HomeMy WebLinkAboutStaff Report 252-08City of Palo Alto
City Manager’s Report
9
TO:HONORABLE CITY COUNCIL
FROM:CITY 5IANAGER DEPARTMENT: UTILITIES
DATE:JUNE 2, 2008 CMR: 252:08
SUBJECT:ADOPTION OF A BUDGET AMENDMENT ORDINANCE INCREASING:
(1) THE BUDGET FOR ELECTRIC SUPPLY COST BY $6,350,000, (2)
REVENUE FOR ELECTRIC SURPLUS ENERGY BY $800,000, (3)
BUDGET FOR GAS SUPPLY COSTS BY $1,500,000, (4) REVENUE FOR
GAS SUPPLY SALES BY $900,000, (5) REVENUE FOR GAS
DISTRIBUTION SALES BY $1,000,000, (6) BUDGET FOR WATER
SUPPLY COSTS BY $700,000, AND (7) REVENUES FOR WATER SALES
BY $2,000,000
RECOMMENDATION
Staff recolrmaends that Council adopt the attached Budget Amendment Ordinance (BAO)
(Attachment 1) which addresses the need for:
a) additional funding for Electric Supply Costs in the amount of $6,350,000;
b) additional revenues for Electric Surplus Energy Revenues in the amount of $800,000;
c) additional funding for the Gas Supply Costs in the amount of $1,500,000;
d) additiona! revenues for Gas Retail Supply Sales Revenues in the anaount of $900,000;
e) additional revenues for Gas Retail Distribution Sales Revenues in the amount of
$1,000,000;
f) additional funding for the Utilities Water Supply Costs in the amount of $700,000; and,
g) additional revenues for Water Retail Sales Revenues in the amount of $2,000,000.
BACKGROUND
Palo Alto’s Municipal Code Title 2 Administrative Code, Chapter 2.28 Fiscal Procedures,
Section 2.28.050 categories of expenditure control lists "utility commodity and commodity
transmission services purchased for resale" as items between which funds can’t be moved.
Therefore, if additional funds are needed for such a catego~’, they must be appropriated by
Council rather than administratively moved from another category for which savings may be
available.
CMR: 252:08 Page 1 of 5
On June 11, 2007, Council approved the Utilities Electric, Gas, and Water Fund Fiscal Year
(FY) 2007-08 budgets [CMR:272:07]. Since then, supply costs have increased for each of those
funds.
During the winter and spring of 2007, drought conditions resulted in lower than projected
hydroelectric generation for the year. As a consequence, the City bought replacement electric
energy from the market to meet City loads. Council was informed of the increased electric
supply costs due to the drought on January 22, 2008 [CMR: 122:08], when staff and the UAC
reconm~ended a drawdown of reserves to cover the increased costs in lieu of a FY 2007-08 mid-
year rate increase. To cover these higher costs, Council approved a mid-year Electric Fund
budget increase of $8 million for FY 2007-08 on February 19, 2008 [CMR:151:08].
Gas supply costs also increased during the winter and spring of 2007 due to colder than normal
weather conditions resulting in higher than projected gas use in the City. Additionally, market
prices for natural gas increased sig-nificantly above the prices estimated when the budget was
prepared.
Council approved a mid-year budget increase of $304,000 for the Water Fund for FY 2007-08 on
February t9, 2008 [CMR:151:08] to cover higher wholesale water supply costs than were
estimated when the budget was prepared.
DISCUSSION
Electric Fund
Based on actual costs through the third quarter of FY 2007-08 and projections for the remainder
of this fiscal year, the Electric Supply Commodi~, Purchases budget requires additional funding
of $2.6 million. These costs increased due to wholesale electric market prices that were higher
than budget estimates and hydroelectric generation that was lower than budget projections.
These projections are based on actual bills received through February 2008, estimated bills for
March 2008 and the forecast of costs for April, May and June 2008.
There is also a high degree of uncertainty about the actual electric commodity costs for April,
May and June 2008. If market prices are higher than are forecast and hydroelectric generation is
lower than is forecast for these months, supply costs could be even higher. In such a "worst
case" scenario for the remainder of this fiscal year, electric commodity costs could increase by
an additional $3.75 million. Therefore, staff requests that the budget for the Electric Supply
Commodity Pro’chases Budget be increased by an additional appropriation of $6.35 million in
order to cover both the expected $2.6 million cost increase and an additional appropriation of
$3.75 million to cover costs in case the high cost/low hydro scenario materializes.
