HomeMy WebLinkAboutStaff Report 7416
City of Palo Alto (ID # 7416)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 11/14/2016
City of Palo Alto Page 1
Summary Title: Gas Cost of Service and Rate Design Guidelines
Title: Utilities Advisory Commission Recommendation That the City Council
Approve Design Guidelines for the 2017 Gas Cost of Service Analysis
From: City Manager
Lead Department: Utilities
Recommendation
Staff and the Utilities Advisory Commission (UAC) request that the Council approve the Design
Guidelines for the 2017 Gas Cost of Service Analysis (Attachment A).
Executive Summary
Gas rates were last adjusted when an 8% rate increase went into effect on July 1, 2016. Staff
intends to complete a gas rate cost of service analysis (COSA) in FY 2017 in advance of a rate
adjustment on July 1, 2017. The primary goal of the COSA will be to review the allocation of
costs to customer classes and the gas rate design to ensure customers are charged according to
the cost to serve them. This report discusses the existing rate design, gives an overview of the
issues to be addressed in the COSA analysis, and presents the proposed COSA design guidelines
to guide staff and the consultant in completing the Gas COSA.
At its October 5, 2016 meeting, the UAC voted unanimously to recommend that Council
approve the proposed Gas COSA design guidelines.
Background
Traditionally, utilities use a COSA to allocate costs among customer classes and to design rates.
COSAs gained a more important role for California publicly-owned utilities after the passage of
Proposition 26 (2010). Proposition 26 added provisions to the State Constitution essentially
defining every local government fee or charge as a tax, requiring voter approval, unless one of
seven exceptions applies. Municipal gas rates that do not exceed the reasonable costs to the
local government of providing gas service are one exception from the constitutional definition
of a tax, and its voter approval requirements.
The FY 2017 Gas Utility Financial Plan (Staff Report 6858) projected the need for a 9% rate
increase on July 1, 2017. The current rates, which were last changed on July 1, 2016, are based
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on a COSA performed in 2012. Current rates include a fixed monthly service charge for each
customer group and volumetric (per therm) rates for all customers. The volumetric component
of residential gas rates (Gas Rate Schedule G-1) consists of two tiers of inclining block rates
(rates that increase with consumption).
Discussion
The following sections provide a review of the current rate structure, a discussion of rate design
issues affecting the utility, and the proposed set of rate design guidelines to guide the COSA.
Summary of Existing Rate Structure
On July 1, 2012 CPAU restructured its gas rates so that the commodity component varied
monthly to match changes in gas market prices. In addition, monthly service charges were
increased to recover the cost of providing gas service to customers. In January 2015, the
Council adopted a new rate component to collect the costs of purchasing allowances to comply
with the State’s cap-and-trade program. This component will change depending on the cost of
allowances and gas demand. Table 1, below, summarizes the current rates for all customer
classes.
Table 1: Current Gas Rates
Rate Component Units
G-1
(Residential)
G-2 (Small
Commercial)
G-3 (Large
Commercial)
G-10
(CNG)
Last
Changed
Service Charge $/month 10.32 78.23 377.43 52.93 7/1/2016
Distribution (Tier
1)
$/therm 0.5021 0.6855 0.6775 0.0963 7/1/2016
Distribution (Tier
2)
$/therm 1.0407 N/A N/A N/A 7/1/2016
Commodity $/therm 0.3433
(Sept. 2016)
0.3433
(Sept. 2016)
0.3433
(Sept. 2016)
0.3433
(Sept. 2016)
(varies
monthly)1
Cap-and-Trade
Compliance $/therm 0.016
(Sept. 2016)
0.016
(Sept. 2016)
0.016
(Sept. 2016)
0.016
(Sept. 2016)
(varies with
actual costs)
Total Volumetric
Rate (Sept. 2016) $/therm Tier 1: 0.8614
Tier 2: 1.4000 1.0448 1.0368 0.4556
Tier 1 amount (for G-1, residential customers):
Winter Therms/day 2 N/A N/A N/A 7/1/2012
Summer Therms/day 0.667 N/A N/A N/A 7/1/2012
On October 17, 2016, Council will consider amending gas rates adding a separate and revenue-
neutral transportation charge that will pass through the costs PG&E charges CPAU for gas
transportation2. If approved, the initial Transportation Charge will be $0.1088/therm with the
Distribution Charges being reduced a like amount.
