HomeMy WebLinkAboutRESO 102621
6059692
Resolution No. 10262
Resolution of the Council of the City of Palo Alto Approving the 2026
Natural Gas Cost of Service Analysis Report, Amending Rate Schedules
G-1 (Residential Gas Service), G-2 (Residential Master-Metered and
Commercial Gas Service), and G-3 (Large Commercial Gas Service), and
repealing G-10 (Compressed Natural Gas Service).
R E C I T A L S
A.The City of Palo Alto (“City”) periodically conducts a Natural Gas Cost of Service
Analysis to follow the reasonable-cost analysis required by Proposition 26.
B.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.
C.On December 1, 2025, the City Council heard and approved the proposed rate
increase at a noticed public hearing.
The Council of the City of Palo Alto does hereby RESOLVE as follows:
SECTION 1. The Council hereby approves the 2026 Natural Gas Cost of Service Analysis
Report (Exhibit 1);
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate
Schedule G-1 (Residential Gas Service) is hereby amended to read as attached and incorporated.
Utility Rate Schedule G-1, as amended, shall become effective February 1, 2026 (Exhibit 2);
SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-2 (Residential Master-Metered and Commercial Gas Service) is hereby
amended to read as attached and incorporated. Utility Rate Schedule G-2, as amended, shall
become effective February 1, 2026 (Exhibit 2);
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule G-3 (Large Commercial Gas Service) is hereby amended to read as attached and
incorporated. Utility Rate Schedule G-3, as amended, shall become effective February 1, 2026
(Exhibit 2);
SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility
Rate Schedule Rate Schedule G-10 (Compressed Natural Gas Service) is hereby repealed,
effective February 1, 2026.
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SECTION 6. The City Council finds as follows:
a.Revenues derived from the gas rates approved by this resolution do not exceed the
funds required to provide gas service.
b.Revenues derived from the gas rates approved by this resolution shall not be used
for any purpose other than providing gas service, and the purposes set forth in
Article VII, Section 2, of the Charter of the City of Palo Alto.
SECTION 7. 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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SECTION 8. The Council finds that approving the FY 2026 Natural Gas Cost of Service
Analysis Report does not meet the California Environmental Quality Act’s (CEQA) 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, and therefore, no environmental assessment is required.
The Council finds that changing g as rates to meet operating expenses, purchase supplies and
materials, meet financial reserve needs and obtain funds for capital improvements necessary to
maintain service 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: DECEMBER 1, 2025
AYES: BURT, LAUING, LYTHCOTT-HAIMS, RECKDAHL, STONE, VEENKER
NOES:
ABSENT: LU
ABSTENTIONS:
ATTEST:
City Clerk Mayor
APPROVED AS TO FORM: APPROVED:
Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
22213852.2
Natural Gas Cost of Service
Analysis Report
City of Palo Alto
P R E P A R E D B Y E E S C O N S U L T I N G
November 6 , 202 5
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
16701 NE 80th Street Suite 102 Redmond, WA 980 52 425-889 -2700 Fax 866-611-3791 www.eesconsulting.com
G e o r g i a Te x a s A l a b a m a N e w H a m p s h i r e Wi s c o n s i n Mai n e Wa s h i n g t o n C a l i f o r n i a
Amber Gschwend, Director
amber.gschwend@gdsassociates.com
direct 425-655-1042
November 6, 2025
Lisa Bilir, Senior Resource Planner
City of Palo Alto
250 Hamilton Avenue
Palo Alto, CA 94301
SUBJECT: Draft 2026 Natural Gas Cost of Service Analysis Report
Dear Ms. Bilir:
Attached please find the draft 2026 Natural Gas Cost of Service Analysis (2026 Report) for the City of Palo
Alto (City) prepared by EES Consulting (EES), a GDS Associates company.
We based the conclusions and recommendations contained within this report on industry practice and
accepted rate setting principles consistent with California law. The assumptions are based upon the
financial and metering data provided by the City. The results are consistent with the cost of service and
rate making principles considered by the City.
EES developed this study in consultation with the City’s staff and legal counsel, and we appreciate the
internal efforts that have helped to refine the study. We also would like to thank the Utility Advisory
Commission subcommittee members for their input and feedback. Collaboration among all these
stakeholders has improved the recommendations and strengthened the foundation in this utility planning
effort. The findings, conclusions, and recommendations of this report supply the basis for the
recommended, fair and equitable rates.
Very truly yours,
Amber Gschwend
Director, EES Consulting Director, EES Consulting
amber.gschwend@gdsassociates.com russ.schneider@gdsassociates.com
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING i
TABLE OF CONTENTS
1 EXECUTIVE SUMMARY ................................................................................................... 1
1.1 System Description ............................................................................................................................................. 2
1.2 Rate Study Overview .......................................................................................................................................... 3
1.2.1 Revenue Requirement .................................................................................................................. 3
1.2.2 Cost of Service Analysis ............................................................................................................... 5
1.2.3 Rate Design Recommendations .................................................................................................. 5
1.2.4 Rate Change Recommendations ............................................................................................... 10
2 REVENUE REQUIREMENT DEVELOPMENT ................................................................. 12
2.1 Overview of the City’s Revenue Requirement Methodology........................................................... 12
2.2 Supply Costs ....................................................................................................................................................... 12
2.3 Distribution Costs ............................................................................................................................................. 13
2.4 Debt Service and Rate-Funded Capital Improvement Program (CIP) .......................................... 13
2.5 General Fund Transfer .................................................................................................................................... 14
2.6 Miscellaneous/Other Revenues .................................................................................................................. 14
2.7 Transfers to/from Reserves ........................................................................................................................... 14
2.8 Summary of Revenue Requirement........................................................................................................... 14
3 COST OF SERVICE ANALYSIS ....................................................................................... 16
3.1 COSA Definition and General Principles .................................................................................................. 16
3.2 City Natural GAs Distribution COSA Methodology ............................................................................. 17
3.2.1 Functionalization ........................................................................................................................ 17
3.2.2 Classification and Allocation of Costs ..................................................................................... 17
3.3 Average & Excess (A&E) ................................................................................................................................ 22
3.3.1 Average & Excess Calculation ................................................................................................... 23
3.4 Customer Weighting for Meter Costs ...................................................................................................... 26
3.5 Customer Classes of Service ......................................................................................................................... 27
3.6 Cost of Service Results ................................................................................................................................... 27
4 RATE DESIGN ................................................................................................................ 32
4.1 Recommended Rate Design: Distribution ............................................................................................... 32
4.1.1 Residential (G1) .......................................................................................................................... 32
4.1.2 Small Commercial and Residential Master-Metered (G2) ..................................................... 35
4.1.3 Large Commercial (G3) .............................................................................................................. 37
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING ii
4.2 Supply Charges ................................................................................................................................................. 38
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 1
1 Executive Summary
The City of Palo Alto (City) retained EES Consulting (EES), a GDS Associates company, to perform a natural
gas cost of service analysis (COSA) and rate study for Fiscal Year 2025-2026 (FY 2025-2026)1 (2026 Report)
as part of its ongoing efforts to maintain fiscally prudent, fair, cost-based rates for its natural gas
customers. This 2026 Report is primarily concerned with the development of natural gas distribution
rates.
While distribution rates are the primary focus of this study, the City also charges four supply-related rates.
These supply-related rates recover the costs that are outside of the immediate control of the City, such
as the cost of purchasing gas and transporting it to the City’s distribution system. These four rates are: 1)
the gas commodity rate, which represents the cost of buying gas in the markets, 2) the gas transportation
rate, which represents the cost of transporting purchased gas to Palo Alto, 3) the Cap and Trade
compliance rate, which represents the cost of mandated participation in the State’s cap and trade
program, and 4) the carbon offset rate, which represents the cost of buying offsets for the City’s Carbon
Neutral Gas Portfolio. These four charges are discussed at the end of this report.
The recommendations from this report are the second step in a 2-step rate adjustment process. The City
adopted this 2-step approach as a phase-in of rate changes. The first adjustment was an 8.7% across the
board rate increase effective July 1, 2025. This second adjustment is a rebalancing adjustment across rate
classes based on the results of this study.
The starting point for this analysis was the study completed for FY 2019-2020 (2020 Study). The City
updated the 2020 COSA model for FY 2020-2021 period (2021 Study), with some assistance by EES. Since
then, the City has implemented distribution system rate adjustments by uniformly adjusting distribution
rates using the percent change in the distribution revenue requirement; thus, distribution rates since 2021
have reflected the 2020 Study framework with an 8.7% increase to all rate schedules in July of 2025 based
on the City’s budget increase.
This 2026 Report is a comprehensive update to the 2020 Study. All assumptions and inputs have been
updated and new rate designs incorporated into the recommendations. This 2026 Report also
incorporates the City’s design principles in its recommendations.2
EES worked closely with the City’s technical staff, management, and Utility Advisory subcommittee
members to refine data inputs for gas sales, expenses, and assets. EES had no issues obtaining appropriate
1 July 2025 through June 2026.
2On September 15, 2025, (Staff Report 2507-4958) the City Council directed staff to follow the reasonable-cost
analysis required by Proposition 26, and that staff collaborate with the UAC to develop revised gas rates effective
January 2026, based on the following design principles: (1) Rates must be based on the reasonable 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) The COSA should involve a review of all existing rate schedules for
applicability in the COSA; (3) The impact of any proposed changes on low-income customers should be evaluated in
alignment with state law, including, without limitation, Public Utilities Code sections 890 and 898; (4) Determine the
proper allocation of fixed and variable costs and how those can be implemented in various rate designs; (5) Review
non-rate revenue sources that may be available for rate discounts or rebates.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 2
data responses or clarification when necessary and commends the transparency of the process and the
capability of internal resources.
1.1 SYSTEM DESCRIPTION
The City’s gas utility serves approximately 23,386 customer accounts over an area of approximately 26
square miles. The gas utility is responsible for the operations and maintenance of the distribution system,
and it purchases all gas from outside suppliers. Total gas consumption in the City forecasted for FY 2025-
2026 is 25.8 million therms. It is expected for sales to continue near their current weather-adjusted level
of 25 to 26 million therms per year and near the current volume of services. Table 1-1 shows the number
of services and annual gas use for each rate class.
TABLE 1-1: NUMBER OF SERVICES UNDER CURRENT RATE SCHEDULES AND
FORECASTED ANNUAL USE IN FY 2025-2026
Rate Schedule Services Annual Use, therms
G1 Residential 21,163 9,762,524
G2 Residential Master Metered and Commercial 2,193 11,506,051
G3 Large Commercial 30 4,510,914
Total 23,386 25,779,489
Gas utility rate schedules consist of a fixed Monthly Service Charge ($/meter/month) and a volumetric
Distribution Charge ($/therm), which vary by rate class. Volumetric charges recover the proportional costs
of both commodity purchases and variable distribution (infrastructure) costs.
Table 1-2 summarizes the rate classes and current rate design for the distribution portion of the rate
schedule. It does not include these volumetric supply charges: Commodity Charge (Monthly Market
Based), Cap and Trade Compliance Charge, Transportation Charge, and Carbon Offset Charge.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 3
TABLE 1-2: CURRENT DISTRIBUTION RATE DESIGN
Utility Rate Schedule Description Current Rate Design
G1: Residential Separately metered:
Single-family residential customers
Multi-family residential customers
2-Tier Volumetric Charge with seasonal
lower-cost tier 1 quantities
Tier 1 Summer:1 20 therms/30-day-billing
Tier 1 Winter: 60 therms/30-day-billing
G2: Residential Master-
Metered and
Commercial (“Small
Commercial”)
Commercial customers who use less
than 250,000 therms per year at one
site, and master-metered residential
customers in multifamily residential
Volumetric Charge, $/therm
G3: Large Commercial
least 250,000 therms per year at one
3
Volumetric Charge, $/therm
1. Summer rates are effective April 1 through October 31. Winter rates are effective November 1 through March
31.
1.2 RATE STUDY OVERVIEW
The purpose of this report is to discuss the data inputs, assumptions, and results that were part of
developing the rate study. A comprehensive rate study generally consists of three separate, yet
interrelated analyses. These three analyses include a revenue requirement, COSA, and rate design.
1. Revenue Requirement Analysis: This analysis examines the various sources and uses of funds for the
utility, and it determines the overall revenue required to operate the utility.
