HomeMy WebLinkAboutStaff Report 14874 (2)
City of Palo Alto (ID # 14874)
City Council Staff Report
Meeting Date: 12/19/2022 Report Type:
City of Palo Alto Page 1
Title: Finance Committee Recommends the City Council Adopt a Resolution
Amending the E-HRA (Electric Hydro Rate Adjuster) Rate Schedule, Increasing
the Current E-HRA Rate to $0.048/kWh Effective January 1, 2023
From: City Manager
Lead Department: Utilities
Recommended Motion
The Finance Committee and Staff and recommend the City Council adopt a Resolution of the
Council of the City of Palo Alto Amending the Electric Hydro Rate Adjuster rate schedule (E-
HRA), Increasing the Current E-HRA Rate to $0.048/kWh Effective January 1, 2023, to reflect
current hydrological conditions and market purchase costs. This would replace the existing E-
HRA surcharges and discounts across all levels and increase the current E-HRA rate from
$0.013/kWh to $0.048/kWh.
Executive Summary
Power available to the City of Palo Alto (City or Palo Alto) from hydroelectric resources is
reduced due to the ongoing drought. Reduced hydro output has resulted in increased demand
for market power resources which is largely comprised of gas-fired generation. The increase in
demand combined with high fossil fuel prices caused by unstable socio-political conditions has
resulted in power prices that are greater than the values used to calculate the existing E-HRA
surcharge. Hydro Stabilization Reserves (HSR) have been exhausted and Operations Reserves
are being negatively impacted by higher ongoing costs. Staff and the Finance Committee
recommends the City Council increase the current $0.013/kwh surcharge to $0.048/kwh,
forecasted to end June 30, 2023.
This change will preserve reserve levels above the minimum guidelines if market prices remain
in the forecasted range during the fiscal year. Activation of the E-HRA surcharge creates a
temporary rate increase. When triggered, the proposed E-HRA increase is approximately a 20%
or $17.15 monthly increase for a median electric residential customer, which remains 39%
below a comparable PG&E customer.
On November 2, 2022, staff recommended, and the Utilities Advisory Commission approved,
increasing the E-HRA from $0.013/kWh to $0.026/kWh (ID# 14837). However, further increases
to electric purchase costs from September projections are prompting staff to revise their
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recommendation. Staff expects that the E-HRA will have to be modified again in July. If market
costs continue to be high, staff will likely increase base electric rates to reflect the new
commodity cost environment, and the E-HRA would be reduced. As part of the FY 2023 rate
setting the Utilities department will evaluate and recalibrate electric rates and adapt to the
changing market.
Background
The City has access to a large amount of relatively low-cost, carbon free hydroelectric
generation to meet its electric supply needs. Whereas hydroelectric generation supplies about
10% of the overall electric supply for California, the City meets about 50% of its electric supply
needs with hydro generation in an average year.
The drawback to maintaining such a heavy reliance on hydroelectric generation is that the
output of these resources is highly sensitive to weather conditions. Although the City receives
about 50% of its electric supplies from its hydroelectric resources in a “normal” weather year,
that amount can fall to as low as 20% in extremely dry years. And unlike many of the City’s
supply contracts, where the cost of the resource is proportional to the amount of generation
delivered, the City essentially pays a fixed amount every year for the output of its two
hydroelectric resources (Western Base Resource and the Calaveras project) regardless of the
amount of electricity they produce.
The City purchases additional supply resources (generic market power and, to comply with the
Carbon Neutral Plan, renewable energy certificates, or RECs) to make up for the reduced
hydroelectric output during dry years. Compounding the problem, market power prices are
often higher in dry years when the City must purchase more because the entire state is
experiencing reduced hydro supply conditions. Market prices are influenced by inflation,
weather, alternative fuel costs, and global supply and demand.
Figure 1 below illustrates this relationship between the City’s annual market purchase costs and
the amount of hydroelectric generation it receives.
Figure 1: Annual Hydro Generation vs. Market Purchase Costs (2012-2022)
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In 2005, when a new “Contract for Electric Service - Base Resource” with the Western Area
Power Administration (Wester or WAPA) increased the City’s exposure to hydro variability,
Council adopted a policy of maintaining reserves, combined with “laddered” market purchases,
to manage this variability.1
In 2018, Council adopted the E-HRA mechanism (ID 8962) to manage the financial impacts of
the annual variability in production of the City’s hydroelectric resource. The E-HRA and the HS
Reserve are used to stabilize electric rates when hydrological conditions are either poor, as is
currently the case, or exceptionally good. Activation of the E-HRA is based on staff’s evaluation
of hydro generation availability and the HS Reserve level. When the HS Reserve falls below 25%
of its maximum ($11 million) and hydro generation is projected to be below normal through the
end of the current fiscal year, the E-HRA surcharge is applied. The resulting revenues are used
to fund the additional short-term costs of providing electric service. When drought conditions
subside and/or HS Reserves are within guideline ranges, the surcharge can be de-activated and
standard rates can resume.
