HomeMy WebLinkAbout2024-02-21 Finance Committee Agenda PacketFINANCE COMMITTEE
Special Meeting
Wednesday, February 21, 2024
Community Meeting Room & Hybrid
5:30 PM
Finance Committee 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
m e e t i n g w i l l b e b r o a d c a s t o n C a b l e T V C h a n n e l 2 6 , l i v e o n
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.
Signs and symbolic materials less than 2 feet by 3 feet are permitted provided that: (1) sticks,
posts, poles or similar/other type of handle objects are strictly prohibited; (2) the items do not
create a facility, fire, or safety hazard; and (3) persons with such items remain seated when
displaying them and must not raise the items above shoulder level, obstruct the view or
passage of other attendees, or otherwise disturb the business of the meeting.
CALL TO ORDER
PUBLIC COMMENT
Members of the public may speak to any item NOT on the agenda.
ACTION ITEMS
1.Discussion and Update on the Fiscal Year 2025 Preliminary Utilities Financial Forecast
and Rate Projections
FUTURE MEETINGS AND AGENDAS
Members of the public may not speak to the item(s)
ADJOURNMENT
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 Special Meeting February 21, 2024
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 COMMITTEESpecial MeetingWednesday, February 21, 2024Community Meeting Room & Hybrid5:30 PMFinance Committee meetings will be held as “hybrid” meetings with the option to attend byteleconference/video conference or in person. To maximize public safety while still maintainingtransparency and public access, members of the public can choose to participate from home orattend in person. Information on how the public may observe and participate in the meeting islocated at the end of the agenda. Masks are strongly encouraged if attending in person. Them e e t i n g w i l l b e b r o a d c a s t o n C a b l e T V C h a n n e l 2 6 , l i v e o nYouTube 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.
Signs and symbolic materials less than 2 feet by 3 feet are permitted provided that: (1) sticks,
posts, poles or similar/other type of handle objects are strictly prohibited; (2) the items do not
create a facility, fire, or safety hazard; and (3) persons with such items remain seated when
displaying them and must not raise the items above shoulder level, obstruct the view or
passage of other attendees, or otherwise disturb the business of the meeting.
CALL TO ORDER
PUBLIC COMMENT
Members of the public may speak to any item NOT on the agenda.
ACTION ITEMS
1.Discussion and Update on the Fiscal Year 2025 Preliminary Utilities Financial Forecast
and Rate Projections
FUTURE MEETINGS AND AGENDAS
Members of the public may not speak to the item(s)
ADJOURNMENT
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 Special Meeting February 21, 2024
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 COMMITTEESpecial MeetingWednesday, February 21, 2024Community Meeting Room & Hybrid5:30 PMFinance Committee meetings will be held as “hybrid” meetings with the option to attend byteleconference/video conference or in person. To maximize public safety while still maintainingtransparency and public access, members of the public can choose to participate from home orattend in person. Information on how the public may observe and participate in the meeting islocated at the end of the agenda. Masks are strongly encouraged if attending in person. Them e e t i n g w i l l b e b r o a d c a s t o n C a b l e T V C h a n n e l 2 6 , l i v e o nYouTube 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.Signs and symbolic materials less than 2 feet by 3 feet are permitted provided that: (1) sticks,posts, poles or similar/other type of handle objects are strictly prohibited; (2) the items do notcreate a facility, fire, or safety hazard; and (3) persons with such items remain seated whendisplaying them and must not raise the items above shoulder level, obstruct the view orpassage of other attendees, or otherwise disturb the business of the meeting.CALL TO ORDERPUBLIC COMMENT Members of the public may speak to any item NOT on the agenda.ACTION ITEMS1.Discussion and Update on the Fiscal Year 2025 Preliminary Utilities Financial Forecastand Rate ProjectionsFUTURE MEETINGS AND AGENDAS
Members of the public may not speak to the item(s)
ADJOURNMENT
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 Special Meeting February 21, 2024
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.
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Finance Committee
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Utilities
Meeting Date: February 21, 2024
Staff Report: 2312-2468
TITLE
Discussion and Update on the Fiscal Year 2025 Preliminary Utilities Financial Forecast and Rate Projections
RECOMMENDATION
This item is for discussion, and no action is requested. Staff will use input from the Finance Committee on
these preliminary rate projections for the Electric, Gas, Water and Wastewater Collection Utilities to
finalize its recommended FY 2025 Financial Plans and proposed rate changes for each utility.
