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Home My WebLink About2025-09-02 Finance Committee Agenda PacketFINANCE COMMITTEE Regular Meeting Tuesday, September 02, 2025 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. Information on how the public may observe and participate in the meeting is located at the end of the agenda. 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 General Public Comment for items not on the agenda will be accepted in person for up to three minutes or an amount of time determined by the Chair. General public comment will be heard for 30 minutes. Additional public comments, if any, will be heard at the end of the agenda. Public comments for agendized items will be accepted both in person and via Zoom for up to three minutes or an amount of time determined by the Chair. Requests to speak will be taken until 5 minutes after the staff’s presentation or as determined by the Chair. Written public comments can be submitted in advance to city.council@paloalto.gov 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@paloalto.gov 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 types 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. 1 September 02, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. CALL TO ORDER PUBLIC COMMENT Members of the public may speak in-person ONLY to any item NOT on the agenda. 1-3 minutes depending on number of speakers. Public Comment is limited to 30 minutes. Additional public comments, if any, will be heard at the end of the agenda. ACTION ITEMS 1.Recommend the City Council Adopt Voluntary Residential Electric Service Time-of-Use Rates (E-1 TOU); CEQA Status: Not a Project 2.Recommend City Council Direct Staff to use Proposition 26 as the Design Principle for the Gas Cost of Service Analysis and Work with the Utilities Advisory Commission on Review of a Recommended Gas Rate Schedule Effective by January 2026 FUTURE MEETINGS AND AGENDAS Members of the public may not speak to the item(s) ADJOURNMENT 2 September 02, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. 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@paloalto.gov. 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 for agendized items 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. 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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@paloalto.gov. Requests for assistance or accommodations must be submitted at least 24 hours in advance of the meeting, program, or service. 3 September 02, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. California Government Code §84308, commonly referred to as the "Levine Act," prohibits an elected official of a local government agency from participating in a proceeding involving a license, permit, or other entitlement for use if the official received a campaign contribution exceeding $500 from a party or participant, including their agents, to the proceeding within the last 12 months. A “license, permit, or other entitlement for use” includes most land use and planning approvals and the approval of contracts that are not subject to lowest responsible bid procedures and have a value over $50,000. A “party” is a person who files an application for, or is the subject of, a proceeding involving a license, permit, or other entitlement for use. A “participant” is a person who actively supports or opposes a particular decision in a proceeding involving a license, permit, or other entitlement for use, and has a financial interest in the decision. The Levine Act incorporates the definition of “financial interest” in the Political Reform Act, which encompasses interests in business entities, real property, sources of income, sources of gifts, and personal finances that may be affected by the Council’s actions. If you qualify as a “party” or “participant” to a proceeding, and you have made a campaign contribution to a Council Member exceeding $500 made within the last 12 months, you must disclose the campaign contribution before making your comments. 4 September 02, 2025 Materials submitted after distribution of the agenda packet are available for public inspection at www.paloalto.gov/agendas. Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Utilities Meeting Date: September 2, 2025 Report #:2506-4899 TITLE Recommend the City Council Adopt Voluntary Residential Electric Service Time-of-Use Rates (E- 1 TOU); CEQA Status: Not a Project RECOMMENDATION The Utilities Advisory Commission and staff recommends that the Finance Committee recommend the City Council adopt a resolution (Attachment A: Resolution) adding voluntary Rate Schedule E-1 Time of Use (TOU) applicable to separately metered single-family residential dwellings receiving electric service effective January 1, 2026 (Attachment B: Rate Schedule E-1 TOU). EXECUTIVE SUMMARY The Utilities Advisory Commission and Staff recommend introducing a voluntary residential electric time-of-use rate plan on January 1, 2026 (E-1 TOU Rate Schedule). Separately metered single-family residential dwellings receiving electric service from the City of Palo Alto with Advanced Metering Infrastructure (AMI) meters may opt-in to this new E-1 TOU rate plan. The proposed E-1 TOU rates align with the requirements of Article XIII C of the California Constitution (often referred to as Proposition 26) to align with the cost of electricity. The proposed E-1 TOU rates also align with the cost of electricity at the time of use. The proposed E- 1 TOU rates provide customers the opportunity to take advantage of lower-cost and lower carbon intensity time periods for electric vehicle charging or other electric uses. TOU rates are a type of electricity pricing where the cost of electricity varies depending on the time of day the electricity is used. Under this structure, electricity prices are typically lower during off-peak hours, when demand is low, and higher during peak hours, when the grid is under more strain due to higher demand compared to available electricity supply. Staff considered the marginal cost of energy, as well as several other factors described in detail below to determine the hours of the day that each TOU rate applies. Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 1 Packet Pg. 5 of 33 BACKGROUND At the December 4, 2024 UAC meeting, Staff presented preliminary rate proposals for FY 2026 and provided an update on TOU rates as an informational item for discussion purposes.1 On June 4, 2025, these TOU rate proposals were reviewed and unanimously recommended for approval by the UAC (Staff Report #2503-4361)2. Staff recommends a January 1, 2026 implementation date for E-1 TOU to allow sufficient time to prepare for its implementation. Staff estimates that 95% of residential customers will have electric AMI meters installed by the end of December 2025. The remaining 5% of residential customers are estimated to receive AMI meters by April 2026. Customers will first need to have an AMI meter installed to be eligible to participate in the E-1 TOU rate. ANALYSIS The Electric Utility’s rates are evaluated and implemented in compliance with cost-of-service requirements set forth in the California Constitution and applicable statutory law. This E-1 TOU recommendation reflects the proposed FY 2026 costs and revenues for the Electric Utility that are reflected in the financial forecast that was approved by the Council on June 16, 2025, and the “City of Palo Alto Electric Cost of Service and Rate Study” by EES Consulting, Inc. in 2023/2024 (FY 2024 COS Study), supplemented by EES’s April 1, 2025 memo on “Electric Time of Use Rate Design for E-1: Residential Customer Class” (Attachment C: COSA Study’s E-1 TOU Supplement). The new E-1 TOU rates are designed to generate the same FY 2026 revenue as the standard E-1 rates, assuming customers do not change their electric usage patterns. Because the number of customers opting in to E-1 TOU will gradually increase over time, the revenue risk to the Electric Utility will be minimal as adjustments to the rate will be implemented over time as more data is available regarding changes in customers’ electric usage patterns. These residential TOU rates align with the cost of electricity at the time of use. Residential customers may opt-in to this rate to take advantage of lower-cost time periods for electric vehicle charging and other appliances with flexible loads can also take advantage of this rate. As presented in the COSA Study’s E-1 TOU Supplement, the hours of the day that each TOU rate applies (peak, off-peak and super off-peak) or “TOU periods” are designed with consideration of several factors including marginal cost of energy, distribution system capacity and peak demand, greenhouse gas intensity of market energy, and best practices in ratemaking. 