In 2018, staff developed the E-HRA mechanism utilizing a 20-year simulation model, estimating
reserve needs under periods of both above average hydro generation as well as periods of
extended drought. The model estimated high market prices during periods of drought using
generation prices that were high at the time, about $47/MWh. As market costs have increased
1 As described in Palo Alto’s current Long-term Electric Acquisition Plan (LEAP) Objectives and Strategies:
https://www.cityofpaloalto.org/files/assets/public/environment-in-palo-alto/energy-compost-facility-
consideration/leap-objectives-and-strategies-april-2012.pdf
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above this level, staff recommends amending the E-HRA structure to update energy prices to
reflect current conditions. The model’s generation levels remain valid.
The E-HRA rate structure in effect now can result in either a 4% rate increase (at the
$0.0065/kWh level) or an 8% increase (at the $0.013/kWh level)2. The proposed E-HRA increase
of $0.035/kWh (from $0.013 to $0.048) is approximately a 20% or $17.15/month increase for a
median electric residential customer and 39% below a comparable PG&E customer.
In March 2022, in response to rapidly worsening drought conditions in California, Council
adopted changes to the E-HRA surcharge (ID 13905), broadening the conditions under which
the rate could be utilized and activating the rate effective April 1, 2022. This was done to help
lower longer-term average rates, as well as help maintain general reserve health.
Staff provided two E-HRA alternatives for Finance Committee consideration at its November
29th meeting (ID# 14975) after a recommendation from the UAC on November 2, 2022. Both
alternatives aimed to keep the Electric Supply Operations Reserve (E-SOR) above minimum
guideline levels at the end of FY 2023. Alternative #1, a $0.048/kWh results in a projected E-
SOR slightly higher than the minimum guideline, while Alternative #2, a $0.050/kWh adds
additional supporting funds to the E-SOR.
Discussion
The City receives power from two hydroelectric projects, the Calaveras project and the Western
Base Resource contract for Federal hydropower from the Central Valley Project.3 The
watershed for Western hydropower is primarily in the northern end of California, while the
watershed for the Calaveras project is in the Central Sierras.
Power from these sources is reduced under continued drought conditions. For water year 2020-
2021 (October 2020 to September 2021), total precipitation was just below 50% of average in
both watersheds. For water year 2021-2022, total precipitation was below 80% of average in
Northern California and about 63% of average in the Central Sierras. As shown in Table 1, total
actual hydropower for FY 2021 was 295 GWh, which is 183 GWh (38%) below the long-term
2 For the median Palo Alto household, which consumes approximately 490 kWh/month, rate adjustments of 0.65
¢/kWh, 1.3 ¢/kWh, and 1.8 ¢/kWh equate to monthly bill impacts of $3.19, $6.37, and $8.82, respectively.
3 The Calaveras project is a hydropower project located in Calaveras County that is maintained and operated by the
Northern California Power Agency on behalf of the City and other project participants. The City is also one of
several public entities with contracts with the Western Area Power Administration for “Base Resource” electricity,
which is the hydroelectric power available from the Federal Government’s Central Valley Project (operated by the
Bureau of Reclamation) after accounting for power used for Central Valley Project operations and power delivered
to certain “preference” customers.
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average, and total actual hydropower for FY 2022 was 230 GWh, which is 250 GWh (52%) below
the long-term average.4
Table 1: Hydro Generation FY 2021-22 Actuals (GWh)
Hydro Generation FY 2021 FY 2022
Calaveras Actuals 49 61
Western Actuals 246 169
Total Hydro Generation 295 230
Long-term Average Total (%) 61% 48%
Long-term Average Total Hydro 481 481
Reservoir levels remain very low across Northern and Central California. Most reservoirs are 30
to 50% below their average levels for this time of year. As a result, Palo Alto’s hydroelectric
projections are approximately 275 GWh for this fiscal year, which is about 57% of the long-term
average level of hydro output, and 377 GWh for FY 2024, which is 78% of the long-term average
level.