EXECUTIVE SUMMARY
Throughout the pandemic, the City of Palo Alto kept rate increases at minimal levels in order to alleviate
the burden of utility cost hikes on residents and businesses already grappling with the pandemic's effects.
In 2023, the Council approved the first in a series of rate adjustments to manage some notable and
unprecedented trends:
•During the winter of 2022-2023, energy prices increased to unprecedented levels;
•A drought from 2021 through 2023 impacted electric supply costs, wholesale water costs, and
customer demand;
•The drought abruptly ended when thirty-one atmospheric rivers from mid-December 2022 to the
end of March 2023 established a near-historic snowpack in the Sierra Nevada; and
•Relatively cool and wet weather patterns persisted locally in 2023 and water conservation habits
established during the drought together contributed to lower customer water use.
Reserve funds were drawn down during the last three years, and the preliminary projections shown in
Table 1 provide a path to steadily restore those reserve levels during the five-year planning period. This
series of rate adjustments is necessary to restore reserves to within guideline ranges within the 5-year
planning period, sustain operations given inflationary cost increases, and enable ongoing capital work
necessary to provide safe, reliable, and sustainable utilities.
Staff is also requesting feedback from the Finance Committee on the amount of the General Fund transfer
for the Gas Utility. 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 up to 18% of
gas utility gross revenues, though Council may choose to transfer a lesser amount. For the FY 2024
Item 1
Item 1 Staff Report
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transfer, the Council approved a transfer from the gas utility to the General Fund of 15.5% of the gross
revenues (Resolution 10101). The proposed transfer for FY 2025 aligns with the Council's previous
guidance, suggesting an 11.9% or $8.96 million transfer from the gas utility to the General Fund.
At the meeting, staff will provide a presentation describing the preliminary rate projections for the
Electric, Gas, Water and Wastewater Collection utilities. A similar presentation was provided to the
Utilities Advisory Commission (UAC) at its January 3, 2024 meeting. The presentation will be available
online prior to the meeting.
BACKGROUND
Table 1 shows the preliminary retail rate forecast over the next five fiscal years and the overall impact to
the median residential bill. The rate changes shown are preliminary estimates. Actual rate changes will be
based on updated financial data and the cost-of-service methodologies and studies for each utility and
may differ by customer class and for individual customers depending on consumption patterns. A cost-of-
service study for the Electric Utility is expected to be completed in early 2024 and will be factored into
proposals for FY 2025. Cost of service studies for the Water and Gas Utilities were completed in 2019, and
one for the Wastewater Utility was completed in 2021.
Staff’s preliminary system average rate adjustment recommendations are
•5% increase for electric
•9% increase for gas
•9% increase for water (this assumes SFPUC increases the wholesale rate at the low end of its
proposed range, however a 13% increase for water is expected if SFPUC increases the wholesale
rate at the high end of the range)
•Storm drain rates increase annually by the calendar year change in the Consumer Price Index (CPI)
which is 2.6% for FY 2025 and Table 1 estimates the same CPI for future years
•Wastewater, staff originally proposed a 9% increase as shown in Table 1. In response to UAC
Commissioner feedback to consider a higher rate increase to avoid deferring sewer infrastructure
investment, staff recommends a 15% increase and presents both alternatives in the analysis
section below for the Finance Committee’s consideration.
•Rates for fiber optic services established prior to September 18, 2006 will also increase by the CPI
rate.
Item 1
Item 1 Staff Report
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Table 1: Projected Residential Rate Changes
1)Preliminary projection pending completion of a cost of service analysis.
2)Based on General Fund transfer of 11.9% of gross revenue in FY25; gas rate changes shown with
commodity rates held constant; actual gas commodity rates vary monthly
3)Storm Drain fees increase by CPI index annually per approved 2017 ballot measure (2.6% in FY
2025)
4)Based on an FY 2023 monthly residential bill of $369
For the Water Utility, this preliminary projection allows the operations reserve to remain within the
guideline range. For the Electric and Wastewater Utilities, the distribution operations reserves dropped
below guideline ranges at the end of FY 2023, and staff projects the Gas distribution operations reserve
will drop below the guideline range by the end of FY 2024. This proposal would restore the Electric
distribution operations reserves to within the guideline range by the end of FY 2025, and for the Gas and
Wastewater Utilities by the end of FY 2026.