1 The transcript from the meeting is available on the City’s website: https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=15106&compileOutputType =1. 2 UAC Staff Report #2503-4361 on June 4, 2025 https://cityofpaloalto.primegov.com/Portal/viewer?id=0&type=7&uid=a193f374-f0af-479d-bf30-ce2b7a3c6a05 Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 2 Packet Pg. 6 of 33 1. Marginal cost of energy The TOU periods are structured to reflect the marginal cost of energy, which refers to the cost of producing or purchasing one additional unit of electricity. This cost fluctuates throughout the day based on overall demand, fuel availability, and market dynamics. By aligning TOU pricing periods with periods of higher or lower marginal cost, utilities can send price signals that encourage consumers to shift their energy usage to times when electricity is cheaper to purchase. This not only reduces strain on the grid but also improves overall economic efficiency in the energy market. Because of the large penetration of solar resources in California, the lowest priced periods typically occur in the sunny mid-day hours, while the highest priced periods typically occur in the evening hours just after sunset. 2. Distribution system capacity and peak demand TOU periods are also influenced by the capacity of the distribution system and the timing of peak demand. Electricity systems must be built to meet the highest expected load, even if those peaks occur infrequently. By identifying and pricing peak hours higher, TOU rates encourage customers to shift consumption away from peak periods, which enhances grid reliability and optimizes use of existing infrastructure, delaying or reducing the need for costly infrastructure upgrades. This also reduces the utility’s need to purchase additional local and system resource adequacy capacity, as these procurement requirements are set based on the utility’s actual peak demand levels. 3. Greenhouse gas intensity of market energy Another important consideration in TOU design is the greenhouse gas (GHG) intensity of the energy supply during different times of the day. Energy generated during peak hours often comes from fossil-fuel-based plants that produce higher emissions compared to cleaner sources like solar, which are more prevalent during mid-day hours. TOU rates can incentivize customers to use electricity when the grid is powered by cleaner energy, thereby supporting emissions reductions and climate goals. (Note that although CPAU has a carbon neutral electricity supply, the utility is still responsible for countering the effects of the marginal emissions that occur as a result of its electricity consumption through the purchase of additional renewable energy; therefore, it lowers the utility’s costs to have customers use electricity primarily in lower emissions periods.) 4. Best practices in ratemaking TOU rate plans also reflect established best practices in utility ratemaking, which aim to balance fairness, efficiency, and transparency. This involves designing rates that are cost-reflective, encourage customer responsiveness, and promote long-term sustainability of the electric system. Best practices ensure that TOU pricing is not only effective in achieving grid and environmental objectives, but also understandable and equitable for customers, including protections for vulnerable populations. It has been shown that consumers are more able to shift energy use to lower-priced periods when the high-priced period is shorter in duration. The recommended peak period is from 4 pm to 9 Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 3 Packet Pg. 7 of 33 pm. This 5-hour period captures the highest marginal energy costs, the highest average GHG intensities, and the timing of both the distribution system peak and residential class peak demand. The Residential TOU program will enable CPAU to gauge customer interest in electric TOU rates and assess the behavioral changes of customers who opt into these TOU rates. In the absence of any E-1 TOU customer data, the TOU rate design assumed the E-1 customer class load profile and the TOU rates were designed to recover the same revenue requirement. Table 1 shows the proposed E-1 TOU rates, compared to the proposed E-1 rates for FY 2026. Table 1: FY 2026 Rates for E-1 and E-1 TOU Commodity Distribution Public Benefits Total E-1 TOU Rate Schedule – Proposed in this Staff Report, effective date January 1, 2026 E-1 TOU Volumetric Rate, $/kWh (No Baseline) Summer: June 1 – September 30 Peak: 4pm to 9pm 0.23354 0.09351 0.00604 0.33309 Off-Peak: 9pm to 9am, 3pm to 4pm 0.08249 0.09351 0.00604 0.18204 Super Off-Peak: 9am to 3pm 0.06690 0.09351 0.00604 0.16645 Winter: October 1 – May 31 Peak: 4pm to 9pm 0.16705 0.09351 0.00604 0.26660 Off-Peak: 9pm to 9am, 3pm to 4pm 0.11033 0.09351 0.00604 0.20988 Super Off-Peak: 9am to 3pm 0.07835 0.09351 0.00604 0.17790 E-1 TOU Customer Charge Customer Charge, $/month 5.15 E-1 Rate Schedule – Effective date July 1, 2025 E-1 Volumetric Rate, $/kWh (Baseline at 450 kWh) E-1 Tier 1 (up to 450 kWh)0.10373 0.09593 0.00604 0.20570 E-1 Tier 2 (over 450 kWh)0.13372 0.08968 0.00604 0.22944 E-1 TOU and E-1 Customer Charge Customer Charge, $/month 5.15 Figures 1 and 2 below show the E-1 and E-1 TOU volumetric rates for summer and winter for FY 2026. Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 4 Packet Pg. 8 of 33 Figure 1: E-1 (Tier 1 and Tier 2) and Summer E-1 TOU Volumetric Rates for FY 2026 Figure 2: E-1 (Tier 1 and Tier 2) and Winter E-1 TOU Volumetric Rates for FY 2026 Customers electing the E-1 TOU rate plan must remain on the plan for a minimum of six months. After six months, E-1 TOU customers may request a change to any applicable rate schedule; however, once a customer switches to a rate schedule other than E-1 TOU, they cannot re-elect E-1 TOU for the next 12 billing cycles. Other utilities have similar restrictions regarding customers switching between rate plans5. For Palo Alto, six months is a reasonable balance between offering flexibility to customers and protecting the utility from customers switching rate plans frequently based upon which season the rate plan benefits the customer, thereby generating additional administration for the utility. 5 This proposed rule is slightly different from that implemented by California’s three largest electric utilities. For PG&E, customers may request a rate plan change up to two times in a rolling 12-month period; however, once a customer makes the 2nd rate change, they will have to remain on that plan for the next 12 billing cycles. For Southern California Edison and San Diego Gas & Electric Company, customers switching to TOU rate will not be able to make another switch for a full 12 months. Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 5 Packet Pg. 9 of 33 Net Energy Metering (NEM) customers7 will not be eligible to opt-in to the Residential TOU rate plan due to existing constraints in the billing system. Staff is working to address these constraints. Implementation Plan Staff has begun the process of updating the billing system to accept energy consumption data from the AMI system to compute electric TOU customer bills. Planning and implementation activities include modifying the billing system and developing logistics related to customer enrollment, customer informational tools and communication plan. To ensure a smooth roll-out of this new rate, staff anticipates an initial testing period with a small group of beta customers beginning in January 2026 followed by a modulated increase in customer enrollments. Staff plans to present marketing and communication and customer-centric details of this new rate implementation to the UAC in Fall 2025. FISCAL/RESOURCE IMPACT The rate level of E-1 TOU is based on the FY 2026 cost estimates and is therefore designed to produce the same revenue increase percentage as that expected from the standard E-1 rates adopted by Council effective July 1, 2025. STAKEHOLDER ENGAGEMENT Staff provided an update on the development of E-1 TOU rates at the December 4, 2024 UAC meeting. On June 4, 2025, staff presented the TOU rate proposals to the UAC. Commissioners reported that the UAC subcommittee had met with staff twice and commented that it is important to communicate to customers why it is important to use electricity during the solar production hours (energy is cleaner and cheaper) potentially using appropriate naming or branding and that E-1 TOU rates would be even more impactful if the dollar impact of shifting load to the super-off peak was greater. One Commissioner asked whether staff had considered maximizing the price differential between the super off-peak and peak in order to provide more of a financial incentive to customers and staff responded that different TOU periods were examined and that changing the TOU periods did not change the resulting rates very much. The UAC unanimously recommended approval of this proposal. The details of the meeting are available on the City’s website at the following link: https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=17431 Since the June 4, 2025 UAC meeting staff added the requirement that residential customers must have an AMI meter installed in order to participate in the E-1 TOU rate schedule. This is reflected in Attachment B. 7 NEM customers are those who receive compensation for the energy generated by photovoltaic systems installed at their residences. Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 6 Packet Pg. 10 of 33 In October, staff plans to solicit UAC feedback on an implementation plan including details regarding the plan for expanding the program in phases, the enrollment process, support that will be provided to help customers make the decision regarding opting in to the TOU rates, and the customer engagement plan . Additionally, staff plans to present the E-1 TOU rates to the City Council in September 2025. ENVIRONMENTAL REVIEW The Finance Committee’s review and recommendation to the City Council on the E-1 TOU Rate Plan does not meet the California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section 21065. Thus, no environmental review is required. ATTACHMENTS Attachment A: Resolution Attachment B: Rate Schedule E-1 TOU Attachment C: COSA Study’s E-1 TOU Supplement APPROVED BY: Alan Kurotori, Director Utilities Staff: Lisa Bilir, Senior Resource Planner Item 1 Item 1 Staff Report Item 1: Staff Report Pg. 7 Packet Pg. 11 of 33 * NOT YET APPROVED * Attachment A 1 027032125 Resolution No. ____ Resolution of the Council of the City of Palo Alto Approving Utility Rate Schedule E-1 TOU (Residential Electric Time of Use Service) R E C I T A L S A. Each year the City of Palo Alto (“City”) adopts Financial Forecasts or Plans for its utilities, to ensure adequate revenue to fund operations with the goal of providing safe, reliable, and sustainable utility services at cost-based rates. Council adopted the FY 2026 Electric Financial Forecast on June 16, 2025.1 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 Month Day, 2025, at a noticed public hearing, the City Council heard and approved the proposed optional electric residential time-of use rates available for qualified residents. The Council of the City of Palo Alto does hereby RESOLVE as follows: SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule E-1 TOU (Residential Electric Time of Use Service) shall become effective January 1, 2026; SECTION 2. The Council finds that the revenue derived from the adoption of this resolution shall be used only for the purpose set forth in Article VII, Section 2, of the Charter of the City of Palo Alto. SECTION 3. 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 4. The Council finds that changing electric rates to introduce an optional Residential Time of Use rate is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and CEQA Guidelines Sec. 15273(a). After reviewing the staff report and all attachments presented to Council, the Council 1 https://www.paloalto.gov/files/assets/public/v/2/agendas-minutes-reports/agendas-minutes/city-council- agendas-minutes/2025/june-16/rates-attachments/finalized-attachment-d-exhibit-1-fy26-electric-utility-financial- forecast-and-cip-detail.pdf Item 1 Attachment A - Resolution Item 1: Staff Report Pg. 8 Packet Pg. 12 of 33 * NOT YET APPROVED * Attachment A 2 027032125 incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption. INTRODUCED AND PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: City Clerk Mayor APPROVED AS TO FORM: APPROVED: Assistant City Attorney City Manager Director of Utilities Director of Administrative Services Item 1 Attachment A - Resolution Item 1: Staff Report Pg. 9 Packet Pg. 13 of 33 RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RATE SCHEDULE E-1 TOU CITY OF PALO ALTO UTILITIES Issued by the City Council Sheet No E-1-TOU-1 Effective 1-1-2026 A. APPLICABILITY: This voluntary Rate Schedule applies to separately metered single-family residential dwellings receiving Electric Service from the City of Palo Alto Utilities (CPAU) who have an Advanced Metering Infrastructure meter installed. This Rate Schedule is not available to Net Energy Metered (NEM) customers and is provided at the sole discretion of CPAU. B. TERRITORY: This rate schedule applies everywhere the City of Palo Alto provides Electric Service. C. UNBUNDLED RATES: Per kilowatt-hour (per kWh)Commodity Distribution Public Benefits Total Summer Period Energy Charge Peak $ 0.23354 $ 0.09351 $ 0.00604 $ 0.33309 Off-Peak 0.08249 0.09351 0.00604 0.18204 Super Off-Peak 0.06690 0.09351 0.00604 0.16645 Winter Period Energy Charge Peak $ 0.16705 $ 0.09351 $ 0.00604 $ 0.26660 Off-Peak 0.11033 0.09351 0.00604 0.20988 Super Off-Peak 0.07835 0.09351 0.00604 0.17790 Customer Charge ($/month)5.15 D. SPECIAL NOTES: 1. Calculation of Charges The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C. Item 1 Attachment B - E-1-TOU effective 2026-01-01 Item 1: Staff Report Pg. 10 Packet Pg. 14 of 33 RESIDENTIAL ELECTRIC TIME OF USE SERVICE UTILITY RATE SCHEDULE E-1 TOU CITY OF PALO ALTO UTILITIES Issued by the City Council Sheet No E-1-TOU-2 Effective 1-1-2026 2. Definition of Seasonal Periods Summer Period: Service from June 1 to September 30 Winter Period: Service from October 1 to May 31 SEASONAL RATE CHANGES: When the Billing Period includes use in both Summer and Winter periods, usage will be prorated based on the number of days in each seasonal period, and the Charges based on the applicable rates therein. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. 3. Definition of Time Periods Peak: 4:00 p.m. to 9:00 p.m. Every day Off-Peak: 9:00 p.m. to 9:00 a.m. Every day 3:00 p.m. to 4:00 p.m. Super Off-Peak: 9:00 a.m. to 3:00 p.m. Every day 4. Changing Rate Schedules Customers electing to be served under E-1 TOU must remain on said Rate Schedule for a minimum of 6 months. Should the Customer so wish, at the end of 6 months, the Customer may request a Rate Schedule change to any applicable City of Palo Alto full-service Rate Schedule as is suitable to their kilowatt-hour usage. However, once a customer elects a rate other than E-1 TOU, they cannot re-elect E-TOU for the next 12 billing cycles. {End} Item 1 Attachment B - E-1-TOU effective 2026-01-01 Item 1: Staff Report Pg. 11 Packet Pg. 15 of 33 16701 NE 80th Street  Suite 102  Redmond, WA 98052  425-889-2700  Fax 866-611-3791  www.gdsassociates.com Georgia  Texas  Alabama  New Hampshire  Wisconsin  Florida  Maine  Washington  California MEMORANDUM TO Lisa Bilir FROM Amber Gschwend DATE April 1, 2025 RE Electric Time-of-Use Rate Design for E-1: Residential Customer Class As part of the electric cost of service study, a rate design analysis is prepared to support the implementation of time of use (TOU) rates for the E-1 class. It is estimated that over 90% of residential customers will have Advanced Metering Infrastructure (AMI) installed by July 1, 2025, and optional TOU rates could be offered at that time. The proposed rate developed in this memo would be implemented on a voluntary basis. The bill impacts provided at the end of the analysis show that consumers with higher use could benefit from the