When Council activated the E-HRA at the $0.013/kwh level effective April 1, 2022, projected
hydro output was about 310 GWh/year and HSR funds were projected to be drawn below $11
million5 by the end of FY 2022. Market prices are now more than double the price used to
estimate the existing E-HRA rate. Actual power supply costs for FY 2022 were about $16 million
more than adopted budget levels, and FY 2023 costs are projected to be similarly high. As a
result, staff requested a transfer of all $15 million of HSR funds to the Operations Reserve to
offset costs in FY 2022. Council’s activation of the E-HRA rate offset $1.5 million of higher costs
that remained after the $15 million HS Reserve transfer. $400,000 remains in the Hydro
Stabilization Reserves.
The ending balance for the Supply Operations Reserve is approximately $22.2 million in the FY
2022 Annual Comprehensive Financial Report (ACFR). This is about $3.3 million above the
Council-adopted minimum guideline levels for FY 20236.
Updated November estimates for FY 2023 electric purchase costs are now $16.1 million more
than budget, compared to the $9 million previously estimated and cited in the November 2 UAC
staff report (which was based on September data). The proposal provided to the UAC was to
increase the E-HRA to $0.026/kwh, resulting in about $5 million in additional revenue (over the
last 6 months of FY 2023). Based upon updated purchase cost estimates, this would still leave
4The long-term average forecast levels for both Western and Calaveras have been revised downward (about 10%
each) in recent years to reflect the impact of climate change. These values may need to be revisited again in the
coming years.
5 When the HS Reserve level falls below 25% of its maximum, or $11 million, the E-HRA can be activated if
projected hydro generation is also below 480 GWh/yr.
6 FY 2023 Electric Financial Plan, adopted June 13, 2022, Staff Report ID# 13661:
https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/city-
councilagendas-minutes/2022/20220613/20220613pccsm-final-amended-linked.pdf
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the Supply Operations Reserve roughly $6.8 million below minimum guideline levels at the end
of FY 2023.
Staff has determined that meeting the revised supply cost increases and keeping reserves at or
above minimum guideline levels, would require increasing the E-HRA surcharge to at least
$0.044/kwh. However, even this would result in an ending Supply Operations Reserve lower
than the original UAC proposal. After reviewing potential rates to address this, the Finance
Committee ultimately recommends Council approve a new E-HRA of $0.048/kwh. This will
provide for $1.6 million above minimum guideline levels by the end of FY 2023
Table 2: Projected FY 2023 Supply Operations Reserve Balances (Million $’s)
FY 2023
Financial Plan
UAC Proposal
($0.026/kwh surcharge)
Recommended Rate
($0.048/kwh surcharge)
Beginning Supply Operations
Reserve Balance $33,046 $22,197 $22,197
Net Fund Revenue (Expense) 927 927 927
Revenue: New E-HRA Revenue N/A 5,000 13,462
Expense: Additional Purchase Cost N/A (9,000) (16,100)
Ending Supply Operations Reserve
Balance $34,973 $19,124 $20,486
Supply Operations Reserve
Minimum Guideline $18,843
For reference, each additional $0.001/kwh would add about $380,000 to FY 2023 revenues,
based on current sales estimates.
Table 3 shows the relative bill impacts of these proposals on a median electric customer, as well
as how far below comparable PG&E bills the new rates would be:
Table 3: Bill Impacts
Current
($0.013/kwh surcharge)
UAC Proposal
($0.026/kwh surcharge)
Recommended Rate
($0.048/kwh surcharge)
Monthly bill $86.57 $92.94 $103.72
Bill Impact ($) - 6.37 17.15
Bill Impact (%) - 7% 20%
% Below PG&E 49% 45% 39%
The current E-HRA levels are shown in Table 4:
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Table 4: Current Hydro Rate Adjustments ($/kWh)
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.0065) $(0.0065) $(0.018)
75% to 100%
($27 to $35 million)
$- $- $(0.0065) $(0.013)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.013 $0.0065 $- $-
Table 5 shows the recommended rates:
Table 5: Recommended Hydro Rate Adjustments ($/kWh)
Hydro Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above Maximum
(>$35 million)
$- $(0.024) $(0.024) $(0.066)
75% to 100%
($27 to $35 million)
$- $- $(0.024) $(0.048)
25% to 75%
($11 to $27 million)
$- $- $- $-
25% and below
(<$11 million)
$0.048 $0.024 $- $-
While the recommended increase would keep the Supply Operations Reserve above minimum
if all other revenue and expense conditions hold, it is still possible that external factors
(higher/lower market prices, reduced/increased sales, etc.) could positively or negatively
impact the Operations Reserve by fiscal year end.