ANALYSIS
Staff seeks input from the Finance Committee prior to finalizing the Utilities Financial Plans and developing
recommendations for rate changes that would be effective July 1, 2024. The proposed rate adjustment
recommendations, along with each utility’s Financial Plans, are currently scheduled to be presented to
the Finance Committee in April.
Every year presentations are provided to the UAC and Finance Committee with financial forecasts for the
Electric, Gas, Water, and Wastewater Collection Utilities and recommends any rate adjustments required
to maintain their financial health. These forecasts are memorialized in Financial Plans that
comprehensively discuss the outlook for each utility. Before providing recommended Financial Plans and
rate changes, typically a preliminary forecast is completed to get early feedback.
Item 1
Item 1 Staff Report
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Electric
In FY 2025 and FY 2026 the electric utility will benefit from significant one-time revenues offset by
significant capital investment expenses. Electric supply purchase costs are anticipated to be lower mainly
due to the amount of hydroelectric generation resulting from heavy rains in the winter of 2022/2023.
Staff also expects substantially higher revenues from resource adequacy and renewable energy credit
sales. On the expense side transmission costs continue to rise, and capital spending and distribution
system maintenance spending is rising due to grid modernization and fiber-related investments and an
upgrade to the Hanover Substation, some of which staff expects to recommend be offset with debt
service. On balance, however, the net effect of these various one-time costs and revenues is expected to
be positive, enabling the utility to refill reserves to target levels, especially the Hydro Rate Stabilization
Reserve. This ensures that, in the event of a significant degradation in hydro conditions, the City will not
need to use the Hydro Rate Adjuster to recover higher supply costs. In addition, an electric utility cost of
service analysis is underway, which is conducted to ensure that the cost of running the utility is allocated
to customer classes according to the cost to serve them. The cost study will incorporate the revenue and
expense data described above to determine resulting rate impacts for all customer classes.
In the longer term (FY 2027 through FY 2029) projected increases in costs related to stricter resource
adequacy requirements, increasing transmission costs, and capital investment and operational cost
increases that are expected to result in system average rate increases of 5% per year. Projected rate
changes for the median residential bill or any other customer may vary from this projection due to the
cost of service analysis currently in progress.
The current year (FY 2024) financial plan for the Electric Utility (approved April 17, 2023) is available at:
https://cityofpaloalto.primegov.com/meeting/attachment/1201.pdf?name=Attachment%20B%20-
%20FY24%20Electric%20Utility%20Financial%20Plan
Gas
Gas fund expenses are currently composed of about 60% supply and 40% distribution expenses. Most of
the supply costs are market driven pass-through charges on customers’ bills that change monthly
according to market conditions. The long-term gas rate increases shown in Table 1 will go towards funding
the distribution and capital investment costs of the Gas Utility. Throughout the pandemic, the City opted
to cap rate increases at 2% to 3% per year. This decision aimed to minimize rate increases on customers
while still aligning with reserve guidelines by scaling down the size of main replacement capital projects.
In the winter of 2022 – 2023, gas supply prices spiked to unprecedented levels and Palo Alto’s Gas Utility
reserves were drawn down to cover the difference between the Council-approved maximum gas
commodity charge and the City’s actual cost of gas. The reserves need to be replenished over time and
the Gas Utility needs to plan for a large main replacement project every other year to ensure safety and
reliability while managing ongoing construction cost inflation. Last year, a gas rate increase of 7% in FY
2025 was forecasted. However, given the continuing increases in construction costs, salaries and benefits,
overhead costs and reserve levels projected to be below minimum guideline levels at the end of the
current fiscal year (FY 2024), staff recommends a 9% overall rate increase for the Gas Utility effective July
1, 2024.
Item 1
Item 1 Staff Report
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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.
