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HomeMy WebLinkAbout2001-05-24 City Council (2)City of Palo Alto City Manager’s Report TO:HONORABLE CITY COUNCIL ATTENTION: FINANCE COMMITTEE FROM:CITY MANAGER DEPARTMENT: ADMINISTRATIVE SERVICES DATE:MAY 24, 2001 CMR: 249:01 SUBJECT:APPROVAL OF UTILITY USERS TAX (UUT) REBATE AND PERMISSION TO ADJUST THE FORMULA THROUGH DECEMBER 31, 2001 BASED ON POTENTIAL FUTURE RATE INCREASES RECOMMENDATION Staff recommends that the Finance Committee recommend to the City Council: ’,Approval of a utility user tax refund to City of Palo Alto utility customers .Approval of adjustments to UUT refund formula through December 31,2001. Approval of an August 1,2001 implementation date for refund. Approval to limit the refund for high volume users to the first threshold of 5 percent. BACKGROUND Wholesale prices of natural gas and electricity have risen substantially during the past year, which has in turn increased rates paid by consumers. Since the natural gas industry is largely deregulated, the wholesale price of gas fluctuates with supply and demand. Energy analysts explain that the current surge in costs is being fueled by a nationwide supply deficit. The increase in natural gas prices has been most noticeable in California. Over the past year, the natural gas component of the Consumer Price Index (CPI) rose by 68 percent in western metropolitan areas, but increased by 133 percent in the San Francisco-Oakland-San Jose area. As a result of these factors, the price of natural gas to the City Of Palo Alto has risen by approximately 250 percent since May 2000. The increase in cost has had a dramatic impact on the fmancial condition of the Gas Utility. To cover part of the increased cost, Council approved gas rate increases in August 2000 (15 percent), January 2001(25 percent) and April 2001 (25 percent). These increases were passed directly through to rates paid by utility customers. The current volatile energy environment, combined with the effects of deregulation, portends that CMR:249:01 Page 1 of 3 future rate increases may be necessary. (67 percent)~ ’ Another gas rate increase is anticipated in June 2001 Statewide, the current energy situation has caused spiraling wholesale cost for electricity, substantial rate increases, and service interruptions (rolling blackouts). The electricity component of the CPI has risen less dramatically because of price regulations, but it is expected to rise more in coming months with newly approved retail rate increases approved by the California Public Utilities Commission. Although the City of Palo Alto has been somewhat insulated against the force of the current electric utility crisis through its contract with the Western Area Power.Association (which provides most of the City’s electricity), a 43 percent electric rate increase is proposed for July 2001. Even with this increase in electric rates, it is conceivable that Palo Alto utility customers could experience higher prices and service interruptions in the coming months. DISCUSSION As the cost of natural gas and electricity continue to increase, Palo Altoresidents are faced with paying significantly higher utility bills. During the April 17 Finance Committee meeting, Committee members expressedconcern regarding the financial impact rising utility costs may have on customers. In response to recent and forthcoming increases in gas and electric utility charges, the Finance Committee directed staff to explore options for refunding a portion of the utility, user tax (UUT) to customers as a way to relieve the financial burden associated with the current energy crisis. The utility user tax imposes a five-percent tax on users of electricity, gas, water, and telephone service in Palo Alto. In response to the Finance Committee’s direction, staff is recommending that a UUT refund be applied to a customer bill in the form of a utility bill credit. This approach would provide immediate rate relief to all gas and electric utility customers in Palo Alto and show the amount of the relief on their monthly statement. Staffwill make adjustments to the UUT refund formula should additional rate increases, be approved through December 31, 2001. Atler December 31, 2001, the utility users tax refund will be discontinued and ratepayers will resume paying the full tax. Staff believes that the current billing system can accommodate the refund. Testing and implementing the change will take time and therefore staff is requesting an August 1 implementation date. Staff proposes that Council approve the following: The UUT refund will begin August 2001. The refund will be applied to incremental charges resulting fi’om June and July 2001 rate increases. This period covers one gas rate increase of 67 percent and the proposed July 1 st electric rate increases of 43 percent. In the event Council approves additional electric and gas rate increases before December 31,2001, staffwill adjust the utility users tax refund to accommodate the effect of the higher rates. CMR:249:01 Page 2 of 3 o The refund will be limited for high volume users to the first 5 percent threshold (High volume users pay a reduced UUT of 3 percent and 2 percent atter reaching a threshold. This threshold is adjusted annually by the CPI). Based upon gas and electric rate increases, staff estimates a 37 percent utility tax refund on the average customer bill. On average, this means $2.26 in tax relief monthly to the average residential customer. RESOURCE IMPACT The impact from rebating UUT revenues based on the June 2001 gas rate increase and the proposed July 1 st electric rate increase is estimated at $2,200,000. In addition, as a result of an agreement to cap the utility equity transfers at 3 percent, utility customers are realizing additional savings of $600,000. Ratepayers will also realize a $1 million saving resulting from a cap on rents paid to the General Fund by the Utilities. While these caps represent relief to ratepayers, they represent forgone revenues to the general Fund that are normally used to pay for inflation expenses and additional or new city services such as Shuttle; Expanded Public Safety, and Human Services. The increased cost of gas and electric sales to City departments for FY 2001-02 is $457,000. The maintenance and operational cost for street lights and traffic signals has increased by $143,000 and $32,500 respectively. ENVIRONMENTAL REVIEW This is not a project under the California Environmental Quality Act. PREPARED BY: ~Deputy Director Senior Financial Analyst DEPARTMENT HEAD APPROVAL: CITY MANAGER APPROVAL: CARL YEATS, Director Administrati)Ce Services ~-’~ILY~kRRISON Assistant City Manager CMR:249:01 Page 3 of 3