2. Cost-of-Service Analysis (COSA): COSA is used to determine the fair allocation of the total revenue
requirement to the various customer classes of service (e.g., residential, small commercial, large
commercial). This analysis provides a determination of the level of revenue responsibility of each class
of service and the adjustments from current revenues required to meet the cost of service.
3. Rate Design Analysis: The third analysis involves evaluating the rate design options available and
designing rate schedules that can be applied to each rate class to collect revenues to cover the cost
to serve customers in that class.
1.2.1 Revenue Requirement
The first step in completing a rate study is to develop the revenue required from rates. A revenue
requirement analysis compares the overall rate revenue demands of the utility based on its forecasted or
budgeted expenses less any sources of non-rate revenue. Over the course of the study period, the City
prepared several financial analyses that included a forecast of FY 2025-2026 sales, revenues, and
expenses. The City has an in-depth accounting and data system that keeps track of ongoing and budgeted
or approved expenditures. EES based the forecasts on projected FY 2026 expenses and sales estimates for
the natural gas utility. The 2026 Report uses a cash-basis method for determining the City’s revenue
3 In addition to these standard rate classes, City of Palo Alto Utilities (CPAU) provides service to its CNG facility. This
facility does not utilize the distribution system, rather it is directly connected to the intertie with PG&E. As such, the
City is separately developing a cost-based fee for service administration. Changes in this fee do not materially impact
the COSA results.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 4
requirement based on the City’s financial forecast. The cash-basis revenue requirement is appropriate
because it is consistent with how the City forecasts expenses for the natural gas utility.
FY 2025-2026 natural gas commodity costs are included in City’s financial plan. However, these costs are
adjusted monthly to pass through actual commodity rates charged to the City by its wholesaler. Therefore,
commodity charges are not set based on the 2026 Report; the 2026 Report only evaluates appropriate
distribution charges for the year.
Table 1-3 summarizes the FY 2025-2026 distribution revenue requirement totaling $41.3 million. Rates
were adjusted on July 1, 2025 to meet this requirement using the straight-line inflator approach. Because
the rate levels have been adjusted to collect the FY2026 revenue required from rates, the proposed
rebalancing and rate design changes recommended in the 2026 Report do not require an overall increase
in rate revenue. The 2026 Report recommends rebalancing between rate classes based on the COSA
results, and this rebalancing has rate and bill impacts to individual customers and across rate classes, as
summarized in Table 1-4.
TABLE 1-3: GAS DISTRIBUTION SYSTEM REVENUE REQUIREMENT: FY 2025-2026 Revenue Requirement
Distribution O&M $9,797,408
Customer Accounts and Services $3,208,008
Administration and General $5,002,927
Debt Service & CIP from Rates $8,339,643
General Fund Transfer $9,734,580
Total Expenses $36,082,566
Transfers to Reserves $5,874,887
Other Revenues ($689,111)
Total Revenue Required from Rates (Revenue Requirement) $41,268,342
Revenues Based on Rates Currently in Effect $41,268,342
Total Required Rate Revenue Increase (Decrease) 0%
TABLE 1-4 BILL IMPACTS OF PROPOSED REBALANCING AND RATE DESIGN
Rate Schedule Monthly Usage (Therms)
Current
Rates
Recommended
FY2025-2026 Rate
Bill
Impact
Residential
G-1 Summer: 10; Winter: 30 $50.78 $54.73 8%
Summer: 17; Winter: 51 $73.44 $79.33 8%
Summer: 30; Winter: 80 $127.24 $134.60 6%
Summer: 45; Winter: 150 $247.31 $263.50 7%
Commercial
G-2 Small: 35 $242.74 $103.05 (58%)
Medium: 280 $739.59 $676.33 (9%)
Large: 2,648 $5,558.74 $5,927.83 7%
G-3 20,834 $42,696.69 $44,131.74 3%
1. Includes supply-related costs; assumes 12-month impact.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 5
1.2.2 Cost of Service Analysis
Cost-of-service is important for the fair allocation of the revenue requirement to the various customer
classes of service. The revenue requirement shown in Table 1-3 for the City was functionalized, classified
and allocated.
Functionalization is the attribution of each cost line-item to one of four different functional parts of
gas service: (1) production (commodity), (2) transportation, (3) distribution, or (4) shared services.
This 2026 Report evaluates only distribution costs and distribution-related overhead (shared services).
Classification is the determination of whether the costs associated with a functionalized line item are
most appropriately allocated based on energy use (therms), demand (maximum system capacity), or
customer (simply having a service).
Allocation is the process of using the classification for each functionalized line item to assign costs to
each customer class. For example, a cost item classified as “energy use” might be allocated based on
annual therm use. This means that the line-item cost is directly correlated to the quantity of energy
used by each customer class annually. This process is described in more detail in the section titled
“Cost of Service Analysis.”
Ultimately, the COSA process requires analysis of how each customer class contributes to the expenses
incurred by the utility to provide service. Table 1-5 shows, by customer class, the revenue requirement
and revenue change needed for FY 2025-2026.
TABLE 1-5: DISTRIBUTION COSA RESULTS: FY 2025-2026
Projected FY 2025-
Revenue
FY 2025-2026
Deficiency/
Revenue
G1 – Residential $17,738,316 $19,210,223 ($1,471,907) 8.3%
$18,006,240 $16,095,484 $1,910,756 (10.6%)
$5,523,787 $5,962,635 ($438,848) 7.9%
Total $41,268,342 $41,268,342 $0 0.0%
1.2.3 Rate Design Recommendations
The final step in the rate study process is to design rates for each class of service. In California, local
governments are subject to Article XIII C of the California Constitution, as amended by Proposition 26,
which requires that gas rates and charges must not exceed the reasonable costs of providing gas service,
and requires that the City’s costs of gas service are allocated to each customer in a manner that bears a
fair or reasonable relationship to the customer’s burdens on, or benefits received from, the gas utility. As
a result, the City sets rates based on COSA results. The goal of rate design is to create rates that recover
costs from customers within each class based on the utility’s cost of providing service. The basis for each
rate design recommendation is provided in this section followed by the recommended rates.
All rate classes are charged a monthly service charge and volumetric charge to recover distribution costs.
EES does not recommend changes to this basic rate design structure, except for a refinement in the
development of the Monthly Service Charge for G2 customers. The refinement is based on additional
analysis of G2 class usage and costs. Section 1.2.3.2, Commercial provides more details on this change.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 6
1.2.3.1 Residential
The G1 distribution rates consist of a monthly service charge and a 2-tiered volumetric rate: the Tier 1
rate applies to usage up to the baseline quantity and the Tier 2 rate applies to all usage above the baseline.
The G1 rate structure proportionately recovers energy and demand (capacity) costs incurred by the class.
Specifically, individual residential customers have usage characteristics that are similar in both usage
profile and baseline usage. For the purposes of this 2026 Report, “Baseline” usage is defined as average
use and “usage profile” is defined as the shape of energy use over time. Figure 1-1 shows that the daily
usage profiles for residential customers are consistent between individual customers despite different
overall usage level (low, low-medium, medium-high, and high). Second, seasonal baseline usage within
the residential class is relatively uniform across individual customers. As such, a tier threshold can be
applied to customers without being discriminatory toward customers with higher use, because higher-use
customers only pay their proportional fair share of the incremental cost of serving that 2nd tier of use.
FIGURE 1-1: RESIDENTIAL DAILY GAS USE BY USAGE LEVEL:
DAILY SHARE (%) OF ANNUAL USE 4
While the tier rates do not change between seasons, the baseline quantity above which Tier 2 rates apply
does change and is higher in winter than in the summer because natural gas-based heating is used more
in the winter and causes higher gas consumption.5 Therefore, the class average therms are higher in the
winter than in the summer. This tiered structure ensures that all G1 customers pay for their Tier 1 demand,
but that all the costs of Tier 2 service are only borne by the customers that have Tier 2 demand. EES
calculated the G1 tiered rates using the Base and Excess method (discussed in more detail in Section 4.1)
and proposes a modest increase of summer baseline from 20 to 23 therms per thirty-day billing period.
4 CALMAC Customer Load Shapes - PG&E. https://www.calmac.org/customer_load_shapes_pge.asp
5 Usage above the Tier 1 baseline quantity is charged Tier 2 rate. The current quantity is 20 therms/30-day-billing in
summer and 60 therms/30-day-billing in winter.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 7
Table 1-6 summarizes the costs to be recovered in each rate component for G1.
TABLE 1-6: G1 RATES AND COST RECOVERY
Rate Component Recovers The Following Costs:
Monthly Service Charge Customer-related costs such as customer service, billing, and overhead adders
Tier 1 Volumetric Rate Energy-related costs plus 21% of demand-related distribution unit costs1
Tier 2 Volumetric Rate Energy-related costs plus 79% of demand-related distribution unit costs1
1See calculations in Section 4.1.1. Residential (G1) Rate Design, Table 4-3.
G1 usage patterns are distinguishable from G2 and G3 usage, and that difference in usage patterns is the
cause for a tiered approach to allocate costs among customers in the G1 (residential) class, but not in the
G2 or G3 classes. Average use is much more consistent (less variable) among all individually metered
residential customers in comparison to G2 or G3 customers. As shown in Table 1-7 below, G1 therm
consumption has a small variation between the median (midpoint consumption) and the average, and the
spread across all the data is relatively low compared with G2 and G3. To illustrate the relative variability,
the average is divided by the spread to produce 0.88 for G1. A higher value indicates that data is more
closely centered around the average value. The spread around G2 and G3 average use is much greater
(showing more variability), as indicated by the lower values of 0.33 and 0.41, respectively.
TABLE 1-7: AVERAGE THERMS/MONTH BY SERVICE ACCOUNT
G1
Residential
G2
Small Commercial
G3
Large Commercial
Average 33 462 13,534
Median 27 78 3,530
% Difference between Average and Median 23% 494% 85%
Spread (Standard deviation) 38 1,382 33,362
Average/Spread (coefficient of variation) 0.88 0.33 0.41
When average usage across individual customers in a class is similar, a certain threshold is associated with
a consistent or baseline share of system capacity that is used relatively proportionately by all customers;
usage above that threshold creates additional system capacity costs that are caused by only a small
portion of the customer base. Average use is an equitable threshold in a relatively low-spread
environment because it identifies the average consistent demand placed on the system by all users. Use
that exceeds the average creates a demand for additional capacity used by only a fraction of the
customers. A tiered system then allocates the additional (“excess”) capacity costs only among the
customers that placed the Tier 2 excess demands on the system. By structuring the rate this way, average
users are not forced to subsidize the costs of larger infrastructure they do not use. At the same time, the
initial average increment of usage is charged identically – so all users pay the same rate for usage up to
the baseline.
Natural gas is a service. Customers must pay not only for the commodity (the natural gas itself) that is
served to their property, but also for all of the infrastructure necessary to distribute the natural gas to the
property. For example, when all houses are the same size and have the same end-use systems, customers
who use an average or below-average amount of natural gas should not only pay proportionally less for
the commodity than high users because they are using proportionally fewer molecules of natural gas; they
should also pay proportionally less of the additional costs incurred by the utility to serve the customers
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CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 8
who use excess energy at peak times (such as the incremental additional cost of a larger pipeline). A tiered
rate ensures that the City’s incremental additional costs to serve Tier 2 demands are charged to the cause
of those costs. Higher users therefore pay a marginally higher rate – but only for the portion of their use
that exceeds the average or baseline threshold.
1.2.3.2 Commercial
EES does not recommend changing the volumetric rate structure for G2 and G3 because the current
structure reasonably recovers individual customer energy and demand components according to how
each customer uses the system. While there are inherent differences in consumption across individual
customers within the G2 and G3 rate classes, the shape of these consumption profiles within each class
are relatively consistent as illustrated in Figure 1-2. Figure 1-2 illustrates the annual usage profiles for
different types of businesses. The differences in average consumption between customers are due
primarily to the type of business operation (end-use of natural gas i.e., refrigeration, heating, etc.) and
building footprint (square footage). Grocery store use averages 8 therms per day during the summer,
whereas government buildings average approximately 2 therms per day in the summer. Winter usage is
also significantly different between these business types, where grocery stores average 14 therms per day
and government buildings average closer to 8 therms per day. These differences in baseline usage mean
that a tiered rate applied to all customers within the class would result in subsidies between customers
with different baseline use. Because customers with higher baseline use would more often exceed the
threshold, those customers would pay more than their fair share of costs.