E-HRA going forward
Staff expects that the E-HRA will have to be modified again in July. If market costs continue to
be high, staff will likely increase base electric rates to reflect the new commodity cost
environment, and the E-HRA would be reduced. Staff is also investigating an alternative
mechanism for passing through cost variations from budget, to be provided and reviewed
during the upcoming FY 2024 budget cycle.
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Recommended Rate
The Finance Committee recommends that City Council adopt the rates shown in Table 5 With
an E-HRA of $0.048/kwh.
While this proposal is different from what the Utilities Advisory Commission reviewed in
November, this revised rate is recommended to address the projected continued increases to
electricity costs from what was seen back in September warrant the change. Given the
burgeoning electricity costs and the relatively low level of current Operations Reserves, staff
believes that increasing the E-HRA rate at this time would place the Electric Utility in a better
financial position for FY 2023 and beyond.
The alternative to increasing the E-HRA surcharge is implementing a general rate increase.
Utilizing the E-HRA is a targeted way to mitigate the impacts of hydro generation and supply
cost fluctuations. If higher market prices persist or appear to be a ‘new normal,’ or larger long-
term reserves are needed, general rates can be increased at the next fiscal year and the E-HRA
brought to zero as additional revenue recovery is not needed.
Resource Impact
Based on the current sales trends for FY 2023, the estimated revenue impacts for the existing
$0.013/kwh adjuster is an increase of $10.25 million in the Electric Fund in FY 2023, which has
already been included in the adopted budget.
The recommended rate change to $0.048/kWh is expected in FY 2023 revenues would increase
by $13.5 million. The City is a utility customer so rate increases will also result in City expense
increases. Resource impacts to City departments and funds of the recommended rate
adjustments will be recommended in the mid-year budget process.
Policy Implications
The proposed Electric Hydro Rate Adjuster (E-HRA) rate amendment is consistent with Council-
adopted Reserve Management Practices that are part of the adopted 2023 Electric Financial
Plans.
Stakeholder Engagement
The UAC considered staff’s request at its November 2, 2022 meeting. At that meeting, the UAC
agreed that, given the escalating costs of purchasing electricity, that the rate increase was
prudent. The UAC approved Staff’s motion unanimously.
The Finance Committee heard staff’s request at its November 29, 2022 meeting. At that
meeting, the Finance Committee and staff concurred to unanimously recommended a E-HRA of
$0.048/kWh.
Staff will provide a subsequent memo the UAC informing of them of staff’s modified
recommendation, the Finance Committee recommendation and the Council action.
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Environmental Review
Adoption of the attached amendment to the E-HRA rate to meet operating expenses, purchase
supplies and meet financial reserve needs is not subject to the California Environmental Quality
Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the
California Code of Regulations Sec. 15273(a).
After reviewing the staff report and all attachments presented to Council, the Council
incorporates these documents herein and finds that sufficient evidence has been presented
setting forth with specificity the basis for this claim of CEQA exemption.
Attachments:
x Attachment8.a: Attachment B: Proposed E-HRA effective January 1, 2023
x Attachment8.b: Attachment A: Resolution E-HRA Rate Amendment
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ELECTRIC HYDRO RATE ADJUSTER
UTILITY RATE SCHEDULE E-HRA
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No EHRA-1 Sheet No E-HRA-1
dated 47-1-20221 Effective 14-1-20232
A. APPLICABILITY:
This schedule applies to all Customers receiving Electric Service from the City of Palo Alto
Utilities.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Electric Service.
C. RATES:
Per kWh
Hydro Rate Adjustment: ...............................................................................($0.06618) - $0.04813
D. SPECIAL NOTES:
1. Hydro Rate Adjustment
a. The Hydro Rate Adjustment is a surcharge or discount applied to Electric rates based
on the strength of the City’s hydrological generation portfolio, applied to manage
volatility in energy costs and generation and the impact of that volatility on customer
rates.
b. The Hydro Rate Adjustment is determined based on the level of funding in the Hydro
Stabilization Reserve, including transfers or withdrawals projected to be made in the
current fiscal year according to the City’s Electric Utility Reserve Management
Practices, and on the forecasted amount of annual generation the City of Palo Alto
Utilities will receive from its hydroelectric generation resources through the end of the
current fiscal year.