Measure L authorized Council to make the transfer annually and granted Council the ability to approve a
lower amount. On 4/17/2023 Council approved the transfer of up to 15.5% of gas utility gross revenues
received during FY 2022 to the General Fund in FY 2024, or $7,707,000. In the preliminary rate projection,
the staff recommendation for the proposed FY 2025 transfer is 11.9% of the gas utility’s gross revenues
in FY 2023, or $8,960,000, which aligns with the voter-approved changes codified in PAMC 2.28.185.
Though the percentage reduced, the transfer amount remains in line with the guidance Council provided
in the FY 2024 Budget Adoption. The percentage is an anomaly as the FY 2025 transfer is based on the
unusual actual activities in FY 2023 which included the unprecedented spike in gas prices. Recommended
beyond FY 2025 is the continuation of a gradual annual transfer increase to up to 18% of gross revenues
by FY 2027. Note that revenues for FY 2026 (two fiscal years prior) and beyond are projected and will
fluctuate depending on gas commodity market prices and other factors.
Item 1
Item 1 Staff Report
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Table 2: Proposed/Projected and Alternate General Fund Transfers as % of Gross Gas Revenues Two FYs
Prior
Approved
(Council
Resolution 10101)
Proposed /
Alternate
Projected
FY 2024 FY 2025 FY 2026 FY 2027
Gas Utility Gross Revenue Two Fiscal Years Prior ($000)
$70,4142$49,721 $75,2911 $61,032 $73,618
Percent of gas utility gross revenue to transfer
11.9%16.5%15.5%18%18%18%
Transfer amount ($000)
Transfer 11.9%$8,960 $10,070 $12,674
Transfer 18%$7,707 $13,552 $10,986 $13,251
Change in Transfer from Prior Fiscal Year (%)
16%12%26%7%76%-19%21%
Table 3: Summary of Distribution Rate Changes for Transfer Proposal and Alternatives
FY 2024
(Approved)
FY 2025 FY 2026 FY 2027
Transfer 11.9%9%7%7%
Transfer 18%8%15%5%5%
The current year (FY 2024) Financial Plan for the Gas utility (approved April 17, 2023) is available at:
https://cityofpaloalto.primegov.com/meeting/attachment/1188.pdf?name=Attachment%20C%20-
%20Gas%20FY2024%20Financial%20Plan
Water
In FY 2023, customers successfully conserved water in accordance with local, regional and state calls for
water conservation. Although the drought came to an end this past winter, the weather continued to be
relatively cool and wet throughout the irrigation season and, together with continuing water
conservation, this led to reduced water sales and lower revenue for the fiscal year. At the end of FY 2023,
the transfer authorized by the City Council of $3 million from the rate stabilization reserve to the
operations reserve was completed. Despite this, the operations reserve was within the guideline range
1 Represents actual gas utility gross revenues for FY 2023.
2 There are two values for gross revenue in FY 2027 because there are two possible rate trajectories shown in Table
3 that would impact the forecasted revenue for FY 2025 (two fiscal years prior to FY 2027); the first would increase
rates by 9% in FY 2025 leading to forecasted revenues of $70.414 million and the second would increase rates by
15% in FY 2025 leading to forecasted revenues of $73.618 million.
Item 1
Item 1 Staff Report
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but near the minimum guideline level at the end of FY 2023. Expenses were higher than forecasted due
to transfers out, accounting adjustments and capital related costs. The Water Utility needs to plan for
some large capital projects in the five-year budget including two reservoir replacements and a large main
replacement every other year. A 13% increase on the distribution rates, which is equivalent to a 7% overall
system average increase on customers water rates is needed to accommodate inflating construction costs,
increases in salaries and benefits and overhead costs, and updated revenue estimates that incorporate
ongoing conservation in the short-term. On January 17, 2024, the City’s water supplier, the San Francisco
Public Utilities Commission (SFPUC), estimated a rate range for its July 1, 2024 rate increase between 4.5%
and 13.1%, an increase from the current rate of $5.21/CCF to between $5.43/CCF and $5.89/CCF. The
three main drivers of the SFPUC rate increase are cost increases, water sales volume decreases, and funds
owed on the wholesale customer balancing account. The overall system average water rate increase
including both the wholesale rate increases together with proposed distribution rate increases, is between
9% to 13% in FY 2025. Projections for FY 2026 – FY 2029 assumes inflationary increases of 3% on SFPUC’s
wholesale rate in each subsequent year.
