENT Members of the public may speak to any item NOT on the agenda.ACTION ITEMS1.Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, andIncreasing Water Rates by Amending Rate Schedules W‐1 (General Residential WaterService), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4(Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7(Non‐Residential Irrigation Water Service) Supplemental Memo, Presentation2.The Utilities Advisory Commission and Staff Request That the Finance CommitteeRecommend the City Council Adopt a Resolution Approving the FY 2024 WastewaterCollection Utility Financial Plan Including Proposed Reserve Transfers and IncreasingWastewater Rates by Amending Rate Schedules S‐1 (Residential Wastewater Collectionand Disposal), S‐2 (Commercial Wastewater Collection and Disposal), S‐6 (RestaurantWastewater Collection and Disposal) and S‐7 (Commercial Wastewater Collection andDisposal – Industrial Discharger) (Continued from March 7, 2023) SupplementalMemo, Presentation3.Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfersand Amending the Gas Utility Reserve Management Practices, and Increasing Gas Ratesby 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) Presentation4.Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending RateSchedules E‐HRA (Hydro Rate Adjuster), E‐1 (Residential Electric Service), E‐2(Residential Master‐Metered and Small Non‐Residential Electric Service), E‐2‐G(Residential Master‐Metered and Small Non‐Residential Green Power Electric Service), E‐4 (Medium Non‐Residential Electric Service), E‐4‐G (Medium Non‐Residential GreenPower Electric Service), E‐4 TOU (Medium Non‐Residential Time of Use Electric Service),E‐7 (Large Non‐Residential Electric Service), E‐7‐G (Large Non‐Residential Green PowerElectric Service), E‐7 TOU (Large Non‐Residential Time of Use Electric Service), E‐NSE(Net Metering Net Surplus Electricity Compensation), and E‐EEC (Export Electricity Compensation) and 2) Discuss and Potential Direction for an Electric Rebate in 2023 Supplemental Memo, Presentation 5.Recommendation to the City Council to Approve and Authorize the City Manager or Their Designee to Execute a Third Phase Agreement with Northern California Power Agency for the Purchase of up to 87,600 Megawatt Hours per Year of Geothermal Energy from Calpine Corporation's Geysers Power Company, LLC Over a Term of up to 12 Years for a Total Not to Exceed Amount of $76.2 Million FUTURE MEETINGS AND AGENDAS Members of the public may not speak to the item(s) ADJOURNMENT AMENDED AGENDA ITEMS 1.Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024 Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W‐1 (General Residential Water Service), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4 (Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7 (Non‐Residential Irrigation Water Service) Supplemental Memo, Presentation 2.The Utilities Advisory Commission and Staff Request That the Finance Committee Recommend the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Proposed Reserve Transfers and Increasing 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) (Continued from March 7, 2023) Supplemental Memo, Presentation 3.Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfers and Amending 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) Presentation 4.Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E‐HRA (Hydro Rate Adjuster), E‐1 (Residential Electric Service), E‐2 (Residential Master‐Metered and Small Non‐Residential Electric Service), E‐2‐G (Residential Master‐Metered and Small Non‐Residential Green Power Electric Service), E‐ 4 (Medium Non‐Residential Electric Service), E‐4‐G (Medium Non‐Residential Green Power Electric Service), E‐4 TOU (Medium Non‐Residential Time of Use Electric Service), E‐7 (Large Non‐Residential Electric Service), E‐7‐G (Large Non‐Residential Green Power Electric Service), E‐7 TOU (Large Non‐Residential Time of Use Electric Service), E‐NSE (Net Metering Net Surplus Electricity Compensation), and E‐EEC (Export Electricity Compensation) and 2) Discuss and Potential Direction for an Electric Rebate in 2023 Supplemental Memo, Presentation PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1. Written public comments may be submitted by email to city.council@cityofpaloalto.org. 2. For in person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers and deliver it to the Clerk prior to discussion of the item. 3. Spoken public comments using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom‐ based meeting. Please read the following instructions carefully. 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. Or download the Zoom application onto your smart phone from the Apple App Store or Google Play Store and enter in the Meeting ID below. 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. 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. When called, please limit your remarks to the time limit allotted. A timer will be shown on the computer to help keep track of your comments. 4. 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 Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. CLICK HERE TO JOIN    Meeting ID: 992‐2730‐7235   Phone: 1‐669‐900‐6833 Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public programs, services and meetings in a manner that is readily accessible to all. Persons with disabilities who require materials in an appropriate alternative format or who require auxiliary aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at (650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service.  3 Regular Meeting March 21, 2023 Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for public inspection at www.CityofPaloAlto.org.   FINANCE COMMITTEERegular MeetingTuesday, March 21, 2023Community Meeting Room & Hybrid5:30 PMAmended AgendaAmended Agenda Items Appear Below In RedPursuant to AB 361 Palo Alto City Council meetings will be held as “hybrid” meetings with theoption to attend by teleconference/video conference or in person. To maximize public safetywhile still maintaining transparency and public access, members of the public can choose toparticipate from home or attend in person. Information on how the public may observe andparticipate in the meeting is located at the end of the agenda. Masks are strongly encouraged ifattending in person. The meeting will be broadcast on Cable TV Channel 26, live onYouTube https://www.youtube.com/c/cityofpaloalto, and streamed to Midpen MediaCenter https://midpenmedia.org.VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235)Meeting ID: 992 2730 7235    Phone: 1(669)900‐6833PUBLIC COMMENTSPublic comments will be accepted both in person and via Zoom for up to three minutes or anamount of time determined by the Chair. All requests to speak will be taken until 5 minutesafter the staff’s presentation. Written public comments can be submitted in advance tocity.council@CityofPaloAlto.org and will be provided to the Council and available for inspectionon the City’s website. Please clearly indicate which agenda item you are referencing in yoursubject line.PowerPoints, videos, or other media to be presented during public comment are accepted onlyby email to city.clerk@CityofPaloAlto.org at least 24 hours prior to the meeting. Once received,the  Clerk will have them shared at public comment for the specified item. To uphold strongcybersecurity management practices, USB’s or other physical electronic storage devices are notaccepted.CALL TO ORDERPUBLIC COMMENT Members of the public may speak to any item NOT on the agenda.ACTION ITEMS1.Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, andIncreasing Water Rates by Amending Rate Schedules W‐1 (General Residential WaterService), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4(Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7(Non‐Residential Irrigation Water Service) Supplemental Memo, Presentation2.The Utilities Advisory Commission and Staff Request That the Finance CommitteeRecommend the City Council Adopt a Resolution Approving the FY 2024 WastewaterCollection Utility Financial Plan Including Proposed Reserve Transfers and IncreasingWastewater Rates by Amending Rate Schedules S‐1 (Residential Wastewater Collectionand Disposal), S‐2 (Commercial Wastewater Collection and Disposal), S‐6 (RestaurantWastewater Collection and Disposal) and S‐7 (Commercial Wastewater Collection andDisposal – Industrial Discharger) (Continued from March 7, 2023) SupplementalMemo, Presentation3.Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfersand Amending the Gas Utility Reserve Management Practices, and Increasing Gas Ratesby 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) Presentation4.Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending RateSchedules E‐HRA (Hydro Rate Adjuster), E‐1 (Residential Electric Service), E‐2(Residential Master‐Metered and Small Non‐Residential Electric Service), E‐2‐G(Residential Master‐Metered and Small Non‐Residential Green Power Electric Service), E‐4 (Medium Non‐Residential Electric Service), E‐4‐G (Medium Non‐Residential GreenPower Electric Service), E‐4 TOU (Medium Non‐Residential Time of Use Electric Service),E‐7 (Large Non‐Residential Electric Service), E‐7‐G (Large Non‐Residential Green PowerElectric Service), E‐7 TOU (Large Non‐Residential Time of Use Electric Service), E‐NSE(Net Metering Net Surplus Electricity Compensation), and E‐EEC (Export ElectricityCompensation) and 2) Discuss and Potential Direction for an Electric Rebate in 2023Supplemental Memo, Presentation5.Recommendation to the City Council to Approve and Authorize the City Manager or TheirDesignee to Execute a Third Phase Agreement with Northern California Power Agency forthe Purchase of up to 87,600 Megawatt Hours per Year of Geothermal Energy fromCalpine Corporation's Geysers Power Company, LLC Over a Term of up to 12 Years for aTotal Not to Exceed Amount of $76.2 MillionFUTURE MEETINGS AND AGENDASMembers of the public may not speak to the item(s)ADJOURNMENTAMENDED AGENDA ITEMS1.Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, andIncreasing Water Rates by Amending Rate Schedules W‐1 (General Residential WaterService), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4(Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7(Non‐Residential Irrigation Water Service) Supplemental Memo, Presentation2.The Utilities Advisory Commission and Staff Request That the Finance CommitteeRecommend the City Council Adopt a Resolution Approving the FY 2024 WastewaterCollection Utility Financial Plan Including Proposed Reserve Transfers and IncreasingWastewater Rates by Amending Rate Schedules S‐1 (Residential Wastewater Collectionand Disposal), S‐2 (Commercial Wastewater Collection and Disposal), S‐6 (RestaurantWastewater Collection and Disposal) and S‐7 (Commercial Wastewater Collection andDisposal – Industrial Discharger) (Continued from March 7, 2023) Supplemental Memo,Presentation3.Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfersand Amending the Gas Utility Reserve Management Practices, and Increasing Gas Ratesby 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) Presentation4.Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending RateSchedules E‐HRA (Hydro Rate Adjuster), E‐1 (Residential Electric Service), E‐2 (Residential Master‐Metered and Small Non‐Residential Electric Service), E‐2‐G (Residential Master‐Metered and Small Non‐Residential Green Power Electric Service), E‐ 4 (Medium Non‐Residential Electric Service), E‐4‐G (Medium Non‐Residential Green Power Electric Service), E‐4 TOU (Medium Non‐Residential Time of Use Electric Service), E‐7 (Large Non‐Residential Electric Service), E‐7‐G (Large Non‐Residential Green Power Electric Service), E‐7 TOU (Large Non‐Residential Time of Use Electric Service), E‐NSE (Net Metering Net Surplus Electricity Compensation), and E‐EEC (Export Electricity Compensation) and 2) Discuss and Potential Direction for an Electric Rebate in 2023 Supplemental Memo, Presentation PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to teleconference meetings via email, teleconference, or by phone. 1. Written public comments may be submitted by email to city.council@cityofpaloalto.org. 2. For in person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers and deliver it to the Clerk prior to discussion of the item. 3. Spoken public comments using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom‐ based meeting. Please read the following instructions carefully. 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. Or download the Zoom application onto your smart phone from the Apple App Store or Google Play Store and enter in the Meeting ID below. 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. 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. When called, please limit your remarks to the time limit allotted. A timer will be shown on the computer to help keep track of your comments. 4. 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 Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. CLICK HERE TO JOIN    Meeting ID: 992‐2730‐7235   Phone: 1‐669‐900‐6833 Americans with Disability Act (ADA) It is the policy of the City of Palo Alto to offer its public programs, services and meetings in a manner that is readily accessible to all. Persons with disabilities who require materials in an appropriate alternative format or who require auxiliary aids to access City meetings, programs, or services may contact the City’s ADA Coordinator at (650) 329‐2550 (voice) or by emailing ada@cityofpaloalto.org. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service.  4 Regular Meeting March 21, 2023 Materials related to an item on this agenda submitted to the Board after distribution of the agenda packet are available for public inspection at www.CityofPaloAlto.org.   1 8 7 1 Finance Committee Staff Report Report Type: ACTION ITEMS Lead Department: Utilities Meeting Date: March 21, 2023 Report #: 2303-1125 TITLE Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024 Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W‐1 (General Residential Water Service), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4 (Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7 (Non‐Residential Irrigation Water Service) DISCUSSION On March 7, 2023 the Finance Committee unanimously recommended Council approve the FY 2024 Water rate changes and Financial Plan. However, based on the Committee’s feedback, staff plan to bring forward an alternative scenario for Committee consideration. Staff recommends reviewing this revised scenario in-lieu of possible alternations to the Wastewater Financial Plans and Rates as discussed on March 7, 2023. A late packet item will be distributed March 16, 2023 providing an alternative scenario for water utility rate changes in the form of a presentation. APPROVED BY: Dean Batchelor, Director of Utilities Item 1 Item 1 Staff Report     Packet Pg. 5     Item No. 2.Page 1 of 1 1 8 5 2 Finance Committee Staff Report From: Kiely Nose, Assistant City Manager Report Type: Action Item Lead Department: Utilities Meeting Date: March 21, 2023 Report #: 2302-1107 TITLE The Utilities Advisory Commission and Staff Request That the Finance Committee Recommend the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Proposed Reserve Transfers and Increasing 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) (Continued from March 7, 2023) RECOMMENDATION The Finance Committee continued this item at the March 7, 2023 meeting and directed staff to return with implications of sewer main replacements on the horizon of adopting Alternative A or Modified Alternative B as discussed at that meeting. A presentation only will be delivered late packet to provide the requested information. APPROVED BY: Dean Batchelor, Director of Utilities 2302-1107 Item 2 Item 2 Staff Report     Packet Pg. 6     Item No. 3.Page 1 of 17 1 6 9 3 Finance Committee Staff Report From: Kiely Nose, Assistant City Manager Lead Department: Utilities Meeting Date: March 21, 2023 Staff Report: 2302-0946 TITLE Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfers and Amending 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) RECOMMENDATION The Utilities Advisory Commission (UAC) and Staff request that the Finance Committee recommend the City Council adopt a resolution (Attachment A): a. Approving the fiscal year (FY) 2024 Gas Utility Financial Plan1; and b. Amending the Gas Utility Reserve Management Practices (Attachment B) c. Transferring up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund in FY 2023; d. Transferring up to ___% of gas utility gross revenues received during fiscal year 2022 to the general fund in FY 2024; e. Transferring up to $3.82 million from the CIP Reserve to the Operations Reserve in FY 2023; and f. 