FIGURE 1-2: COMMERCIAL DAILY GAS USE BY BUILDING TYPE6
While these customers vary significantly in total gas usage, the usage profiles for commercial and
industrial customers are similar within each class (G2 or G3), as shown in Figure 1-2. Because customers
6 CALMAC Customer Load Shapes - PG&E. https://www.calmac.org/customer_load_shapes_pge.asp. The above
example profiles are included in G2 and G3 classes according to Table 3-4.
0
2
4
6
8
10
12
14
16
18
20
Th
e
r
m
s
Retail Religious Construction Office Government Grocery Health
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 9
within each class have similar usage profiles, the cost to serve individual customers within each class is
similar from a volumetric perspective ($/therm). The similar cost of service is determined from the COSA
methodology which allocates costs based on class usage profile. Therefore, a uniform variable charge is
an equitable rate design for both G2 and G3 classes.
This 2026 Report updated input, assumptions, and calculations of fixed charges. The methodology and
supporting assumptions are detailed in Section 3. In addition to the methodology review, the 2026 Report
provides additional analysis for G2 meter capacity-related costs by comparing the average consumption
for various meter capacities. Fixed costs are higher for customers with larger capacity service because of
the larger and more expensive equipment required to provide higher capacity service. Three G2
subclasses are defined based on meter capacity, as shown in Table 1-8. The recommended monthly
service charge is developed based on the COSA methodology which, in part, allocates costs to each
customer class based on meter costs.
With the recommended rates, G2 customers would be charged a Monthly Service Charge based on
maximum meter capacity; customers with lower-capacity meters would pay a lower Monthly Service
Charge than those with higher capacity meters. For example, a customer with a meter capacity of 200
standard cubic feet per hour (scfh) would pay the lowest Monthly Service Charge, at $29.24.
TABLE 1-8: G2 MONTHLY SERVICE CHARGES: FY 2025-2026
CPAU Approved Maximum
7
Number of
Current Monthly
Service Charge
Monthly Service
Charge
1,136 $170.55 $29.24
940 $170.55 $94.56
117 $170.55 $419.08
While Table 1-8 shows the lower Monthly Service Charge for smaller G2 customers (defined as customers
with meter capacity up to 220 scfh), Table 1-9 illustrates that this same group of customers should also
receive an overall rate decrease. The rate decrease is primarily achieved through the lower monthly
service charge. The column “Revenue Requirement” in Table 1-9 presents the total revenue requirement
amounts (including fixed and variable costs) that correspond to the recommended Monthly Service
Charges shown in Table 1-8 above. The recommended rates for G2 are provided in Section 1.2.4.
7 All meters have a manufacturer-rated capacity and an approved for engineering maximum capacity. The CPAU
approved capacity is typically slightly lower than the manufacturer maximum capacity due to connected
characteristics and other variable conditions.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 10
TABLE 1-9: G2 REVENUES AND REVENUE REQUIREMENT: FY 2025-2026
CPAU Approved Maximum
2026 Revenues
at Current
Monthly Service
Revenue
Projected
FY 2026
Revenue
Change
$3,251,805 $1,740,448 ($1,511,358) (46.5%)
Above 220 but Below 4,000 $8,235,944 $7,630,668 ($605,276) (7.3%)
4,000 and Above $6,518,490 $6,724,368 $205,878 3.2%
Total G2 $18,006,240 $16,095,484 ($1,910,756) (10.6%)
Customers that exceed 250,000 therms per year in consumption are placed on the G3 rate schedule. For
this level of consumption, the service sizes and meter costs are much more uniform within the class
compared with G2. For example, the cost for the smallest meters in G3 is 56% of the cost for the largest
capacity meters. The same comparison for G2 results in the smallest capacity meter cost at less than 2%
of the cost of the largest capacity meter. Meter cost uniformity within a customer class is a factor in
determining a cost-based rate design for each class. Customers with larger meters are charged a higher
monthly Service Charge. Because individual customers within G3 have relatively uniform meter sizes and
costs, it is reasonable to charge the same monthly service charge to all G3 customers.
1.2.4 Rate Change Recommendations
Table 1-10 provides a comparison of current rates and recommended rates for FY 2026, including the
newly developed G2 Monthly Service Charge by meter capacity.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 11
TABLE 1-10: CURRENT AND RECOMMENDED RATES
Current FY 2025-2026 Percent
$18.40 $19.58 $1.18 6.4%
Distribution Charge ($/therm)
Tier 1
For Winter: first 60 therms/30-day-billing
For Summer: first 20 therms/30-day-billing
(current); first 23 therms/30-day-billing
$0.8944 $1.0456 $0.1512 16.9%
Tier 2
For Winter: over 60 therms/30-day-billing
For Summer: over 20 therms/30-day-billing
(current); over 23 therms/30-day-billing
$2.2873 $2.5203 $0.2330 10.2%
G2: Small Commercial (Total)
Monthly Service Charge $170.55 $78.03 ($92.52) (54.2%)
Distribution Charge ($/therm)
G2: Meter Capacity ≤ 220 scfh
Monthly Service Charge $170.55 $29.24 ($141.31) (82.9%)
Distribution Charge ($/therm) $1.1749 $1.2204 $0.0455 3.9%
G2: Meter Capacity > 220 scfh and < 4,000 scfh
Monthly Service Charge $170.55 $94.56 ($75.99) (44.6%)
Distribution Charge ($/therm) $1.1749 $1.2204 $0.0455 3.9%
G2: Meter Capacity ≥ 4,000 scfh
Monthly Service Charge $170.55 $419.08 $248.53 145.7%
Distribution Charge ($/therm) $1.1749 $1.2204 $0.0455 3.9%
G3 Large Commercial
Monthly Service Charge $780.34 $1,712.36 $932.02 119.4%
Distribution Charge ($/therm)
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 12
2 Revenue Requirement Development
This section presents the development of the natural gas revenue requirement in the 2026 Report. A
revenue requirement analysis compares the overall revenues of the utility to its projected expenses and
determines the overall adjustment to rate levels required for the utility’s revenues to meet those
expenses.
2.1 OVERVIEW OF THE CITY’S REVENUE REQUIREMENT METHODOLOGY
The City utilizes the cash basis approach for determining its revenue requirement. The revenue
requirement for the City’s natural gas utility includes the elements shown in Table 2-1.
TABLE 2-1: ELEMENTS OF A CASH BASIS REVENUE REQUIREMENT
+ Operating Expenses
Natural Gas Supply Expense
Distribution O&M Expense
Customer Accounting Expenses
Administrative and General Expense
+ Capital Improvements Funded from Rates
+ General Fund Transfer
= Total Revenue Requirement
- Transfers from Reserves
- Miscellaneous Revenue Sources
= Net Revenues Required From Rates (or Net Revenue Requirement)
In this basic analytical framework, the first step in determining the revenue requirement is to select a
period over which to review revenues and expenses. This 2026 Report uses a future fiscal year test period
to correspond with the City’s budget year. The revenue requirement in this 2026 Report reflects the City-
provided financial forecast (budget) for FY 2025-2026.
The next step in the analysis was to translate the City-budgeted costs into the system of accounts used by
a natural gas utility.
2.2 SUPPLY COSTS
While this 2026 Report does not include an analysis for gas supply costs, a summary of these costs is
provided here for reference. As with most natural gas utilities, a major expense associated with operating
the utility is the cost of natural gas supply. The City is projecting FY 2025-2026 gas supply costs at $29.2
million or 42 percent of the total FY 2025-2026 revenue requirement. Supply costs are charged to
customers via four pass-through rate components. The following rate components are adjusted monthly
to reflect actual costs:
1. Gas commodity: This represents the cost of buying gas in the market.
2. Gas transportation: This reflects the cost of transporting purchased gas from the delivery points
to Palo Alto.
3. Cap and Trade compliance: This covers the cost of mandated participation in the State’s cap and
trade program.
4. Carbon offset charge: This accounts for the cost of buying offsets needed to comply with the City’s
Carbon Neutral Gas Portfolio Program.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 13
While the cost of natural gas supply is included in the 2026 Report, it is treated as a separate category
because the cost of natural gas supply is collected through separate rate components. A description of
these separate rates is provided in Section 4.2.
2.3 DISTRIBUTION COSTS
Total FY 2025-2026 revenue requirement for distribution is projected to be $41.3 million. Distribution
operating expenses include the following (other expenses are discussed in Sections 2.4 through 2.7):
Physical system costs of $9.8 million. These costs include the operation and maintenance of
distribution system infrastructure such as distribution mains, regulators, and meters.
Customer service-related costs of $3.2 million. These costs include meter reading, billing, key account
representatives and general customer service.
Administrative and general costs of $5.0 million. These costs include functions like accounting,
purchasing, legal, and other administrative functions provided by the City’s General Fund staff, as well
as Utilities Department administrative overhead, insurance, rent, and transfers to city non-enterprise
funds for items such as utility building improvements and to other enterprise funds for items such as
the gas utility’s share of Geographic Information System project costs.
The customer service category includes $0.5 million in expenses for energy efficiency, conservation
(demand side management), and low-income assistance programs. These expenses are incurred by the
gas enterprise as part of a program established by the City pursuant to California Public Utilities Code
Section 898. By virtue of this program, gas customers are exempted from a state surcharge that would
otherwise be collected on utility bills pursuant to Public Utilities Code Section 890. The City’s energy
efficiency and demand-side management programs reduce customer gas demand and are designed to
reduce the need for capital expenditures that would otherwise be needed to expand the capacity of the
gas distribution system.
2.4 DEBT SERVICE AND RATE-FUNDED CAPITAL IMPROVEMENT PROGRAM (CIP)
The City must cover its capital improvement projects (CIP) through either debt, cash from rates, or
external sources such as grants or loans.
For FY 2025-2026, the City has debt service payments of $0.8 million for past borrowings to fund CIP,
specifically the 2011 Series A Utility Revenue Refunding Bonds. This bond issuance was to refinance the
$18 million principal remaining on the Utility Revenue Bonds, 2002 Series A issued for the Gas and Water
Utilities to finance various improvements to the distribution systems.
The majority of CIP is funded from rate revenues. For FY 2026, the budgeted CIP is $7.5 million. This
amount is partially offset by contributions made by new customers in the form of connection fees. The
$0.7 million in connection fees is included in other revenues, which is further discussed below. Total FY
2025-2026 debt service and rate-funded CIP is $8.3 million before customer contributions.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 14
2.5 GENERAL FUND TRANSFER
The City calculates the equity transfer from its natural gas utility based on a methodology approved by
voters in November 2022.8 The General Fund Transfer is estimated to be $9.7 million in FY 2025-2026.
2.6 MISCELLANEOUS/OTHER REVENUES
The City receives additional operating and non-operating revenues. These revenues include interest
earned on City reserves, connection fees (customer charges that recover the cost of capital facilities
necessary to accommodate increased demand on the system) and other miscellaneous service revenues.
Miscellaneous revenues include customer discounts and uncollectible bills. These are recovered from non-
rate revenues, including interest income from investments. For FY 2025-2026, the projection for the total
miscellaneous/other revenues is $0.7 million. The miscellaneous/other revenues are separate from fixed
and volumetric charges for natural gas service and are therefore considered an offset to the total revenue
required from retail rates.
2.7 TRANSFERS TO/FROM RESERVES
In its FY 2025-2026 natural gas financial forecast, the City is anticipating that $5.9 million of rate revenues
will need to be added to the reserves in FY 2025-2026 to restore both the operating and CIP reserves. The
operating reserve balance is adjusted to meet future debt service requirements as projected from the
City’s financial plan. Additionally, the City plans to make contributions to the CIP reserve fund to balance
year-to-year fluctuations in CIP expenditures. The use of the reserve fund allows the City to have more
stable and gradual rate increases over time.
2.8 SUMMARY OF REVENUE REQUIREMENT
The City’s Distribution revenue requirement for the FY 2025-2026 test period is summarized in Table 2-2.
No overall rate increase is required to meet projected FY 2025-2026 costs, due to current overall rate
levels.