The FY 2007-08 budgeted Electric Surplus Energy Revenue is $2.502 million. However, this is
expected to increase by $800,000. Therefore, staff requests that the budget for these revenues
increase by $800,000. In the high market prices and lower hydroelectric generation scenario,
these revenues may not increase from the budget estimate.
CMR: 252:08 Page 2 of 5
The funds to cover the requested cost increases will come from the Electric Supply Rate
Stabilization Reselwe (E-SRSR). Any increased Electric Surplus Energy Revenue will go into
the E-SRSR.
Gas Fund
Gas commodity- costs are expected to be higher than was budgeted by about $1.1 million based
on actual cost projections through the third quarter of FY 2007-08 and projections for the
remainder of this fiscal year. The increase is due to higher than anticipated market prices as well
as higher than anticipated natural gas demand in the City due to colder than normal weather. In
January 2008, the expected gas market price for fourth quarter (Apri! through June 2008) was
about $0.80 per therm. Currently, the expected price for gas is $1.04 per therm, a 30%
increase. Market prices were driven by late-season cold weather in the Midwest, low amounts of
gas in storage nation-wide, low amounts of liquefied natural gas (LNG) coming to the country,
and record high crude oil prices worldwide.
If prices remain higher than expected for the remainder of the year, costs could increase by an
additiona! $400,000. Therefore, staff requests additional appropriations of $1.5 million for the
Gas Supply Commodity Purchases Budget, which includes the $1.1 million of expected cost
increases plus $400,000 of potential cost increases.
Since part of the reason for increased supply costs is that natural gas consumption increased due
to cold weather, the retail sales revenue is expected to increase as well. Based on actual sales to
date, total sales revenue is expected to increase by about $! .8 million above the budgeted amount
with supply revenues increasing by about $800,000 and distribution revenues increasing by $1
million. If gas prices are higher than expected for the remainder of the fiscal year, retail supply
sales revenue would increase by an additional $100,000 since the largest customers have a cost
pass-through type retail rate for supply. Therefore, staff requests that the budget for Gas Supply
Sales Revenue be increased by $900,000 and the budget for Gas Distribution Sales Revenue be
increased by $1,000,000.
The Gas Supply Rate Stabilization Reserve (G-SRSR) is the source for the requested additional
appropriation. Additional revenues will go into both the G-SRSR (for additional supply
revenues) and the Gas Distribution Rate Stabilization Reserve (G-DRSR) (for additional
distribution revenues).
Water Fund
Water consumption for the fiscal year to date is above the adjusted FY 2007-08 budget estimates.
This may be attributed to drier than normal precipitation levels during the winter and early spring
months prompting water use to increase for irrigation. Increased water consumption requires
additional water supply purchases that are expected to cost an additional $165,000 above the
budget level. If consumption levels for May and June are higher than expected, then the costs
could increase by an additional $535,000. Therefore, staff requests additional funding of
$700,000 for the Water Supply Commodity- Purchases Budget, which includes the $165,000 of
expected cost increases plus $535,000 of potential cost increases.
CMR: 252:08 Page 3 of 5
The increased water costs are due to increased water consumption, which also increases the retail
sales revenue for the Water Fund. Based on actual sales to date, total retail sales revenue is
expected to increase by about $500,000 above the budgeted amount. In addition, if consumption
is high for May and June, water sales revenue could increase an additional $1.5 million.
Therefore, staff requests that the budget for Water Sales Revenue be increased by $2.0 million,
which includes the $500,000 of expected increased retail sales revenue plus $1.5 million of
potential increased retail sales revenue.
The requested increased appropriation will come from the Water Rate Stabilization Reselwe (W-
RSR). Increased revenue wil! go into the W-RSR.
RESOURCE IMPACT
Electric Fund
The expected impact on the Electric Supply Rate Stabilization Reselwe (E-SRSR) is a reduction
of $1.8 million, or $2.6 million of expected commodity cost increases less $800,000 of expected
sm’plus energy revenue.
In a worst case scenario, the E-SRSR could be a reduced by $6.35 million, if co~mnodity costs
increase by $6.35 million and there is no additional surplus energy revenue.