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) (Attachment C). Staff is also seeking Finance Committee feedback on the FY 2024 general fund transfer before sending a final recommendation to Council, and has provided two general fund transfer alternatives which comply with the voter-approved Measure L2. For Item (d) above, the UAC 1 FY24 Gas Utility Financial Plan https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/reports/city-manager-reports-cmrs/attachments/03-21-2023-id-2302-0946-gas-financial-plan.pdf 2 Measure L Web Page https://www.cityofpaloalto.org/Departments/City-Clerk/Municipal-Elections/November-8- 2022-Ballot-Measures Item 3 Item 3 Staff Report     Packet Pg. 7     Item No. 3.Page 2 of 17 1 6 9 3 recommends transferring up to 15.5% of gas utility gross revenues received during fiscal year 2022 to the general fund in FY 2024. EXECUTIVE SUMMARY The FY 2024 Gas Utility Financial Plan includes projections of the utility’s costs and revenues for FY 2023 through FY 2028. Gas utility costs are made up of supply-related costs (60 percent of costs in FY 2023), which are collected through a supply rate that varies monthly, and distribution- related costs (40 percent of costs in FY 2023), which are collected through a distribution rate that is typically adjusted annually. Distribution rates last increased on July 1, 2022, which resulted in a roughly 3 percent increase in the total system average gas rate (the supply rates plus the distribution rates). The UAC reviewed these plans and unanimously recommends the City Council adopt them at its March 1, 2023 meeting. Not included in this item is the review of gas rebates; per City Council direction, an item is scheduled for City Council review on March 27, 2023 to provide a rebate up to 20% of the highest month gas utility bills. Gas market prices rose to unprecedented levels in FY 2023, leading to far higher gas costs than are projected for FY 2024 through FY 2028. Staff is proposing to increase the distribution component of the gas rates in FY 2024 to ensure the utility is recovering its costs of operations. Revenues were already below costs after keeping rate increases low through the pandemic, but construction inflation and other factors have driven costs up. The distribution rate increase is projected to increase overall customer bills approximately 8% if supply costs remain the same in FY 2024 as they were in FY 2023, though staff does not expect this. This 8% increase in customer bills results from increasing the distribution component of the rates 21% to fully recover distribution costs and avoid decreasing reserves further. Even with this distribution rate increase, staff expects average annual customer gas bills to decline 13% in FY 2024 compared to FY 2023 because gas supply costs were extremely high in FY 2023, particularly in the winter. FY 2024 annual gas supply costs are forecasted to be about 36% lower than FY 2023. Gas market prices are uncertain, however, and these forecasts can change. The distribution rate increase is driven by two things: 1) the need to replenish reserves, which were depleted by significant losses due to FY 2023 commodity costs that were not be fully passed through to customers under the City’s commodity rate cap of $4 per therm, and 2) continuing increases in capital and operating costs. Distribution rates have not kept up with these increased costs in past years as the City has minimized gas rate increases to minimize impacts to the community during the economic downturn associated with the COVID-19 pandemic. The gas utility's transfer to the City’s General Fund is another component of the City’s gas rates. City voters first authorized the transfer in 1950, and in November 2022 voters approved Measure L, affirming the continuation of this practice by adding section 2.28.185 to the Municipal Code. Each year the City Council may transfer from the gas utility to the general fund an amount Item 3 Item 3 Staff Report     Packet Pg. 8     Item No. 3.Page 3 of 17 1 6 9 3 up to 18% of the gross revenues of the gas utility,3 though Council may choose to transfer a lesser amount. Staff is seeking Finance Committee feedback on the amount of the FY 2024 transfer before sending a final recommendation to Council. Two alternatives and their associated rate increases are shown in the section below titled “Alternative Gas Increase Plans.” All post-FY 2023 rate and cost discussions in this staff report are based on Alternative 2, which involves transferring up to 18% of gas utility gross revenues in FY 2023, and projects 15.5% in FY 2024. BACKGROUND Every year staff presents the UAC 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 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 and Canada. The City 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 and gas distribution costs. Supply costs include the cost of the gas itself, the cost of transmitting the gas to Palo Alto, and environmental costs4 and distribution costs include the costs of operating the distribution system. As noted above, gas supply costs are passed through to customers through four gas supply rate components. The commodity rate is the largest gas supply rate component and it varies monthly, while transportation and environmental pass-through rates change less frequently. ANALYSIS Staff’s annual assessment of the financial position of the City’s gas utility is completed to ensure adequate revenue to fund operations, including reserves, 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 FY2023 and FY 2024: 3 18% of the gross revenues of the gas utility received “during the fiscal year two fiscal years before the fiscal year of the transfer.” (Palo Alto Municipal Code Section 2.28.185). 4 These are the costs of complying with the State’s Cap and Trade regulations and procuring offsets under the City’s Carbon Neutral Gas program. Item 3 Item 3 Staff Report     Packet Pg. 9     Item No. 3.Page 4 of 17 1 6 9 3 The FY 2024 Gas Utility Financial Plan includes the following proposed actions: a. Approve the FY 2024 Gas Utility Financial Plan (Linked Document); and b. Amend the Gas Utility Reserve Management Practices (Attachment B); and c. Transferring up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund in FY 2023; d. Transferring up to ___% of gas utility gross revenues received during fiscal year 2022 to the general fund in FY 2024; e. Transfer up to $3.82 million from the CIP Reserve to the Operations Reserve in FY 2023; and f. Amend gas rate schedules (Attachment C) to increase distribution rates by 21.4 percent, (for an estimated 8 percent increase to total rates in FY 2024). These proposed actions are described in more detail below and in the FY 2024 Gas Financial Plan (Linked Document). Staff is seeking Finance Committee feedback on the General Fund transfer in item (d) above before sending a final recommendation to Council and has provided two alternatives for determining the amount of the transfer, both of which comply with the voter- approved Measure L. Both options are described in the section below titled “Alternative Gas Increase Plans.” The UAC, at its March 1, 2023 meeting, recommended transferring up to 15.5% of gross gas utility revenues, alternative 2. Overview of Cost and Rate Projections and Drivers The Financial Plan projects overall gas costs to increase from FY 2022 actuals through FY 2028 at about 5.1% per year on average. Although it is not possible to precisely predict commodity rates, staff monitors market prices monthly and automatically incorporates market prices into monthly supply rate adjustments, which are passed directly to customers as a line item on their utility bills. Staff projects commodity prices to decline in FY 2024. Beyond FY 2024 the forecast assumes (consistent with current gas market forecasts from various sources, including forward gas contracts on exchanges, forecasts from suppliers, and the Federal Energy Information Administration) overall supply costs will increase gradually from FY 2025 through FY 2028, remaining higher than historical gas prices. Total gas supply costs (which include gas commodity, transportation, and environmental charges) were $0.4 per therm to $0.6 per therm before FY 2022, but are projected to be between $1.0 per therm and $1.3 per therm for the rest of the forecast period. This is partially due to projected increases in environmental and transportation charges, but also higher projected western gas prices going forward. However, gas commodity prices are highly variable, and weather or economic factors could shift this forecast rapidly, in which case any savings or additional costs would be passed through to customers via the monthly varying commodity rate adjuster. The gas utility last increased distribution rates on July 1, 2022, which resulted in about a 3% increase in the total system average gas rate (the supply rate plus the distribution rate). This Financial Plan includes an increase in distribution rates effective July 1, 2023 that will result in about an 8% increase to the total system average gas rate if supply costs remain the same in FY 2024 as they were in FY 2023, though staff does not expect this. This 8% increase in customer bills results from increasing the distribution component of the rates 21% to fully recover Item 3 Item 3 Staff Report     Packet Pg. 10     Item No. 3.Page 5 of 17 1 6 9 3 distribution costs and avoid decreasing reserves further. This Financial Plan includes additional 5-7% increases to the total system average gas rate annually over the subsequent four years. The unprecedented and extremely high gas prices in FY 2023 impacted the gas utility’s reserves significantly, and very high double-digit rate increases in the total system average gas rate would be required to return the Operations Reserve to a level within guidelines. Due to the market price dynamics described above and commodity rate cap limits, the utility did not recover the full supply purchase costs from customers. Specifically, the commodity rate limit was $4/therm in January, but about 50% of the City’s gas was purchased at $5/therm, leading to significant additional costs being absorbed from the Operations Reserve instead of being passed through to customers. The rate increases in the attached Financial Plan partially replenish the gas utility’s reserves over the next several years. However, Staff is also proposing to allow the Gas Operations Reserve to be below the risk assessment levels for two fiscal years (FY 2024 and FY 2025) and below the minimum guideline for three fiscal years (FY 2024 through FY 2026) to mitigate required rate increases. The Gas Utility Reserves Management Practices (Attachment B) require returning reserves to within minimum guidelines (60 days of O&M and commodity expense) within one year unless an alternative plan is approved by Council. Figure 1: Operations Reserve Projection In addition to replenishing gas utility reserves, distribution rate increases are needed to pay for increasing operations costs and Capital Improvement Project (CIP) expenditures in the distribution system. Distribution system operations costs are increasing primarily due to salary and benefit increases both in the gas utility and for administrative functions provided by the City’s General Fund staff. Item 3 Item 3 Staff Report     Packet Pg. 11     Item No. 3.Page 6 of 17 1 6 9 3 The priority for the City’s gas utility is operating the system safely, which requires the replacement of higher risk PVC and steel mains on a reasonable timeline. The cost of gas main replacement continues to rise. For this reason, failing to increase the gas main replacement program budget steadily would result in a reduction of the rate of main replacement over time. This Financial Plan addresses these challenges in a way that will allow CPAU to meet its main replacement needs by increasing the main replacement budget beginning in FY 2025 and including a 3% annual construction inflationary increase thereafter. Staff is also controlling costs by applying for grant funding for the upcoming main replacement project and is currently awaiting a response regarding a Natural Gas Distribution Infrastructure Safety and Modernization grant opportunity. In addition, with the ongoing discussions and direction from City Council related to electrification of homes and neighborhoods throughout the City and transitioning away from natural gas, the City may be able to retire some PVC and steel mains through aggressive electrification in neighborhoods with these types of mains. Staff is working to develop an efficient phasing plan for electrification and the scaling back of the gas infrastructure. 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. During the COVID-19 pandemic, usage amongst customer classes dropped to reflect people working and staying at home rather than going to the workplace. Similarly, businesses operated at minimum staffing conditions or fully remote. Cost projections for CIP and operation of the distribution system as well as supply costs are increasing. The overall rate changes (gas supply plus distribution) referenced in this report are based on current gas market forecasts that indicate that the commodity portion of the overall rate is unlikely to continue increasing at the unprecedented level observed in FY 2023. Current gas market forward prices indicate that average annual commodity costs are likely to decline 36% FY 2024 from FY 2023. This is consistent with current gas market forecasts from various sources, including forward gas contracts on exchanges and forecasts from suppliers, but staff cautions that these forecasts can change rapidly due to changing weather, economic factors, or gas supply constraints. Staff recommends increasing the distribution component of the rates by 21.4%, which equates to an 8% increase to total rates, if commodity rates remain unchanged from FY 2023 (which, as noted above, staff does not project to be the case). Table 3 below shows both the proposed increase in distribution rates (about 21%) and the net impact on rates including commodity costs (about 8% overall, as distribution is about 40% of total rate revenue in FY 2023). From FY 2023 to FY 2024, the distribution portion of customer gas bills will increase 8%, and the commodity portion of the bill is projected to decline 22%. The result is that customers should see a 13% overall decrease in their bills in FY 2024 over the prior year, if, as forecasted above, commodity rates drop 36% from FY 2023 to FY 2024. Item 3 Item 3 Staff Report     Packet Pg. 12     Item No. 3.Page 7 of 17 1 6 9 3 Table 1: Revenue and Rate Revenue Changes by Customer Class Cost of Service Analysis FY 2024 Proposed Distribution Rate Increase Assumed Commodity Rate Change Net Change for Combined Commodity and Distribution Rate G1 – Residential G2 - Small Commercial G3 - Large Commercial Total* 21% -36% -13% * CPAU also has a G-10 Compressed Natural Gas Rate Schedule that currently does not have any customers but is retained for potential future use. Figure 2 below shows the primary drivers for the proposed rate change, which are split between increasing operating and capital improvement expenses and replenishing reserves to work towards bringing reserves back to within guideline levels for the Operations Reserve set forth in the Reserve Management Practices (Attachment B). The attached FY 2024 Gas Financial Plan provides more detailed discussion. Figure 2: Allocation of 21% Distribution Rate increase Proposed Gas Rates Staff proposes to adjust gas rates as shown in Table 2 and Table 3 below, effective July 1, 2023. These changes are projected to increase distribution rates by 21.4% resulting in a total system average gas rate (total of supply and distribution) by roughly 8 percent for all classes. These rate changes are included in the proposed amended rate schedules in (Attachment B). Item 3 Item 3 Staff Report     Packet Pg. 13     Item No. 3.Page 8 of 17 1 6 9 3 Table 2: Current and Proposed Monthly Service Charges Rate Schedule Current (as of 1/1/23) Proposed for FY 2024 Change ($)Change (%) G-1 (Residential)$ 11.54 $ 14.01 $ 2.47 21.4% G-2 (Small Commercial)106.90 129.78 22.88 21.4% G-3 (Large Commercial)489.12 593.79 104.67 21.4% G-10 (CNG)72.30 87.77 15.47 21.4% Table 3: Current and Proposed Gas Distribution Charges Current (as of 1/1/23) Proposed for FY 2024 Change ($)Change (%) G-1 (Residential) Tier 1 Rates $ 0.5607 $ 0.6807 $ 0.1200 21.4% Tier 2 Rates 1.4338 1.7406 0.3068 21.4% G-2 (Residential Master-Metered and Small Commercial) Uniform Rate 0.7365 0.8941 0.1576 21.4% G-3 (Large Commercial) Uniform Rate 0.7292 0.8852 0.1560 21.4% G-10 (CNG) Uniform Rate 0.0120 0.0145 0.0025 20.8%* *Adjusted downward due to rounding Bill Impact of Proposed Rate Changes Table 4 shows the impact of the proposed July 1, 2023 rate changes on the median residential bill for representative average winter and summer bills, with average winter bills forecasted to be significantly lower and summer bills higher. The average annual gas bill for the median residential customer is projected to be 13% lower in FY 2024 than FY 2023. However, since customer gas usage varies and the price of commodities changes monthly, the actual change may vary. Table 4 shows a representative winter period (November thru March) and summer period (April through October) bill comparison. Item 3 Item 3 Staff Report     Packet Pg. 14     Item No. 3.Page 9 of 17 1 6 9 3 Table 4: Impact of Proposed Gas Rate Changes on Residential Bills ChangeUsage (Therms/month)Bill under Current Rates Bill under Proposed Rates $/mo.% Winter Commodity Prices based on: Average Actual Commodity Cost Nov. 2022 – Jan. 2023 Average Forecast Commodity Cost Nov. 2023 – Jan. 2024 30 $ 98.98 $ 66.53 $(32.45)-33% 54 (median)168.93 108.54 (60.39)-36% 80 262.18 175.25 (86.92)-33% 150 527.32 371.99 (155.34)-29% Summer (Based on May 2022 Commodity Prices) 10 $ 27.41 $ 31.08 $ 3.67 13% 18 (median)40.11 44.74 4.63 12% 30 67.89 75.83 7.94 12% 45 104.80 117.34 12.54 12% Table 5 shows the impact of the proposed July 1, 2023 rate changes on various representative commercial customer bills. The overall increases for the G-2 and G-3 classes are projected to be about -13% on an annual basis, assuming gas commodity prices decline as described above. Table 5: Impact of Proposed Gas Rate Changes on Commercial Bills5 ChangeUsage (Therms/month) Bill under Current Rates Bill under Proposed Rates % 500 $ 1,282 $ 1,146 -11% 5,000 11,855 10,295 -13% 10,000 23,604 20,460 -13% 50,000 117,609 101,802 -13% FY 2024 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). 