8 In November 2022, voters approved Measure L, amending the Municipal Code, Section 2.28.185, “Natural Gas
Utility Transfer” states: “Each fiscal year the City Council may transfer from the natural gas utility to the general fund
an amount equal to 18% of the gross revenues of the gas utility received during the fiscal year two fiscal years before
the fiscal year of the transfer. At its discretion, the City Council may decide to transfer a lesser amount. The projected
cost of the transfer shall be included in the City’s retail natural gas rates as part of the cost of providing gas service.”
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 15
TABLE 2-2: SUMMARY OF NATURAL GAS DISTRIBUTION REVENUE REQUIREMENT: FY 2025-2026 Revenue Requirement
Distribution O&M $9,797,408
Total Expenses $36,082,566
$5,874,887
Total Revenue Required from Rates (Revenue Requirement) $41,268,342
Additional Rate Revenue Needed without Gas Supply $0
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 16
3 Cost of Service Analysis
The objective of the cost-of-service analysis (COSA) is to allocate the costs in the revenue requirement to
each customer class of service to determine the cost to serve those customers. An essential principle of
cost allocation is the concept of cost-causation. Cost-causation evaluates which customer or group of
customers causes the utility to incur certain costs by linking system facility investments and the operating
costs to serve certain facilities to the way customers use those facilities and services. This section of the
report discusses the general approach used to allocate the City’s costs and presents a summary of the
results.
3.1 COSA DEFINITION AND GENERAL PRINCIPLES
A COSA study allocates the costs of providing utility service to the various customer classes served by the
utility based upon the cost-causal relationship associated with specific expense items. This approach is
taken to develop a fair and equitable designation of costs to each class of service. The COSA allocates joint
and common costs among the various classes using factors appropriate to each type of expense. The COSA
is the second step in a traditional three-step process for developing natural gas service rates, after
development of the revenue requirement but before designing rates.
This COSA study is an embedded cost analysis. Embedded costs generally reflect the actual costs incurred
by the utility and closely track the costs kept in its accounting records.
There are three basic steps to follow in developing a COSA: functionalization; classification; and allocation.
Functionalization separates costs into major categories that reflect the different services provided to
customers and the types of assets used to provide those services. The primary functional categories for
the City’s natural gas utility are supply and distribution.
Classification determines the portion of each cost that is related to specific cost-causal factors, or
“classifiers.” These classifiers might be demand-related (related to the class of service’s peak energy usage
over a given period), energy-related (related to the total energy used by the class of service over a given
period), or customer-related (costs incurred as a result of receiving service, regardless of the energy use
or peak demand). Natural gas supply or commodity costs are related to the amount of natural gas
purchased and are therefore considered energy-related. The distribution system is designed to extend
service to all customers attached to the system and to meet both the peak day demand and the annual
energy requirement of each customer, meaning that costs are both demand-related and energy-related.
Some operational costs, such as billing, are generally customer-related. Costs can also be classified based
on whether they are system-wide or specifically assigned to a customer or group of customers, if
appropriate.
Allocation of costs to specific classes of service happens after those costs have been classified. Allocation
factors are chosen to allocate the costs assigned to each classification, and the share of costs allocated to
each class of service are based on the class’s contribution to the specific allocation factor selected. For
example, certain distribution costs might be classified as partially demand-related and partially energy-
related. The demand-related costs could be allocated to the classes of service using each class’s
contribution to the annual system peak day demand (the highest day for the system as a whole at any
time during the year), while the energy-related costs would be allocated to classes based on their annual
energy usage. In this example, the allocation factors are 1) each class of service’s contribution to the
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 17
annual system peak day demand, and 2) the annual energy usage of each class of service. An analysis of
customer requirements and usage characteristics is completed to develop allocation factors reflecting
each of the classifiers employed within the COSA.
3.2 CITY NATURAL GAS DISTRIBUTION COSA METHODOLOGY
3.2.1 Functionalization
As mentioned previously, this rate study addresses only the distribution portion of the City’s gas utility.
As such, all costs included in the revenue requirement have already been functionalized as Distribution.
Distribution costs include are allocated based on the depreciated value of all the physical assets (“rate
base”) and all operating costs required to transport the natural gas commodity from the point of
interconnection across the City’s distribution system to customers at their meters.
3.2.2 Classification and Allocation of Costs
The classification and allocation factors used for each component of the rate base and revenue
requirement are shown in Table 3-1 and Table 3-2 and are discussed in more detail below. The purpose
of looking at the rate base in the COSA is to set the cost causation associated with the physical assets,
which are then used to guide the allocation of the annual expenses. The rate base for the City’s natural
gas utility consists of the net value of its physical assets – both the distribution system itself (“Distribution
Plant”) and the natural gas utility’s fair share of general City facilities, equipment, and other capital such
as software that provide for the administration and general costs of the utility (“General Plant”). The rate
base is taken from audited fiscal 2025 physical asset/plant values. The revenue requirement is a
forecasted future year.
Descriptions of each factor are included in Table 3-3. In general, this COSA employs the same methodology
used in the 2020 Study but with changes to allocation factors based on updated cost-causation.
Specifically, the distribution rate base classification was updated as discussed in Section 4.3 below.
Distribution costs are classified into the following components: demand, energy, customer, and direct
assignments. The demand component reflects the portion of costs driven by peak demand for natural gas.
The energy component is related to costs incurred to provide the annual amount of gas to customers or
groups of customers. The customer component covers the facility and operating costs that vary with the
number of customers, such as meters and billing. Directly assigned costs are costs that can be attributed
to just one or more rate classes. The following are the specific classifiers used for the City’s distribution
function:
Demand. Demand-related costs are those that vary with the peak demand or the maximum rates of
natural gas supply to classes of service. Customer and system demands for this analysis are measured
in peak day therms. Demand costs are generally related to the size of facilities needed to meet a
customer’s maximum daily demand. Generally, the rate base is allocated based on the Average &
Excess method which involves a demand component (see Section 3.3). The allocated rate base is then
used to allocate certain revenue requirement expenses.
Energy. Energy-related costs are those that vary with the total amount of natural gas consumed by
customer class. Usage measured in therms is used in this portion of the analysis. Energy costs are the
costs of consumption over a specified period, such as a month or year. Reserve fund contributions are
an example of a cost item that is allocated to customer classes based on therms used. This ensures
that each customer contributes to the reserve fund based on their proportional use of the system.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 18
Customer. Customer-related costs are those that vary with the number of customers. Customer costs
are weighted to account for differences in the cost of providing services to those customers. For
example, the service line and metering associated with serving a large commercial customer is larger
and more costly and requires substantially more work and material than the service line and meter
for a small residential customer. Customer service expenses are typically allocated to customers based
on some measure of number of customers or weighted customer service factors based on the amount
of time and complexity to provide service to different types of customers.
Direct Assignment. Some costs are directly assigned to specific classes of service. For example, costs
associated with specific account representatives to large commercial customers are allocated directly
to the G3 rate class. In exchange, G3 does not share in other customer service costs incurred by the
other classes.
The methodology for classification and allocation of the City’s rate base is summarized in Table 3-1. All
line items in this table are functionalized as Distribution.
Note that the rate base does not reflect the annual expenses associated with running the utility but
instead reflects the capital investments made by the utility for the physical assets in the distribution
system or that are part of the general administration of the utility. The purpose of looking at the rate base
in the COSA is to set the cost causation associated with the physical assets, which are then used to guide
the allocation of the annual expenses.
Working capital is traditionally added to cover the cash on hand needed to run the utility. An estimate of
1/8th of operating costs is typically used to reflect the lag time between revenue collections and accounts
payable. This metric, 1/8th of annual expenses, or 45 days,9 is common because it accounts for the
operating expenses that need to be paid prior to the collection of revenues after metering and billing.
9 One eighth of 365 days is 45.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 19
TABLE 3-1: DISTRIBUTION RATE BASE
Asset Description
Asset Value
FY 2021-2022 10
and Allocation
Equipment-Meters
$12,334,716 CUSTM Weighted by Meters and
Total Distribution Plant $155,578,873
General Plant
$1,910,425 GPLT Plant
$2,911,310 GPLT Plant
Total General Plant $4,821,735
Total Gross Plant in Service $160,400,608
Less: Accumulated Depreciation
Total Accumulated Depreciation
Total Net Plant
Working Capital: 1/8 Operating Costs
$2,251,043 OMWOP Expense
TOTAL RATE BASE
Constructions Working in Progress
(CWIP)
Total CWIP
TOTAL RATE BASE plus CWIP $117,034,679
Next, the methodology for classification and allocation for the City’s Natural Gas Distribution revenue
requirement can be found in Table 3-2. More detail on the classification and allocation factor codes used
in the classification and allocation process can be found in Table 3-3. Two changes were made to the
allocation factor assumptions since the prior study:
1. The general fund transfer allocation was updated from net plant to revenue. This update reflects
a policy change approved by the voters via Measure L, approved in 2022 where the transfer is
calculated as a share of rate revenue.
10 Fiscal year ending June 30, 2022 was the audited asset values available for the study period.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 20
2. Reserves contributions or transfers are allocated based on therms. The reserves are used to
stabilize supply costs. Supply costs are 100% energy related; therefore, this line item should be
classified and allocated based on energy.
TABLE 3-2: DISTRIBUTION REVENUE REQUIREMENT
FY 2025-2026
Classification
and Allocation
Engineering Support 768,861 RBD Distribution Rate Base
Operations & Maintenance 9,028,547 RBD Distribution Rate Base
9,797,408
Admin - Customer & Marketing
$227,967 CUSTW Weighted for
$485,915 CUSTM
$543,152 CUSTW Weighted for
$9,850 CUSTW Weighted for
$155,106 DA1
$1,266,689 CUSTW2 Weighted for
Total Customer Service, Accounts &
Sales $3,208,008
Administrative & General
Administrative & General Salaries 11 $1,451,715 OMAG
Allocated Charges 12 $2,735,638 OMAG
Rents $574,830 OMAG
Transfers to Non-Enterprise Funds $59,411 OMAG
11 Administrative and General Salaries includes salaries and benefits for staff assigned directly to Gas Utility
Administration.
12 Allocated charges are general costs incurred on behalf of all of the City’s utilities (water, wastewater, fiber, electric
and gas) that are individually determined and allocated to each business line, as well as salaries and benefits
allocated based on Capital Improvement Project cost centers.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 21
FY 2025-2026
Classification
and Allocation
Transfers to Enterprise Funds $181,333 OMAG
Administrative & General Salaries
Total Costs with A&G
Interest and Debt Service Expense
Total Debt Service /Capital
Improvement $8,339,643
Revenue Requirement Before Other
Revenues $41,957,453
Other (Revenues) & Expenses
$449,823 NETPLT
($625,693) NETPLT
Total Other Revenues
REVENUE REQUIREMENT for COST
ALLOCATION $41,268,342
Table 3-3 shows how each factor code classifies then allocates the costs to classes of service. The Average
& Excess (AE) allocator is described in greater detail below the table.
