HomeMy WebLinkAboutStaff Report 13546
City of Palo Alto (ID # 13546)
City Council Staff Report
Report Type: Consent Calendar Meeting Date: 11/1/2021
City of Palo Alto Page 1
Title: Staff and the Finance Committee Recommend the City Council Approve
Design Guidelines for the 2022 Electric Cost of Service and Rates Analysis
From: City Manager
Lead Department: Utilities
Executive Summary
Electric rates were last adjusted when an 8% rate increase went into effect on July 1, 2019.
Staff intends to complete an electric rate cost of service analysis (COSA) in advance of future
rates and necessary adjustments. The primary goal of any COSA is to review the allocation of
costs to customer classes, and the electric rate design, to ensure customers are charged
according to the cost to serve them. This COSA will include a review of the rate design issues
created by increasing building electrification, electric vehicle (EV) penetration, EV charging
needs and microgrids, and time of use (TOU) rate designs in preparation for the deployment of
advanced metering infrastructure (AMI). This report discusses the existing rate design, provides
an overview of the issues to be addressed in the COSA analysis and sets forth work plans for
addressing various types of rate design issues.
This was reviewed and unanimously approved by the Finance Committee in October 2021. The
Committee’s discussion showed general support for this plan and included additional discussion
regarding the nexus between this COSA study and the current initiatives and goals associated
with the City’s Sustainability/Climate Action Plan (S/CAP). Included in the Committee’s motion
is a recommendation that the City Council direct staff to study options for an interim
modification to tiers that would support electrification and return to UAC, Finance Committee
and City Council at a future date - this is change is reflected in this report.
Background
COSAs allocate costs among customer classes and are the foundation for equitable and
constitutionally compliant rates. COSAs gained a more important role for California publicly-
owned gas and electric 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 apply. Municipal
electric rates that do not exceed the reasonable costs to the local government of providing
electric service are one exception from the constitutional definition of a tax, and its voter
approval requirements.
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The current rates, which were last changed on July 1, 2019, are based on a COSA performed in
2015/2016 (“City of Palo Alto Electric Cost of Service and Rate Study” drafted by EES Consulting,
Inc.1). The fundamental structure of the City’s current rates has remained the same since the
early 1980s, though the commodity, distribution, and public benefits portions of the rates were
“unbundled,” or separated out, as a result of California’s deregulation of the electric market in
the late 1990s. Like many utilities, Palo Alto had declining block rates (rates that decreased with
increasing consumption) for all customers until the late 1970s, at which point the City switched
to the current system. For residents, the current system includes inclining block rates (rates
that increase with consumption, more commonly called tiered rates), and for the more diverse
non-residential customer classes, flat seasonal rates with demand charges for larger customers.
As Palo Alto transitioned to its current rate design, fixed charges for both types of customers
were switched to minimum charges and eventually eliminated. The main driver for these
changes was to encourage conservation, within the context of a cost-based rate structure.
Palo Alto now has flat to declining electric loads, as larger, industrial usage is replaced with
smaller commercial and residential uses, and the influx of more electric appliances is offset by
improvements in efficiency. The direction many utilities are taking in California is towards
implementing TOU rates, to better reflect the cost of power being faced by utilities as well as
stresses on the California power grid. Palo Alto will seek to implement these kinds of rates as
well in the future, as the City’s Advanced Metering Infrastructure (AMI) program progresses
over the next five years, and meters capable of providing time-based (interval) data are
deployed. Many utilities are also implementing fixed charges, instead of minimum charges, to
better fund operations, maintenance and capital costs which do not decrease as less power is
used. These trends and pricing methods will be evaluated as part of this COSA.
Discussion
The following sections provide a review of the current rate structure and a discussion of rate
design issues affecting the utility in the short term and in the long term. They also include a
work plan and a proposed set of COSA and rate design policy objectives to guide the COSA.