5 Commodity prices for bills under current rates are based on the average actual commodity prices from July 2022 through February 2023 and projections for March 2023 to June 2023. Commodity prices for bills under the proposed rates are based on staff’s forecast for July 2023 through June 2024. Item 3 Item 3 Staff Report     Packet Pg. 15     Item No. 3.Page 10 of 17 1 6 9 3 Table 6: Projected Distribution Rate Adjustments, FY 2024 to FY 2028 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Gas Utility 8%7%5%5%5% Estimated Residential Bill Impact ($/mo)* $ 6.43 $ 4.34 $ 3.10 $ 3.30 $ 3.49 * Estimated impact of distribution rate increases on median residential gas bill, which is currently $64.14 for FY 2023, assuming commodity rates are static. Reserve Transfers Table 7 below shows the reserve transfers from FY 2023 and projected through FY 2028. 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 2023 to FY 2028 ($000) *Operations Reserve represents the Gas Supply Fund Rate Stabilization Reserve and the Gas Distribution Fund Operations Reserve combined. FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Starting Reserve Balances 1 Operations Reserve*11,300 3,666 4,169 3,983 8,536 13,101 2 CIP Reserve 3,820 ----- 3 Cap and Trade Reserve 6,732 8,834 11,908 15,395 19,294 23,623 4 Debt Service Reserve 434 434 434 434 -- Revenues 5 Total Revenues 70,468 63,223 65,479 68,993 72,516 76,622 6 Cap and Trade 2,102 3,074 3,487 3,898 4,329 4,776 Transfers 7 Operations Reserve*1,718 (3,074)(3,487)(3,464)(4,329)(4,776) 8 CIP Reserve (3,820)----- 9 Cap and Trade Reserve 2,102 3,074 3,487 3,898 4,329 4,776 10 Debt Service Reserve (434) Expenses 11 Total Non-CIP Expenses (71,704)(55,684)(55,318)(57,374)(57,800)(59,122) 12 Planned Distribution CIP (10,217)(7,036)(10,347)(7,500)(10,150)(11,818) Ending Reserve Balances 1+5+6+7+11+12 Operations Reserve*3,666 4,169 3,983 8,536 13,101 18,784 2+8 CIP Reserve ------ 3+9 Cap and Trade 8,834 11,908 15,395 19,294 23,623 28,398 4+10 Debt Service Reserve 434 434 434 --- Operations Reserve Guidelines 13 Minimum 13,394 10,044 10,055 10,450 10,575 11,504 14 Maximum 26,788 20,089 20,111 20,900 21,151 23,008 CIP Reserve Guidelines 15 Minimum 10,217 7,036 10,347 7,500 10,150 11,818 16 Maximum 17,253 17,383 17,847 17,650 21,968 26,261 Item 3 Item 3 Staff Report     Packet Pg. 16     Item No. 3.Page 11 of 17 1 6 9 3 Cost Trends Figure 3 below illustrates the projected long run changes in the Gas Utility’s costs. Cost increases over the FY 2019 to FY 2028 time period are mainly from supply costs, followed by operations and capital expenses. Figure 3: FY 2019, FY 2024 and FY 2028 Cost Trends Figure 3 shows total gas supply costs, including commodity and transmission and environmental costs. Together these supply costs increased by 13% annually on average from FY 2019 to FY 2024. Gas commodity costs, a component of the supply costs in Figure 3, are the most variable component and represent the largest jump in costs from FY 2022 to FY 2023. Staff projects commodity costs to approximately double from FY 2022 to FY 2023 and then decline by FY 2024 (consistent with current gas market forecasts from various sources, including forward gas contracts on exchanges, forecasts from suppliers, and the Federal Energy Information Administration). For the remainder of the five-year forecast period from FY 2024 through FY 2028, these forecasts show gas market prices per therm expected to decrease gradually, though longer-term projections are even more uncertain. Despite the projected gradual increase in FY 2024 – FY 2028 in gas market cost estimates, there are several smaller components of supply costs that are expected to increase significantly during that time period, leading to an overall gradual increase in total gas supply costs. Cap and Trade allowance costs are increasing by 15.7% annually from FY 2024 to FY 2028.6 Staff projects 6 Based on allowance broker quotes. Item 3 Item 3 Staff Report     Packet Pg. 17     Item No. 3.Page 12 of 17 1 6 9 3 transmission costs to increase steadily at 4-6% annually from FY 2024 to FY 2028.7 Carbon offset products are also increasing at 7% per year on average.8 This leads to a gradual increase in gas supply costs over the forecast period, despite the projected decline in gas market prices (which itself is inherently uncertain). Averaging the cost of CIP over the two-year main replacement cycles, staff expect costs to increase by around 11% on average annually from FY 2024 through FY 2028 as main replacement costs continue to rise. Capital Improvement Program (CIP) costs vary from year to year and staff projects the two-year average CIP costs to increase by about 10% on average over the forecast horizon. While CPAU has historically planned a new gas main replacement project every year, higher than expected bid proposals have required resizing and redesign of some projects. Since FY 2020, staff has been budgeting for a new, larger main replacement project every other year, and this revised main replacement schedule has allowed CPAU to reasonably meet its main replacement needs while addressing challenges in the construction market and optimizing staffing resources. However, replacement costs continue to rise and holding the gas main replacement program budget steady results in a reduction of the rate of main replacement over time. This Financial Plan addresses these challenges in a way that will allow CPAU to meet its main replacement needs by increasing main replacement budget beginning in FY 2025 and including a 3% annual construction inflationary increase thereafter. Staff also projects operations costs to increase by about 2% annually on average from FY 2024 to FY 2028, primarily due to inflation and salary and benefit increases. Operations costs include funding for the cross-bore 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. 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 $0.6 million to $0.8 million per year in additional funding between FY 2024 and FY 2028 to complete the inspections within the next 5 years. Gas Purchases Forecast The ongoing pandemic recovery, 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 gas consumption will last. As seen with prior economic and drought-related gas usage declines, it is likely that consumption will not come back to pre-conservation/pandemic levels but will likely become a longer-run usage decline. 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, 7 The transportation rates for calendar years 2022-2026 reflect the rates in the September 30, 2021 prepared testimony (A.21-09-018) regarding PG&E’s 2023 Gas Transmission & Storage (GT&S) Cost Allocation and Rate Design (CARD); afterward a 3% escalation rate is applied. 8 Based on carbon offset provider quotes. Item 3 Item 3 Staff Report     Packet Pg. 18     Item No. 3.Page 13 of 17 1 6 9 3 and customer behavior are also expected to lower long run usage, and this forecast will be revised accordingly as more customers adopt these measures. Based on billing data through the end of 2022, gas usage has shown modest recovery with the return of winter heating. It is too early in the winter heating season to tell what the trend will be for the whole season. However, long term 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. Figure 4 shows the gas supply purchases actuals through the end of 2022 and projected for the next 10 years. Figure 4: Gas Supply Purchases Forecast Gas Bill Comparison with Surrounding Cities Table 8 presents residential bills for Palo Alto and PG&E for Calendar Years 2021 and 2022 compared to winter months in 2022 – 2023 during the recent supply price spikes at median usage levels. The annual gas bill for the median residential customer for CY 2022 was $821, about 11% lower than the annual bill for a PG&E customer with the same consumption. PG&E’s distribution rates for gas have increased to collect for needed system improvements for pipeline safety and maintenance. The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which includes the surrounding communities. Item 3 Item 3 Staff Report     Packet Pg. 19     Item No. 3.Page 14 of 17 1 6 9 3 Table 8: Residential Monthly Natural Gas Bill Comparison ($/month) Year/Month Median Usage (therms)9 Palo Alto PG&E Zone X % Difference CY 2021 402 $ 631.28 $ 701.60 (14%) CY 2022 402 821.33 868.62 (11%) November 2022 32 62.64 76.93 (19%) December 2022 69 175.06 171.96 2% January 2023 76 393.57 217.25 81% Historically, Palo Alto’s residential gas bills have been competitive relative to PG&E. During January 2023, bills increased significantly relative to PG&E. Staff is looking into reasons why gas prices spiked this winter and why PG&E’s gas rates did not rise as rapidly as Palo Alto’s gas rates during the recent market price spikes. Governor Newsom has requested that the Federal Electric Regulatory Commission start an investigation of winter gas prices. The Mayor sent a letter to the Governor on February 7, 2023 expressing the City’s support for pursuing these investigations. Similar investigations are underway by the California Public Utilities Commission (CPUC) in collaboration with the California Energy Commission and California Independent System Operator (CAISO). Staff is also in the process of doing a more extensive competitiveness review and will provide updates in the future. Alternative Gas Increase Plans The gas utility's transfer to the City’s General Fund is a component of the City’s gas rates. City voters first authorized the transfer in 1950, and in November 2022 voters approved Measure L, affirming the continuation of this practice by amending the Municipal Code. Specifically, section 2.28.185, “Natural Gas Utility Transfer” states: Each fiscal year the City Council may transfer from the natural gas utility to the general fund an amount equal to 18% of the gross revenues of the gas utility received during the fiscal year two fiscal years before the fiscal year of the transfer. At its discretion, the City Council may decide to transfer a lesser amount. The projected cost of the transfer shall be included in the City’s retail natural gas rates as part of the cost of providing gas service. The attached Financial Plan proposes an 18% transfer, $7,191,000 for FY 2023, which aligns with the voter-approved changes codified in PAMC 2.28.185. Measure L authorized Council to make the transfer annually, and granted Council the ability to approve a lower amount. Although Council will formally direct the FY 2024 transfer amount next year, Staff provided preliminary projections for FYs 2024 – 2026 for the UAC and Finance Committee’s consideration and feedback: Alternative 1 proposes transferring 18% of gross revenue as voters approved in Measure L, and Alternative 2 proposes a transfer between 15.5% and 11.1% annually through FY 2026. 9 Median usage data based on CY 2022 Item 3 Item 3 Staff Report     Packet Pg. 20     Item No. 3.Page 15 of 17 1 6 9 3 Staff prepared Alternative 2’s lower transfer percentages in response to recent increases in gas distribution rates and supply costs; this alternative is projected to create FY 2024 - 2026 transfers similar to the annual 2% to 3% growth rate in the transfer prior to Measure L. To illustrate, Alternative 2 links the FY 2024 – 2026 transfers to the Consumer Price Index (CPI). CPIError! Reference source not found. is projected to be 3% long term, though staff projects 5% CPI increases in FY 2024 and FY 2025. Table 9 shows a 6% per year projection as the maximum proposed increase under Alternative 2; actual increases for the years shown would be capped at 6% or CPI, whichever is less. Table 9Error! Reference source not found. shows the amount of the transfer both in dollars and as a percentage of utility revenue for each fiscal year, as well as the projected rate of annual growth in the transfer. Table 10 below shows the distribution rate increases (as a percentage of the total bill, excluding supply cost changes) associated with each alternative. Table 9: Proposed / Projected General Fund Transfers as % of Gross Sales Revenues Two FYs Prior10 Proposed Projected FY 2023 FY 2024 FY 2025 FY 2026 Gas Utility Gross Sales Revenue Two Fiscal Years Prior ($000) Alternative 1 66,927 Alternative 2 39,950 49,634 72,570 66,269 Percent of gas utility gross revenue to transfer Alternative 1 18.0%18.0%18.0% Alternative 2 18.0%15.5%11.1%12.9% Transfer amount ($000) Alternative 1 8,934 13,063 12,047 Alternative 2 7,191 7,622 8,080 8,565 Change in Transfer from Prior Fiscal Year (%) Alternative 1 24%46%-8% Alternative 2 -1%6%6%6% Table 10: Summary of Distribution Rate Changes for Transfer Proposal and Alternatives FY 2023 FY 2024 FY 2025 FY 2026 Alternative 1 9%10%8% Alternative 2 4%8%7%5% COMMISSION REVIEW The Utilities Advisory Committee reviewed the FY 2024 Gas Financial Plan on March 1, 2023 and voted 6-1 (Metz no) to recommend the staff recommendation with a General Fund transfer of up to 15.5% of gross gas utility revenues in FY 2024 (based on FY 2022 revenue), which 10 Measure L authorizes a transfer based on 18% (or a lesser percentage if approved by Council) of the revenue for two fiscal years prior, so the FY 2024 transfer is based on FY 2022 revenue. Item 3 Item 3 Staff Report     Packet Pg. 21     Item No. 3.Page 16 of 17 1 6 9 3 corresponds to Alternative 2 in Tables 11 and 12 above. The Commissioner who voted no said he wanted to see the reserves structure and transfers improved in the plan before approving it (for example, to have separate supply and distribution reserves and to avoid transfers from a reserve for a purpose different from the one that reserve typically serves). Commissioners expressed concern about keeping reserves below the minimum guidelines for as long as the plan proposes to do. There were several comments acknowledging how important it was to raise distribution rates to cost recovery right away given the condition of the reserves. There was some discussion of possible alternatives to raising rates right now and acknowledgement that it would require cuts to safety-related investments and the cross-bore program, ending the Carbon Neutral Gas program, or other cuts to core operations. Some Commissioners noted that the community had received a benefit during the pandemic by keeping gas prices low, which had been appropriate during the pandemic, but that the current rates could not be sustained. Several Commissioners emphasized the uncertainty in future gas prices and that there was not guarantee FY 2024 gas prices would be lower than FY 2023. They expressed interest in exploring alternatives for hedging against future gas price spikes. TIMELINE The City Council will consider adopting the Financial Plan and rate adjustments as part of the FY 2024 budget review and adoption process. If Council approves the proposed rate changes, they will become effective July 1, 2023. FISCAL/RESOURCE IMPACT Normal year sales revenues for the Gas Utility are projected to increase by roughly 8 percent or $5.7 million as a result of the proposed rate increases. If commodity costs decline 36% as forecasted, total supply revenue is projected to decrease by 36% as well. Commodity costs are uncertain, but any changes in costs from these forecasts would be passed through to customers via the monthly varying rate adjuster. The FY 2024 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 2024 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. As noted in the Reserves Management Practices (Attachment B), if reserves fall below the minimum guidelines, Council approval is required for a rate plan that requires more than one year to return reserves to within guideline levels. STAKEHOLDER ENGAGEMENT Staff, the UAC’s, and the Finance Committee’s recommendation on the FY 2024 gas rate increases and proposals in this report will go to City Council in June during the budget adoption process. Item 3 Item 3 Staff Report     Packet Pg. 22     Item No. 3.Page 17 of 17 1 6 9 3 ENVIRONMENTAL REVIEW The Finance Committee’s review and recommendation to the City Council on the FY 2024 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: Gas Resolution FY24 Attachment B: Reserves Management Practices Attachment C: Rate Schedule Approved by: Dean Batchelor, Director of Utilities Staff: Jonathan Abendschein, Assistant Director of Utilities Resource Management 2302-0946 Item 3 Item 3 Staff Report     Packet Pg. 23     Attachment A * NOT YET APPROVED * 6056713 Resolution No. Resolution of the Council of the City of Palo Alto Approving the Fiscal Year 2024 Gas Utility Financial Plan, Including Proposed Reserve and General Fund Transfers and 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, including reserves. 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. 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. C. On June 19, 2023, 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 adopts the FY 2024 Gas Utility Financial Plan. SECTION 2. The Council hereby approves the amendment to the Gas Utility Reserves Management Practices as shown in Attachment B. SECTION 3. The Council hereby approves the transfer of up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund in FY 2023. SECTION 4. The Council hereby approves the transfer of up to $3.82 Million from the CIP Reserve to the Operations Reserve, as described in the FY 2024 Gas Utility Financial Plan approved via this resolution. SECTION 5. 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, 2023. Item 3 Attachment A - Gas Resolution FY24     Packet Pg. 24     Attachment A * NOT YET APPROVED * 6056713 SECTION 6. 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, 2023. SECTION 7. 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, 2023. SECTION 8. 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, 2023. SECTION 9. 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 10. 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. SECTION 11. 