13 This includes uncollectible accounts for bad debt, low-income rate assistance discounts, and pre-1970s retired
employee discounts on utility bills at a primary residence. These are funded through non-rate revenues and Public
Utilities Code 890 revenues.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 22
TABLE 3-3: NATURAL GAS DISTRIBUTION REVENUE REQUIREMENT
Factor Code Factor Name Classification Allocation Basis
AE Average and Excess 63% Demand
37% Energy and Above Average (Excess) coincident
peak demand. Energy portion is remaining
share of A&E attributed to average
Accounting/Metering w/o G3 accounting and metering but excluding G3
Rate Base 34% Energy
8% Customer
based on the net book value of all shared
services assets and other capital assets
Gas Supply and A&G) 30% Energy Gas Supply and A&G expenses
Rate Base 34% Energy based on the book value of all general plant
(w/o General Plant & 34% Energy value of all capital assets (initial cost)
34% Energy
8% Customer
value of all capital assets (initial cost less
accumulated depreciation) assigned to
Purchased Gas Supply) 30% Energy the cost of Purchased Gas Supply
3.3 AVERAGE & EXCESS (A&E)
The classification and allocation of several rate base line items in Table 3-1 are based on the Average &
Excess (A&E) method. This 2026 Report improves the A&E methodology to better align with how the
distribution system is designed and built for reliable service. The 2020 Study classified A&E costs as 100%
demand-related and then used each customer’s share of demand to allocate those distribution costs
across customer classes. In this study, A&E is classified as both energy and demand to more accurately
reflect how the City’s distribution system is designed and built. The previous A&E method primarily
attributed system costs entirely to demand, which is an appropriate option for systems experiencing
growth. Now that the system is expected to exhibit declining use, and because capacity sizing is
determined based on both energy and demand, the revised A&E method is recommended. The system
planning criteria and the associated recommended A&E method are described below.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 23
The natural gas utility’s capital plan is primarily focused on upgrading and maintaining aging infrastructure
rather than expanding the system for growth. When evaluating the sizing of mains, City engineers model
the annual maximum demand (i.e., highest gas consumption during a January cold spell) to determine the
optimal system size to meet customers’ peak demand. The modeling also incorporates an analysis of
energy usage depending on the physical structure of the distribution system. The energy component is
particularly important to analyze when a network of mains result in endogenous impacts when one or
more of the pipes is replaced or resized. For example, the City’s engineers evaluate main sizing when
planning for replacement projects. In areas where a portion of the system has more than one main
providing service, engineers model the sizing of the main being replaced based on locational energy use
and available capacity of adjacent mains. Depending on the capacity and energy available from the other
mains, the replacement main can be resized to minimize cost on the system. This is particularly important
where usage has declined (or expected to decline) since the system was originally put into service.
Because both demand and energy use are important factors in considering current and future capacity
investments in the system, the distribution rate base is classified as both demand and energy under the
revised A&E method. Demand-related costs are then allocated to customer classes based on each class’s
contribution to peak demand. Energy-related costs are allocated to customer classes based on therms.
The revised A&E classification to demand and energy is based on a comparison of the energy used (the
“average”) against the maximum demand (the “excess”). Maximum demand is equal to the highest daily
usage for the class in each month or the non-coincident peak (NCP). The NCP is the sum of individual
customer peaks within the class independent of the system peak timing.
Overall, the A&E method makes the following assumptions:
1. Average energy represents the capital investment needed to serve the average customer in each class;
2. Excess use is the additional investment needed to serve customers with demands that vary by season.
Those customers with higher excess use require a larger investment in the system compared with
customers whose usage remains close to the average use year-round.14 Allocating excess use costs only to
excess users reasonably places those increased costs on only the customers that created the need for
capacity above their average use; otherwise, customers with lower use would arguably be subsidizing
customers higher use.
3.3.1 Average & Excess Calculation
As explained above, the A&E method classifies (splits) distribution costs between energy and demand
components. This classification recognizes that a portion of the distribution system is engineered to serve
a customer with average energy. In addition, another portion of the distribution system investment is
needed to meet customer maximum use (excess demand).
In order to develop the A&E calculation, daily or hourly load profile data is needed to calculate class load
factors. A load factor is the ratio of average use to peak use over a given time period. A low load factor
(for example 30%) indicates that average natural gas usage for that customer is relatively low compared
14 A good example of this type of customer is an individually metered multi-family unit. These customers have low
average use and the services needed for each unit are lower in cost compared with services needed to serve a single
family home (not shared).
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 24
to that customer’s peak usage. A low load factor customer is more costly to serve on a $/therm basis since
there are fewer therms over which to spread system capacity costs. Due to the relationship between load
factors and cost of service, these factors are key components of the recommended cost allocation
methodology from the COSA.
The City does not yet have hourly or daily meter data from which to calculate load factors. In lieu of specific
Palo Alto data, daily load profiles were developed using public data available from California Management
Advisory Council (CALMAC).15 These load profiles are a good approximation for Palo Alto customers
because they are developed by a neighboring utility for the portion of its service area that has similar
weather conditions to Palo Alto as well as similar building attributes (based on California building codes
for example).
The overall method applies Palo Alto monthly usage data by class to the daily curves from CALMAC. The
CALMAC data is based on PG&E load research data for calendar year 2024 and specifically for the coastal
region. This data is applied to the City’s FY2026 load data. Next, maximum day demands are calculated
for each rate class and for the system as a whole.
For the G1 class, several residential load shapes were aggregated to produce a class load curve. Figure 3-
1 illustrates the sample daily load curves for 4 usage groups ranging from low annual use (less than 235.4
therms) to high annual use (above 575.7 therms). The curves are similar in shape and differ primarily in
magnitude.
FIGURE 3-1: PG&E AVERAGE RESIDENTIAL DAILY LOAD BY HOME TYPE
Commercial building load shapes were aggregated to develop G2 and G3 class load shapes. In many cases,
building/business types can range in usage level; therefore, profiles may be included in more than one
class. Table 3-4 details the building segments included for each class.
15 CALMAC Customer Load Shapes - PG&E. https://www.calmac.org/customer_load_shapes_pge.asp
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Th
e
r
m
s
0 - 235.37 therms 235.37 - 378.83 therms 378.83 - 575.72 therms > 575.72 therms
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 25
TABLE 3-4: COMMERCIAL INDUSTRY SEGMENT ASSIGNMENT TO CLASSES
Segment
G2 –
Small
G2 –
Medium
G2 –
Large
G3 –
Large Commercial
Multifamily Included Included Included
Automotive and Repair Included Included Included Included
Construction Included Included Included Included
Education Included Included Included Included
Full Service Restaurants Included Included
Gas Station & Convenience Stores Included Included
Government (Institutional) Included Included Included Included
Grocery Included Included Included Included
Health Included Included Included Included
Limited Service Restaurants Included Included
Lodging Included Included Included Included
Manufacturing Included
Office Included Included Included Included
Personal Care Services Included Included
Religious Included Included Included Included
Retail Included Included Included Included
Transportation & Utilities Included Included Included Included
Warehouse Included
Figure 3-2 compares the resulting daily therm usage by class after the class profiles are applied to monthly
Palo Alto use. Notably, the G1 profile is characterized by a much larger increase in peak winter demand
compared with G2 and G3 classes. This relationship is observed even after adjusting for relative load sizes
across classes.
FIGURE 3-2: PALO ALTO CLASS LOAD
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
7 8 9 10 11 12 1 2 3 4 5 6
Th
e
r
m
s
/
d
a
y
Month
G1 G2 Small G2 Medium G2 Large G3 Total System
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 26
3.3.1.1 Load Factor Calculations
Monthly class load factors were calculated from monthly usage, each month’s individual maximum day
usage (demand or non-coincident peak) and the number of days per month. Load factors are calculated
for each month according to the equation below where usage is the total therms per month, demand is
the maximum daily therms in that month, and days is the number of days in the month. So, a residential
customer who uses 60 therms in January, and has a maximum daily use of 2.74 therms, has a load factor
of 70.6% for January.16
𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 𝑭𝑭𝑳𝑳𝑭𝑭𝑭𝑭𝑳𝑳𝑭𝑭= 𝑼𝑼𝑼𝑼𝑳𝑳𝑼𝑼𝑼𝑼(𝑫𝑫𝑼𝑼𝑫𝑫𝑳𝑳𝑫𝑫𝑳𝑳∗𝑫𝑫𝑳𝑳𝑫𝑫𝑼𝑼)
Table 3-5 contains the monthly load factor results by class. A lower load factor indicates that peak daily
use is relatively high compared to the average use over the same period. These customers typically have
a higher cost to serve because more capacity is needed to serve them, but energy use is relatively lower,
all else equal. The G1 rate class has the lowest average monthly load factor. The lower load factor is also
illustrated in Figure 3-2 where there is a larger difference in winter use compared with summer use. Lower
load factors result in higher volumetric rates because costs associated with the required system capacity
are spread over a lower number of therms. For example, two customers groups with the same maximum
consumption but different load factors will have different $/therm rates. Both groups use the same share
of system capacity; however, the customer group with lower energy use will have a higher rate in $/therm.
TABLE 3-5: LOAD FACTOR BY CLASS
CY Month G1 G2 – Small G2 – Medium G2 – Large G3
2025 7 70.6% 89.8% 90.0% 87.9% 87.6%
2025 8 73.8% 89.0% 89.1% 86.1% 90.6%
2025 9 74.8% 82.1% 82.1% 79.0% 83.2%
2025 10 55.7% 68.5% 68.3% 60.5% 68.8%
2025 11 59.5% 72.6% 72.4% 67.7% 72.1%
2025 12 65.1% 74.8% 74.5% 70.1% 74.0%
2026 1 75.4% 81.8% 81.8% 79.1% 81.9%
2026 2 59.7% 72.4% 72.2% 68.5% 71.7%
2026 3 63.2% 72.4% 72.3% 69.4% 71.8%
2026 4 58.7% 75.9% 75.6% 70.8% 75.5%
2026 5 65.0% 78.2% 78.2% 74.3% 78.7%
2026 6 75.5% 86.8% 86.8% 83.2% 87.1%
The load factors are used to calculate each class’s NCP (sum of individual customer peaks). The NCP is
used to measure the “excess” demand portion in the A&E calculation. The NCP is appropriate because the
system sizing is based on the sum of individual customer peaks regardless of when the peaks occur.
3.4 CUSTOMER WEIGHTING FOR METER COSTS
The number of customers weighted by meter costs is used in the study to allocate meter asset value in
the rate base. Weighted meter costs are appropriate for allocating meter asset values in the rate base
because they represent the relative cost of replacing meters for each class as infrastructure ages. “Meter
16 Load factor = 60 therms divided by (31 days x 2.74 therms) = 70.6%.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 27
costs” for each customer class are equal to the current replacement cost of the meters (equipment) plus
labor costs for installation. Utilities typically do not record original meter and installation costs by
customer or location; therefore, the next best measure for service cost is the current replacement cost.
Table 3-6 compares the resulting meter costs. This 2026 Report uses an average of meter replacement
costs based on the count of all meter types currently in service within each class. This weighted average
cost is most appropriate because it considers all of the meter types and requisite costs used by each class
of service.
TABLE 3-6: CUSTOMER WEIGHTING FOR METER COSTS: FY2026 G1 G2 G3
Meter Costs1 $414 $1,262 $10,473
Weighting $8,761,310 $2,772,869 $308,954
1. Meter Costs include both the cost of the assets and labor costs for installation. Costs are based on current
replacement costs and labor rates.
The meter cost weighting from Table 3-6 results in a larger share of meter values from the rate base being
allocated to G1 and a relatively smaller share of meter rate base allocated to G2 compared with the 2020
Study. This update is one of the primary drivers for the rate rebalancing recommended in this study. Note
that the G2 class is later disaggregated into 3 subgroups based on meter size and usage. Meter costs for
G2 small, medium, and large are $313, $1,709, and $6,935, respectively. Taken together, the average G2
meter cost is $1,262 as shown in Table 3-6.
3.5 CUSTOMER CLASSES OF SERVICE
Customer classes of service refer to the arrangement of customers into groups that reflect common usage
characteristics or facility requirements.17 The classes of service used within this 2026 Report were as
follows: Residential (G1); Small Commercial (G2); and Large Commercial (G3). The City also serves its own
Compressed Natural Gas (CNG) meter. The costs for the CNG service are paid by the City’s Public Works
department. The City is developing a cost-based fee to recover the CNG service’s fair share of metering
costs, service administration, and directly assigned costs. The estimated fee revenue is small (0.01% of
the total revenue requirement), and changes do not materially impact the results of this study.
3.6 COST OF SERVICE RESULTS
Given the key assumptions and updates discussed above, the COSA was completed. Tables 3-7 and 3-8
provide a summary of the Rate Base and Revenue Requirement amounts allocated to the various
customer classes.18 These schedules are calculated by multiplying the applicable classification and
allocation factors to each cost in the rate base and revenue requirement.