Summary of Existing Rate Structure
Table 1, below, summarizes the number of customers on each electric rate schedule and the
percentage of the City’s sales volume they represent. Currently the electric rate for separately
metered residential customers (Rate Schedule E-1) has two tiers, with rates that increase when
customer use exceeds roughly 330 kilowatt-hours (kWh) per month. Non-residential customers’
rates are flat (not tiered) and are higher during the summer. Larger non-residential customers
are billed based on their peak demand (the highest fifteen minutes of consumption in the
month, measured in kilowatts, or kW) in addition to their monthly energy use. These demand
charges are higher in the summer than in the winter, just like the energy charges.
1 Staff Report 6857 http://www.cityofpaloalto.org/civicax/filebank/documents/52274
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Table 1: Existing Electric Rate Schedules
Rate Applicability Description
Number of
customers(1)
Share of
sales(1)
E-1 Separately metered
residential customers
Two-tiered rate
25,300 20%
E-2 Small non-residential
customers and master
metered multi-family
customers
Flat energy charge that varies
seasonally
3,060 5%
E-4 Demand-metered non-
residential customers, peak
demand <1000 kW
Flat energy and demand charges
that vary seasonally
860 30%
E-7 Demand-metered non-
residential customers, peak
demand >1000 kW
Flat energy and demand charges
that vary seasonally
70 45%
(1) FY 2021
The City also has several optional and special use rate schedules. Both the E-4 and E-7 customer
classes have optional time-of-use (TOU) rate schedules, as well as charges for standby service
(maintenance of utility distribution system capacity to serve energy when on-site generation is
offline). The E-14 rate establishes charges for street and highway lighting, and the E-16 rate
covers unmetered electrical equipment such as billboards, wireless antennas, and traffic
cameras. There are also generation-related rates, such as the E-3, E-NSE and E-EEC rates. The
E-3 rate establishes wholesale energy purchase prices for certain types of customer-owned
generating facilities. The City designed this schedule to comply with the Public Utility
Regulatory Policies Act of 1978 (PURPA), which Congress enacted to encourage domestic
energy resources and promote competition for electric generation, but no customers are on
this rate at this time. The E-NSE and E-EEC rates establishes the City’s purchase price for surplus
generation from customer-owned net-metered solar systems under NEM-1 and NEM-2
(successor) programs. As part of the last COSA update, the City implemented a Hydro Adjuster
rate (E-HYD) to be activated during times of very low, or very high, hydroelectric generation
conditions. Lastly, the voluntary PaloAltoGreen rate is still available for certain commercial
customers who want it for sustainability reporting purposes.
COSA and Rate Design Policy Objectives
In the past, the UAC, Finance Committee and City Council have expressed concern about having
limited ability to make changes to proposed rate structures once a COSA is completed. Staff
agrees and has committed to having policy discussions with the UAC, Finance Committee and
Council prior to embarking on a COSA. Staff is proposing a set of Design Guidelines (Attachment
A) to guide its work over the next year. The proposed guidelines are:
Guideline 1. Rates must be based on the cost of providing service.
Guideline 2. The effect of proposed rate design changes on low income customers should be
considered, to the extent permissible within a cost-based rate structure.
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Guideline 3. Rates should ensure all value provided by building and vehicle electrification,
including public EV charging, is reflected in the rates while remaining cost-
based.
Guideline 4. Rates should ensure all value provided by on-site generation and storage is
reflected in the rates while simultaneously avoiding subsidies between
customer classes and remaining cost based.
Guideline 5. The COSA and rate design should support a transition to more time variant rates
(such as TOU, seasonal, etc.) as AMI infrastructure is deployed.
Guideline 6. The COSA should provide support for a transition to fixed or minimum monthly
charges.
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. In compliance with Prop. 26, 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: Impact on low income customers
Changes in rate design can have different impacts on customers who use different amounts
of electricity. Staff intends to evaluate the impact of any recommended rate design changes
on low-income consumers and may recommend mitigation of those impacts to the extent
feasible under current law.
Guideline 3: Rates should ensure all value provided by building and vehicle electrification,
including public EV charging, is reflected in the rates while remaining cost-based
Certain rate structures may disincentivize customers from taking up electrification
measures, such as tiered rates for residential customers, or demand charges for commercial
customers. Staff will evaluate existing rates designs for consistency with City electrification
goals.