1 For historic commodity rates, see: http://www.cityofpaloalto.org/civicax/filebank/documents/30399
2 The UAC supported this proposal at its August 31, 2016 meeting. See:
https://www.cityofpaloalto.org/civicax/filebank/documents/53652
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Rate Design Issues
The Gas Utility’s rates are evaluated and implemented based on the utility’s cost to serve its
customers. The Gas Utility’s current rates are based on the methodology from the April 2012
Gas Utility Cost of Service Study completed by Utility Financial Solutions3. Staff has identified
rate design issues to address including:
The need to update the City’s Gas COSA. The current COSA was completed over 4 years
ago and best practice is to prepare a new COSA about every five years, or when there
are significant changes in the utility’s costs, customer base, or other factors.
Carbon reduction goals. The City’s Carbon Neutral electric supply portfolio has led some
customers to consider electrifying the space and water heating systems in their homes,
or replacing gas-using appliances with electric ones. The gas rate structure has an
impact on these decisions.
Rate Design Guidelines
In the past, the UAC and Council have expressed concern about having limited ability to make
changes to proposed rate structures once a COSA is completed. Therefore, staff has committed
to having policy discussions with the UAC and Council prior to embarking on a COSA. Staff is
proposing a set of rate design guidelines (Attachment A) to guide the development of the next
Gas COSA. The proposed guidelines are described below:
Guideline 1. Rates must be based on the cost of service.
Guideline 2. Maximize the volumetric rate and minimize the fixed charges, if feasible.
Guideline 3. All existing rates should be reviewed for applicability in the COSA.
Guideline 4. The COSA should consider the impact of rate designs on electrification.
Guideline 5. The effect of proposed rate design changes on low income customers should be
considered.
Guideline 1: Rates to be based on the cost of service
The goal of a COSA is to identify the costs associated with serving each customer class and the
rates required to recover those costs. Historically, gas utilities have been able to make some
adjustments to COSA-recommended rates to achieve environmental or social objectives. After
Proposition 26, such rates cannot be structured solely to achieve policy objectives unless they
are also cost-based, absent voter approval. The COSA has become an important tool for
demonstrating that utility rates are based on the cost of service. As a result, this guideline must
be the overriding one for the COSA.
Guideline 2: Maximize the volumetric rate and minimize the fixed charges, if feasible
Staff anticipates retaining the existing rate structure—consisting of a volumetric component
and a fixed monthly charge. To encourage efficient use of resources and to maximize the
incentive to convert gas-using appliances to electric-using appliances, the volumetric
3 Staff Report 2812: http://www.cityofpaloalto.org/civicax/filebank/documents/41839
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component should be maximized to the extent feasible while still complying with the cost of
service requirement of Proposition 26 (See Guideline 1).
Guideline 3: Evaluation of all existing rate schedules for continuation, consolidation, or
redefinition
Staff recommends evaluating all existing rate schedules to determine whether they should be
continued or redefined. The main focus of this review will be the customer class definitions for
non-residential customers. The consultant will evaluate whether the boundaries between small
commercial and master-metered residential customers (G-2) and large commercial customers
(G-3) should be redefined to more accurately reflect the customer profiles of each group.
Guideline 4: Impact on electrification
To achieve the City’s carbon reduction goals, electrification is required. Some customers are
considering greater use of electricity in their homes by replacing natural gas fueled water and
space heaters with efficient heat pump water and space heaters. These customers are likely to
have significantly different gas load profiles from the average residential customer. Staff
recommends evaluating whether the cost to serve these customers differs from other
residential customers. If so, adjusting the pricing structure applicable to these customers may
be appropriate.
Guideline 5: Impact on low income customers
Changes in rate design can have different impacts on customers who use different amounts of
energy. Low-income customers have lower gas usage than other customers, on average. Staff
intends to evaluate the impact of any recommended rate design changes on low-income
consumers and may recommend mitigation of those impacts if necessary.
Commission Review and Recommendation
The UAC reviewed the proposed Gas COSA design guidelines at its October 5, 2016 meeting.
Commissioner Forssell asked a clarifying question as to whether the COSA would influence the
overall proposed rate change for July. Staff clarified that he overall rate change would not be
affected, but the COSA may indicate certain customer groups should receive rate changes larger
or smaller than the system average change. In addition, Commissioner Johnston asked if
customer rate groups would be reviewed, which staff affirmed would be included as part of
design guideline 3.