program. Bills at any usage level can be reduced with changes in behavior. TOU RATE DESIGN BACKGROUND Time-of-use rate design has many benefits including appropriate price signaling to customers and the potential for customers to modify electric use to fall in periods of lower overall system costs, to reduce bills and utility power costs. Investor-owned utilities (IOUs) in California have defaulted residential customers to TOU rates, with the exception of low-income program customers.1 As a voluntary program, it is expected that customers who opt into the TOU rate would be those customers who can modify electric consumption timing, and these customers may be more aware of their energy use profiles in general. Customers with electric vehicles (EV) can benefit by choosing to charge vehicles during lower energy cost periods. Under the current tiered rate, electric vehicle charging would likely fall under the higher Tier 2 electric rate, based on higher household consumption. Therefore, the TOU rate offers the opportunity for EV owners to reduce electric bills without increasing costs for other customers. Additionally, when combined with demand response programs, TOU rates could also incentivize customers to purchase programmable appliance controls (e.g., battery energy storage systems, water heaters) further allowing customers to reduce electric usage during high-priced periods. TOU program participation in the United States, when voluntary, typically ranges from 1% to 10% of the total number of eligible households.2 As of 2023, approximately one in three residential customers in Palo Alto own EVs, therefore, the adoption rate in Palo Alto is likely to be higher. If Palo Alto decides to implement TOU as the default option, while allowing customers to opt back to a tiered rate option, TOU program participation would likely increase to 75-90%. Alternatively, the City may require TOU rate design for all customers in the class, resulting in 100% participation. 1 Pirro, Michael. The Evolution and Challenges of Time-of-Use Rate Designs. GridX. August 29, 2024. The Evolution and Challenges of Time-of-Use Rate Designs. 2 Eligible households are those with appropriate meeting infrastructure or some other factor as determined by the utility. Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 12 Packet Pg. 16 of 33 MEMORANDUM Electric TOU Rate Design E-1 2 RECOMMENDED PALO ALTO RESIDENTIAL TOU PROGRAM A voluntary E-1 TOU program will provide useful information to the City. Peak demand reduction estimates can be made by comparing E-1 TOU participant demands to standard E-1 class demands over the same period. This information will help the City plan for future program roll-out design as well as reduce its future power costs. Based on PG&E’s program, it is expected that peak demand reduction on the order of 3-6% could be achieved through TOU rate design.3 Note: The residential customer share of Palo Alto’s overall peak demand is estimated at 12%, therefore, a reduction in residential class peak of 3- 6% results in an overall system peak reduction of 0.4 to 0.7%. A voluntary program will also help the City determine with greater certainty the impact of TOU rate design on utility revenues and expenses. As customers modify their behavior, it is expected that the revenue collected will decrease and that power supply expenses will also decrease. It is recommended that the TOU program revenues be analyzed annually, and retail rates updated so that the utility remains financially stable. This initial rate design proposal considers the recovery of fixed and variable costs by including fixed cost recovery in rate components that do not vary depending on the time of day energy is used. This design mitigates potential impacts to revenue collection resulting from changed behavior from TOU rate implementation. Table 1 below summarizes the recommended TOU rate design methodology. The balance of the memo describes the data and results of the analysis. TABLE 1: RECOMMENDED TOU RATE DESIGN METHODOLOGY Rate Schedule Current Rate Design Recommended Rate Methodology Residential Electric Service •E-1: Not Time of Use •Inclining Rate with Two Tiers •Baseline Use (Tier 1) is 450 kWh/month •Higher Use (Tier 2) is over 450 kWh/month •E-1 TOU: Billing Periods Based on Differential in Marginal Cost, Distribution System Capacity and Peak Demand, Greenhouse Gas Intensity, and Best Practices in Rate Design •Commodity Rate Based on Marginal Cost •Optional Rate Plan TOU RATES FOR NET ENERGY METERED (NEM) CUSTOMERS Due to technical hurdles associated with the electric billing system, CPAU is currently unable to implement TOU rates for Net Energy Metered (NEM1 and NEM2)customers, who have energy generation and/or storage capacity from solar panels and batteries. When CPAU overcomes NEM2 billing system hurdles, TOU NEM2 will be developed. 3 Rate design and season impacts the peak demand reduction estimates. Pacific Gas and Electric (PG&E) study authors note that peak demand impacts may diminish over time. Reference: Christensen Associates. 2023 Load Impact Evaluation of Pacific Gas and Electric Company’s Residential Time-of-Use Rates Ex Post and Ex-Ante Report. CALMAC Study ID PGE0496. April 1, 2024. https://www.calmac.org/publications/2._PGE_2023_Res_TOU_Rpt_PUBLIC.pdf Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 13 Packet Pg. 17 of 33 MEMORANDUM Electric TOU Rate Design E-1 3 REVENUE REQUIREMENT The rate level for E-1 TOU is based on the FY2026 budget. The FY2026 budget is the FY2025 budget plus a 1% increase to power supply expenses, and an 11% increase for distribution expenses for an average adjustment of 5% overall. Therefore, the proposed rates are equal to the FY2025 cost of service analysis plus 5%. For E-1, the total revenue target for FY2026 is $29.4 million compared with $27.9 million for FY2025. This is equivalent to 17% of the total electric utility retail revenue target of $172.9 million. TOU COST JUSTIFICATION TOU rate design is recommended to promote the efficient use of electricity by providing more accurate cost-based pricing. 1. TOU rates are based on the marginal cost of electrical energy and electrical capacity at the time of usage, reflecting accurate market price signals. 2. TOU rate design may lower the impact of increased EV charging on distribution feeder and transformer loadings, by providing customer incentives to reduce or shift energy use away from higher-priced periods. 3. TOU rates will provide customers with the opportunity to take advantage of lower-cost time periods for EV charging or other electric use. 4. TOU rates support electrification by not penalizing high energy use if it occurs during lower market priced periods. Typically, the goal of TOU rate design is to provide more accurate cost-based pricing to retail customers. In addition to this goal, TOU may also be used as a program to reduce overall power supply costs to the utility and, to the extent possible, lower the peak load on the distribution system infrastructure. These lowered costs are then passed to consumers through updated rate studies. A reduction in power costs may be realized if customers conserve energy during high-priced periods, or if customers shift their energy use to lower-priced periods. Similarly, reducing the peak loading of the distribution system will lower the need for system upgrades and will also result in lower system energy losses. DETERMINATION OF APPROPRIATE TOU PERIODS As noted in Table 1, TOU periods are designed with consideration of several factors including: 1. Marginal cost of energy 2. Distribution system capacity and peak demand 3. Greenhouse gas intensity of market energy 4. Best practices in ratemaking. Each of these considerations is described below. Marginal Cost of Energy The primary goal of the rate design is to accurately reflect the cost of service depending on the time of day energy is used. Typically, higher-priced energy results from the combination of high electricity demands and constrained resource output, which occurs after the sun sets when lower-cost solar resources are no longer producing energy. The marginal cost of energy for the City is considered to be the hourly market prices at the NP15 (North of Path 15) trading hub, adjusted for the Palo Alto service area location. Hourly prices are commonly