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 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. Item 3 Attachment A - Gas Resolution FY24     Packet Pg. 25     Attachment A * NOT YET APPROVED * 6056713 // 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 Item 3 Attachment A - Gas Resolution FY24     Packet Pg. 26     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. Item 3 Attachment B - Reserves Management Practices     Packet Pg. 27     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 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 Item 3 Attachment B - Reserves Management Practices     Packet Pg. 28     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 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 Item 3 Attachment B - Reserves Management Practices     Packet Pg. 29     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. At the end of each fiscal year staff is authorized to transfer all revenues from the sale of allocated carbon allowances to this reserve. Item 3 Attachment B - Reserves Management Practices     Packet Pg. 30     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 17-1-20232 Effective 71-1-2023 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 residential facilities. B. TERRITORY: This schedule applies anywhere the City of Palo Alto provides Gas Service. C. UNBUNDLED RATES: Per Service Monthly Service Charge: .................................................................................................$14.011.54 Tier 1 Rates: Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .......................................... $0.10-$4.00 2. Cap and Trade Compliance Charge ............................................ $0.00-$0.25 3. Transportation Charge ................................................................. $0.00-$0.25 4. Carbon Offset Charge .................................................................. $0.00-$0.10 Distribution Charge:....................................................................................... $0.68075607 Tier 2 Rates: (All usage over 100% of Tier 1) Supply Charges: 1. Commodity (Monthly Market Based) .......................................... $0.10-$4.00 2. Cap and Trade Compliance Charge ............................................. $0.00-$0.25 3. Transportation Charge ................................................................. $0.00-$0.25 4. Carbon Offset Charge .................................................................. $0.00-$0.10 Distribution Charge:.........................................................................................................................................................................................................$1.74064338 Item 3 Attachment C - Rate Schedule     Packet Pg. 31     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 17-1-20232 Effective 71-1-2023 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. 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 1 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.cityofpaloalto.org/files/assets/public/utilities/rates-schedules-for-utilities/monthly-gas-commodity-rates.pdf Item 3 Attachment C - Rate Schedule     Packet Pg. 32     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 17-1-20232 Effective 71-1-2023 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. 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} Item 3 Attachment C - Rate Schedule     Packet Pg. 33     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 71-1-2023 dated 17-1-20232 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: .............................................................................................$129.7806.90 Per Therm Supply Charges: 1. Commodity (Monthly Market Based) ......................................... $0.10-$4.00 2. Cap and Trade Compliance Charges ........................................... $0.00-$0.25 3. Transportation Charge ................................................................. $0.00-$0.25 4. Carbon Offset Charge .................................................................. $0.00-$0.10 Distribution Charge: .................................................................................................. $0.89417365 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. Item 3 Attachment C - Rate Schedule     Packet Pg. 34     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 71-1-2023 dated 17-1-20232 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 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.cityofpaloalto.org/files/assets/public/utilities/rates-schedules-for-utilities/monthly-gas-commodity-rates.pdf Item 3 Attachment C - Rate Schedule     Packet Pg. 35     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 71-1-2023 dated 17-1-20232 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: $593.79489.12 Per Therm Supply Charges: 1. Commodity (Monthly Market Based) .................................................... $0.10-$4.00 2. Cap and Trade Compliance Charges .................................................... $0.00-$0.25 3. Transportation Charge .......................................................................... $0.00-$0.25 4. Carbon Offset Charge ........................................................................... $0.00-$0.10 Distribution Charge: .....................................................................................................$0.88527292 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 Item 3 Attachment C - Rate Schedule     Packet Pg. 36     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 71-1-2023 dated 17-1-20232 Sheet No G-3-2 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. 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 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.cityofpaloalto.org/files/assets/public/utilities/rates-schedules-for-utilities/monthly-gas-commodity-rates.pdf Item 3 Attachment C - Rate Schedule     Packet Pg. 37     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 71-1-2023 dated 17-1-20232 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: ...............................................................................................$87.7772.30 Per Therm Supply Charges: Commodity (Monthly Market Based) ................................................................ $0.10-$4.00 Cap and Trade Compliance Charges .................................................................. $0.00-$0.25 Transportation Charge ....................................................................................... $0.00-$0.25 Carbon Offset Charge ........................................................................................ $0.00-$0.10 Distribution Charge .........................................................................................................$0.0145120 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. Item 3 Attachment C - Rate Schedule     Packet Pg. 38     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 71-1-2023 dated 17-1-20232 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 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.cityofpaloalto.org/files/assets/public/utilities/rates-schedules-for-utilities/monthly-gas-commodity-rates.pdf Item 3 Attachment C - Rate Schedule     Packet Pg. 39     1 8 5 4 Finance Committee Staff Report Report Type: ACTION ITEMS Lead Department: Utilities Meeting Date: March 21, 2023 Report #: 2303-1109 TITLE Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E-HRA (Hydro Rate Adjuster), E-1 (Residential Electric Service), E-2 (Residential Master-Metered and Small Non-Residential Electric Service), E-2-G (Residential Master-Metered and Small Non- Residential Green Power Electric Service), E-4 (Medium Non-Residential Electric Service), E-4-G (Medium Non-Residential Green Power Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E-7 (Large Non-Residential Electric Service), E-7-G (Large Non- Residential Green Power Electric Service), E-7 TOU (Large Non-Residential Time of Use Electric Service), E-NSE (Net Metering Net Surplus Electricity Compensation), and E-EEC (Export Electricity Compensation) and 2) Discuss and Potential Direction for an Electric Rebate in 2023 DISCUSSION The Utilities Advisory Commission (UAC) review the FY 2024 Electric Financial Plan and Proposed Rates on March 1, 2023, the full report can be found here: https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas- minutes/utilities-advisory-commission/archived-agenda-and-minutes/agendas-and-minutes- 2023/03-mar-2023/03-01-2023-item-4.pdf A late packet report will be distributed on Thursday, March 16th, 2023. Staff is updating the UAC documents based on updated financial information regarding the CVPIA Supply Costs as well as Council recent direction to explore an electric rebate to customers in 2023. APPROVED BY: Dean Batchelor, Director of Utilities Item 4 Item 4 Staff Report     Packet Pg. 40     Item No. 5.Page 1 of 14 Finance Committee Staff Report From: Kiely Nose, Assistant City Manager Lead Department: Utilities Meeting Date: March 21, 2023 Report #: 2303-1032 TITLE Recommendation to the City Council to Approve and Authorize the City Manager or Their Designee to Execute a Third Phase Agreement with Northern California Power Agency for the Purchase of up to 87,600 Megawatt Hours per Year of Geothermal Energy from Calpine Corporation's Geysers Power Company, LLC Over a Term of up to 12 Years for a Total Not to Exceed Amount of $76.2 Million RECOMMENDATION The Utilities Advisory Commission (UAC) and Staff request that the Finance Committee recommend the City Council: 1. Authorize the City Manager, or their designee, to execute a Third Phase Agreement1 with the Northern California Power Agency (NCPA) to purchase up to 87,600 MWh of renewable energy/year from a portfolio of geothermal projects owned by Calpine Corporation’s Geysers Power Company, LLC, over a period of 12 years, at a total cost not to exceed $76.2 million; 2. Authorize the City Manager, or their designee, to execute on behalf of the City all related documents or agreements necessary to administer the Third Phase Agreement that are consistent with the Palo Alto Municipal Code and City Council approved policies, including, but not limited to, collateral assignment agreements; and take any and all actions as are necessary or advisable to implement and administer the Third Phase Agreement1; 3. Authorize the City Manager, or their designee, to approve and execute amendments to the Third Phase Agreement1, as may be required from time to time, so long as the contract price and length of the agreement remain unchanged; and 4. Waive the application of the anti-speculation requirement of Section D.1 of the City’s Energy Risk Management Policy as it may apply to surplus electricity purchases resulting 1 Third Phase Agreement: https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/reports/city-manager-reports-cmrs/attachments/03-07-2023-id-15051-ncpa-agreement.pdf Item 5 Item 5 Staff Report     Packet Pg. 41     Item No. 5.Page 2 of 14 from the City’s participation in the Calpine contract, due to the variability of the City’s hydroelectric resources and uncertainty around the City’s long-term load forecast. EXECUTIVE SUMMARY Through a Request for Proposals (RFP) recently conducted by NCPA, the City has the opportunity to enter into a 12-year agreement to purchase renewable power from a geothermal resource owned by Calpine. NCPA has executed a power purchase agreement (PPA) with Calpine to purchase the project output (which includes renewable energy and local resource adequacy capacity), and the City and other NCPA members who have elected to participate would receive shares of the output via Third Phase Agreements with NCPA. Palo Alto’s share of the 100 MW project capacity would be 5 MW for the first two years of the agreement, and 10 MW for the remaining ten years—the output of which would be equivalent to 10.6% of Palo Alto’s 2021 retail energy sales. The primary benefits of the Calpine project are: (1) the units are fully constructed and are already in operation—hence there is no project development risk; (2) geothermal resources are baseload generators, meaning they produce a nearly uniform level of energy on a 24-hour basis, which is a good match for the City’s load; and (3) the units provide local resource adequacy (RA) capacity, of which the City has a significant shortage. In addition, staff has determined that the contract price and value are very competitive with other renewable energy offerings in the market, and that this contract would provide a net value to the City (i.e., its total value would exceed the cost of the contract) of at least $13/MWh, which would be equivalent to over $550k/year during the first two years of the contract, and over $1.1 million/year during the remaining ten years. BACKGROUND SB 100 & Carbon Neutral Plan goals As part of ongoing efforts to meet the City’s Carbon Neutral Plan requirements, as well as to comply with the state Renewable Portfolio Standard (RPS) mandate of providing at least 60% of sales from qualifying renewable resources by 2030, staff pursued a PPA opportunity presented by Calpine to NCPA. Calpine is offering to sell power from a geothermal2 power plant, which qualifies as an in-state “Bucket 1” renewable resource under the state’s RPS requirements. Existing RPS portfolio Over the past three years, the City has had an average RPS level of 63%3 and is projected to maintain a high percentage of its power from renewable resources well into the future. Figure 1 below shows Palo Alto’s projected RPS requirements along with the City’s existing supply 2 Geothermal power plants have a small amount of carbon emissions associated with their operations from the natural release of greenhouse gases from the geysers 3 This value refers to the total renewable energy content of the City’s supply portfolio, including all of its in-state (“Bucket 1”) renewable resources and its unbundled, out-of-state (“Bucket 3”) renewable energy credits (RECs). For state RPS reporting purposes, the volume of Bucket 3 RECs that can be counted is limited; under this more restrictive framework the City’s reported RPS level has averaged 31% over the last three years. Item 5 Item 5 Staff Report     Packet Pg. 42     Item No. 5.Page 3 of 14 resources. Starting in 2029, the City is projected to have a deficit relative to its RPS requirement level (depending on the amount of large hydroelectric output the City receives4). Figure 1: Palo Alto’s Existing RPS Supplies and RPS Requirement Levels ANALYSIS The Market for Renewable Resources in California The pricing and availability of renewable resources in California has evolved significantly over the past decade as state and federal policies have shifted the market landscape. While the trend over the last decade has been the declining cost of renewable PPAs, the last two years has seen increasing challenges to developing and building renewable projects resulting from material shortages, supply chain issues, inflation, labor shortages, and tariffs. Before 2020, the market would generally have been described as a buyer’s market, however, in the last two and a half years, this characterization has shifted to a seller’s market as there are more renewable buyers, increasing challenges to completing projects, and as a result PPA prices have risen from record lows. While the downward trend in renewable energy pricing has reversed in the last couple of years, staff expects the generous subsidies included in the Inflation Reduction Act (IRA), which was 4 Under the state’s RPS law, utilities that receive significant amounts of generation from certain large hydroelectric facilities are able to satisfy their RPS requirements with a lower RPS level than is required of other utilities. Such utilities are only required to achieve an RPS level equal to the difference between their total retail sales volume and the amount of generation they receive from qualifying large hydro facilities. Item 5 Item 5 Staff Report     Packet Pg. 43     Item No. 5.Page 4 of 14 signed into law August 16th, 2022, to eventually push renewable energy prices lower again. There are many details in the IRA that are being outlined by the Treasury Department, and the initial feedback from developers is that it is still too early to understand the net impact this law will have on Palo Alto’s renewable resource options. Ultimately staff expects the IRA to reduce the cost of renewables. However, the consensus view in the California market is that it will likely be several years before these cost reductions materialize, given the extent of the current supply- demand imbalance and the various development challenges. While the market prices for intermittent renewable resources such as solar and wind, and energy storage systems have fluctuated in recent years, the price for baseload firm renewable resources such as geothermal energy has remained relatively steady. The price for energy from geothermal resources is relatively high, reflecting its higher cost of development and its higher value to the electrical grid. Results of Palo Alto’s Renewable RFP (2022 RFP) In May 2022, staff issued a Request for Proposals of new renewable and/or carbon-free generating resources and energy-storage resources. Staff’s evaluation of the four conforming project proposals (all of which were for solar resources) indicated that their “green premiums” (i.e. their net cost to the City – their total value less their total cost) ranged from $3/MWh to - $18 /MWh. In comparison, the Calpine geothermal project’s net cost is estimated at -$3/MWh (see below for more detail on this analysis). But in the course of reviewing the four responsive proposals, staff (1) became aware of efforts at the federal level to pass significant new clean energy legislation (in what became the IRA), and (2) learned about the Calpine geothermal project proposal. As a result of these two events, staff decided to reject the four conforming proposals received through this RFP. Calpine Geothermal Project Summary In May 2020, Calpine submitted a proposal to NCPA’s5 Renewables RFP for the sale of energy and associated attributes from Calpine’s6 existing portfolio of geothermal projects located in The Geysers area of Northern California. At the time Calpine submitted its proposal, NCPA members were evaluating other lower-cost project proposals. But shortly thereafter, the price of renewable projects started to significantly increase, due to the confluence of factors noted above. So in September 2021, NCPA requested proposal updates from Calpine and the other RFP respondents to see if their projects were still available and if there were any changes in price and/or terms initially offered. Section 2.30.340(d) of the City’s Municipal Code permits the City to procure wholesale utility commodities and services through public agencies, including NCPA. After receiving the updated information, NCPA and member utility staff7 reviewed and analyzed 5 NCPA is a not-for-profit Joint Powers Agency whose membership includes municipalities, a rural electric cooperative, and other publicly owned entities, including the City of Palo Alto. The mission of NCPA is to provide members cost effective wholesale power, energy-related services, and advocacy on behalf of public power consumers through joint action. 