The UAC voted unanimously to recommend that Council approved the proposed Gas COSA
design guidelines. The draft minutes for the UAC’s October 5, 2016 meeting are provided as
Attachment B.
Next Steps
The Gas COSA is expected to be completed by the spring of 2017 so that updated rates can be
adopted as part of the FY 2018 budget process to be effective on July 1, 2017.
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Resource Impact
The work associated with this project will be absorbed using existing staff and contract budgets.
The new rates adopted as a result will be designed to generate adequate sales revenue to fund
the gas utility’s operations in FY 2017. For FY 2017, the utility is projected to need roughly 9%
more sales revenue ($3.8 million) than is generated by current rates. Expenses exceed revenues
currently, and reserves are being used to moderate customer impacts as rates are brought to
parity. Costs in general are projected to increase due to inflation, and continued work on cross-
bore inspections requires additional short-term funding. For more detail on these projections
see the proposed FY 2017 Gas Utility Financial Plan (Staff Report 6858).
Policy Implications
The process of adopting these design guidelines provides the UAC, Finance Committee and
Council an opportunity to provide policy guidance to staff before work begins on the COSA.
Once a COSA is complete, it can be difficult to modify the resulting rate design without
reviewing and possibly amending the analysis.
Environmental Review
Adoption of the Design Guidelines for the 2017 Gas Cost of Service Analysis 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.
Attachments:
Attachment A: Gas COSA Rate Design Guidelines (PDF)
Attachment B: Excerpted Draft Minutes from the October 5, 2016 UAC meeting (PDF)
Attachment A
Design Guidelines for the Gas Utility Cost of Service Analysis
1. Rates must be based on the cost to serve customers. This is the overriding principle for the
cost of service analysis (COSA); all other rate design considerations are subsidiary to this
basic premise.
2. For this cost of service study, and to the extent feasible, the revenue from volumetric
energy charges should be maximized and the revenue from the fixed charge should be
minimized to provide the maximum incentive for efficiency and electrification, the
conversion of gas-using appliances to electricity-using appliances.
3. The COSA should involve a review of all existing rate schedules for applicability in the COSA.
4. The COSA should evaluate the impact of rate designs on the economics of electrification.
5. The impact of any proposed changes on low income customers should be evaluated
EXCERPTED DRAFT MINUTES OF THE OCTOBER 5, 2016 UTILITIES ADVISORY COMMISSION
ITEM 2. ACTION: Staff Recommendation that the Utilities Advisory Commission Recommend
that the City Council Approve Design Guidelines for the 2017 Gas Cost of Service Analysis
Vice Chair Danaher asked staff to provide some background on why the City completes cost of
service analyses (COSAs) prior to developing its rate proposals. Acting Rates Manager Eric
Keniston explained that, for gas and electric rates, the City is subject to the requirements of
Proposition 26, which requires that all rates be based on the cost of service. A cost of service
analysis allocates expenses across ratepayer groups.
Vice Chair Danaher noted that the City’s electric supplies are carbon neutral and that the
Council will consider a proposal to convert the gas supplies to be carbon neutral. He said that
the Council encourages, and the UAC supports, moving towards electrification.
Commissioner Forssell asked if the 9% projected rate increase in July 2017 will change as a
result of the COSA. Keniston responded that the system wide rate increase will be determined
by the City, but that the COSA may reveal the need to make adjustments between costs
allocated to different customer groups.
Commissioner Johnston asked if there would be different customer groups identified. Keniston
said that this would be looked at and is addressed by proposed Design Guideline 3 (The COSA
should involve a review of all existing rate schedules for applicability in the COSA).
Senior Deputy Assistant City Attorney Jessica Mullan said that the first guideline is the overall
guiding principle and that any policies that may be considered must be compliant with the
overarching cost of service guideline and must be in compliance with Proposition 26.
ACTION:
Commissioner Trumbull made a motion that the UAC recommend that Council approve the
proposed Design Guidelines for the 2017 Gas Cost of Service Analysis. Commissioner Forssell
seconded the motion. The motion carried unanimously (4-0, with Vice Chair Danaher and
Commissioners Forssell, Johnston, and Trumbull voting yes and Chair Cook and Commissioners
Ballantine and Schwartz absent).
ATTACHMENT B