The current year (FY 2024) financial plan for the Water Utility (approved June 19, 2023) is available at:
http://cityofpaloalto.org/civicax/filebank/documents/76983
Wastewater Collection
Last year, the Council approved the first of a series of rate increases with the understanding that the City
would accelerate the rate of sewer main replacements from 1 mile to 2.5 miles per year by FY 2026. This
is a sustainable rate of main replacement needed to replace sewer mains within, or as close as possible
to, their 100 year life expectancy. Additionally, in FY 2023 the Wastewater Utility accelerated by a year
the most expensive sewer main replacement that the utility has ever completed. This project is double
the cost of the second largest project in 2021. It was important to coordinate the work with Caltrans to
limit or avoid digging into newly-paved street on El Camino. Council approved transfers of all funds from
the CIP Reserve ($3.178 million) and from the Rate Stabilization Reserve ($0.34 million) to the operations
reserve to utilize all available funds. Staff projected that this project would bring the operations reserve
temporarily down to the minimum guideline range.
However, in FY 2023 costs were higher than forecasted, primarily for CIP-related costs and transfers out
to capital projects, and revenue was lower than forecasted (primarily capacity fee revenue, which varies
from year to year) and the operations reserve ended the year with negative $0.7M. Additionally, in the
current year, non-residential revenues are declining instead of increasing as a result of wet weather and
reductions in winter water usage.
Under consideration is deferring the five-mile main replacement planned for FY 2026 due to the low
reserve and revenue levels and the inflationary costs.
It is still important for the sustainable management of sewer main replacement to achieve replacing 2.5
miles per year. However, given the current reserve levels and revenue impacts, it will take more time than
initially projected last year in order to reach the sustainable replacement rate. If the City replaces the last
138 miles of the sewer main over the next 60 years and executes the five-mile project in FY 2026, the final
main would be replaced at the age of 108, which is 8 years past its useful life. By postponing the FY 2026
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project and adding a new one at the end of the 60-year period, the last main would be replaced at around
111 years old, exceeding its useful life by 11 years.
This will allow time for the Wastewater Utility revenues to increase in line with expected costs and for the
reserves to return to within the guideline range by the end of FY 2026. However, by deferring sewer main
replacement planned for FY 2026 to the end of the ~60 year cycle, construction cost inflation will mean
that customers have to pay market prices at that time, and the total costs may be much higher.
Wastewater treatment costs are projected to rise over the next several years due to higher capital
improvement project costs and debt service or loan repayments at the Regional Water Quality Control
Plant (RWQCP). A series of large increases in treatment costs are planned during the next five years to
address aging infrastructure at the treatment plant.
During the UAC’s January 3, 2024 meeting, a 9% rate increase in FY 2025 for the Wastewater Utility was
presented. Based upon feedback from the UAC Commissioners during the meeting, a scenario with a 15%
rate increase in FY 2025 has been molded that allows a sewer replacement project of a reduced size to
continue in FY 2026, while each option resumes the 2.5 miles per year of sewer main replacement in FY
28.
•15% rate increase in FY 25 ($7.29 per residential customer per month)
•7-9% per year rate increases in FY 26 – FY 29
•Continue with planned sewer replacement with $1M in FY 25 and $2M in FY 26
•$2M Pump station retrofit in FY 28
Table 4 shows the projected residential bill impact and each rate increase trajectory together with
estimated monthly bill and net difference in monthly bills from FY 2025 through FY 2029. The difference
between the 15% and 9% alternatives is $2.92 in FY 2025 and ranges from $1.96 to $3.46 per month for
residential customers in each subsequent year.