referred to as Default Load Aggregation Point (DLAP). The NP15 trading hub is the closest wholesale market transacting location. This pricing data is utilized in other areas Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 14 Packet Pg. 18 of 33 MEMORANDUM Electric TOU Rate Design E-1 4 of the City’s utility planning and ratemaking and is the appropriate marginal cost metric for electric TOU rate design. Because of the large penetration of solar resources in the California markets, the highest priced periods typically occur in the evening. This is demonstrated in the average hourly market pricing data shown in Figure 1.4 These market prices are the marginal cost of electricity. In case of resource production surpluses or shortages, the City would sell or purchase energy at these prices. Figure 1 illustrates the average hourly market pricing for the 3-year period August 2021-July 2024. This period is the most relevant to the analysis since it is the most recent data available. While the natural gas shortage in winter 2023 inflated pricing in that period, removing that data from the analysis did not result in significant differences. This is because the shape of the pricing curves is more important than the pricing levels. Figure 1 shows three periods for pricing. The red shaded period (peak) is the highest priced period between 4 pm and 9 pm, averaging $95/MWh annually. The lowest priced period is between 9 am and 3 pm daily at $49/MWh on average (super off-peak). The average price for the remaining hours (off-peak) is $65/MWh. The relative prices in these three periods are used to determine commodity rates. FIGURE 1: AVERAGE HOURLY MARKET PRICES: 8/2021-7/2024 The recommended rate design has the same pricing periods for winter and summer seasons. Keeping the time of day pricing periods the same year-round is simpler from the customer perspective and follows Bonbright’s criteria of desirable rate structure where he emphasizes simplicity and understandability of 4 Average hourly prices for NP15 (DLAP Palo Alto), August 2021-July 2024. $0 $20 $40 $60 $80 $100 $120 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:0 0 11:0 0 12:0 0 13:0 0 14:0 0 15:0 0 16:0 0 17:0 0 18:0 0 19:0 0 20:0 0 21:0 0 22:0 0 23:0 0 $/M W h Hour Beginning Off Peak Super Off Peak Peak Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 15 Packet Pg. 19 of 33 MEMORANDUM Electric TOU Rate Design E-1 5 rate design.5 A more complicated rate design with multiple TOU periods would more precisely reflect marginal costs, but it would also be more difficult for customer understanding and implementation. For this reason, a simpler rate design is recommended. Distribution System Capacity and Peak Demand The second consideration for the TOU periods is the peak at the distribution system level. This peak is the maximum peak achieved when combining customer electric demands. A peak can be analyzed in various ways such as system total (all City loads) or a subset of customers such as those being served from a particular asset (substation, feeder, transformer). The peak on the distribution system drives distribution system investments. Therefore, managing peak demands on the system can defer or avoid investments in system expansion. Typically, the distribution system peak coincides with the timing of higher-priced electricity. To test this, the 12 monthly peaks (maximum demand) for the City’s entire system were analyzed. The three highest monthly peaks on the system occur within the 4 pm to 9 pm time period. While the system peaks during this time period, each class of customer contributes to that peak differently. Class system peaks help define the capacity requirements across the distribution system. If the residential class peak were to occur during a low marginal cost period for energy, the recommended TOU rate design could result in increased distribution system costs. Shifting loads toward the residential class peak could result in an increase to the distribution system capacity needs. To ensure that the recommended TOU rate periods do not place undue upgrade costs on the distribution system, EES analyzed residential class load profile data. At the time of this analysis, the City does not have hourly load profile data available for its residential class. The City is currently installing AMI, which will provide usage data for future cost analysis and rate making. Because hourly meter data is unavailable, EES evaluated hourly usage data for substation feeders: Hopkins feeder 5 (HO5) and Hopkins feeder 7 (HO7). These feeders serve a total of 1,208 customers. Of these, 1,200 customers are residential. Based on the customer count data, the hourly data from these feeders should be a good approximation for residential load profiles for the City of Palo Alto. To further test this theory, the hourly data from these feeders was compared with PG&E residential load profiles for PG&E’s baseline territory “T.” This territory is adjacent to the City of Palo Alto and similar in climate. The comparison further validates that the hourly Palo Alto feeder data is appropriate Palo Alto residential TOU rate design. Figure 2 compares the average hourly load shape for the 12 months beginning September 2022 for both Hopkins feeders, and a similar-climate load shape from PG&E dynamic load profile data. The average is calculated by averaging electric demand over the entire year for each hour ending (1-24). Figure 2 shows normalized kW which is equal to kW in each hour divided by the average. Normalizing each curve makes the curves comparable even if the data sets have different means. 5 Bonbright, James C. Principles of Public Utility Rates. Columbia University Press, 1961 (Reprinted 2005). Page 291. powellgoldstein-bonbright-principlesofpublicutilityrates-1960-10-10.pdf Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 16 Packet Pg. 20 of 33 MEMORANDUM Electric TOU Rate Design E-1 6 FIGURE 2: RESIDENTIAL HOURLY LOAD PROFILE AVERAGE: 9/2022-8/2023 Using the feeder data, an analysis of monthly peaks indicated that the 4 pm to 9 pm period captures the two maximum feeder peaks (August and September for HO5 and December and September for HO7). This is also supported in Figure 2 where the average daily peak occurs in the same window. Therefore, both the system and feeder peak analyses support an on-peak period in the later afternoon/evening. Palo Alto’s overall system peak, across all customer classes also occurs between 4 pm and 9 pm in the highest 9 monthly peaks. This also supports setting the peak period between 4 pm and 9 pm. Greenhouse Gas (GHG) Content The third consideration for TOU periods is the carbon content of market purchases during lower-cost periods. While not perfectly correlated, marginal cost, system peak demands, and high GHG content are all highest during the same evening period. Figure 3, on the next page, shows the average hourly emission intensity by month for energy transactions located within the management area of the California Independent System Operator (CAISO). Emissions data are represented as metric tons (MT) of carbon dioxide equivalent (CO2e) per megawatt hour (MWh) of electricity. The highest emission intensities are between 7 pm and 7 am, when solar resources are not generating. The emission intensity data supports a third TOU period during the day that represents the lower costs associated with both the low GHG intensity and low marginal cost. 0.00 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:0 0 11:0 0 12:0 0 13:0 0 14:0 0 15:0 0 16:0 0 17:0 0 18:0 0 19:0 0 20:0 0 21:0 0 22:0 0 23:0 0 PG&E HO5 2022 HO7 2022 No r m a l i z e d k W Hour Beginning Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 17 Packet Pg. 21 of 33 MEMORANDUM Electric TOU Rate Design E-1 7 FIGURE 3: AVERAGE CAISO EMISSION INTENSITY 2023, MT CO2 PER MWH 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:00 11:00 12:00 13:00 14:00 15:00 16:00 17:00 18:00 19:00 20:00 21:00 22:00 23:00 1 0.31 0.31 0.32 0.32 0.31 0.29 0.29 0.28 0.24 0.21 0.2 0.2 0.2 0.2 0.2 0.22 0.26 0.29 0.29 0.29 0.3 0.3 0.31 0.31 2 0.31 0.32 0.31 0.31 0.3 0.29 0.28 0.27 0.21 0.17 0.17 0.17 0.17 0.17 0.17 0.18 0.23 0.28 0.29 0.29 0.29 0.3 0.31 0.31 3 0.28 0.28 0.28 0.28 0.27 0.26 0.26 0.24 0.19 0.17 0.16 0.16 0.17 0.16 0.16 0.16 0.17 0.21 0.24 0.26 0.26 0.27 0.28 0.28 4 0.25 0.25 