17 Breakpoints between or within rate classes are sometimes referred to as segmentation in rate making.
18 The rate base and revenue requirement tabs of the COSA model also show the rate base and revenue requirement
allocated to each class of service.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 28
TABLE 3-7: DISTRIBUTION RATE BASE ALLOCATION RESULTS: FY 2025-2026
Asset Description Total G1 Residential
G2 Small
G3 Large
Equipment-Meters $12,334,716 $9,124,973 $2,364,799 $844,943
Equipment-Services $59,109,371 $25,762,073 $22,504,632 $10,842,665
Equipment-Misc. $2,729,148 $1,189,465 $1,039,065 $500,618
Equipment-Regulators $976,067 $425,406 $371,617 $179,044
Equipment-Distribution Mains $77,559,779 $33,803,451 $29,529,232 $14,227,096
Equipment-Measuring $2,869,793 $1,250,763 $1,092,612 $526,417
Building $1,910,425 $878,671 $698,726 $333,029
Equipment $2,911,310 $1,339,013 $1,064,793 $507,505
($49,833,503) ($22,920,160) ($18,226,279) ($8,687,064)
($3,812,789) ($1,753,634) ($1,394,503) ($664,652)
$2,251,043 $1,160,297 $761,319 $329,427
TOTAL RATE BASE
$8,029,320 $3,692,963 $2,936,671 $1,399,685
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 29
TABLE 3-8: DISTRIBUTION REVENUE REQUIREMENT ALLOCATION RESULTS: FY 2025-2026
Plant Description FY 2026 Total G1 Residential
G2 Small
G3 Large
Engineering Support $768,861 $353,626 $297,780 $117,455
Operations & Maintenance $9,028,547 $4,152,543 $3,496,760 $1,379,245
Total Distribution $9,797,408 $4,506,169 $3,794,540 $1,496,700
$465,537 $176,305 $207,750 $81,482
Total Customer Service $3,208,008 $2,197,456 $728,749 $281,803
Transfers to Non-Enterprise Funds
Total Administrative & General $5,002,927 $2,578,752 $1,740,020 $684,155
Total Costs with A&G $18,008,343 $9,282,376 $6,263,309 $2,462,658
Interest and Debt Service Expense
$23,348 $10,738 $9,042 $3,567
$778,250 $357,944 $301,417 $118,889
Total Debt Service /CIP Expense $8,339,643 $3,835,692 $3,229,947 $1,274,004
General Fund Transfer
Reserves Contribution
Revenue Requirement Before Other
Revenues $41,957,453 $19,527,169 $16,362,377 $6,067,907
Customer Discounts $318,105 $146,308 $123,202 $48,595
Connection Fees ($700,000) ($321,954) ($271,110) ($106,935)
$449,823 $206,889 $174,217 $68,717
($131,346) ($60,411) ($50,870) ($20,065)
Total Other Revenues ($689,111) ($316,946) ($266,893) ($105,272)
NET REVENUE REQUIREMENT $41,268,342 $19,210,223 $16,095,484 $5,962,635
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 30
Table 3-9 provides a summary of the COSA results with the recommended revenue changes. These results
are the basis for the recommended distribution charges provided in the next section.
TABLE 3-9: DISTRIBUTION COSA RESULTS: FY 2025-2026
Projected FY 2026
Revenue
Projected FY
Change
$17,738,316 $19,210,223 ($1,471,907) 8.3%
G2 – Small Commercial $18,006,240 $16,095,484 $1,910,756 (10.6%)
G3 – Large Commercial $5,523,787 $5,962,635 ($438,848) 7.9%
Total $41,268,342 $41,268,342 $0 0.0%
Residential and Large Commercial classes require rate increases and the Small Commercial class requires
a rate decrease. EES compared this study with the previous analysis (FY 2019-2020) and found the
following significant drivers for these results:
1. Overall, the FY 2025-2026 Distribution revenue requirement is 171% of the FY 2019-2020 revenue
requirement. The increase is due to multiple years of significant inflationary pressures and
planned reserve fund contributions.19 However, because the rate was adjusted on July 1, 2025,
the overall revenue level does not need to be increased at this time.
2. The allocation of the General Fund Transfer was updated from Net Plant to Revenue. As a result,
G1 is being allocated a larger share of the General Fund Transfer. Despite the adverse impact on
G1 rates, this update better aligns the expense item with cost since the General Fund Transfer is
calculated based on gross revenues.20
3. Customer allocators, such as customers weighted for meter costs, were updated to reflect current
meter cost and billing cost information. More detail on this analysis can be found in Section 3.3.2.
Further, the method for calculating the meter costs for each class was changed from using a
representative meter to using a weighted average for all meters in each class. These updates
resulted in larger shares of expenses allocated to G1 and G3. The development of these allocators
included a detailed analysis of the average cost of the average capacity meter for each rate class
and rate class grouping.
4. Previous studies relied on Average & Excess for some aspects of Distribution System Allocation,
and that is maintained in the current revision. However, the Rate Base Allocation of Distribution
assets was updated to reflect updated Average & Excess calculations. This change moved some
asset value from G1 to G2 and G3 based on the classes relative share of total sales. The
19 Resolution 10232 https://portal.laserfiche.com/Portal/DocView.aspx?id=200675&repo=r-704298fc approving the
Reserves Management Practices (Exhibit 3 to Resolution 10232)
https://www.paloalto.gov/files/assets/public/v/3/agendas-minutes-reports/agendas-minutes/city-council-
agendas-minutes/2025/june-16/rates-attachments/finalized-attachment-c-exhibit-3-fy26-gas-reserve-
management-practices.pdf)
20 In November 2022, voters approved Measure L, amending the Municipal Code, Section 2.28.185, “Natural Gas
Utility Transfer” states: “Each fiscal year the City Council may transfer from the natural gas utility to the general fund
an amount equal to 18% of the gross revenues of the gas utility received during the fiscal year two fiscal years before
the fiscal year of the transfer. At its discretion, the City Council may decide to transfer a lesser amount. The projected
cost of the transfer shall be included in the City’s retail natural gas rates as part of the cost of providing gas service.”
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 31
classification to both energy and demand better reflects how the system is planned and its current
operation, as discussed previously in the report. More detail on this update can be found in
Section 3.3.1.
5. Total use for all classes is lower in FY 2025-2026 compared with FY 2019-2020. Total G1 use
declined from 10.3 million therms to 9.8 million therms, G2 usage declined from 12.5 million
therms to 11.5 million therms, and G3 use declined from 5.6 million to 4.5 million therms. When
total use declines, fixed costs are spread across a smaller number of therms impacting the
$/therm rate.
In addition, all rate change aspects in this report are for distribution charges only and do not include
changes to supply. When considering overall rate impacts, it is important to note that most of these rate
changes are forecasted to be less than a 10% impact when considering combined commodity and
distribution charges.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 32
4 Rate Design
The final step in the rate study process is to design rates for each class of service or customer class. In
California, local governments are subject to Article XIII C of the California Constitution, amended by
Proposition 26 (2010), which requires gas rates and charges to not exceed the reasonable costs of
providing gas service, and requires that the City’s costs of gas service are allocated to each customer in a
manner that bears a fair or reasonable relationship to the customer’s burdens on, or benefits received
from, the gas utility. As a result, the City has set rates to match the COSA results for each customer class.
The results of the revenue requirement and COSA study are based on forecasted load data estimates and
usage pattern assumptions. Actual load and usage patterns may differ from the forecast. For this 2026
Report, rates are developed based on the forecast loads and observed historical usage patterns for each
customer class.
The rates for the Residential and Commercial customers are designed to reflect the differences in costs
among the various customer classes. The costs per customer class differ based on the seasonal shape of
consumption (referred to as energy use) as well as the daily peak demand for each customer class.
Differences in energy use by season and the level of peak demand have an impact on the utility’s need for
distribution facilities and the costs to operate and maintain those facilities.
4.1 RECOMMENDED RATE DESIGN: DISTRIBUTION
This section of the report reviews the present rate structures for the City and provides a comparison with
the recommended rates based on this cost of service study. Table 4-1 summarizes the current rate design
for each rate schedule and recommended rate design updates. As mentioned previously, the
recommended rate design is the same as the current rate design with the exception of some updates and
refinement as described below.
TABLE 4-1: NATURAL GAS DISTRIBUTION RATE DESIGN RECOMMENDATION OVERVIEW
Rate Schedule Current Rate Design Recommended Rate Design
Residential G1 Fixed Monthly Charge
Seasonal Tiered Rate with
Inclining Blocks
Update fixed and volumetric charges to cost of service unit costs
Calculate tiered rates based on Base and Excess methodology
Update Tier 1 summer baseline quantity
Small Commercial G2 Fixed Monthly Charge
Volumetric Charge
Update fixed and volumetric charges to cost of service
Implement three separate fixed monthly charges based on
Large Commercial G3 Update fixed and volumetric charges to cost of service unit costs
Table 1-10 in Section 1.2.3, Rate Recommendations, summarizes the current and FY 2025-2026
recommended rates for each class. The rate recommendations and bill impacts by rate class are provided
below.
4.1.1 Residential (G1)
The G1 distribution rates consist of a monthly service charge and volumetric tier rates: The Tier 1 rate
applies to usage up to the baseline quantity and the Tier 2 rate applies to all usage above the baseline.
While the tier rates do not change between seasons, the baseline quantity varies by season and is higher
in winter than in the summer because natural gas-based heating is used more in the winter. Therefore,
the class average therms are higher in the winter than in the summer. The tiered rate structure ensures
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 33
that those customers contributing to higher seasonal demand are paying appropriately for their share of
the demand-related cost.
The current G1 Tier breakpoints (baselines) were evaluated using sales data for several test periods. Based
on average winter monthly use for 2022-2024, the winter baseline of 60 therms/30-day-billing is
appropriate. However, the most recent data supports increasing the summer baseline from 20 to 23
therms/30-day-billing. Table 4-2 shows the current baseline and average consumption values supporting
the recommendation.
TABLE 4-2: BASELINE QUANTITY ASSESSMENT
Tier 1 Baseline Assessment Therms/30-Day-Billing
Summer Winter
Current Baseline 20 60
Average Consumption
FY 2022 Actual 22 60
FY 2023 Actual 24 70
FY 2024 Actual 21 53
Gas Forecast FY 2026 24 56
Average of 3 Historical Years and 1 Forecast Year 23 60
Summer Winter
Recommended Baseline 23 60
The recommended baselines are used in the tiered rate calculations. The tiered rates recover all energy-
related distribution costs plus a share of demand-related distribution costs from each tier. The Base and
Excess capacity methodology is used to determine the portion of distribution demand costs collected from
each tier.21 The Base and Excess method first calculates G1 maximum annual use by applying G1 peak day
usage over the entire year. This assumes that the full capacity of the system is utilized year-round, which
is the basis for apportioning annual system capacity costs to Base use (Tier 1) and Excess use (Tier 2). If all
customers used this maximum amount of therms per day for the entire year, then the $/therm rate would
be a uniform rate. Because customers do not use the full capacity of the system year-round, the portion
of system capacity costs needed to serve demands above the base use level, are apportioned to the Tier
2 rate. Base level demand is thus collected in the Tier 1 rate by dividing distribution demand costs by the
annual use calculated at full capacity. The resulting $/therm is included in the Tier 1 rate. All excess
(remaining) demand costs are included in the Tier 2 rate. Table 4-3 illustrates the calculation of first tier
rate. Table 4-4 illustrates the calculation of the Tier 2 rate.
21 The Average & Excess methodology is used to apportion system costs to each rate class. The Base & Excess is used
only in the G1 tiered rate design.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 34
TABLE 4-3: G1 RATE CLASS TIER 1 RATE CALCULATION: BASE & EXCESS CAPACITY
Formula/Line Value Cost Share
Tier 1 Therms A 7,029,018
Distribution Demand Costs B $5,742,961 100%
Class Peak, therms/day C 89,733
Annualized Usage based on Peak
Demand, Therms
d = 365 × c 32,752,486
Tier 1 Demand Component, $/therm e = b ÷ d $0.1753
Tier 1 Demand Cost f = a × e $1,237,498 21%
Distribution Energy Costs g $8,495,630
Total Therms h 9,762,524
Energy, $/therm i = g ÷ h $0.8702
Tier 1 Total, $/therm j = e + i $1.0456
TABLE 4-4: TIER 2 RATE CALCULATION: BASE & EXCESS CAPACITY Formula/Line Value Cost Share
Tier 2 Therms k 2,733,507
Excess Demand Costs l = b – f (Table 4-3) $4,510,463 79%
Tier 2 Demand
Component, $/therm
m =l ÷ k $1.6501
Energy, $/therm i (Table 4-3) $0.8702
Tier 2 Total, $/therm n = m + i $2.5203
Table 4-5 shows the distribution bill impacts for average customer use in summer and winter.