6 Calpine Corporation (Calpine) was founded in 1984 and, through its wholly-owned subsidiary GPC, is the largest owner of geothermal plants in The Geysers area in Northern California, with 725 MW of green energy capacity operating around the clock. The Geysers area is known as the world’s largest geothermal field spanning an area of 30 square miles in Sonoma, Lake, Mendocino, Marin, and Napa counties. 7 The City of Alameda, City of Biggs, City of Gridley, City of Lodi, City of Lompoc, Port of Oakland, and City of Santa Clara are all expected to sign onto the Third Phase Agreement to receive output from this project. Item 5 Item 5 Staff Report     Packet Pg. 44     Item No. 5.Page 5 of 14 the projects again and determined the geothermal output from Calpine would best diversify their renewable energy portfolios, aid them in achieving California RPS requirements, help meet their sustainability goals, and meet the needs of their expected load growth. Over the course of 2022, NCPA staff led negotiation of a PPA with Calpine for renewable energy and RA from Calpine’s Geysers geothermal facilities on behalf of the interested NCPA members. To enable NCPA to enter into the PPA with Calpine, participating NCPA members must execute a Third Phase Agreement with NCPA, which specifies the rights and obligations of NCPA and participating members regarding governance and administration of the PPA. The Third Phase Agreement also obligates the participating members to pay their assigned contract percentage share of all project costs (outlined in Exhibit A of the attached Third Phase Agreement), including but not limited to, administrative services costs, scheduling coordination costs, and all other costs related to the PPA. Santa Clara, as the initial project participant, executed the Third Phase Agreement on December 23, 2022, which enabled NCPA to execute renewable energy and RA Agreements with Calpine for output from the Geysers geothermal facilities. As described in Exhibit A of the attached Third Phase Agreement, participating members become project participants by exercising their right to accept a transfer of a portion of the project participation percentage from Santa Clara by April 30, 2023. In total, NCPA members have expressed interest in purchasing 100 MW of generating capacity from Calpine for a term of 12 years. Palo Alto requested up to 20 MW of this capacity, but given the demand from other NCPA members, has only been allocated 10 MW, with 5 MW starting in 2025, and 5 additional MW starting in 2027. This total geothermal capacity is expected to generate up to 876,000 MWh annually, of which Palo Alto would receive up to 87,600 MWh/year. This project will increase and further diversify Palo Alto’s renewable energy portfolio in accordance with the City’s adopted Integrated Resource Plan and RPS Procurement Plan. The proposed 10 MW share of the Calpine geothermal output is equivalent to 10.6% of Palo Alto’s 2021 retail energy sales. Due to increased demand for renewable energy generation resources, Calpine is limiting the amount of time it will reserve the quantity, price and terms of a PPA for prospective buyers. Therefore, staff recommends authorizing the City Manager to enter into the aforementioned Third Phase Agreement with NCPA. The benefits of the Calpine project are: (1) the units are fully constructed and are already in operation; (2) geothermal resources are baseload generators, meaning they produce a nearly uniform level of energy on a 24-hour basis; and (3) the units provide local resource adequacy (RA) capacity, of which the City has a significant shortage. Unlike many other new renewable energy projects, this project doesn’t carry any development risk. Economic Assessment of Calpine Geo Contract The Calpine Geothermal PPA is expected to provide good value to CPAU customers while also reducing the supply portfolio’s seasonal energy and RA capacity deficits, thereby reducing budget uncertainty. The geothermal project provides three valuable products to the electric portfolio: Item 5 Item 5 Staff Report     Packet Pg. 45     Item No. 5.Page 6 of 14 energy, resource adequacy, and renewable energy credits (RECs). If the sum of these three values is greater than the cost of the power purchase agreement, then the City will see a net monetary benefit from this contract. The primary value provided by this PPA is from the baseload energy output that the geothermal resource produces. Based on forward energy curves as of December 12, 2022, the average value of this energy is $71.80/MWh between 2025 and 2030.8 In addition to the energy component, each MWh of geothermal generation qualifies as a “Bucket 1” renewable energy credit (REC), which historically has been valued between $12-$18/MWh. Recently, Palo Alto sold surplus RECs for as much as $25/MWh, and according to reports from independent brokers, the value of RECs has recently surged to over $40/MWh. Finally, the geothermal plant capacity qualifies as local RA, which the City can count towards its annual local and system RA requirements. RA is typically transacted and priced on a $/kW-month basis and has ranged between $6/kW-month to $8/kW-month recently, which would translate to approximately $8 to $11/MWh for the geothermal project. Staff transacted for system RA at a price around $15/MWh in October 2022, well above historical RA prices. The increase in RA prices is driven by increasing system RA requirements and reduced qualifying capacity of solar resources, leading to a market shortage of RA in high load summer months. These benefits of the geothermal PPA in aggregate are estimated to range between $92 to $101/MWh against a PPA price of $79/MWh. With each of these revenue streams, there is a large degree of uncertainty around what will happen to future prices from changes to macro-economic conditions, regulations, interdependent regional power markets, and overall market uncertainty. That said, forward pricing curves project off-peak power prices to become more valuable than on-peak prices within the next few years, and proposed changes to the RA market rules would reward generators that produce in times of the grid’s greatest need. Furthermore, under the state’s RPS legislation, all load serving entities are required to increase their share of renewable energy in their portfolios (to 60% by 2030), so there is increasing demand for RECs. All of these trends support the expected long-term value of the geothermal project, given its ability to generate renewable energy around the clock. The geothermal project’s inability to reduce output during the sunshine hours will expose it to some lower prices, but these downsides are expected to be offset by the other trends mentioned. Staff conservatively estimates the geothermal project will provide a net benefit of at least $3/MWh9, with the potential for significant upside if market prices stay high and there are further challenges to bringing new resources onto the grid in the coming 5-10 years. 8 Note that all energy prices in California have increased sharply over the past two years, not just those of renewable energy projects: Two years ago, forward energy curves pegged the value of this product at $33/MWh, and even four months ago its value was projected to be just $54/MWh. 9 The conservative net value estimate of $3/MWh is based on the lower-end estimates of the value of the project’s RPS and RA products ($12/MWh and $8/MWh, respectively) and an energy value of $62/MWh instead of $71.80/MWh. The lower energy value estimate is equivalent to the energy value estimate of a few months ago, before the recent run-up in power and gas market prices. Item 5 Item 5 Staff Report     Packet Pg. 46     Item No. 5.Page 7 of 14 Risk Management Assessment Given this project is an existing power plant, there is no development risk, and instead only operational risk. There are some unique operational risks to running a geothermal power plant, but NCPA, who owns and manages an existing geothermal plant nearby, has confidence in Calpine’s history of managing their steam fields and the plant’s ability to reliably produce power over the term of the agreement. In general, businesses in the renewable industry lack extensive financial and operational track records, and because of the capital-intensive nature of these projects, they tend to be highly leveraged as well. In contrast to most of the City’s renewable energy suppliers, Geysers Power Company, LLC (the wholly-owned subsidiary of Calpine that controls its geothermal assets) is an investment-grade company (BBB/stable credit rating), as determined by KBRA, a nationally recognized statistical rating organization (NRSRO), approved by the Securities and Exchange Commission (SEC). While Calpine has a higher projected default rate than the City’s other (non- renewable) electric and gas suppliers, Calpine does have an excellent track record of operating a large portfolio of geothermal projects in the Geysers area over many years. And the output for this project will come from a collection of Calpine’s resources in this area, so even if there are problems with one or two resources there is very little risk that the City will not receive the contracted volumes of output. To further mitigate this risk, in the event of a credit downgrade event, Calpine will provide collateral (in the form of cash or a letter of credit), in the amount of $2.5 million for the first two years of the contract and $5.0 million for the remainder of the contract, which would protect the City and the other PPA offtakers in a scenario where the facilities are unable to produce the contracted output and the market price of the replacement renewable power is higher than the price of the Calpine PPA. And perhaps most importantly, under the terms of the proposed PPA the City is not at risk for paying for output that is not delivered. As with all of the City’s PPAs, the City will make no payments under the PPA until energy from the project is delivered. Palo Alto’s Energy Portfolio with Calpine Geo Under the City’s Energy Risk Management Procedures, staff regularly develops procurement plans for the prompt 36-month period to mitigate the City’s market price exposure. Given the supply portfolio’s heavy concentration of hydroelectric and solar resources, these procurement plans typically result in staff buying market energy in the fall/winter months and selling surplus energy during the spring/summer months. Furthermore, within any given day, the supply portfolio is routinely short during off-peak (nighttime) and long during on-peak (daytime) periods. This PPA would reduce the need for market purchases and increase the opportunity for market sales in the spring and summer months, depending on the level of output from the City’s hydroelectric resources. Item 5 Item 5 Staff Report     Packet Pg. 47     Item No. 5.Page 8 of 14 The existing supply portfolio10 is projected to have an overall surplus position from 2025 through 2028 even without entering an agreement for the geothermal project, as shown in Figure 2 below. The load forecast shown in Figure 2 is based on the mid-range scenario presented at the December 2022 UAC meeting, which includes modest load growth from data centers, electric vehicles, and building electrification. The hydro generation estimates are based on long term historical averages, which have been significantly higher than actual generation in the last few years during the drought. However, as noted in the December UAC meeting discussion, there is significant uncertainty around both the load and hydro generation projections shown here. Staff recently learned about commercial development plans that could result in significantly greater data center load within the next few years; meanwhile, the impacts of climate change are likely to significantly reduce the long-term level of hydro generation. Combined, these two factors could flip the portfolio’s overall surplus positions of the next few years to deficit positions—which is why staff recommends waiving the anti-speculation requirement of the City’s Energy Risk Management Policy for this agreement. Figure 2: Projected Annual Load-Resource Balance, 2025-2045 10 All six of the City’s solar PPA extend to 2040 or later, while the landfill gas PPAs expire between 2026 and 2034. The City has one remaining wind PPA which expires in June 2028. Furthermore, the City can renew the Western Base Resource contract for a new 30-year term that would start in 2025, and for planning purposes it is currently included in the supply portfolio baseline assumptions. Lastly, the City owns its share of the Calaveras project and it is therefore expected to remain in the portfolio indefinitely. Item 5 Item 5 Staff Report     Packet Pg. 48     Item No. 5.Page 9 of 14 While the supply portfolio, on average, has an overall surplus position in any given year, the portfolio is short during the 1st and 4th quarters of the calendar year given the seasonal generation from hydro and solar. Additionally, the portfolio is generally short during the non- solar (off-peak) hours. Monthly and daily load resource balance charts are shown in Attachments B and C. The geothermal project is a baseload power plant that produces electricity evenly across the day and year. Given the portfolio is currently projected to have surplus positions during the first few years of the geothermal PPA as shown above, staff is currently monitoring the City’s actual load levels closely and evaluating whether to sell solar energy during the 2nd and 3rd quarters (an amount equal to the total purchase amount from the Calpine project) to hedge being overly long on energy, while also improving the daily load-resource balance. Figure 3 below shows a monthly load-resource balance for the City’s portfolio with both the Calpine purchase and solar energy sales included. This would balance the portfolio supply and demand more evenly across the seasons within any given year. While the City’s risk management policies don’t prescribe a specific load-resource balance level, staff tries to minimize the portfolio’s overall exposure to the market in either direction to mitigate large supply cost fluctuations from market pricing volatility. Item 5 Item 5 Staff Report     Packet Pg. 49     Item No. 5.Page 10 of 14 Figure 3: Monthly Load-Resource Balance with Geothermal Energy Purchase and Q2/Q3 Solar Energy Sale Included Palo Alto’s Resource Adequacy Portfolio with Calpine Geo Resource adequacy (RA) is another market that the City is required to participate in as a load serving entity in the California Independent System Operator (CAISO) balancing authority. The CAISO RA requirements dictate required levels of generating capacity the City must own or procure to meet local, system, and flexible resource requirements on an annual and monthly basis. Currently, staff manages the City’s RA requirements by utilizing its own resources, participating in NCPA’s Capacity Pool Program, and through bilateral transactions with other market participants. The geothermal plant would qualify as local RA for the City, and it would also count towards the City’s system RA requirements. As Figures 4 and 5 below indicate, the City has local RA deficits of approximately 50-80 MW per month, but surpluses of system RA that average approximately 80 Item 5 Item 5 Staff Report     Packet Pg. 50     Item No. 5.Page 11 of 14 MW. This PPA would reduce the city’s Local RA deficit by 10 MW and would increase the System RA surplus by an equivalent amount.11 Figure 4: Annual Average Local RA Balance Forecast, 2025-2036 11 While the City would retain the geothermal capacity in its own portfolio to help satisfy its local RA requirements, the addition of this contract would free up capacity from other resources (which do not qualify as local RA) that the City could sell to generate additional revenue and reduce its system RA surplus positions. Item 5 Item 5 Staff Report     Packet Pg. 51     Item No. 5.Page 12 of 14 Figure 5: Annual Average System RA Balance Forecast, 2025-2036 Palo Alto’s RPS Portfolio with Calpine Geo The PPA will also increase the City’s share of power being generated by renewable resources, as required by the state’s RPS regulations. The City is already on track to meet state RPS targets without the geothermal PPA, so this is not a driving factor for this deal, but it would further increase the