Table 4: Projected Residential Bill Impact, Rate Increase Percentage, Estimated Monthly Sewer Bill, and
Net Difference in Monthly Bills FY 2025 to FY 2029
Alternatives FY 2025 FY 2026 FY 2027 FY 2028 FY 2029
7.29 5.03 5.48 5.31 5.02 Proposal: 15% in
FY 2025 15%9%9%8%7%
4.37 4.77 5.20 5.66 6.17
Estimated Bill Impact for
Residential Customers
($/mo.) and Rate
Increase Percentage (1)Alternative: 9% in
FY 2025 9%9%9%9%9%
Proposal: 15% in
FY 2025 55.93 60.96 66.44 71.75 76.77 Estimated Monthly
Sewer Bill ($)
Alternative: 9% in
FY 2025 53.01 57.78 62.98 68.64 74.81
Net Difference in
Monthly Bills ($)
15% vs. 9% in FY
2025 2.92 3.18 3.46 3.11 1.96
(1) estimated impact on residential wastewater monthly bill, which is currently $48.64
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The most recent (FY 2024) financial plan for the Wastewater Collection Utility (approved June 19, 2023)
is available at:
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-
reports-cmrs/attachments/03-07-2023-id-2302-0944-ww-financial-plan-lisa.pdf
FISCAL/RESOURCE IMPACT
Based on the preliminary rate increases as shown, the estimated distribution revenue impacts in FY 2025
would be an increase of $4.4 million in the Water Fund if the SFPUC increases the wholesale water rate
to $5.43/CCF (up to $6.3 million in the Water Fund if the SFPUC increases the wholesale water rate to
$5.89/CCF), an increase of $3.3 million in the Wastewater Collection Fund at the 15% rate increase level
in FY 2025 ($2.0 million in the Wastewater Collection Fund at the 9% rate increase level in FY 2025) and
$5.1 million in the Gas Fund. For the Electric Fund, the revenue change for FY 2025 is uncertain but is not
expected to increase significantly despite the rate changes. This is due to various factors, including
forecasted load reduction in FY 2025 and the implementation of the cost of service analysis, which is
expected to yield higher rate changes for some customer classes than others.
STAKEHOLDER ENGAGEMENT
The UAC reviewed the preliminary financial forecasts at its January 3, 2024 meeting. Input from
Commissioners was sought regarding the preliminary rate adjustment recommendations and the transfer
amount from the gas utility to the general fund for FY 2025. Commissioners asked about the effect on
Palo Alto customers from PG&E electric transmission cost increases, the marginal cost of electric
transmission, how much surplus energy Palo Alto has, and they asked for more information about each of
the electric reserve transfers. One Commissioner commented that there should be a separate fund within
each utility by cost category with no loans between funds and we should use root-cause analysis.
Commissioners asked questions about the ongoing cost of service study work on the Electric Utility.
Commissioners agreed with the recommendation to transfer 11.9% instead of 18% of Gas Utility gross
revenue to the General Fund for FY 2025. A water rate trajectory with 5% overall increases in each year
from FY 2025 through FY 2029 was presented. Some Commissioners commented that staff should
consider proposing a higher water rate increase in order to replenish reserves faster and build up CIP
reserves for future One Water Plan CIP recommendations. The water rate proposal included in this
preliminary rate report and presentation was revised. One Commissioner asked for more detail on
operating cost components. For the Wastewater Collection Utility, Commissioners suggested staff
consider a higher rate increase to avoid deferring sewer infrastructure investment, especially given the
City’s favorable rates compared to neighboring agencies. Two alternative rate increases for discussion
with the Finance Committee have been prepared. An excerpt of the minutes from the UAC’s January 3,
2024 meeting is located at the Utilities Advisory Commission website.
The UAC is scheduled to review the long-term Financial Plans and proposed rate adjustments for the
Electric, Water, Wastewater and Gas Utilities in March. The Finance Committee is tentatively scheduled
to review the long-term Financial Plans and proposed rate adjustments in April. Once the Finance
Committee has provided its recommendation, notification of any recommended Water and Wastewater
Collection rate adjustments will be sent to customers, giving them the opportunity to protest the
proposed changes as required by Article XIIID of the State Constitution (added by Proposition 218). The
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Financial Plans and proposed new rate schedules will be considered by the City Council with the FY 2025
budget, at which time the public hearing required by Article XIIID of the State Constitution will be held.
ENVIRONMENTAL REVIEW
The Finance Committee’s review of the preliminary financial projections does not meet the definition of
a project, pursuant to Section 21065 of the California Environmental Quality Act, thus no environmental
review is required.
ATTACHMENTS
No Attachments
APPROVED BY:
Dean Batchelor, Director of Utilities
Staff: Lisa Bilir, Senior Resources Planner
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