TABLE 4-5: G1 BILL IMPACTS AT AVERAGE CUSTOMER USE, DISTRIBUTION ONLY
At Current Recommended Average Use
$40.86 $42.58 $1.72 4.2% 22.0
$74.58 $85.08 $10.50 14.1% 61.1
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 35
Table 4-6 shows the impacts for a range of customer bills under various low, median and high usage levels.
TABLE 4-6: G1 BILL IMPACTS AT VARIOUS USAGE LEVELS, DISTRIBUTION ONLY
Season
Usage At
Current FY 26 Rates
At
Recommended
Distribution
Bill Impact
$/Month
Distribution
Bill Impact
$27.34 $30.03 $2.69 9.8%
$33.60 $37.35 $3.75 11.2%
30
45 $89.29 $99.07 $9.78 11.0%
Winter 30
(Median) 51 $64.01 $72.90 $8.89 13.9%
80
150 $277.92 $309.14 $31.22 11.2%
Annual (Median) 31
4.1.2 Small Commercial and Residential Master-Metered (G2)
The current G2 distribution rate design is composed of a fixed monthly service charge and a volumetric
charge. The fixed monthly service charge for a given rate schedule (customer class) is set to recover the
customer-related costs allocated to that schedule. As described in Section 1.2, Rate Study Overview, EES
recommends refinement in the development of the Monthly Service Charge for G2. Due to the diversity
in G2 meters and service sizes, and the methodology in the COSA that allocates fixed customer costs based
on meter costs, it is recommended to implement three separate Monthly Service Charges for G2 based
on service size. These service charges more precisely reflect the different services provided and the
associated costs for each of the three subclasses.
The creation of G2 subclasses (Small, Medium, and Large – defined below) is necessary to avoid intra-class
subsidies that exist from a single monthly service charge applied to customers that range in size from 36
therms per month to over 11,000 therms per month. G2 is unique in that the types of meters (and meter
costs) and customer usage represents a much wider range. To address the potential subsidies within the
class, G2 meter types and corresponding usage data is analyzed to determine G2 monthly service charges
that more precisely reflect customer-related fixed costs among differentiated subclasses within the class.
Figure 4-1 shows G2 meter capacity and associated average consumption. Meter size is positively
correlated with average use. This finding is expected and indicates that larger meters have higher average
use.22 Larger capacity meters also require larger service lines (connecting the meter to the distribution
system) and generally impose greater demand on the system. Recall that usage for commercial buildings
are uniform in shape but differ in relative size (Figure 1-3).
22 This is expected because meter capacity is sized to match the customer’s demand. City of Palo Alto, Utility Rule
and Regulation 15, Section B.6: Meter Installations, Capacity of Meters, April 2023.pdf
https://www.cityofpaloalto.org/files/assets/public/v/2/utilities/rules-and-regulations/rule-15-metering-april-
2023.pdf
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 36
FIGURE 4-1: AVERAGE MONTHLY USAGE BY METER CAPACITY
Figure 4-1 shows distinct patterns and separations in average usage levels that support 3 G2 meter
groupings based on maximum meter capacity. Figure 4-2 shows the distinct average usage levels
associated with the following three groupings by maximum meter capacity (in standard cubic feet per
hour or scfh).
1. Up to 220 scfh (≤ 220 scfh)
2. Above 220 scfh and below 4,000 scfh (> 200 scfh and < 4,000 scfh)
3. 4,000 scfh and above (≥ 4,000 scfh)
FIGURE 4-2: G2 – AVERAGE MONTHLY USAGE BY METER CATEGORY
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 37
The above G2 meter ranges were chosen based on a detailed examination of the use across different
meter types and capacities, according to summary data in Figures 4-1 and 4-2. This same rigor was also
applied to determine appropriate meter costs for G1 and G3.
The calculation for the G2 volumetric charge remains unchanged. As mentioned previously, the uniform
shape in G2 usage profiles supports a uniform volumetric rate. Recommended rates for G2 can be found
in Table 1-6, G2 Monthly Service Charges: FY 2025-2026, and Table 1-10, Current and Recommended
Rates.
Table 4-7 shows the G2 bill impacts for representative accounts in each G2 subgroup. Impacts for average
use and for 50% of average use are provided.
TABLE 4-7: G2 BILL IMPACTS, DISTRIBUTION ONLY
At Current
FY 2026-2027
FY 2025-2026
Average
# of
$684.29 $628.21 -$56.08 -8.2% 437 2,193
≤ 1,136
Average Use $235.17 $96.36 -$138.81 -59.0% 55
50% of Average Use $202.86 $62.80 -$140.06 -69.0% 28
˂ 940
Average Use $739.20 $685.24 -$53.96 -7.3% 484
50% of Average Use $454.88 $389.90 -$64.97 -14.3% 242
≥ 117
Average Use $4,615.20 $5,035.93 $420.74 9.1% 3,783
50% of Average Use $2,392.87 $2,727.51 $334.63 14.0% 1,892
4.1.3 Large Commercial (G3)
The present G3 rate design is composed of a monthly service charge and a volumetric charge. As noted
earlier, this class generally has large capacity meters and a high consumption threshold for service. G3
rate schedule applies to commercial customers who use at least 250,000 therms per year at one site.23
This threshold, which defines the rate class, results in a group of customers with similar services and usage
characteristics, but very different usage levels. The service size and service cost uniformity means that
fixed customer-related costs are also uniform within the rate class. Therefore, as a single charge fairly
recovers the fixed customer-related charges from each customer. And, for tiered rates to be
nondiscriminatory, the class would need to be both uniform in usage profile and average use. Individual
customer baseline use is not uniform within this rate class. Therefore, tiered rates are not appropriate as
they would result in higher-use customers subsidizing lower-use customers. No change is recommended
in the overall design of these charges.
For illustrative purposes, Table 4-8 presents the G3 bill impact at 20,833 therms, which is 1/12 of the
annual threshold level for G3 service.
23 Utility Rate Schedule G-3.
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 38
TABLE 4-8: G3 BILL IMPACTS, DISTRIBUTION ONLY
At Current FY FY 2025-2026
G3 Large Commercial $25,015.37 $26,450.39 $1,435.02 5.7%
4.2 SUPPLY CHARGES
The primary focus of the rate study was the distribution charges which vary based on budgets and
operating needs. The City also must pass through costs that vary based on external factors and market
conditions. These appear in the rate schedules as Supply Charges. Supply charges include the Commodity,
Cap and Trade Compliance, Carbon Offset, and Transportation Charges. These charges are on a $/therm
basis and require frequent updates due to the variable nature of the underlying costs.
Currently, the City has a range included in the rate schedules. Table 4-9 shows the current ranges.
TABLE 4-9: SUPPLY CHARGES
Supply Charges $/therm
1. Commodity (Monthly Market Based) $0.10-$4.00
2. Cap and Trade Compliance Charges $0.00-$0.25
3. Transportation Charge $0.00-$0.30
4. Carbon Offset Charge $0.00-$0.10
EES examined both the current calculation of each charge and the basis for that calculation, as well as
whether the charge should remain a pass-through and whether or not a range of values is appropriate.
EES does not recommend any changes to the Commodity charge range. For the Commodity supply charge,
Council amended the Gas Utility Long-term Plan (GULP) Objectives, Strategies and Implementation Plan
including collecting funds via a gas price mitigation adder to manage potential future short-term natural
gas price spikes above the $4.00 per therm maximum charge (Resolution 101187, August 9, 2024). The
Commodity charge range, therefore, is consistent with the Council-approved strategy.
The City’s gas utility is a covered entity under the California Air Resources Board (CARB) Cap-and-Trade
program, under which the City is obligated to purchase allowances to cover all greenhouse gas emissions
resulting from natural gas use within Palo Alto’s service territory. EES recommends eliminating the ranges
for the Cap and Trade Compliance charge and instead converting this charge to a pass-through of the
City’s actual costs because the City has little to no control over them, and they are largely non-
discretionary. The Cap and Trade Compliance Charge is calculated based on the Cap-and-Trade program
quarterly auction allowance closing prices.
Likewise, EES recommends eliminating the ranges for the Transportation Charge and passing through
these charges. The Transportation charge is the rate the City pays Pacific Gas and Electric Company (PG&E)
to transport gas from the PG&E Citygate to the City of Palo Alto distribution system. PG&E is regulated by
the California Public Utilities Commission. Palo Alto has no control over these charges and no alternatives
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 39
for transporting gas to its distribution system. The Transportation Charge is based on PG&E’s wholesale
tariff (G-WSL)24.
Recently, the transportation charge exceeded the published range and the Council increased the upper
limit on the Transportation Charge.25 This is likely to occur for both the Transportation Charge and the
Cap and Trade Compliance Charges in the future. Because the true costs can vary outside of the ranges
provided, the ranges do not appear to provide material value to customers. If the costs vary outside the
upper limit of the range the costs above the limit are paid for by the gas utility’s reserves unless the Council
increased the upper limit. Updating the ranges with a wider spread would also provide less practical
information to customers. Therefore, EES recommends eliminating the ranges for the Cap and Trade
Compliance and Transportation charges. Two years of historical monthly values for the Transportation
Charge and Cap and Trade Compliance Charge are posted publicly on the City’s website for reference.26
EES does not recommend changes to the Carbon Offset Charge range. In December 2020 Council adopted
Resolution 99303, amending the Carbon Neutral Gas Plan. This program is voluntary in the sense that it is
a local program approved by the City Council rather than a compliance obligation imposed by the state or
another governing body. The amended plan limited the purchase price of offsets to $19 per ton CO2e,
consistent with the original maximum 10 cents per therm rate impact, therefore the range is consistent
with the Council-approved program.
Second, EES recommends providing more detailed information on the source costs and calculation for all
four of the supply charges. Recommended additions include language in Table 4-10.
24 https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_G-WSL.pdf
25 On October 7, 2024, Council adopted resolution 10190 increasing the upper limit on the Transportation Charge on
all of the City’s gas rate schedules from $0.25 per therm to $0.30 per therm effective November 1, 2024.
26 Residential: https://www.cityofpaloalto.org/files/assets/public/v/25/utilities/rates-schedules-for-
utilities/residential-utility-rates/monthly-gas-volumetric-and-service-charges-residential-3.pdf and
Non-Residential and Residential Master-Metered:
https://www.cityofpaloalto.org/files/assets/public/v/24/utilities/business/business-rates/monthly-gas-volumetric-
and-service-charges-commercial-3.pdf
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 40
TABLE 4-10: SUPPLY LANGUAGE
Supply Charges Description
1. Commodity (Monthly Market Based) This charge is based on the monthly natural gas Bidweek Price Index for delivery at
PG&E Citygate, adjusted to account for delivery losses to the customer’s meter. The
Commodity Charge also includes adjustments to account for Council-approved
programs implemented to reduce the cost of Gas, including a municipal purchase
discount (Adopted via Resolution 9451, on September 15, 2014), and $0.055 per therm
for mitigating the impact of short-term natural gas market price spikes.
The Commodity Charge calculation formula is:
PG&E Citygate Monthly Bidweek Price ($/MMBtu)
+ Gas Supplier Adder ($/MMBtu)
– Municipal Gas Discount ($/MMBtu)
× (1+ Distribution Loss Multiplier)
+ Gas Price Spike Mitigation Charge ($/MMBtu)
÷ 10 (conversion from MMBtu to therm) (MMBtu/therm)
= Commodity Rate ($/therm)
Where :
PG&E Citygate Monthly Bidweek Price is the monthly price for PG&E Citygate as
reported in the first issue of the month of Natural Gas Intelligence’s Bidweek Survey
as published by Intelligence Press Inc.
The Gas Supplier Adder is the premium or discount applied to the Bidweek Price Index,
based on the City's actual transactions with its natural gas suppliers.
The Distribution Loss Multiplier, updated annually, is calculated by the variances of gas
supply purchases and gas retail sales for the past three fiscal years.
2. Cap and Trade Compliance Charge
with the State’s Cap and Trade Program, including the cost of acquiring compliance
instruments sufficient to cover the Gas Utility’s compliance obligations. The Cap and
Trade Compliance Charge is adjusted in response to market conditions, retail sales
volumes, and the quantity of allowances required. The calculation formula is based on
carbon allowance auction prices and allowances needed to comply with state law. One
allowance is equal to 1 metric ton (MT) of CO2.