The E-SRSR is expected to be within the minimum and maximum reserve guideline levels as of
the end of FY 2007-08.
Gas Fund
The expected impact on the Gas Supply Rate Stabilization Reserve (G-SRSR) is a reduction of
$100,000, or $1.1 mi!lion of expected commodity cost increases less $1,000,000 of expected gas
supply retail sales revenue. The expected impact on the Gas Distribution Rate Stabilization
Reselwe (G-DRSR) is an increase of $800,000.
If gas prices are higher than expected for the balance of the fiscal year, the G-SRSR could be
reduced by $400,000, if commodity costs increase by $1.5 million and retail supply sales
revenues increase by $1.1 million. The G-DRSR is not impacted by a change in commodity
costs so the impact on it would be the same as expected, or an increase of $800,000.
As of the end of FY 2007-08, the G-SRSR is expected to be below the minimum guideline level,
but above the risk assessment levels. The G-DRSR is expected to be within the minimum and
maximum guideline levels.
Water Fund
The expected impact on the Water Rate Stabilization Reserve (W-RSR) is an increase of
$335,000, or $165,000 of expected commodity cost increases less $500,000 of expected water
retail sales revenue.
If consumption is high for the balance of the fiscal year, the W-RSR could increase by $1.3
million due to commodity costs increasing by $700,000 and retail water sales revenue increasing
by $2 million.
CMR: 252:08 Page 4 of 5
The balance of the W-RSS at the end of FY 2007-08 will be within the minimum and maximum
reselwe guideline levels.
POLICY IMPLICATIONS
This request does not represent a change in policy.
ENVIRONMENTAL REVIEW
This is not a project under the California Environmental Quality Act.
ATTACHMENT
1. Budget Amendment Ordinance
PREPARED BY: .~gek Colmolly, Senior Resource Plamaer
L~Jane Ratchye. Assistant Director of Utilities. Resource Management
DEPARTMENT HEAD:
DEPARTMENT HEAD:
CITY MANAGER APPROVAL:
Director of Utilities
LALO PEREZ
Director of Administrative/Services Diyjsion
S rEVE EN---gLIE LL¥
Interim Deputy Ci~- M~agers
CMR: 252:08 Page 5 of 5
ATTACHMENT A
01KD !NANCE NO.
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO
AMENDING THE BUDGET FOR THE FISCAL YEAR 2007-08 TO
PROVIDE ADDITIONAL APPROPRIATIONS OF $6,350,000 FOR
ELECTRIC FUND SUPPLY COSTS, $1,500,000 FOR GAS FUND
SUPPLY COSTS, AND $700,000 FOR WATER FUND SUPPLY COSTS
The Counci! of the City of Palo Alto does ordain as fol!ows:
SECTION I. The Counci! of the City of Pa!o Alto finds
and determines as fol!ows:
A. Pursuant to the provisions of Section 12 of Article !iI of
the Charter of the City of Palo Alto, the Council on June ii, 2007
did adopt a budget for fiscal year 2007-08; and
B. The adopted budget for fiscal year 2007-08 included
$67,510,771 for electric supply commodity purchases, $26,139,362
for gas supply commodity purchases, and $7,698,000 for water
supply co.~kmodity ~purchases. The budget was amended by the City
Counci! on February 19, 2008, to include additional appropriations
of $4,500,000 for electric supply commodity purchases and $303,753
for water supply commodity purchases bringing tota! appropriations
to $72,010,771 for electric supply commodity purchases and
$8,001,753 for water supply co~moditv murchases; and
C. The adopted budget and related adjustments for fiscal year
2007-08 for the Electric Fund, Gas Fund, and Water Fund are based
on prevailing market prices and anticipated demand levels at the
time the budget was adopted and adjusted; and
D. Wholesale electric market prices have increased and
hydroelectric generation has been !ower than estimates since the
time the budget was adopted and adjusted. An estimated additional
$6,350,000 beyond the amount appropriated in the budget is
required for electric supply commodity purchases; and
E. Revenue from electric surplus energy, which is sold on a
daily basis, is expected to increase by $800,000 due to higher
than anticipated estimates. This increase in revenue is expected
to partially offset the increase of $6,350,000 in electric supply
commodity purchases resulting in a net reduction to the Electric
Supply Rate Stabilization Reserve of $5,550,000; and
F. Gas commodity costs have risen since the time the budget