0.25 0.25 0.25 0.24 0.24 0.2 0.12 0.1 0.09 0.08 0.08 0.07 0.07 0.06 0.07 0.1 0.18 0.23 0.25 0.24 0.25 0.25 5 0.26 0.26 0.26 0.26 0.26 0.26 0.24 0.18 0.14 0.12 0.12 0.11 0.1 0.08 0.07 0.07 0.08 0.12 0.17 0.23 0.25 0.25 0.26 0.26 6 0.24 0.24 0.24 0.24 0.24 0.24 0.22 0.16 0.13 0.11 0.1 0.09 0.08 0.06 0.05 0.05 0.07 0.1 0.14 0.19 0.22 0.23 0.24 0.24 7 0.28 0.28 0.28 0.28 0.28 0.28 0.25 0.21 0.19 0.17 0.15 0.14 0.13 0.13 0.13 0.14 0.16 0.18 0.21 0.26 0.28 0.29 0.29 0.29 8 0.31 0.31 0.31 0.31 0.3 0.3 0.29 0.26 0.23 0.21 0.19 0.17 0.16 0.16 0.17 0.18 0.2 0.22 0.25 0.29 0.3 0.3 0.31 0.31 9 0.29 0.29 0.29 0.29 0.29 0.29 0.28 0.25 0.2 0.18 0.16 0.15 0.14 0.12 0.12 0.13 0.15 0.19 0.24 0.26 0.27 0.27 0.28 0.29 10 0.34 0.34 0.34 0.35 0.34 0.33 0.32 0.3 0.24 0.21 0.19 0.18 0.17 0.16 0.15 0.16 0.19 0.26 0.3 0.31 0.31 0.32 0.33 0.34 11 0.33 0.34 0.34 0.34 0.33 0.32 0.3 0.27 0.22 0.2 0.2 0.2 0.19 0.19 0.18 0.21 0.26 0.28 0.29 0.29 0.3 0.31 0.32 0.32 12 0.32 0.33 0.33 0.33 0.32 0.31 0.3 0.28 0.23 0.2 0.19 0.19 0.19 0.19 0.2 0.24 0.28 0.28 0.29 0.29 0.29 0.3 0.31 0.32 Hour Beginning Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 18 Packet Pg. 22 of 33 MEMORANDUM Electric TOU Rate Design E-1 8 Best Practices The last consideration for TOU periods is based on ratemaking best practices. First, it has been shown that consumers are more able to shift energy use to lower priced periods when the high-priced period is shorter in duration. As such, there is a trade-off in cost-based rates between peak usage pricing that is significantly higher than off peak but for a shorter period versus smaller price differentials over a longer period. The recommended peak period is from 4 pm to 9 pm. This 5-hour period captures high marginal energy costs, high average GHG intensity, and the timing of both the distribution system peak and residential class peak demand. TOU RATE RECOMMENDATIONS It is recommended that TOU rates be calculated for two seasons: summer and winter. The recommended summer season is from June 1 through September 30. This choice of season is based on the annual system peak typically in August or September and the local capacity requirement (determined by the annual peak). Additionally, the seasonal rate design is necessary to pass through the differences in marginal costs between seasons. In particular, the months of June through September are the peak cooling months where the impact of solar on marginal costs is slightly less compared to winter. The recommended seasonal definition results in a larger difference in pricing during summer hours as demonstrated by the higher peak and lower troughs in Figure 4. Winter hours are priced closer together. FIGURE 4: AVERAGE HOURLY MARKET PRICES BY SEASON: 8/2021-7/2024 $0 $20 $40 $60 $80 $100 $120 $140 $160 0:00 1:00 2:00 3:00 4:00 5:00 6:00 7:00 8:00 9:00 10:0 0 11:0 0 12:0 0 13:0 0 14:0 0 15:0 0 16:0 0 17:0 0 18:0 0 19:0 0 20:0 0 21:0 0 22:0 0 23:0 0 Summer June-Sept Winter Oct-May $/M W h Hour Beginning Off Peak Super Off Peak Peak Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 19 Packet Pg. 23 of 33 MEMORANDUM Electric TOU Rate Design E-1 9 Based on the above analysis, the following TOU periods are recommended: TABLE 2: RECOMMENDED TOU RATE PERIODS Time of Day Summer: June 1 – September 30 and Winter: October 1 – May 31 Peak 4 pm to 9 pm Off-Peak 9 pm to 9 am and 3 pm to 4 pm Super Off-Peak 9 am to 3 pm Based on these TOU periods, marginal cost data, and the seasonal rate period, the recommended rate differentials are developed. During the summer season, peak period prices average 85% higher than off- peak prices. In winter, October 1 through May 31, the peak period prices average 23% higher than off- peak prices. Super off-peak prices coincide with the time of day with the lowest marginal cost and lowest greenhouse gas emission intensity. Prices during super off-peak periods during the summer are 19% lower than off-peak summer prices and prices during super off-peak periods during the winter are 29% lower than winter off-peak prices. Table 3 summarizes the marginal cost data for the 3-year period analyzed, August 2021-July 2024. This data was also analyzed by excluding the high winter prices in 2023 caused by natural gas shortages. This event was unusual; however, the resulting price differentials between the recommended TOU periods were not significantly different when the event is excluded. Note that the marginal cost is not used directly for rate-setting. The marginal cost levels are adjusted to reflect the utility’s actual all-in power costs; however, the ratio of peak, off-peak, and super off-peak prices is maintained.6 By maintaining the relative cost of power, the resulting rates reflect the marginal cost attributes while collecting the power supply costs allocated to residential customers in the cost of service study. 6 This methodology differs from the Export Electricity Compensation rate (EEC) used to credit excess generation value to Net Energy Metering (NEM) customers. The EEC rate considers the marginal cost of energy plus other costs avoided when customers generate electricity locally. Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 20 Packet Pg. 24 of 33 MEMORANDUM Electric TOU Rate Design E-1 10 TABLE 3: TOU MARGINAL COST: COMMODITY Average DLAP1 Price $/MWh Difference from Seasonal Off Peak Price Summer: June 1 – September 30 Peak: 4 pm to 9 pm $99.98 + 85% Off-Peak: 9 pm to 9 am and 3 pm to 4 pm $53.96 0% Super Off-Peak: 9 am to 3 pm $43.76 -19% Winter: October 1 - May 31 Peak: 4 pm to 9 pm $88.49 +23% Off-Peak: 9 pm to 9 am and 3 pm to 4 pm $72.17 0% Super Off-Peak: 9 am to 3 pm $51.25 -29% 1. DLAP or Default Load Aggregation Point is the industry name for hourly wholesale electricity prices for the relevant trading point. In this case, the PG&E delivery point is the appropriate trading node. The commodity rates for E-1 TOU are developed such that the pricing differentials in Table 3 are maintained for the energy-related portion of the rate. The commodity costs that are demand-related are added to the peak commodity rates. Demand-related commodity costs are spread evenly across summer and winter seasons and applied only to peak commodity rates. Finally, because local capacity costs are based on peak demand, 72% of these costs occur in summer, while 28% occur in the winter and these costs are correspondingly included in the summer and winter volumetric rates. Table 4 summarizes the cost components in each TOU commodity rate. TABLE 4: TOU RATE DESIGN COST COMPONENTS Commodity Cost Component Energy Related Demand Related Summer Peak 187% of Off Peak Price 72% of Local Capacity Costs Summer Demand Costs Summer Off-Peak Marginal Cost Scaled Based on Embedded Power Costs (Calculated in COSA) None Summer Super-Off Peak 84% of Off Peak Price None Winter Peak 121% of Off Peak Price 28% of Local Capacity Costs Winter Demand Costs Winter Off-Peak Marginal Cost Scaled Based on Embedded Power Costs (Calculated in COSA) None Winter Super Off-Peak 73% of Off Peak Price None LOAD CHARACTERISTICS The billing determinants for each TOU pricing period are estimated from the load profile data obtained from the HO5 and HO7 feeders. Table 5 summarizes the estimated share of annual energy within each TOU period. For the average customer using 450 kWh per month (5,400 kWh/year), 31.6% or 1,706 kWh are consumed in the winter off peak period. Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 21 Packet Pg. 25 of 33 MEMORANDUM Electric TOU Rate Design E-1 11 TABLE 5: RESIDENTIAL LOAD SHARE BY TOU PERIOD Share of Annual Energy Summer: June 1 – September 30 Peak: 4 pm to 9 pm 8.0% Off-Peak: 9 pm to 9 am and 3 pm to 4 pm 9.2% Super Off-Peak: 9 am to 3 pm 14.2% Winter: October 1 - May 31 Peak: 4 pm to 9 pm 15.7% Off-Peak: 9 pm to 9 am and 3 pm to 4 pm 31.6% Super Off-Peak: 9 am to 3 pm 21.3% Table 6 compares the recommended E-1 TOU rate with the standard E-1 rate adjusted for FY2026. The commodity rates are developed by scaling the marginal costs for the TOU periods (Table 3) so that when combined with the billing determinants resulting from Table 5, the revenue collected equals the commodity revenue requirement. The fixed customer charge is the same as the recommended fixed customer charge for the E-1 class. The distribution costs for FY2026 are estimated at $14.1 million (11% increase from FY2025 distribution costs). After an 11% increase in the customer charge, the remaining distribution costs are $12.4 million. This translates to $0.09351/kWh. This distribution rate is the same between E-1 and E-1-TOU.7 The Public Benefits Charge (PBC) is also the same across time periods and across the Tiered E-1 rate compared to the E-1-TOU rate. TABLE 6: RECOMMENDED RESIDENTIAL TOU RATE FY2026 (PRICES PER KWH UNLESS OTHERWISE STATED) Commodity Distribution PBC Total E-1 Customer Charge, $/month $5.15 Tier 1 (up to 450 kWh)$0.10373 $0.09593 $0.00604 $0.20569 Tier 2 (> 450 kWh)$0.13372 $0.08968 $0.00604 $0.22944 E-1-TOU Customer Charge, $/month $5.15 Summer (June 1 to Sept 30) Peak: 4 pm to 9 pm $0.23354 $0.09351 $0.00604 $0.33309 Off Peak: 9 pm to 9 am and 3 pm to 4 pm $0.08249 $0.09351 $0.00604 $0.18204 Super Off Peak: 9 am to 3 pm $0.06690 $0.09351 $0.00604 $0.16645 Winter (Oct 1 to May 31) Peak: 4 pm to 9 pm $0.16705 $0.09351 $0.00604 $0.26660 Off Peak: 9 pm to 9 am and 3 pm to 4 pm $0.11033 $0.09351 $0.00604 $0.20988 Super Off Peak: 9 am to 3 pm $0.07835 $0.09351 $0.00604 $0.17790 7 The average distribution rate of $0.09351/kWh is required to recover the $12.4 million in residential class distribution system costs. The Standard E-1 Rate is based on a tiered rate design which results in the same collection of $12.4 million in revenues. Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 22 Packet Pg. 26 of 33 MEMORANDUM Electric TOU Rate Design E-1 12 The FY2026 average annual volumetric rate for both for E-1 and E-1 TOU is $0.21486/kWh. If all residential customers select the E-1 TOU rate plan, and did not modify behavior, the revenue collected would total $29.4 million. BILL IMPACTS The bill impacts from switching from E-1 to E-1-TOU will depend on the monthly electric use. Higher usage in any month will make the TOU rate more attractive to customers. Average monthly use is estimated at 450 kWh, the Tier 1 baseline. Table 7 compares residential monthly bills under two rate plans at the same average monthly use. In every month, the E-1 rate results in a lower bill. The annual difference is $37.96. This suggests that customers near the average use, and with a usage profile consistent with the feeder data, should prefer to stay on the E-1 rate unless they plan to change their usage patterns. TABLE 7: BILL IMPACTS: AVERAGE USE Month Average Use kWh Bill: E-1-TOU Bill: E-1 Difference (E-1 TOU bill – E-1 bill) 1 408 $92.05 $89.07 $2.98 2 440 $98.38 $95.66 $2.72 3 385 $86.90 $84.34 $2.56 4 388 $87.81 $84.96 $2.85 5 436 $98.16 $94.83 $3.33 6 438 $98.59 $95.24 $3.35 7 619 $138.83 $136.49 $2.34 8 523 $119.46 $114.46 $5.00 9 523 $117.50 $114.23 $3.27 10 418 $94.52 $91.13 $3.39 11 407 $91.80 $88.87 $2.93 12 417 $93.96 $90.72 $3.24 Total $1,217.96 $1,180.00 $37.96 Table 8 shows the same analysis for the case where 200 kWh per month is added to the 450 kWh/month usage. It is assumed that this use is due to electrification (such as electric vehicle charging). We assume a 50/50 split between off-peak and super off-peak period usage for the additional kWh. Table 8 demonstrates that for EV charging timed to avoid the peak cost period, the E-1-TOU rate is beneficial, saving customers approximately $55 per year. Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 23 Packet Pg. 27 of 33 MEMORANDUM Electric TOU Rate Design E-1 13 TABLE 8: BILL IMPACTS: AVERAGE USE PLUS 200 KWH EV CHARGING Month Average Use kWh Bill: E-1-TOU Bill: E-1 Difference 1 653 $130.83 $133.96 -$3.14 2 689 $137.16 $141.31 -$4.14 3 627 $125.68 $128.69 -$3.01 4 631 $126.59 $129.37 -$2.78 5 684 $136.94 $140.39 -$3.45 6 687 $133.44 $140.85 -$7.41 7 888 $173.68 $182.38 -$8.69 8 781 $154.31 $160.35 -$6.04 9 781 $152.35 $160.12 -$7.77 10 664 $133.30 $136.26 -$2.96 11 652 $130.58 $133.73 -$3.15 12 663 $132.74 $135.80 -$3.06 Total $1,667.59 $1,723.20 -$55.61 Finally, Table 9 shows a range of potential bill impacts for low, average, and high levels of monthly kWh use. Even with no changes in behavior to avoid peak cost periods, residential customers with higher use could potentially reduce their bills by switching to the TOU rate option. The analysis assumes that customer usage profiles are consistent with the feeder data. Refer back to Table 5 for the share of annual energy consumption in each seasonal TOU period. This profile is used to calculate monthly bills at different levels of consumption ranging from 200 kWh/month to 1,600 kWh/month. TABLE 9: BILL IMPACTS: LOW, AVERAGE, AND HIGH USAGE LEVELS Bill: E-1 TOU Bill: E-1 Difference 200 kWh $47.96 $46.29 $1.68 450 kWh (Tier 1 Baseline)$101.48 $97.71 $3.77 600 kWh $133.59 $132.13 $1.46 800 kWh $176.41 $178.02 -$1.61 1,600 kWh $347.66 $361.57 -$13.91 Item 1 Attachment C - COSA Study's E-1 TOU Supplement Item 1: Staff Report Pg. 24 Packet Pg. 28 of 33 7 7 8 6 Finance Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: Utilities Meeting Date: September 2, 2025 Report #:2507-4993 TITLE Recommend City Council Direct Staff to use Proposition 26 as the Design Principle for the Gas Cost of Service Analysis and Work with the Utilities Advisory Commission on Review of a Recommended Gas Rate Schedule Effective by January 2026 RECOMMENDATION Staff, with support from the Utilities Advisory Commission (UAC) recommend that the Finance Committee recommend the Council direct staff to follow the reasonable-cost analysis required by Proposition 26, in lieu of adopting additional design principles, and that Council work with the UAC on a recommendation to the Council on revised gas rates effective January 2026. EXECUTIVE SUMMARY Article XIII C of California Constitution (often referred to as Proposition 26) requires voter approval for municipal electric and gas rates that exceed the reasonable costs to the utility of providing service. The City Council can adopt cost-based utility rates without voter approval. Public agencies rely on ratemaking consultants to determine the costs of providing service and to design rates that accurately recover those costs; this is referred to as a “cost of service analysis”, or COSA. As outlined during the spring 2025 discussion, one step of a routine cost of service analysis includes a kick-off process affirming any guiding principles for the study, while always ensuring adherence to California Proposition 26 regulations. This action forwards the UAC’s advice recommending that Council direct staff to rely on Proposition 26 as the guiding principle for the 2026 Gas COSA with the intention to complete the necessary processes to implement new gas rates in accordance with the new 2026 gas COSA on or around January 1, 2026. BACKGROUND COSAs took on greater significance for California publicly-owned utilities following the passage of Proposition 26 in 2010. Proposition 26 added provisions to the California Constitution defining every local government fee or charge as a tax requiring voter approval, unless one of seven Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 1 Packet Pg. 29 of 33 7 7 8 6 exceptions applies.1 A rate set at a level “which does not exceed the reasonable costs to the local government of providing the service”2 is an exception to the voter approval requirement, and can be approved by Council. The City bears the burden to prove that a rate is not a tax, the amount is no more than necessary to cover the reasonable costs of providing service, and the manner in which those costs are allocated to ratepayers bears a fair or reasonable relationship to the ratepayer’s burdens on, or benefits received from, the governmental activity.3 COSAs completed with the assistance of ratemaking consultants are designed to ensure that the City meets its burden to set rates accurately. Staff drafted a 2025 COSA and received guidance from the Finance Committee on May 7, 2025 through a unanimous vote (3-0) to return to the UAC to further review the 2025 Gas COSA assumptions and principles. Additionally, Council further directed staff through its vote on June 16, 2025 (5-1-1, Lythcott-Haims no, Stone absent) to return to the UAC to consider the issue of a one-time climate credit along with the revised Gas COSA. After discussing the proposed Design Principles and considering Council’s direction to the UAC to reconsider the 2025 Gas COSA, the UAC voted 6-1 in July to recommend: 1) relying on Proposition 26 as the design principle for the Gas COSA and 2) forming a UAC subcommittee to work with staff and the ratemaking consultant to develop a new 2026 Gas COSA and provide regular report-outs to the UAC, with recommendations to Council made by the full UAC. The UAC also expressed an interest in addressing only the gas rate-making design principles at this time. ANALYSIS Proposition 26 as the Gas COSA design principle On July 9, 2025, staff proposed to the UAC4 that the UAC recommend that Council accept design principles that would apply to both the City’s gas and electric rates5. Those principles were: Design Principle 1: Evaluate rates to ensure they are cost-based Design Principle 2: Evaluate rate schedules for continuation or redefinition Design Principle 3: Determine the proper allocation of fixed and variable costs and how those can be implemented in various rate designs 1 CA. Const. Article XIII C(1)(e). 