The City also has DC Fast charging stations for electric vehicles. These types of customers
typically have very high 15-minute energy demand peaks, but serve a limited amount of
energy, especially while electric vehicle penetration is still relatively low. This leads to
significantly higher costs that charging station owners pass to customers, which makes
customers even less likely to use the charging station, exacerbating the issue. Staff will have
the consultant evaluate which options best address charging station owner needs, avoid
suppressing charging station demand, and are still consistent with Palo Alto’s cost structure.
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Guideline 4: Rates should ensure all value provided by on-site generation and storage is
reflected in the rates while simultaneously avoiding subsidies between customer classes and
remaining cost based
The City has been approached by customers looking to create or install technologies which
are not effectively accommodated by the City’s existing rate schedules, such as large-scale
solar and storage installations. Current rates include standby charges which were designed
to apply to engine generators rather than solar and storage installations, and thus need
updating. Also, because of the dynamics of energy usage and battery storage capability,
rates need to be designed to reflect shifts in the time of day when demand peaks
throughout California, which is different from when demand peaks on Palo Alto’s system.
This will ensure costs are recovered and that proper incentives are sent to energy storage
systems.
Guideline 5: COSA and rate design should support a transition to time variant rates (such as
TOU, seasonal, etc.) as AMI infrastructure is deployed
The City’s Utilities department is planning on installing advanced, or interval, metering
within the next five years, and the trend in rates both in California as well as nationwide is a
move towards Time of Use (TOU) pricing. TOU pricing seeks to better align customer rates
with the real cost of electricity, but also generally does not involved tiered or block rate
pricing mechanisms. Tiered rate pricing can potentially place a higher cost burden on
customers moving away from natural gas and installing electric space heating, water heating,
induction cooking, etc., as well as for customers opting to own electric vehicles and charging
at home.
Staff feels it is the appropriate time to evaluate existing residential tiered rates, to see if
tiered rates should be continued or modified to reflect changing load patterns. Analysis will
also be done to see if rates should include a seasonal component or designed on a uniform
basis prior to introducing TOU rates. Other local and regional utilities who have transitioned
to TOU pricing from tiered rate mechanisms have done so through a combination of
minimizing the number of tiers, increasing tier allocation levels to make prices more
uniform, or moving to uniform rates entirely, prior to launching TOU pricing.
Guideline 6: The COSA should support a transition to fixed or minimum monthly charges
In order to adequately and fairly collect certain costs incurred by the utility regardless of
whether power is used or not (such as billing, capital improvement and some distribution
related costs), staff will evaluate different means and methods of producing either a
minimum or fixed monthly charge for the various customer classes.
As part of this COSA and rates update, the consultant will address the following work plan
items:
Work Item 1: Evaluate TOU rates for all customer classes
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While TOU rate options exist for the E4 and E7 rate categories currently, these should be
evaluated for the E1 and E2 categories as well. An evaluation should be made of the time
periods used, as well as the applicability of seasonal variation.
Work Item 2: Evaluate minimum charges and fixed charges
For this COSA, staff recommends evaluating the minimum charge and fixed charge as a way
of ensuring that all customer groups contribute their share of the utility’s operating costs.
This is consistent with the approach currently being implemented by PG&E and other
investor-owned utilities, as well as a number of publicly owned utilities throughout
California. Many of these utilities are considering eventually implementing fixed charges
rather than minimum charges. Staff recommends considering whether the City should
implement a minimum charge or proposed a fixed charge instead.
Work Item 3: Evaluate the division of distribution costs between demand and energy charges
For customers with demand metering (E4 and E7), an evaluation will be made as to the
allocation of charges between energy (kWh) and demand (kW).
Work Item 4: Update rates for large scale energy storage and intermittent generation, such as
solar photovoltaic (PV) and microgrids
As mentioned in Guideline 4 above, new and existing rates for microgrids, battery storage,
as well as standby rates, need to be evaluated and implemented.
Work Item 5: Update rates to accommodate public vehicle charging
As mentioned in Guideline 3 above, new or modified cost of service-based rates should be
implemented to help facilitate and foster the growth of DC fast charging stations.