amount of Bucket 1 RECs the City is able to swap for lower-cost Bucket 3 RECs through its REC Exchange Program. In addition, increasing the City’s RPS level provides further flexibility in the future if the City pursues a smaller share of the Western Base Resource contract. Item 5 Item 5 Staff Report     Packet Pg. 52     Item No. 5.Page 13 of 14 Figure 6: Palo Alto’s Existing RPS Supplies and RPS Requirement Levels, with the Calpine Project NEXT STEPS The NPCA Commission approved Purchase Agreements Between Geysers Power Company, LLC and Northern California Power Agency, and the Third Phase Agreement for Purchase Agreements with Geysers Power Company, LLC at its December 1, 2022 meeting. Since then, NCPA, with input from attorneys representing participating members, completed PPA negotiations with Calpine. Santa Clara has executed the Third Phase Agreement with NCPA, and as the initial project participant has been allocated the full PPA output. Once Palo Alto and other participating members obtain their governing board approvals and execute the Third Phase Agreement as well, Santa Clara will assign shares of the PPA’s energy, RECs and RA capacity to participating members, adding those members to the Third Phase Agreement between NCPA and Santa Clara. Santa Clara has asked all participating members to execute the Third Phase Agreement by the end of April 2023. If the Finance Committee recommends approval, staff will present the Third Phase Agreement to the City Council for approval. Item 5 Item 5 Staff Report     Packet Pg. 53     Item No. 5.Page 14 of 14 FISCAL/RESOURCE IMPACT If Council approves the execution of this Third Phase Agreement with NCPA, the City will purchase up to 87,600 MWh/year for a total not-to-exceed amount of $6.93 million/year during the 12- year contract term (2025-2036). Funding for the purchase of the renewable energy will be included in the Electric Utility Fund budget beginning in FY 2025. POLICY IMPACT Approval of the proposed Third Phase Agreement is in conformance with the City’s Sustainability and Climate Action Plan (S/CAP), Integrated Resource Plan, Carbon Neutral Plan, and RPS Procurement Plan, specifically the City’s Renewable Portfolio Standard to meet at least 60% of the City’s electric sales from renewable energy. STAKEHOLDER ENGAGEMENT The UAC reviewed staff’s recommendation to recommend approval of the Third Phase Agreement with NCPA at its meeting on February 1, 202312. At that meeting, staff provided background on the Calpine geothermal project, the market for renewable energy in California, and the impact that the Calpine contract would have on the City’s electric supply portfolio. The UAC expressed strong approval for the Calpine contract, and encouraged staff to seek out additional opportunities to contract for new baseload renewable resources. ENVIRONMENTAL REVIEW The Finance Committee’s recommendation to approve the Third Phase Agreement does not meet the definition of a project under the California Environmental Quality Act (CEQA), pursuant to Public Resources Code Section 21065. APPROVED: Dean Batchelor, Director of Utilities Staff: James Stack, PhD, Sr. Resource Planner 2303-1032 12 Excerpt UAC Minutes February 1, 2023: https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/reports/city-manager-reports-cmrs/attachments/03-07-2023-id-15051-uac-excerpt.pdf Item 5 Item 5 Staff Report     Packet Pg. 54     Item No. 1.Page 1 of 2 Finance Committee Staff Report From: Kiely Nose, Assistant City Manager Lead Department: Utilities Department Meeting Date: March 21, 2023 Staff Report: 2303-1172 TITLE Recommend the City Council Adopt a Resolution Approving a Revised Fiscal Year 2024 Water Utility Financial Plan, Including Revised Proposed Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W‐1 (General Residential Water Service), W‐2 (Water Service From Fire Hydrants), W‐3 (Fire Service Connections), W‐4 (Residential Master‐ Metered and General Non‐Residential Water Service), and W‐7 (Non‐Residential Irrigation Water Service) BACKGROUND On March 7, 2023 the Finance Committee unanimously recommended Council approve the FY 2024 Water rate changes and Financial Plan. However, based on the Committee’s feedback, staff plan to bring forward an alternative scenario for Committee consideration. Staff recommends reviewing this revised scenario in-lieu of possible alternations to the Wastewater Financial Plans and Rates as discussed on March 7, 2023. Staff is providing Attachment A for review with alternatives.1 Overall, when compared to the total expected utility bill impacts outlined on March 1, 2023 to the Utilities Advisory Commission and the Finance Committee on March 7, 2023, staff have brough forward two alternative scenarios impacts the electric and water rates or the electric water and wastewater rates. Below is a summary of total bill impacts that staff will review in greater detail at the Committee meeting. On March 7, 2023, staff presented an overall projected change in residential median bill of $17.10 per month, a 5% increase. The total bill projection is inclusive of the following utilities: electric, gas, wastewater, water, refuse, and storm drain. Alternative Electric and Water Rates: When considering the recommended adjustments to the electric and water rates included on the March 21, 2023 Finance Committee agenda, the overall projected change in total residential 1 Water Presentation https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city- manager-reports-cmrs/attachments/03-21-2023-id2303-1172-w-presentation-fy24.pdf Item 1 Item 1 Supplemental Memo     Packet Pg. 55     Item No. 1.Page 2 of 2 median bill is $11.70 per month, a 3% increase from current rates, a difference of $5.40 per month lower than the March 7 proposals reviewed by the Committee. Alternative Electric, Water, and Wastewater Rates: When considering the potential adjustments to the electric, water, and wastewater rates included on the March 21, 2023 Finance Committee agenda, the overall projected change in total residential median bill is $10.80 per month, a 3% increase from current rates, a difference of $6.30 per month lower than the March 7 proposals reviewed by the Committee. ATTACHMENT: Attachment A: Water Presentation APPROVED by: Dean Batchelor, Director Utilities Staff: Lisa Bilir, Sr. Resource Planner Item 1 Item 1 Supplemental Memo     Packet Pg. 56     March 21, 2023 www.cityofpaloalto.org WATER UTILITY FINANCIAL PLAN AND PROPOSED RATE CHANGES FOR FY 2024 (revised as of March 21, 2023) Staff: Lisa Bilir Item 1 Item 1 Presentation     Packet Pg. 57     2 WATER RATE PROPOSAL (revised as of March 21, 2023) Overall Water Rate Increases Fiscal Year 2024 2025 2026 2027 2028 3/7/23 Finance Committee Recommendation 7%3%3%3%5% Alternative 6%4%3%3%5% Fiscal Year 2024 2025 2026 2027 2028 3/7/23 Finance Committee Recommendation 3%6%6%6%6% Alternative 2%7%6%6%6% Water Distribution Rate Increases Item 1 Item 1 Presentation     Packet Pg. 58     3 WATER COST AND REVENUE PROJECTION (Finance Committee as of March 7, 2023) * Includes changes due to commitments/reappropriations and funds transferred to the CIP Reserve Item 1 Item 1 Presentation     Packet Pg. 59     4 WATER COST AND REVENUE PROJECTION (revised as of March 21, 2023) * Includes changes due to commitments/reappropriations and funds transferred to the CIP Reserve Item 1 Item 1 Presentation     Packet Pg. 60     5 WATER OPERATIONS RESERVE PROJECTION (revised as of March 21, 2023) Item 1 Item 1 Presentation     Packet Pg. 61     6 WATER CIP RESERVE PROJECTIONS (revised as of March 21, 2023) The Capital Reserve Ending Balances are the same under the 3/7/23 Finance Committee Recommendation and Alternative Item 1 Item 1 Presentation     Packet Pg. 62     7 RECOMMENDATION Option 1:No change to the Finance Committee Recommendation from 3/7/23 for the Water Utility Financial Plan and Rate Increase (including a 3% water distribution rate increase); OR Option 2:Staff recommend that the Finance Committee Recommend that the City Council: 1. Adopt a resolution approving: a)a. FY 2024 Water Utility Financial Plan, including 2% water distribution rate increase b)b. Up to a $3.746 million transfer from the Capital Improvement Projects Reserve to the Operations Reserve in FY 2023 c)c. Up to a $3.0 million transfer from the Rate Stabilization Reserve in FY 2023 d)d. Increasing Water Utility Rates Via the Amendment of Rate Schedules W-1, W-2, W-3, W-4, and W-7 Item 1 Item 1 Presentation     Packet Pg. 63     Item No. 2.Page 1 of 2 Finance Committee Staff Report From: Kiely Nose, Assistant City Manager Lead: Utilities Department Meeting Date: March 21, 2023 Staff Report: 2303-1173 TITLE The Utilities Advisory Commission and Staff Request That the Finance Committee Recommend the City Council Adopt a Resolution Approving the FY 2024 Wastewater Collection Utility Financial Plan Including Proposed Reserve Transfers and Increasing 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) (Continued from March 7, 2023) BACKGROUND & ANALYSIS The Finance Committee continued this item at the March 7, 2023 meeting and directed staff to return with implications of sewer main replacements on the horizon of adopting Alternative A or Modified Alternative B as discussed at that meeting. Staff is providing a presentation with the alternatives for consideration1 Overall, when compared to the total expected utility bill impacts outlined on March 1, 2023 to the Utilities Advisory Commission and the Finance Committee on March 7, 2023, staff have brough forward two alternative scenarios impacts the electric and water rates or the electric water and wastewater rates. Below is a summary of total bill impacts that staff will review in greater detail at the Committee meeting. On March 7, 2023, staff presented an overall projected change in residential median bill of $17.10 per month, a 5% increase. The total bill projection is inclusive of the following utilities: electric, gas, wastewater, water, refuse, and storm drain. Alternative Electric and Water Rates: When considering the recommended adjustments to the electric and water rates included on the March 21, 2023 Finance Committee agenda, the overall projected change in total residential 1 Updated Wastewater Presentation https://www.cityofpaloalto.org/files/assets/public/agendas-minutes- reports/reports/city-manager-reports-cmrs/attachments/03-21-2023-id2302-1107-ww-presentation-fy24.pdf Item 2 Item 2 Supplemental Memo     Packet Pg. 64     Item No. 2.Page 2 of 2 median bill is $11.70 per month, a 3% increase from current rates, a difference of $5.40 per month lower than the March 7 proposals reviewed by the Committee. Alternative Electric, Water, and Wastewater Rates: When considering the potential adjustments to the electric, water, and wastewater rates included on the March 21, 2023 Finance Committee agenda, the overall projected change in total residential median bill is $10.80 per month, a 3% increase from current rates, a difference of $6.30 per month lower than the March 7 proposals reviewed by the Committee. ATTACHMENT: Attachment A: Wastewater Presentation APPROVED by: Dean Batchelor, Director Utilities Staff: Lisa Bilir, Senior Resource Planner Item 2 Item 2 Supplemental Memo     Packet Pg. 65     March 21, 2023 www.cityofpaloalto.org WASTEWATER COLLECTION UTILITY FINANCIAL PROJECTIONS (revised as of March 21, 2023) Staff: Lisa Bilir Item 2 Item 2 Presentation     Packet Pg. 66     2 WASTEWATER PROJECTIONS (revised as of March 21, 2023) FY 2024 recommendation: 9% overall rate increase •Accelerate main replacement from 1 mile per year to 2.5 miles per year in FY 2026 to replace the last main no more than ~ 8 years beyond ~100 year life expectancy •Alternatives A, B and C lower sewer rate increases & slower transition to 2.5 miles per year; increasing likelihood of increased repair and maintenance costs, sanitary sewer overflows, sinkholes or other catastrophic impacts •Fully funds current main replacement project (SSR 31) Summary of Recommended Rate Increases and Alternate Scenarios Fiscal Year 2024 2025 2026 2027 2028 Start 2.5 Mile Per Year Main Replacement Recommendation 9%9%9%8%5%2026 Alternative A 9%8%6%6%6%2028 Modified Alternative B 7%7%6%6%6%2032 Alternative B 7%7%5%5%5%2034 Alternative C 5%5%5%5%5%Later than 2034 Item 2 Item 2 Presentation     Packet Pg. 67     3 WASTEWATER COST AND REVENUE PROJ. (Modified Alternative B) * CIP in the projected years include changes due to commitments/reappropriations and funds transferred to the CIP Reserve Item 2 Item 2 Presentation     Packet Pg. 68     4 WASTEWATER COST AND REVENUE PROJ. (Staff Recommendation, presented on March 7, 2023) * CIP in the projected years include changes due to commitments/reappropriations and funds transferred to the CIP Reserve Item 2 Item 2 Presentation     Packet Pg. 69     5 WASTEWATER OPERATIONS RESERVE PROJECTION (revised as of March 21, 2023) Item 2 Item 2 Presentation     Packet Pg. 70     6 WASTEWATER CIP RESERVE PROJECTION (revised as of March 21, 2023) Item 2 Item 2 Presentation     Packet Pg. 71     7 RECOMMENDATION The Utilities Advisory Commission and Staff recommend that the Finance Committee Recommend that the City Council Adopt a resolution approving: •The Fiscal Year 2024 Wastewater Collection Financial Plan, including 9% overall rate increase •Transfer up to $3.178 million from the Capital Improvements Projects Reserve to the Operations Reserve in FY 2023 •Transfer up to $342 thousand from the Rate Stabilization Reserve to the Operations Reserve in FY 2023 •Increase Wastewater Collection Utility Rates Via the Amendment of Wastewater Collection and Disposal Rate Schedules S-1 (Residential), S-2 (Commercial), S-6 (Restaurant) and S-7 (Industrial Discharger) Item 2 Item 2 Presentation     Packet Pg. 72     March 21, 2023 www.cityofpaloalto.org GAS UTILITYFINANCIAL PLAN ANDPROPOSED RATECHANGESFOR FY 2024 Staff: Jonathan Abendschein • CITY OF PALO ALTO UTILIT Item 3 Item 3 Presentation     Packet Pg. 73     2 •Rate Design: •Gas Supply rate components: •commodity (reflects cost of gas purchased at market prices) •transmission (reflects cost of transporting gas to Palo Alto) •environmental (reflecting cost of mandatory Cap and Trade program participation and Carbon Neutral Gas Portfolio) •These rates vary monthly, quarterly, or annually according to market-driven costs that are passed directly to customers •Distribution rates are set based on the City’s costs for maintaining its gas distribution system (gas mains, services, related equipment) GAS RATE DESIGN ~CITY OF ~PALO ALTO Item 3 Item 3 Presentation     Packet Pg. 74     3 •8% overall rate increase to customer bills due to 21% distribution rate increase; •Projecting gas supply costs to be lower in FY 2024 (36% decrease), down from extreme FY 2023 prices •Net effect is a 13% net decrease in average annual customer bills from FY23 to FY24 •7% projected increase in FY 2025 and 5% annually from FY 2026 through FY 2028 •18% Measure L General Fund (GF) transfer for FY 2023 (PAMC 2.28.185) •Feedback requested on FY 2024 Measure L transfer GAS RATE PROPOSAL ~CITY OF ~PALO ALTO Item 3 Item 3 Presentation     Packet Pg. 75     4 Alternative Gas Rate Projections •Seeking feedback on proposed FY 2024 General Fund transfer •Measure L: 18% of gas utility gross revenues from two fiscal years prior; Council may transfer less •FY 2024 Alternative 1: Transfer 18% •FY 2024 Alternative 2: Transfer 15.5%, approximates 2-3% annual growth in transfer from past years, CPI ~CITY OF ~PALO ALTO $14,000 $12,000 ..... C ~ $10,000 E <( ,_ $8,000 QJ ...... 1/) C ro $6,000 F ro ::::, $4,000 C C <( $2,000 $0 - FY 2023 FY 2024 FY 2025 FY 2026 -Alternative 1 (18% of Gross Revenue Per Measure L) -Alternative 2 (15.5% Transfer in FY 2024) Item 3 Item 3 Presentation     Packet Pg. 76     5 Gas Utility Cost Structure Gas Distribution (in green): The cost to distribute gas within Palo Alto, including: maintaining and replacing gas infrastructure, customer service, billing, administration, etc. *Gas Supply (in blue): All pass-through ~CITY OF ~PAILO ALTO Capital Investment $7.0 million 11% Distribution $24.9 million 40% ~ Gas Supply ■ Distribution Gas Supply $19.7 million 32%* 1/ Gas Environmental $2.4 million 6%* Gas Transmission $6.5 million 11%* ~ Gas Environmental ■ Gas Transmission § Capital Investment Item 3 Item 3 Presentation     Packet Pg. 77     6 Long Term Cost Trends Annualized Increase, FY19-FY24: Annualized Increase, FY24-FY28: Supply, Transmission, Environmental 13%/yr* Supply, Transmission, Environmental 1%/yr* Operations: 5%/yr Operations: 2%/yr Capital: 9%/yr Capital ** 11%/yr * Forecast is uncertain and will vary with the markets ** Projected CIP is an average of two years due to staggered main replacement schedule 80 70 vi' 60 C O so ~ 40 30 20 10 FY 2019 FY 2024 (Projected)* FY 2028 (Projected)* Gas Supply, Environmental, and Transmission Costs D Capital Investment** ■ Gas Operations ~CITY OF ~PAILO ALTO Item 3 Item 3 Presentation     Packet Pg. 78     7 Gas Supply Cost Drivers* •Gas supply –high volatility in gas market prices. Gas prices have risen in recent years as demand has increased, paired with transmission pipeline constraints, low regional storage issues •PG&E gas transmission rates continue to rise to fund safety investments •Cap-and-trade costs continue to rise (as intended by design) •Carbon Neutral Gas –offset costs rising * All of the above costs are passed through to customers via rate adjusters ~CITY OF ~PAILO ALTO Item 3 Item 3 Presentation     Packet Pg. 79     8 GAS DISTRIBUTION COST TRENDS Annualized Increase, FY19-FY24: Gas Capital: 9%/yr* Gas Operations: 5%/yr Annualized Increase, FY24-FY28: Gas Capital: 8%/yr* Gas Operations: 3%/yr * Projected CIP is an average of two years due to staggered main replacement schedule 45 40 35 -30 V) C 0 25 ~ 20 -- -<.I). 