2 CA. Const. Article XIII C(1)(e)(2). 3 CA. Const. Article XIII C(1)(e). 4 Utilities Advisory Commission Staff Report 2505-4722, July 9, 2025 meeting, Item 3, https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=17717 5 A different constitutional provision, commonly referred to as Proposition 218, applies to the City’s water, wastewater and refuse rates, which are deemed “property-related fees”. While property-related fees must also be cost-based to avoid the voter approval requirement, the substantive and procedural rules for these fees differ from those applicable to electric and gas rates and are outside the scope of these rate design principles. Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 2 Packet Pg. 30 of 33 7 7 8 6 Design Principle 4: Review non-rate revenue sources that may be available for rate discounts or rebates Further details on these Design Principles are available in the UAC staff report 2505-4722.11 As an additional reference, the City Council approved prior gas COSA guidelines on November 14, 2016 (Staff Report 741612). During its July meeting, the UAC considered design principles which included some policy preferences to guide staff and the City’s ratemaking consultants on future gas and electric COSAs in alignment with California’s Constitutional requirements. The Commission considered whether revising them could provide clearer guidance for staff and the ratemaking consultant in developing the new 2026 Gas COSA. During the discussion, staff emphasized that the primary and overriding guiding principle is Proposition 26, which requires that rates be based on cost and does not address other policy considerations. Courts look to constitutional requirements when a public agency’s rates are challenged and have held that rates which incentivize policy choices must remain cost-based. Staff also noted that most cities rely on Proposition 26 alone, rather than creating their own set of design principles. The UAC voted 6-1 to recommend: 1) relying on Proposition 26 as the only design principle for the Gas COSA and 2) forming a UAC subcommittee to work with staff and the ratemaking consultant to develop the 2026 Gas COSA and provide regular report-outs to the full UAC to ultimately support a recommendation to the City Council. Staff with UAC support recommends the Finance Committee recommend that Council direct staff to apply Proposition 26 as the sole design principle for the 2026 Gas COSA. Alternatively, the Finance Committee could recommend that Council approve: The Design Principles proposed by staff on July 9, 2025, for both the Gas and Electric Utilities, The Design Principles proposed by staff on July 9, 2025, for the Gas Utility only, The 2016 Gas COSA Design Principles adopted by Council, or Modifications to any of the above. Tentative Timeline & UAC Review When Council directed the UAC to review the 2025 Gas COSA, some Councilmembers expressed an intent to complete the new COSA and implement new gas rates by early 2026. In order to minimize the impact on the project completion date and allow for thorough development and legal review of the proposed gas rates, staff’s estimate the fastest process possible under ideal conditions would reflect the following; actual timing may shift depending on requested analysis: September/October: UAC subcommittee to review (see below for details) and provide report outs to the full UAC verbally 11 Utilities Advisory Commission Staff Report 2505-4722, July 9, 2025 meeting, Item 3, https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=17717 12 City Council Staff Report 7416, November 14, 2016: https://www.cityofpaloalto.org/files/assets/public/v/1/agendas-minutes- reports/reports/city-manager-reports-cmrs/year-archive/2016/final-staff-report-id-7416_gas-cost-of-service-and-rate-design-guidelines.pdf Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 3 Packet Pg. 31 of 33 7 7 8 6 November (week 1): UAC review and discuss proposed 2026 Gas COSA study results for recommendation to Finance Committee and City Council November (week 3): Finance Committee review and discuss proposed 2026 Gas COSA study results and rate changes for recommendation to City Council December: City Council review and adoption of final 2026 Gas COSA study results and rate changes including Public Hearing Gas rates effective on or around January 1, 2026 depending on the complexity and timeline necessary to implement rate changes. The use of a UAC subcommittee15 permits a subset comprised of less than a quorum of the UAC to engage in detailed and candid discussion with staff and the City’s ratemaking experts, followed by verbal reports to the full UAC to facilitate discussion and recommendation to Council on the proposed 2026 Gas COSA. During UAC Subcommittee Meetings, the subcommittee reviews draft materials and provides input and feedback to staff and the ratemaking consultant on several key topics. These include the design of fixed and variable customer charges, as well as an analysis of whether to subdivide the current G-2 customer class. This analysis will explore the potential creation of a distinct customer class comprised of multi-family master-metered customers, or other appropriate cost-based reclassifications. FISCAL/RESOURCE IMPACT The work associated with this project will be absorbed using existing staff and contract budgets. Staff may need to push back other rate-related work to later in the fiscal year. If additional subcommittee meetings or other meetings are required, or substantive additional models and analysis is requested during the final stages of drafting the Gas COSA report, the schedule and cost will be impacted. This will mean the effective date of new rates will be later in 2026 and there will be additional costs to the City of working with the expert consultants. 15 A temporary advisory committee composed solely of less than a quorum of the legislative body that serves a limited or single purpose, that is not perpetual, and that will be dissolved once its specific task is completed is not subject to the Brown Act. (Cal. Gov. Code sec. 54952(b).) Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 4 Packet Pg. 32 of 33 7 7 8 6 STAKEHOLDER ENGAGEMENT The UAC and staff received numerous communications expressing a variety of concerns about the gas utility. Those letters and all of the public letters to the UAC for the July 9, 2025 meeting are available for viewing.17 Public review and feedback as part of this next process will be available and advertised through the public review at the UAC, Finance Committee, and City Council. 18192021ENVIRONMENTAL REVIEW A recommendation that Council direct staff to follow the reasonable-cost analysis required by Proposition 26, in lieu of adopting additional design principles, and acceptance of the tentative gas rate adoption schedule shown in Table 1 does not meet the 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, thus no environmental review is required. APPROVED BY: Alan Kurotori, Director of Utilities 17 Link to public letters to the UAC from the July 9, 2025 agenda: http://www.paloalto.gov/files/assets/public/v/2/agendas-minutes- reports/agendas-minutes/utilities-advisory-commission/archived-agenda-and-minutes/agendas-and-minutes-2025/07-july/public-letters-to- uac-7.09.25-v2.pdf Item 2 Item 2 Staff Report Item 2: Staff Report Pg. 5 Packet Pg. 33 of 33