Work Item 6: Evaluate rates for electrified homes and vehicles
While this may be covered under the evaluation of TOU options, until such time that AMI
can be implemented, an evaluation should be made to see if other rate options are
applicable for these types of customers (such as different rate tiers, uniform rates and/or
seasonal pricing).
Commission Review and Recommendation
The UAC reviewed these guidelines at its September 1, 2021 meeting. The UAC made several
inquiries, including whether rates items such as critical peak pricing could be investigated, as
well as minimum vs. fixed charge options. Commissioners wanted the COSA to provide
flexibility for future rate options, ensure that under-collection of costs didn’t take place, and
provide proper incentives as well as cost allocation to customers. There were a variety of
questions about rates for resiliency investments, setting rates on a geographic basis, and the
future of net energy metering.
Chair Forsell moved staff’s recommendation with the addition of a sixth guideline supporting a
transition to fixed or minimum charges. The motion carried 5-0 with Commissioners Scharff and
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Smith absent.
The Finance Committee reviewed these guidelines at its October 1, 2021 meeting. The Finance
Committee inquired whether bill discounts could be included for customers choosing
electrification measures, and whether those could be implemented before the COSA was
completed. Also, the Committee recommended modifying the language on Guidelines 3 and 4
to represent a goal of ensuring that all value from the assciated technologies would be
reflected in the rates, rather than just setting rates to avoid creating barriers. These suggestions
have been incorporated into the guidelines.
Vice Mayor Burt moved and Chair Cormack seconded approving the design guidelines with
modifictions to Guidelines 3 and 4 (incorporated). Also, the Finance Committee added a
request that staff study options for an interim modification to tiers that would support
electrification, and return to the UAC, Finance and Council at a future date. Staff will work with
the Attorney’s office to determine what options are available within the structure of the
existing COSA study, and anticipates a statement on possible options to be developed during
the winter/spring financial forecasting process. The motion carried 3-0.
Next Steps
After receiving the City Council recommendation, Staff will use these items in the preparation
of the COSA, which is expected to be completed within FY 2022 so that updated rates can be
adopted as part of the FY 2023 budget process or soon thereafter. Staff will also begin work on
the study of options for interim modifications to tiers in support of electrification, however, it is
expected that this will be completed outside of the COSA process outlined.
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Resource Impact
The work associated with this project will be absorbed using existing staff and contract budgets.
Any new rates adopted as a result will be designed to generate adequate sales revenue to fund
the electric utility’s operations in FY 2023 and beyond. As discussed in the FY 2022 Electric
Utility Financial Plan (Staff Report 118872), for FY 2023, the utility is currently projected to need
roughly 5% more sales revenue than is generated by current rates. Expenses are projected to
exceed revenues, with reserves being used to moderate customer impacts as rates are brought
to parity over several years.
Policy Implications
The process of adopting these design guidelines provides the UAC, Finance Committee and City
Council an opportunity to provide policy guidance to staff before work begins on the COSA.
Environmental Review
Adoption of these Design Guidelines for the 2022 Electric Utility Cost of Service and Rate
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:
• Attachment10.a: Attachment A: Electric COSA Rate Design Guidelines
2 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-
cmrs/2021/id-11887.pdf
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Attachment A
Design Guidelines for the 2022 Electric Utility Cost of Service and Rate Analysis
1. Rates must be based on the cost of providing service. This is the overriding principle for the
cost of service analysis (COSA); all other rate design considerations are subsidiary to this
basic premise.
2. The effect of proposed rate design changes on low income customers should be considered,
to the extent permissible within a cost-based rate structure.
3. Rates should ensure all value provided by building and vehicle electrification, including
public vehicle charging, is reflected in the rates while remaining cost-based.
4. Rates should ensure all value provided by on-site generation and storage is reflected in the
rates while simultaneously avoiding subsidies between customer classes and remaining cost
based.
5. The COSA and rate design should support a transition to more time variant rates (such as
TOU, seasonal, etc.) as AMI infrastructure is deployed.
6. The COSA should provide support for a transition to fixed or minimum monthly charges.
10.a
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