15 10 5 ~CITY OF ~PAILO ALTO . . . . . ' . ' . . . . . . . . ' . ' . . . . . . . . . . . . FY 2019 FY 2024 (Projected)* FY 2028 (Projected)* ■ Debt Service □ Operations L!1 Capital Investment Item 3 Item 3 Presentation     Packet Pg. 80     9 GAS DISTRIBUTION COST DRIVERS •Health, retirement, and associated overhead costs continue to increase •Underground construction costs have increased substantially as well •About $0.7M/Year needed for Crossbore Projects through FY 2028 •Need to replenish reserves, which were depleted by significant losses due to FY 2023 commodity costs that could not be passed through to customers ~CITY OF ~PALO ALTO Item 3 Item 3 Presentation     Packet Pg. 81     10 FY 2024 GAS COST AND REVENUE PROJECTIONS Distribution Rate Changes $100 0% 4% 5% 2% 3% 3% 8%, 7% 5°/o 501o 50/o $HO $80 --Revenue en $,70 C: 0 □Capita l !Investm ent -$60 ~ '--""' □Gas Supply w $50 $40 D Operations $30 ■Tra n sfers $20 ■ Debt Service $10 $0 co, CJ) 0 ~ ("') ~ co r-co ~ ..... N N N N N N N 0 0 0 0 0 0 0 0 0 0 0 N N N N N N N N Actuals Projjection s • CITY OF PAILO ALTO Item 3 Item 3 Presentation     Packet Pg. 82     11 FY 2024 GAS COST AND REVENUE PROJECTIONS Overall Rate Changes (including supply rate changes) $,90 0% 2% 33% 44% -13% 3% 5%, 4Yo 4% $80 ,_, Revenue $70 □ Capital Investment $60 -· □Gas Supp y en C $50 0 ·-■ Debt Service :~ $40 -EA-□ Op,era ,·ons $30 $20 ■ Tr.ansf,ers $10 $0 -- co 0) 0 ''r' N I C"') ,q-lO co t-,. co ~ T"" I I ,N N N 0 0 0 Q , 0 0 ,o 0 0 0 0 N N N N N Actuals Projections .CITY OF PAILO ALTO Item 3 Item 3 Presentation     Packet Pg. 83     12 GAS OPERATING RESERVE PROJECTIONS $30 $25 $20 -Cl) C 0 ·- r, I ' I ' I ', I ' -$15 ' -------~ I __________ _... - - - -·-~ - $10 $5 $0 I I I - I -.. -.. -.. ....-.. .. -.. -.. --.. - FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 ~CITY OF ~PAILO ALTO -Reserve (Year-End) -Reserve Maximum - -Reserve Target -Reserve Minimum -Risk Assessment Item 3 Item 3 Presentation     Packet Pg. 84     13 Alternative Gas Rate Projections FY 2024 (Proposed) FY 2025 (Projected) FY 2026 (Projected) Alternative 1 (18% of Gross Revenue)9%10%8% Alternative 2 (15.5% of Gross Revenue in FY 2024)8%7%5% Percent of gross gas utility revenue to transfer FY 2024 (Proposed) FY 2025 (Projected) FY 2026 (Projected) Alternative 1 18.0%18.0%18.0% Alternative 2 15.5%11.1%12.9% $14,000 $12,000 .j.J C 5$10,000 E <i <i3 $8,000 ...... V) C ~ $6,000 cu ::::, § $4,000 <i $2,000 $0 FY 2023 FY 2024 ~CITY OF ~PAILO ALTO FY 2025 FY 2026 -Alternative 1 (18% of Gross Revenue Per Measure L) ~Alternative 2 (15.5% Transfer in FY 2024) Item 3 Item 3 Presentation     Packet Pg. 85     14 ESTIMATED BILL CHANGES CommercialResidential Usage (!~.~ri:n~/ month) Bill under Current Bill under Proposed Rates Rates Winter Commodity Average Budget Prices based on: Average Nov. Forecast Nov. 2022 -Jan. 2023 2023 -Jan . 2024 30 $ 98.98 $ 66.53 54 (median} 168.93 108.54 80 262.18 175.25 150 527.32 371.99 Summer (Based on May 2022 Commodity Prices) 10 $ 27.41 18 (median} 40.11 30 67.89 45 104.80 ~CITY OF ~PALO ALTO $ 31.08 44.74 75.83 117.34 Change Usage Bill under Billi und,eir Chang,e $/mo. % ~month) Current Rates Prn1posed Rates, % 500 $ 1,282 $ 1,146 -11% 5,000 11,855 10,295 -13% $(3 2.45) -33% 10,000 23,604 20,.46'0 -13% (60.39) -36% 50,000 117,609 101,802 -13% (86.92) -33% (155.34) -29% $ 3.67 13% 4.63 12% 7.94 12% 12.54 12% Item 3 Item 3 Presentation     Packet Pg. 86     15 CURRENT BILL COMPARISONS CommercialResidential Palo Alto median residential bill is about 11% below PG&E’s median bill (based on CY 2022 data) Staff is in the process of doing a more extensive review of commercial competitiveness and will provide updates in the future Usage Sea,son (therms) 30 Winter (Median) S4 (Nov,embe r 2022 Rates) 80 150 10 Summer (Median) 18 (May 2022 Rates.) 30 45 ~CITY OF ~PALO ALTO Palo Allto $ 59.45 97.77 156.75 329.6,5 $ 27.41 40.11 67.89 104.80 % PG&E Zone X Difference· $ 69.02 (14%) 125.08 (22%) 197.07 (20%) 390.88 (16%) 19.66, 39% 36.90 9% 65.99 3% 102.34 2% Item 3 Item 3 Presentation     Packet Pg. 87     16 RECOMMENDATION Staff and the Utilities Advisory Commission (UAC) recommend that the Finance Committee recommend that Council adopt a resolution (Attachment A): •Approving the fiscal year (FY) 2024 Gas Utility Financial Plan (Linked Document); and •Amending the Gas Utility Reserve Management Practices (Attachment B) •Transferring up to 18% of gas utility gross revenues received during fiscal year 2021 to the general fund in FY 2023; •Transferring up to ___% of gas utility gross revenues received during fiscal year 2022 to the general fund in FY 2024; •Transferring up to $3.82 million from the CIP Reserve to the Operations Reserve in FY 2023; 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) (Attachment C). The UAC recommends that the Finance Committee transfer up to ___% of gas utility gross revenues received during fiscal year 2022 to the general fund in FY 2024; ~CITY OF ~PALO ALTO Item 3 Item 3 Presentation     Packet Pg. 88     Item No. 4.Page 1 of 8 1 6 9 2 Finance Committee Staff Report From: Kiely Nose, Assistant City Manager Lead Department: Utilities Meeting Date: March 21, 2023 Staff Report: 2303-1141 TITLE Recommendation to the City Council to 1) Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E-HRA (Hydro Rate Adjuster), E-1 (Residential Electric Service), E-2 (Residential Master-Metered and Small Non-Residential Electric Service), E-2-G (Residential Master-Metered and Small Non- Residential Green Power Electric Service), E-4 (Medium Non-Residential Electric Service), E-4-G (Medium Non-Residential Green Power Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E-7 (Large Non-Residential Electric Service), E-7-G (Large Non-Residential Green Power Electric Service), E-7 TOU (Large Non-Residential Time of Use Electric Service), E- NSE (Net Metering Net Surplus Electricity Compensation), and E-EEC (Export Electricity Compensation) and 2) Discussion and Potential Direction for a Residential Electric Rebate in 2023 RECOMMENDATION Staff recommends that the Finance Committee recommend the City Council adopt a Resolution: 1. Approving the Fiscal Year (FY) 2024 Electric Financial Plan modified to reflect the transfers and rate actions listed below in sections 2, 3, and 4; 2. Approving the following transfers at the end of FY 2023: a. Up to $12 million from the Supply Operations Reserve to the Distribution Operations Reserve; and b. Up to $4.5 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and 3. Approving the following transfers in FY 2024: a. Up to $10 million to the Electric Special Projects (ESP) reserve from the Supply Operations Reserve; and b. Up to $8 million to the Hydroelectric Stabilization Reserve from the Supply Operations Reserve; and c. Up to $3 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and 4. Approving the following rate actions for FY 2024: a. Deactivation of the hydroelectric rate adjuster from customer bills effective July Item 4 Item 4 Supplemental Memo     Packet Pg. 89     Item No. 4.Page 2 of 8 1 6 9 2 1, 2023; b. An increase to retail electric rates E-1 (Residential Electric Service), E-2 (Small Non- Residential Electric Service), E-4 (Medium Non-Residential Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E-7 (Large Non- Residential Electric Service), and E-7 TOU (Large Non-Residential Time of Use Electric Service) of 21% effective July 1, 2023; c. An increase to the Export Electricity Compensation (E-EEC-1) rate to reflect 2022 avoided cost, effective July 1, 2023; d. An increase to the Net Surplus Electricity Compensation (E-NSE-1) rate to reflect current projections of FY 2023 avoided cost, effective July 1, 2023; and e. An update to 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 modified distribution and commodity components, effective July 1, 2023. On March 1, 2023 the Utilities Advisory Commission (UAC) recommended the Finance Committee recommend to Council the staff recommendation in Staff Report 2301-0844.1 The staff recommendation above would modify the resolution, Financial Plan, and rate sheets from that staff report to reflect the new staff rate recommendation described in this report. EXECUTIVE SUMMARY Since presenting the rate proposal and financial plan to the UAC on March 1, 2023, new information has arisen that materially improves the electric utility’s financial position. Staff expects to receive approximately $24 million as part of Northern California Power Agency litigation in the coming months. Based on the information, staff revised the rate proposal provided to the UAC and proposes a net reduction of 5% to electric customers (net average electric rate costs). the $24M payment can be used to replenish reserves with some of the payment left over for rate stabilization, providing adequate reserves to manage hydroelectric risk and enabling rates to be phased over a slightly longer period. More importantly, the replenished reserves enable the HRA to be removed. 1 Titled “Staff Recommends the Utilities Advisory Commission Recommend that the Finance Committee Recommend that the City Council Adopt a Resolution Approving the Fiscal Year 2024 Electric Financial Plan and Proposed Reserve Transfers, and Amending Rate Schedules E-HRA (Hydro Rate Adjuster), E-1 (Residential Electric Service), E-2 (Residential Master-Metered and Small Non- Residential Electric Service), E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service), E-4 (Medium Non-Residential Electric Service), E-4-G (Medium Non- Residential Green Power Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E-7 (Large Non-Residential Electric Service), E-7-G (Large Non-Residential Green Power Electric Service), E-7 TOU (Large Non-Residential Time of Use Electric Service), E-NSE (Net Metering Net Surplus Electricity Compensation), and E-EEC (Export Electricity Compensation)” https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/utilities-advisory- commission/archived-agenda-and-minutes/agendas-and-minutes-2023/03-mar-2023/03-01-2023-item-4.pdf Item 4 Item 4 Supplemental Memo     Packet Pg. 90     Item No. 4.Page 3 of 8 1 6 9 2 In addition to the rate proposal outlined in this report, Attachment A provides options for consideration for providing rebates to electric customers to offset high winter energy bills. BACKGROUND On March 8, the City of Palo Alto learned about the timing of a financial payment in the City’s favor related to the litigation of the Central Valley Project Improvement Act (CVPIA) operated by the U.S. Bureau of Reclamation and anticipates receiving approximately $24 million in the coming months. The payment comes after years of litigation by Northern California Powers Agency members that the United States government did not follow the CVPIA legislation and overcharged Palo Alto Utilities $24M when collecting CVPIA on an annual basis from 1992-2020. The timing, amount, and form of repayment were unknown until March 8 and therefore, was not included in the financial plan presented to the Utilities Advisory Commission (UAC) on March 1, 2023. DISCUSSION Since presenting the rate proposal and financial plan to the UAC on March 1, 2023, new information has arisen that materially improves the electric utility’s financial position. Based on the new information, the expected $24 million payment as part of NCPA litigation, staff revised the FY 2024 rate proposal and financial projections reviewed by the UAC and proposes a new FY 2024 5% reduction in net average rate in the electric utility. This revised recommendation reflects the impacts of the expected payment . This report covers the following two topics for Committee consideration: 1. Staff recommends a net 5% rate reduction that customers will benefit from beginning July 2023; this is the combination of 1) deactivating the hydroelectric rate adjuster (HRA) and 2) increasing the electric utility rate by 21%. The previous plan presented to UAC recommended a continuation of the current overall electric utility cost to the customer. This net reduction can be achieved with the allocation of the $24 million payment to repay loans in the amount of $10M, transfer $8M to stabilize reserves, and allocate $6M for future electric rate relief. The HRA is able to be removed in full with the recommended replenished reserves mitigating the risk associated with dependency on electricity generated by water. 2. Staff has provided options for consideration of rebates to electric customers to offset high winter energy bills at the direction of the City Council on February 13, 2023, as part of the FY 2023 Mid-Year Budget reivew. (Attachment A) Recommended FY 2024 Electric Utility Cost – net 5% reduction to customer costs Staff is recommending rate changes resulting in a 5% decrease in the electric utility system average rate effective July 1, 2023. This involves two key actions, 1) deactivating the hydroelectric rate adjuster completely and 2) increasing the electric utility base rate by 21%. This updated rate Item 4 Item 4 Supplemental Memo     Packet Pg. 91     Item No. 4.Page 4 of 8 1 6 9 2 proposal generates $208.4 million, or roughly $11 million less than the financial plan presented to the UAC on March 1st that generated $219.8 million in revenue. The changes recommended to the electric utility financial plan that enable the net 5% decrease in customer costs, including the recommended use of the $24M in revenues from the payment, are summarized below: •Repay $10 million in internal loans & repeal recommended additional internal loans: The Council has approved previous internal loans of $10 million from the electric utility’s Electric Special Projects Reserve to its Operation Reserves. The Financial Plan proposed included an additional $8 million internal loan, for a total liability of $18 million paid back over three years. These loans have been used to mitigate electric utility customer rate increases and allow a phased approach to cost escalation and pauses in rate adjustments during the pandemic. Staff is proposing to forego the additional $8 million internal loan and use $10 million of the $24 million payment to repay the remaining outstanding $10 million internal loan. This reduces electric utility revenue needs in future years since internal loan repayment is no longer needed. •Transfer $8 million to the Hydroelectric Stabilization Reserve & Eliminate the Hydroelectric Rate Adjuster (HRA): The hydroelectric rate adjuster (HRA) is activated during periods of lower hydroelectric output (typically drought conditions) only when there are insufficient funds in the Hydroelectric Stabilization Reserve to fund the purchase of additional electricity needed to meet customer demand with that lower output of electricity generation by water. Currently there is only $400,000 in the Hydroelectric Stabilization Reserve. The target level for the reserve is $19 million and the HRA is typically activated when reserves are below $11 million. To mitigate a potential reactivation of the HRA due to dry weather as early as next year, a $8.4 million Hydroelectric Stabilization reserve ($8.0 million increase) is recommended. Although not at targeted minimum levels, staff recommends this lower value managing the risk of future weather conditions and expecting to increase reserve levels if FY 2024 hydroelectric generation exceeds projections. •Allocate $6 million for future rate relief: The remaining $6 million is recommended to be added to the Supply and Distribution Operations Reserve which are projected to be at $19.5 million at the end of FY 2023, which is $11.3 million (36%) below the minimum guidelines of $31 million. These funds will be used to phase in future rate increases needed to stabilize the financial health of the electric utility gradually over the forecast period. The recommended changes above are modeled in the tables and charts outlined below. The proposed rate trajectory (including the HRA) can be seen in Figure 1 below. The revenue from the receipt of the CVPIA $24 million payment is not shown, but it is included in the reserves charts that follow. The rates proposed for July 1, 2024 are 5% lower than the January 1, 2023 Item 4 Item 4 Supplemental Memo     Packet Pg. 92     Item No. 4.Page 5 of 8 1 6 9 2 rates, but would generate more revenue because they would be in effect the entire fiscal year (July 1, 2023 to June 30, 2024) whereas the January 1, 2023 rates will only be in place for six (6) months. Figure 1: Electric Utility Revenues, Expenses, Rate Changes Figure 2 below reflects the system average rate with and without the HRA included. This chart shows the changes to customers net bill impact over the previous 4 years and the projected new rate proposal impacts moving forward. Item 4 Item 4 Supplemental Memo     Packet Pg. 93     Item No. 4.Page 6 of 8 1 6 9 2 Figure 2: Electric Utility With and Without the HRA The Operations reserve remains below minimum guidelines through FY 2024, as shown in Figures 3 and 4 below, however, staff believes this is an acceptable proposal because the Electric Special Projects reserve will be fully funded and could be used in an emergency. The Hydroelectric Stabilization Reserve would also have some funds to protect against a dry winter in FY 2024. Figure 3: Electric Utility Supply Operations Reserve Item 4 Item 4 Supplemental Memo     Packet Pg. 94     Item No. 4.Page 7 of 8 1 6 9 2 Figure 4: Electric Utility Distribution Operations Reserve Consideration of rebates to electric customers to offset high winter energy bills Council asked staff to return to the Finance Committee with potential residential electric rebate options. These options are described in more detail in Attachent A. Also of note, on March 27th, the Council is scheduled to consider a gas rebate program for 2023 as well at a cost of