2. Calculation of Hydro Rate Adjustment
a) Staff calculates the Hydro Rate Adjustment surcharge or discount annually in May, or
whenever hydrologic conditions are poor and Hydro Stabilization Reserves are
projected to fall below the 25% level within the current fiscal year.
b) The Hydro Rate Adjustment will be applied to all Customers’ Electric rate schedules
upon Council approval, and re-evaluated annually.
c) The Hydro Rate Adjustment surcharge or discount will fall within the
minimum/maximum range set forth in Section C, and will be applied as follows:
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ELECTRIC HYDRO RATE ADJUSTER
UTILITY RATE SCHEDULE E-HRA
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No EHRA-2 Sheet No E-HRA-2
dated 47-1-20221 Effective 14-1-20232
Hydro Rate Adjustment ($/kWh)
Hydro
Stabilization
Reserve Level
Projected Hydro Generation vs. Average Hydro Generation
(GWh/year)
Less than 319 319 to 480 480 to 642 Over 642
Above
Maximum
$- $(0.024065) $(0.024065) $(0.06618)
75% to 100% $- $- $(0.024065) $(0.04813)
25% to 75% $- $- $- $-
25% and below $0.04813 $0.024065 $- $-
{End}
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Attachment A
6056681C 1
Reference Document: Utility Rate Schedule E-HRA
Resolution No.___
Resolution of the Council of the City of Palo Alto Amending Electric
Rate Schedule E-HRA (Electric Hydro Rate Adjuster), Increasing the
Current E-HRA Rate to $0.048/kWh Effective January 1, 2023
R E C I T A L S
A. Hydroelectric Rate Adjustment mechanisms are designed to modify customer
rates, either up or down, such that overall sales revenue is aligned with supply costs for the
electric utility.
B. Hydroelectric Rate Adjustment mechanisms are intended to enable the electric
utility to maintain a reasonably stable level of financial reserves, and maintain base electric
rates at lower levels over the long term.
C. In 2018, staff developed the E-HRA rate mechanism utilizing a 20-year
simulation model, estimating reserve needs under periods of both above average hydro
generation as well as periods of extended drought. The original model inputs have changed
since then, with multi-year drought conditions, rising inflation, increased market costs for
alternative fuels, and uncertainty in natural gas markets greatly increasing the market costs for
electricity. The existing E-HRA rate is no longer collecting enough revenue to adequately offset
required market purchases.
D. Section D(2)(a) of the Council-adopted E-HRA Rate Schedule directs staff to
calculate the Hydro Rate Adjustment annually in May. E-HRA activation may also occur at other
times throughout the year, such as when hydrologic conditions are poor and Hydroelectric
Stabilization Reserve levels are projected to fall below the 25% level within the current fiscal
year.
E. On November 2, 2022, staff recommended and the Utilities Advisory Commission
approved increasing the E-HRA from $0.013/kWh to $0.026/kWh (ID# 14837).
F. Further increases to electric purchase costs from staff’s September projections
prompted staff to revise their recommendation to the Finance Committee at its November 29,
2022 meeting (ID #14975). There, staff offered 2 alternatives intended to keep the Electric Supply
Operations Reserve (E-SOR) above minimum guideline levels at the end of FY 2023: Alternative
#1 increased the E-HRA surcharge to $0.048/kWh and Alternative #2 increased the E-HRA
surcharge to $0.050/kWh.
G. The Finance Committee unanimously approved recommending Alternative #1 to
the City Council.
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Attachment A
6056681C 2
Reference Document: Utility Rate Schedule E-HRA
H. 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.
The Council of the City of Palo Alto hereby RESOLVES as follows:
SECTION 1. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule E-HRA (Electric Hydro Rate Adjuster) is added as attached and incorporated.
Utility Rate Schedule E-HRA, as amended, shall become effective January 1, 2023.
SECTION 2. As a result, on January 1, 2023 the $0.013/kWh E-HRA rate activated by
Council on March 14, 2022, and effective April 1, 2022, will increase to $0.048/kWh.
SECTION 3. 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 4. 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.
//
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Attachment A
6056681C 3
Reference Document: Utility Rate Schedule E-HRA
//
SECTION 5. The Council finds that the adoption of this resolution changing electric
rates to meet operating expenses and meet financial reserve needs is not subject to the
California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec.
21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing
the staff report and all attachments presented to Council, the Council 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
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