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Home My WebLink AboutStaff Report 2411-3805CITY OF PALO ALTO CITY COUNCIL Special Meeting Monday, December 16, 2024 Council Chambers & Hybrid 5:30 PM Agenda Item 19.Adoption of a Resolution of Intention to Reimburse Expenditures for the Grid Modernization and Related Projects of the Electric Utility System Infrastructure from the Proceeds of Tax-Exempt Utility Revenue Bonds. City Council Staff Report From: City Manager Report Type: CONSENT CALENDAR Lead Department: Administrative Services Meeting Date: December 16, 2024 Report #:2411-3805 TITLE Adoption of a Resolution of Intention to Reimburse Expenditures for the Grid Modernization and Related Projects of the Electric Utility System Infrastructure from the Proceeds of Tax-Exempt Utility Revenue Bonds. RECOMMENDATION Staff recommends that the City Council adopt the attached resolution of intention to reimburse expenditures for the grid modernization and related projects from the proceeds of tax-exempt (Electric) Utility Revenue Bonds. BACKGROUND On June 17, 2024, Council adopted the Electric Fund’s capital budgets for FY 2025 and conceptually approved a capital expenditure plan for FY 2026 through FY 2029. This plan included, in concept, issuing debt to fund the Electric Grid Modernization for Community-Wide Electrification Project (CIP Project No. EL-24000), or Grid Modernization project. The Grid Modernization project is estimated to take 7 to 10 years and cost up to $306 million, depending upon the approach and material costs. The Grid Modernization Project was developed to enhance the distribution system’s grid resiliency and reliability in a manner that will continue to accelerate the City’s clean energy and decarbonization goals. Palo Alto’s grid must be modernized to reach the capacity required to electrify all homes and cars. The modernized system will be designed to fully accommodate energy received from local generation such as rooftop solar and battery storage, an important element in decarbonization goals. There will be an upgrade to the distribution system to incorporate local generation, allow two-way power flow, meet projected capacity needs, enhance voltage regulation and system protection requirements, and provide a high level of resiliency and reliability. The Project’s three main objectives are: •Increase capacity on the Electric Grid to allow for the addition of new electrical load from the electrification of heating load, electric vehicles, and battery storage. •Enhance system reliability and resiliency by installing advanced distribution network protection schemes. •Implement distribution system control technologies to allow for high levels of solar penetration, battery storage, distributed energy resources, and electric vehicles. To meet the expected increase in demands, this Project will increase network capacity. Capacity increases will include the following work: •Converting 4kV systems to 12kV. •Installing more distribution transformers with greater capacity. •Rebuilding secondary networks by increasing the conductor size and creating more secondary networks. •Replacing four distribution substation transformers at two substations with larger transformers having greater capacity. ANALYSIS Work on Grid Modernization project work has already begun. Staff anticipates selling the first series of the (Electric) Utility Revenue Bonds towards the end of the 2025 calendar year. Due to the long project duration and federal law requirement on the spending time limit on tax-exempt bond spending, multiple bond issuance will be needed over the next decade. The proposed resolution allows the City’s Utility enterprise fund to use bond proceeds to reimburse itself for certain pre-construction and construction costs related to the Grid Modernization project but incurred before the bonds are issued. The reimbursement of these expenditures would restore the Electric Fund’s reserve(s) for these expenditures. Staff recommends that Council approve the attached resolution (Attachment A). This does not authorize any issuance of debt or financial obligation to the City. Though the project work has begun, the bond issuance is being delayed by a year to leverage the projects cash reserves and minimize financing cost. Current forecasts anticipate in the upcoming year declining interest rate environment due to the Federal Open Market Committee’s (FOMC) expected federal funds interest rate cuts, which will impact the borrowing interest rate on these tax-exempt bonds. FISCAL/RESOURCE IMPACT It is estimated that the principal amount of the first series utility revenue tax-exempt bonds to be issued to be in the range of $70 million to $100 million. The amount of this bond issuance that will be able to be reimbursed under this resolution is subject to the amount of work that has and will be done in the coming year. Once the bonds are issued, subject to authorization by the City Council, then all future expenditures for this project will be reimbursed under the bond issuance authority. All financial transactions associated with issuance of debt will require Council action later and authorization of this resolution does not obligate the Council to issue debt in the future should plans change. STAKEHOLDER ENGAGEMENT Staff works internally (e.g., Utility, City Attorney’s Office, and Administrative Services) and with external parties (Financial Advisor, Bond and Disclosure Counsels, Paying Agent, etc.) to prepare this resolution and to eventually issue the bonds. ENVIRONMENTAL REVIEW Council action on this item is not a project under California Environmental Quality Act (CEQA) as defined in CEQA Guidelines because the adoption of a reimbursement resolution is a government fiscal activity which does not