up to $1.8 million. Potential electric rebate program options for a cost of up to $720,433: • Option 1: 20% rebate of $720,433 to all residential electric customers based on their electric consumption in January 2023; • Option 2: Flat rebate of $27.05 to every residential electric customer in January 2023 totaling $720,369, based on an average January residential electric bill of $135.26. TIMELINE The City Council will consider adopting the Financial Plan and rate adjustments as part of the FY2024 budget review and adoption process. If Council approves the proposed rate changes, the rates will become effective July 1, 2023. FISCAL/RESOURCE IMPACT FY 2024 revenues are projected to increase by $12 million2 (6%) compared to FY 2023 levels if Council adopts this report’s recommendations, despite the fact that rates would decrease 5%. This is because the current rates were effective January 1, 2023, and were only in place for 50% of the fiscal year, while the proposed rates would be in place a full fiscal year. 2 This revenue calculation excludes expected monies to be received from the CVPIA payment. Item 4 Item 4 Supplemental Memo     Packet Pg. 95     Item No. 4.Page 8 of 8 1 6 9 2 The City is a utility customer, so the rate change will also result in estimated City expenses of about $5,800,000, approximately $2,030,000 of that being in the General Fund. Resource impacts to City departments and funds of the recommended rate adjustments will be programmed in the FY 2024 Proposed Operating Budget. If the final rates adopted by Council in June differ from those proposed in this report, further adjustments may be brought forward as part of the annual budget process. STAKEHOLDER ENGAGEMENT Stakeholder engagement for the rate adoption process includes review by the UAC, Finance Committee, and City Council, as well as outreach to residents via the website and social media. At the Utilities Advisory Commission (UAC) March 1, 2023 meeting, staff presented the attached Financial Plan and the recommendation was approved unanimously. ENVIRONMENTAL REVIEW The Finance Committee’s review and recommendation on the FY 2024 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: Residential Electric Rebate Options APPROVED: Dean Batchelor, Director of Utilities Staff: Jonathan Abendschein, Assistant Director Utilities 2302-0945 2302-1141 Item 4 Item 4 Supplemental Memo     Packet Pg. 96     1 0 2 2 RESIDENTIAL ELECTRIC REBATE OPTIONS Council asked staff to return to the Finance Committee with some proposed residential electric rebate options. •Option 1: 20% rebate of $720,433 to all residential electric customers based on their electric consumption in January 2023; •Option 2: Flat rebate of $27.05 to every residential electric customer in January 2023 totaling $720,369, based on an average January residential electric bill of $135.26. ANALYSIS In late 2022 electricity market prices increased at unprecedented levels, leading to the need to increase the hydroelectric rate adjuster on January 1, 2023 of an additional 20% to match the cost of replacing hydroelectric power with market power. Since April 2022, electric rates have increased by approximately 35%. Staff analyzed January 2023 residential electric bills when the electric hydro rate adjuster (E-HRA) was increased an additional 20%. There were a total of 26,631 residential electric customers in January 2023. The total January 2023 residential electric charge was $3.6M compared to $2.9M in December 2022 when E-HRA was not increased. Electric residential bills for the service period of January 2023 were as follows: Under the 20% rebate scenario based on January customer consumption, the average rebates will range from $2.08 for customers with less than a $20 electric bill to $774.37 for customers with bills greater than $2,000 totaling $720,433. The average residential electric consumption for January was 609.20 therms with an average bill of $135.26. A flat 20% rebate across all residential electric users would be equivalent to $27.05 per customer totaling $720,369. Bill Range % of Total # of Customers Greater than $1,000 0.2%63 $500 to $1,000 1.6%435 $150 to $500 29.9%7,962 Less than $150 68.2%18,171 Item 4 Attachment A Residential Electric Rebate Options     Packet Pg. 97     1 0 2 2 RESOURCE IMPACT The City’s General Fund would provide full funding of the electric residential rebate program through a transfer to the Electric Fund. The General Fund receives a five percent utility users tax (UUT) on monthly electric, gas, and water bills. For January 2023 electric billing, the City received $174,825 in electric UUT for residential bills compared to $161,438 in electric UUT for December 2022. The unplanned increase in UUT revenue will be recorded in the General Fund Budget Stabilization Reserve, which would be used to fund the transfer to the Electric Fund for the rebate program. Electric Billing Range Number of Residential Accounts % of Total Accounts Jan Electric Bill Charge Average Jan Electric Bill 20% Rebate Amount Avg. 20% Rebate per Customer Flat Rebate of $27.05 Based on Average Bill of $135.26 < $20 2,243 8.4%23,384$ 10.43$ 4,677$ 2.08$ 60,673$ $20 - $49.99 4,522 17.0%160,527$ 35.50$ 32,105$ 7.10$ 122,320$ $50 - $99.99 6,655 25.0%489,647$ 73.58$ 97,930$ 14.72$ 180,018$ $100 - $149.99 4,751 17.8%584,921$ 123.12$ 116,984$ 24.62$ 128,515$ $150 - $199.99 3,071 11.5%531,536$ 173.08$ 106,307$ 34.62$ 83,071$ $200 - $299.99 3,180 11.9%769,615$ 242.02$ 153,923$ 48.40$ 86,019$ $300 - $399.99 1,190 4.5%407,777$ 342.67$ 81,555$ 68.53$ 32,190$ $400 - $499.99 521 2.0%231,091$ 443.55$ 46,218$ 88.71$ 14,093$ $500 - $599.99 206 0.8%111,495$ 541.24$ 22,299$ 108.25$ 5,572$ $600 - $699.99 102 0.4%66,361$ 650.60$ 13,272$ 130.12$ 2,759$ $700 - $799.99 68 0.3%50,836$ 747.59$ 10,167$ 149.52$ 1,839$ $800 - $899.99 40 0.2%33,678$ 841.95$ 6,736$ 168.39$ 1,082$ $900 - $999.99 19 0.1%17,714$ 932.29$ 3,543$ 186.46$ 514$ $1,000 - $1,499.99 38 0.1%45,879$ 1,207.34$ 9,176$ 241.47$ 1,028$ $1,500 - $1,999.99 9 0.0%15,750$ 1,750.02$ 3,150$ 350.00$ 243$ > $2,000 16 0.1%61,950$ 3,871.86$ 12,390$ 774.37$ 433$ Grand Total 26,631 3,602,161$ 720,433$ 720,369$ Item 4 Attachment A Residential Electric Rebate Options     Packet Pg. 98     March 21, 2023 www.cityofpaloalto.org ELECTRIC UTILITY FINANCIAL PLAN ANDPROPOSED RATECHANGES FOR FY 2024 Staff: Jonathan Abendschein • CITY OF PALO ALTO UTILIT Item 4 Item 4 Presentation     Packet Pg. 99     2 FY 2024 proposal: •Total system average rate reduction of 5%, which consists of a 21% base rate increase and deactivating the Hydroelectric rate adjuster (HRA) •Payment from winning Central Valley Project Improvement Act Litigation will provide rate relief, increase hydro stabilization reserve, and repay loan to Electric Special Projects Reserve •Operations Reserves will remain below minimum guidelines through FY 2025 •21% base rate increase incorporates long-term hydroelectric and cost trends, and allows full removal of the HRA Future years: •FY 2025 –FY 2028 assumes 5% per year for grid modernization and electrification costs Electric Rate Proposal ~CITY OF ~PALO ALTO Item 4 Item 4 Presentation     Packet Pg. 100     3 •This chart shows recent rate changes in both the base electric rates and the hydroelectric rate adjuster (HRA). •Base rate recovers costs for all routine utility expenses •HRA recovers costs for additional expenses associated with low hydroelectric generation •Recent rate increases driven by: •No rate increases during pandemic •Depleted reserves •Extended drought •High electricity market prices Electric Rate Changes Current Proposal: Overall FY 2024 rate reduction of 5% HRA deactivated, base rate to increase 21% Actual Proposed / Forecasted ~CITY OF ~PALO ALTO 0.3000 r 0.2500 0.2000 8% 0% 0% 0.1500 0.1000 8 0 0% 0% 0% 5% 0.0500 Jul 2019 Jul2020 Jul2021 Jul2022 -system Average Base Rate % Change (Sys Avg Base Rate) 19% -5% 5% 5% 5% 5% 0% l Jul2023 Jul 2024 Jul 2025 -system Average Base Rate with HRA % Change (Sys Average with HRA) Item 4 Item 4 Presentation     Packet Pg. 101     4 •Through the pandemic, the utility held its electric rates flat to help customers impacted by the pandemic. •Costs continued to rise due to: •Rising electricity supply costs •Increasing operational costs •Construction inflation •Rising capital investment •Costs are now well above revenues, requiring increases to base rates •Reserves are much lower than was forecasted in last year’s (FY 2023) Financial Plan due in part to extended drought and high electricity market prices •The 5% rate reduction will be keep operations reserves below minimum guidelines through FY 2025 •CVPIA payment funds hydro stabilization reserve above minimum guideline, allowing low operations reserves Trends Driving Rate Changes –Depleted Reserves Pandemic –no rate changes $__ FY 22 Deficit $__ FY 23 Deficit FY 2023 Reserves Projection Current Reserves Projection V) $300 C 0 ~ $250 $200 $150 $100 $50 $- V) $50 C 0 ~ $40 $30 $20 $10 $- -Total Costs -Base+ HRA Revenues -Base Revenues FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 -. -. -. -. -. -. -. -- FY 2020 FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 -FY23 Total Operations Reserves -FY24 Total Operations Reserves -Minimum Operations Reserve - • Risk Assessment Item 4 Item 4 Presentation     Packet Pg. 102     5 •Alongside pandemic, California experienced extreme drought •Heavy rains in Dec 2022 -Mar 2023 helped. Drought significantly decreased, conditions vary by location in California. •Years of drought mean significant runoff will likely be absorbed by the parched ground rather than going to hydroelectric generation. •Activating the hydroelectric rate adjuster is intended to be a rare event, but staff believes declining average hydroelectric generation levels are making it more likely. •Current forecasting methodology assumes higher average hydroelectric, increasing chance of activation •Staff intends to use a lower hydroelectric forecast in this Financial Plan to reduce the likelihood of activating HRA in the future. Trends Driving Rate Changes –Multiple Years of Drought 600 GWh 500 GWh 400 GWh 300 GWh 200 GWh 100 GWh OGWh ---➔---~---------------• • • • • Jul 2019 Jul 2020 Jul 2021 Jul 2022 Jul 2023 Jul 2024 Jul 2025 500000 500000 400000 300000 200()00 100000 0 • Hydroelectric Generation - -Long-term Average Hydro Generation :'5;-iliiiiiill --- • Jul2019 Jul 2020 Jul 2021 Jul 2022 Jul 2023 Jul2024 Jul2025 • Hydro 1ectrk Generation New FY24 Financial Plan Forecast -1,!1-• Long-term Average Hydro Generation (Historical) Item 4 Item 4 Presentation     Packet Pg. 103     6 Trends Driving Rate Changes –Multiple Years of Drought Northern Sierra Precipitation: a-Station Index, March 13, 2023 100 .-----:::::::Mount Shasta City 95 ,.~Shasta Dam ~Mineral 90 ~ ~Quincy ,. ~Brush creek 85 • ,. ..---s1erravllle RS .:...--Blue Canyon Percent of Average for this Date: 129% 2016-2017 Daily Precip (wettest) BO .. --Pacific House ---"' 75 QI .l: u C: 70 2018 -2019 Daily Precip _, C: 0 65 .; ,u C: 0 .., 60 ·c. .OJ ,u ·;:; ·'= QI 55 ... .. Cl. >-Average (1991-2020) ~ C. u QI ... :E 50 c 0 45 ~ --: 40 ·;; 0 ~I Current: 51 .0 I 2021 -2022 Daily Precip Cl. ... Ill QI >-... QI ; 3:: QI 35 > .; ~ 30 ;;s 2019 -2020 Daily Precip iu .. {:. E ;;s 25 u 2020-2021 Daily Precip (3rd driest) 20 1923-1924 (driest) 1 5 1976-1977 (2nd driest) 10 5 0 Oct 1 Nov 1 Dec 1 Jan 1 Feb 1 Mar 1 Apr 1 May 1 Jun 1 Jul 1 Aug 1 Sep 1 Oct 1 Water Year (October 1 -September 30) Item 4 Item 4 Presentation     Packet Pg. 104     7 •Long-term electricity prices have been rising •FY 2023 and FY 2024 forward power prices increased ~$0.025/kWh-$0.035/kWh compared to last year’s projections •Increases due to: •Drought decreasing hydroelectric generation across the West •High Natural Gas Prices •Generating capacity limitations leading to market price spikes •High prices forecasted to continue, though not at FY 2023 levels. Trends Driving Rate Changes –High Electricity Prices 0.100 Wh 0.090kWh O,OSOkWh O.070kWh 0.060kWh 0.050 Wh 0.040kWh O.030kWh 0.020kWh O.010kWh O.OOOl<Wh 2020 YoY Changes in Forward Market Prices 202 Actual 20 2 Forecasted 2023 2024 20 5 FY24 Forward Prices-Around the Clock -FY23 Forward Prices -Around the Clock _,Actual l)ay Ahead Price • Around the Clock 2026 Item 4 Item 4 Presentation     Packet Pg. 105     8 Current financial plan assumes grid modernization and electric utility fiber backbone investment will start in FY 2024 and run through the course of the financial plan. Trends Driving Rate Changes –Grid Modernization (Long-term) Expenses ($000) IFY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Grid Mode rni zation Projects 25 000 I 25 000 .I 50000 .I 50000 I 50000 .I Electric Utility IF ber 13,000 0 0 0 0 !Backbone TOTAll 38,000 25 000 .I 50000 .I 50000 I 50000 .I Expenses ($000) IFY 2024 FY 2025 FY 2026 IFY 2027 FY 2028 IBond Proceeds 63,000 50 000 .I 0 50000 I 50000 .I Debt Service Costs 0 -2 032 .I -3 632 I -6,432 -9 632 .I Item 4 Item 4 Presentation     Packet Pg. 106     9 Proposed: Electric Cost and Revenue Projections with HRA Co s t / R e v e n u e "' C .!:! ~ ~CITY OF ~PAILO ALTO $300 $250 $200 $150 $100 $50 $0 RATE CHANGES: imm!Electric Commodity 14% 6% 8% 0% 0% 00 O'\ 0 ..-1 N ("() s::t ..-1 ..-1 N N N N N 0 0 0 0 0 0 0 N N N N N N N >->->->->- >->-u.. u.. u.. u.. u.. u.. u.. Actuals 5% 5% U'l I.O r--N N N 0 0 0 N N N >->- >-u.. u.. u.. Projections 5% 00 N 0 N >-u.. □Capital Investment CJJTransfers □Operations □Grid Modernization Debt •Debt Service -Revenue Notes: 1) The 37% increase includes April 2022 actviation of the Hydroelectric Rate Adjuster (HRA), a S% base rate increase, and the January 1, 2023 increase of the HRA from $0.013/kWh to $0.048/kWh. 2) Because the full 37% rate increase was only in effect for part of the year, FY 2024 revenue will still increase despite the 5% rate decrease. Note that the FY 2024 revenue shown does not include the CVPIA settlement. Item 4 Item 4 Presentation     Packet Pg. 107     10 Proposed: Electric Cost and Revenue Projections (Base Rate only) Co s t / R e v e n u e Ill C .2 ~ ~CITY OF ~PAILO ALTO $300 $250 $200 $150 $100 $SO $0 RATE CHANGES: 14% 6% 8% 0% 0% 8% 21% 5% 5% ------------------------------------------------------------- m::: . . '"'"' '"'"' .,.,. I I I ...... •:!:::i:::i;_;~•::::!:::•:::i;;;•:::::::•::::_ ...... •:_:: ···· :~_~:::::::,i::i;;•::I:,i::i;,.:: .. 1 ...... -1-.... 1..... . . . m} mi mi ~~t~f ~~:.?-:• 00 CJ) 0 .--t N ("() s::t" .--t .--t N N N N N 0 0 0 0 0 0 0 N N N N N N N >- >- >->->->->-LL LL LL LL LL LL LL Actuals I ...... 1 ·-··· L/) N 0 N >-LL I..O N 0 N >-LL Projections 5% r--N 0 N >-LL 5% I I fiaill!Electric Commodity ~Capital Investment EIJTransfers ······ 1 ···□Operations 00 N 0 N >-LL □Grid Modernization Debt -Debt Service Item 4 Item 4 Presentation     Packet Pg. 108     11 Electric Supply Operating Reserve Projections ~CITY OF ~PAILO ALTO Ill $50 C: .2 i $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 ---~ --- ------... FY 2022 FY 2023 FY 2024 --- -Reserve Maximum - -Reserve Target -Reserve Minimum -Reserve (Year-End) FY 2025 FY 2026 FY 2027 FY 2028 Item 4 Item 4 Presentation     Packet Pg. 109     12 Electric Distribution Operating Reserve Projections Ill $20 C: .!2 ~ $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 ~CITY OF ~PAILO ALTO _,------------------------------------------------------------------------------------------------------,,,,. ---------------------------------------------;;,----------------- ,,,, ,,,, / -Reserve Maximum ---------------------------------------------------------------------------------------------_ -Reserve Target _________________ _ -Reserve Minimum -Reserve (Year-End) Risk Assessment FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 Item 4 Item 4 Presentation     Packet Pg. 110     13 Staff recommends that the Finance Committee recommend the City Council adopt a Resolution: 1.Approving the Fiscal Year (FY)2024 Electric Financial Plan modified to reflect the transfers and rate actions listed below in sections 2, 3, and 4; 2.Approving the following transfers at the end of FY 2023: a.Up to $12 million from the Supply Operations Reserve to the Distribution Operations Reserve; and b.Up to $4.5 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and 3.Approving the following transfers in FY 2024: a.Up to $10 million to the Electric Special Projects (ESP)reserve from the Supply Operations Reserve; and b.Up to $8 million to the Hydroelectric Stabilization Reserve from the Supply Operations Reserve; and c.Up to $3 million from the Supply Operations Reserve to the Cap and Trade Program Reserve; and Staff Recommendation ~CITY OF ~PALO ALTO Item 4 Item 4 Presentation     Packet Pg. 111     14 Staff recommends that the Finance Committee recommend the City Council adopt a Resolution: 4.Approving the following rate actions for FY 2024: a.Deactivation of the hydroelectric rate adjuster from customer bills effective July 1, 2023; b.An increase to retail electric rates E-1 (Residential Electric Service),E-2 (Small Non-Residential Electric Service),E-4 (Medium Non-Residential Electric Service),E-4 TOU (Medium Non-Residential Time of Use Electric Service),E-7 (Large Non-Residential Electric Service),and E-7 TOU (Large Non-Residential Time of Use Electric Service)of 21%effective July 1, 2023; c.An increase to the Export Electricity Compensation (E-EEC-1)rate to reflect 2022 avoided cost,effective July 1, 2023; d.An increase to the Net Surplus Electricity Compensation (E-NSE-1)rate to reflect current projections of FY 2023 avoided cost,effective July 1, 2023;and e.An update to 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 modified distribution and commodity components, effective July 1, 2023. Staff Recommendation (continued) ~CITY OF ~PALO ALTO Item 4 Item 4 Presentation     Packet Pg. 112