was adopted due to higher than anticipated market prices and
higher than anticipated demand as well as several external
factors. An estimated additiona! $1,500,000 beyond the amount
appropriated in the budget is required for gas commodity
purchases; and
G. Higher than expected demand for natural gas is expected
to generate an additional $1,900,000 in tota! sales revenue, which
includes $900,000 in gas supply sales revenue and $!,000,000 in
gas distribution sales revenue. The $900,000 in gas supply sales
revenue is expected to partially offset the increase of $1,500,000
for gas supply commodity purchases resulting in a net reduction to
the Gas Su~!v Rate Stabilization Reserve of $600,000; and
H. Water supply costs have increased since the time the
budget was adopted and adjusted due to higher than anticipated
water consumption. An estimated additiona! $700,000 beyond the
amount appropriated in the budget is required for water supply
commodity purchases; and
I. Higher than expected demand for water is expected to
generate an additiona! $2,000,000 in water sales revenue. This
increase in revenue is expected to exceed the increase of $700,000
in water supply commodity purchases resulting in a net addition to
the Water Fund Rate Stabilization Reserve of $1,300,000; and
J. City Council authorization is needed to amend the 2007-08
budget to make additiona! appropriations of $6,350,000 for
electric supply commodity purchases, $1,500,000 for gas supply
commodity purchases, and $700,000 for water sum~!y commodity
purchases as hereinafter set forth.
SECTION 2. The sum of Six Million Three Hundred Fifty Thousand
Dollars ($6,350,000) is hereby appropriated to commodity purchases
expense in the Supply Resource Management Functiona! Area in the
Electric Fund.
SECTION 3. Electric Fund revenues are hereby increased by
Eight Hundred Thousand Dollars ($800,000) to reflect higher than
previously anticipated estimates for electric surplus energy
revenue.
SECTION 4. The Supply Rate Stabilization Reserve in the
Electric Fund is hereby reduced by Five Million Five Hundred Fifty
Thousand Dollars ($5,550,000) to Thirty-Six Million Seventy-Six
Thousand Dollars ($36,076,000).
SECTION 5. The sum of One Million Five Hundred Thousand
Dollars ($1,500,000) is hereby appropriated to commodity purchases
expense in the Supply Resource Management Functional Area in the
Gas Fund.
SECTION 6. Gas supply sales revenues and gas distribution
sales revenues are hereby increased by Nine Hundred Thousand
Dollars ($900,000) and One Million Dollars ($I,000,000),
respectively, to reflect higher than expected demand for natural
gas.
SECTION 7. The Supply Rate Stabilization Reserve in the Gas
Fund is hereby reduced by Six Hundred Thousand Dollars ($600,000)
to Four Million Nine Hundred Ninety Thousand Dollars ($4,990,000).
SECTION 8. The Distribution Rate Stabilization Reserve in the
Gas Fund is hereby increased by One Million Dollars ($I,000,000)
to Three Million Six Hundred Fourteen Thousand Dollars
$3,614,000).
SECTION 9. The sum of Seven Hundred Thousand Dollars
$700,000) is hereby appropriated to commodity purchases expense
in the Supply Resource Management Functional Area in the Water
Fund.
SECTION i0. Water sales revenues are hereby increased by Two
Million Dollars ($2,000,000) to reflect higher than expected
demand for water.
SECTION !!. The Water Fund Rate Stabilization Reserve is
hereby increased by One Million Three Hundred Thousand Dollars
($1,300,000) to Ten Million Nine Hundred Ninety-Six Thousand
Dollars ($10,996,000).
SECTION 12. As specified in Section 2.28.080(a) of the Palo
Alto Municipa! Code, a two-thirds vote of the City Counci! is
required to adopt this ordinance.
SECTION 13. The Council of the City of Palo Alto hereby finds
that this is not a project under the California Environmental
Quality Act and, therefore, no environmental impact assessment is
necessary.
SECTION 14. As provided in Section 2.04.330 of the Palo Alto
Municipal Code, this ordinance shal! become effective upon
adoption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:
City Clerk
APPROVED AS TO FORM:
Senior Asst. City Attorney
APPROVED:
Mayor
City Manager
Director of Utilities
Department
Director of Administrative
Services