involve any commitment to any specific project which may result in a potentially significant physical impact on the environment. CEQA Guidelines section 15378(b)(4). In addition, Council’s approval of the grid modernization project(s) does not require additional environmental review under CEQA Guidelines section 15183, because the grid modernization project, an element of the Council-approved S/CAP, is consistent with the Environmental Impact Report (EIR) Addendum to the City of Palo Alto Comprehensive Plan Final Environmental Impact Report Council approved on June 5, 20231. ATTACHMENTS Attachment A: Resolution of the City of Palo Alto Declaring Intention to Reimburse Expenditures from the Proceeds of Tax-Exempt Debt APPROVED BY: Lauren Lai, Administrative Services Director 1 Environmental Impact Report, item # 14: https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=12530 *** NOT YET APPROVED *** 1 0005_20241015 Resolution No. _____ A Resolution of the City of Palo Alto Declaring Intention to Reimburse Expenditures Relating to Modernization of the Electric Utility System Infrastructure from the Proceeds of Tax-Exempt Debt WHEREAS, the City of Palo Alto (the “City”) operates a system for the distribution of electric energy (the “Electric System”); and WHEREAS, the City provides electricity from a 100% carbon neutral portfolio, and has been in the forefront of efforts to design programs allowing customers to easily use clean energy; and WHEREAS, one major initiative in the City’s Sustainability and Climate Action Plan (“S/CAP”) is to promote the transition to all-electric homes and electric vehicles (“EVs”) to reduce greenhouse gas (“GHG”) emissions; and WHEREAS, in 2020, the City launched an update to the S/CAP to reduce GHG emissions 80 percent below 1990 levels, i.e., reduce 624,095 metric tons of greenhouse gases by 2030 (the “80 x 30 goal"); and WHEREAS, a 2021 impact analysis showed that to meet the “80 x 30 goal”, the City must electrify all of its roughly 15,000 single-family homes, replacing natural gas equipment with efficient electric alternatives; and WHEREAS, the City recently conducted an electrification study to evaluate the impacts of projected electrification loads from converting houses to electrical power and the adoption of EVs on the City’s distribution and substation transformers, primary/secondary distribution circuits, and to propose upgrades needed to mitigate overloads; and WHEREAS, in response, the City developed the Electric Grid Modernization for Electrification Project (“Modernization Project”) to increase distribution capacity, enhance grid resiliency and reliability of the electric distribution system, and to continue to accelerate the City’s clean energy and decarbonization goals; and WHEREAS, to meet the expected increase in demands, the Modernization Project will increase network capacity; capacity increases will include the following work: • converting 4kV systems to 12kV, • installing more distribution transformers with greater capacity, • rebuilding secondary networks by increasing the conductor size and creating more secondary networks, and 2 0005_20241015 • replacing distribution substation transformers, breakers and feeders at three substations to increase capacity; and WHEREAS, in addition, the City expects to finance acquisition and construction of a Hanover substation improvement and the acquisition of land for use in the construction of the Electric Grid Modernization for Electrification Project, among other things; and WHEREAS, the estimated cost of the Modernization Project, the Hanover substation improvement and the land acquisition (collectively, “Project”) is between $220 million to $306 million, depending on the approach and cost of materials; and WHEREAS, United States Income Tax Regulations section 1.150-2 provides generally that proceeds of tax-exempt debt are not deemed to be expended when such proceeds are used for reimbursement of expenditures made prior to the date of issuance of such debt unless certain procedures are followed, one of which is a requirement that prior to the payment of any such expenditure, the issuer declares an intention to reimburse such expenditure; and WHEREAS, it is in the public interest and for the public benefit that the City declares its official intent to reimburse the expenditures referenced herein. NOW, THEREFORE, the Council of the City of Palo Alto does hereby RESOLVE, as follows: 1. The City intends to issue one or more series of debt payable from its Electric System revenues, including, but not limited to revenue bonds, loans and installment purchase obligations (collectively, the “Bonds”) for the purpose of paying the costs of the Project. 2. The City hereby declares that it reasonably expects (i) to pay certain costs of the Project prior to the date of issuance of the Bonds, and (ii) to use a portion of the proceeds of the Bonds for reimbursement of expenditures for the Project that are paid before the date of issuance of the Bonds. // // // // // // 3 3. The principal amount of the Bonds is not expected to exceed $350,000,000, not including the amount needed to pay for debt service reserve funds, costs of issuance and capitalized interest. INTRODUCED: PASSED: AYES: NOES: ABSENT: ABSTENTIONS: ATTEST: __________________________ City Clerk APPROVED AS TO FORM: __________________________ Chief Assistant City Attorney Jones Hall, A Professional Law Corporation By: _______________________ Christopher K. Lynch Jones Hall, A Professional Law Corporation Bond Counsel 0005_20241015 __________________________ Mayor APPROVED AS TO CONTENT: __________________________ City Manager __________________________ Director of Utilities __________________________ Director of Administrative Services/ Chief Financial Officer