The Cap and Trade Compliance Charge calculation formula is:
Most Recent Auction Price ($/MT CO2)
x Number of Allowances Required (%)
x (conversion from MT CO2 to therm) (MT CO2/therm)
= $/Therm
Where:
Number of Allowances Required (%) =
(Projected Emissions for Current Year- Palo Alto’s Allocated Allowances for Current
Year)
÷ Projected Emissions for Current Year
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 41
3. Transportation Charge The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto,
accounting for delivery losses to Customer Meters. The current rates are shown in
this tariff https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_G-
WSL.pdf, provided by PG&E. Additionally, there is a distribution loss factor (updated
annually), which is calculated by the variances of gas supply purchases and gas retail
sales for the past three fiscal years.
The Transportation Charge calculation formula is:
PG&E G-WSL Transportation Charges ($/therm)
- Cap and Trade Cost Exemption ($/therm)
× (1+ Distribution Losses Multiplier)
= Transportation Charge ($/therm)
Where:
The Distribution Loss Multiplier, updated annually, is calculated by the variances of gas
supply purchases and gas retail sales for the past three fiscal years.
4. Carbon Offset Charge
gases produced when Gas is burned. The Carbon Offset Charge will change in response
to market conditions, sales volumes, and the quantity of offsets purchased within the
Council-approved cap of $19 per MT CO2e, calculated annually.
The Carbon Offset Charge calculation formula is:
Weighted Average Cost of Carbon Offset ($/MT CO2)
x (conversion from MT CO2 to therms) (MT CO2/therms)
= Carbon Offset Charge ($/therm)
Where:
Purchase Price of Carbon Offset ≤ $19/MT CO2e
Exhibit 1Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-1 Effective 27-1-20265
dated 0711-1-20254 Sheet No G-1-1
A. APPLICABILITY:
This schedule applies to the following Customers receiving Gas Service from City of Palo Alto
Utilities:
1. Separately-metered single-family residential Customers;
2.Separately-metered multi-family residential Customers in multi-family residential
facilities.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Gas Service.
C. UNBUNDLED RATES:Per Service
Monthly Service Charge: ..............................................................................................$ 19.5818.40
Tier 1 Rates: Per Therm
Supply Charges:
1. Commodity (Monthly Market-Based) ......................................... $0.10-$4.00
2. Cap and Trade Compliance Charge ............................................ $0.00-
$0.25Pass-through
3. Transportation Charge ................................................................. Pass-
through$0.00-$0.30
4. Carbon Offset Charge .................................................................. $0.00-$0.10
Distribution Charge:....................................................................................... $
1.04560.8944
Tier 2 Rates: (All usage over 100% of Tier 1)
Supply Charges:
1.Commodity (Monthly Market-Based) ......................................... $0.10-$4.00
2. Cap and Trade Compliance Charge ............................................. $0.00-
$0.25Pass-through
3. Transportation Charge ................................................................. $0.00-
$0.30Pass-through
4. Carbon Offset Charge .................................................................. $0.00-$0.10
Exhibit 2Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-2 Effective 27-1-20265
dated 0711-1-20254 Sheet No G-1-2
Distribution Charge:............................................................................................. $
2.52032.2873
D.SPECIAL NOTES:
1.Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
The Commodity Charge is based on the monthly natural gas Bidweek Price Index for
delivery at PG&E Citygate, adjusted to account for delivery losses to the Customer’s
Meter. The Commodity Charge also includes adjustments to account for Council-
approved programs implemented to reduce the cost of Gas, including a municipal
purchase discount 1 and $0.055 per tTherm for mitigating the impact of short-term natural
gas market price spikes2.
The Cap and Trade Compliance Charge is a pass-through charge that reflects the City’s
cost of regulatory compliance with the state’s Cap and Trade Program, including the cost
of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s
compliance obligations. The Cap and Trade Compliance Charge changes in response to
changing market conditions, retail sales volumes and the quantity of allowances required,
and is calculated based on the Cap-and-Trade Program’s quarterly auction allowance
closing prices.
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse
gases produced when Gas is burned. The Carbon Offset Charge changes in response to
changing market conditions, sales volumes and the quantity of offsets purchased within
the Council-approved per Ttherm cap.
1 Adopted via Resolution 9451, on September 15, 2014.
2 Adopted via Resolution 10187 on August 19, 2024.
Exhibit 2Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-3 Effective 27-1-20265
dated 0711-1-20254 Sheet No G-1-3
The Transportation Charge is a pass-through charge based on the current PG&E G-WSL 3
(Gas Transportation Service to Wholesale/Retail Customers) rate for Palo Alto,
accounting for delivery losses to the Customer’s Meter.
The Commodity and, Cap and Trade Compliance, Carbon Offset and Transportation
Charges will fall within the minimum/maximum ranges set forth in Section C. Current
and historic per tTherm rates for the Commodity, Cap and Trade Compliance, Carbon
Offset and Transportation Charges are posted on the City Utilities website.4
2. Seasonal Rate Changes:
The Summer period is effective April 1 to October 31 and the Winter period is effective
from November 1 to March 31. When the Bbilling Pperiod includes use in both the
Summer and the Winter periods, the usage will be prorated based on the number of days in
each seasonal period, and the charges based on the applicable rates for each period. For
further discussion of bill calculation and proration, refer to Rule and Regulation 11.
3. Calculation of Usage Tiers
Tier 1 Nnatural Ggas usage is calculated and billed based upon a level of 0.667 therms per
day23 Ttherms per 30 day Billing Period during the Summer period, and 60 tTherms per
30 day Billing Period during the Winter period, based on Meter reading days of Service,
and rounded to the nearest whole tTherm. As an example, Tier 1 Natural Gas is calculated
at 0.767 tTherms per day during the Summer period (.767 tTherms per day x 30 days = 23
tTherms) and 2.0 tTherms per day during the Winter period (2 tTherms per day x 30 days
= 60 tTherms). , rounded to the nearest whole therm, based on meter reading days of
service. As an example, for a 30 day bill, the Tier 1 level would be 20 therms during the
Summer period and 60 therms during the Winter period months. For further discussion of
bill calculation and proration, refer to Rule and Regulation 11.
{End}
3 https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_G-WSL.pdf
4 Monthly gas and commodity and volumetric rates are available here, or by visiting
https://www.paloalto.gov/files/assets/public/utilities/rates-schedules-for-utilities/residential-utility-rates/monthly-gas-
volumetric-and-service-charges-residential.pdf
Exhibit 2Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-2-1 Effective 27-1-20265
dated 711-1-20245 Sheet No G-2-1
A. APPLICABILITY:
This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto
Utilities:
1. Commercial Customers who use less than 250,000 tTherms per year at one site;
2. Master-Mmetered residential Customers in multi-family residential facilities.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Gas Service. C. UNBUNDLED RATES: Per Service
Monthly Service Charge:
For Meters with maximum capacity:
1. Up to 220 Standard Cubic Feet per Hour (scfh) .......................................................$ 29.24
2. Above 220 scfh and less than 4,000 scfh ................................................................$ 94.56
3. 4,000 scfh and above ...................................................................................$ 419.08170.55
Per Therm
Supply Charges:
1. Commodity (Monthly Market Based) ......................................................... $0.10-$4.00
2. Cap and Trade Compliance Charges ........................................................... $0.00-
$0.25Pass-through
3. Transportation Charge .................................................................................. $0.00-
$0.30Pass-through
4. Carbon Offset Charge ................................................................................... $0.00-$0.10
Distribution Charge: .................................................................................................. $
1.17491.2204
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill
statement, the bill amount may be broken down into appropriate components as
calculated under Section C.
The Mmeter’s maximum capacity used to determine the applicable Monthly Service
Charge for G-2 Gas Service is the installed Meter’s City of Palo Alto-approved
Exhibit 2Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-2
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-2-2 Effective 27-1-20265
dated 711-1-20245 Sheet No G-2-2
maximum capacity in standard cubic feet per hour (scfh), measured at 7 inches of water
column or equivalent to 0.25 pounds per square inch.
The Commodity Charge is based on the monthly natural gas Bidweek Price Index for
delivery at PG&E Citygate, adjusted to account for delivery losses to the Customer’s
Meter. The Commodity Charge also includes adjustments to account for Council-
approved programs implemented to reduce the cost of Gas, including a municipal
purchase discount 1 and $0.055 per tTherm for mitigating the impact of short-term natural
gas market price spikes2.
The Cap and Trade Compliance Charge is a pass-through charge that reflects the City’s
cost of regulatory compliance with the state’s Cap and Trade Program, including the cost
of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance
obligations. The Cap and Trade Compliance Charge changes in response to changing
market conditions, retail sales volumes and the quantity of allowances required, and is
calculated based on the Cap-and-Trade Program’s quarterly auction allowance closing
prices.
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases
produced when Gas is burned. The Carbon Offset Charge changes in response to changing
market conditions, sales volumes and the quantity of offsets purchased within the Council-
approved per Ttherm cap.
The Transportation Charge is a pass-through charge based on the current PG&E G-WSL 3
(Gas Transportation Service to Wholesale/Retail Customers) rate for Palo Alto,
accounting for delivery losses to the Customer’s Meter.
The Commodity, Cap and Trade Compliance, and Carbon Offset and Transportation
Charges will fall within the minimum/maximum ranges set forth in Section C. Current
and historic per Ttherm rates for the Commodity, Cap and Trade Compliance, Carbon
Offset and Transportation Charges are posted on the City Utilities website.4
{End}
1 Adopted via Resolution 9451, on September 15, 2014.
2 Adopted via Resolution 10187 on August 19, 2024.
3 https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_G-WSL.pdf
4 Monthly gas and commodity and volumetric rates are available here, or by visiting
https://www.paloalto.gov/files/assets/public/utilities/business/business-rates/monthly-gas-volumetric-and-service-charges-
commercial.pdf
Exhibit 2Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-3-1 Effective 27-1-20265
dated 711-1-20254 Sheet No G-3-1
A. APPLICABILITY:
This schedule applies to the following Customers Commercial Customers receiving Gas Service
from the City of Palo Alto Utilities, who use at least 250,000 Ttherms per year at one site.:
1. Commercial Customers who use at least 250,000 therms per year at one site;
2. Customers at City-owned generation facilities including the City’s Natural Gas fueling
station at the Municipal Services Center.
B. TERRITORY:
This schedule applies everywhere the City of Palo Alto provides Gas Service.
C. UNBUNDLED RATES: Per Service
Monthly Service Charge: $ 780.341,712.36
Per Therm
Supply Charges:
1. Commodity (Monthly Market Based) .................................................... $0.10-$4.00
2. Cap and Trade Compliance Charges ................................ $0.00-$0.25Pass-through
3. Transportation Charge .......................................................................... $0.00-
$0.30Pass-through
4. Carbon Offset Charge ........................................................................... $0.00-$0.10
Distribution Charge: .................................................................................................$ 1.16331.1874
D. SPECIAL NOTES:
1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and
adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill
statement, the bill amount may be broken down into appropriate components as calculated
under Section C.
The Commodity Charge is based on the monthly natural gas Bidweek Price Index for
delivery at PG&E Citygate, adjusted to account for delivery losses to the Customer’s
Meter. The Commodity Charge also includes adjustments to account for Council-
approved programs implemented to reduce the cost of Gas, including a municipal
Exhibit 2Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-3-2 Effective 27-1-20265
dated 711-1-20254 Sheet No G-3-2
purchase discount 1 and $0.055 per Ttherm for mitigating the impact of short-term natural
gas market price spikes2.
The Cap and Trade Compliance Charge is a pass-through charge that reflects the City’s
cost of regulatory compliance with the state’s Cap and Trade Program, including the cost
of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance
obligations. The Cap and Trade Compliance Charge changes in response to changing
market conditions, retail sales volumes and the quantity of allowances required, and is
calculated based on the Cap-and-Trade Program’s quarterly auction allowance closing
prices.
The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases
produced when Gas is burned. The Carbon Offset Charge changes in response to changing
market conditions, sales volumes and the quantity of offsets purchased within the Council-
approved per Ttherm cap.
The Transportation Charge is a pass-through charge based on the current PG&E G-WSL 3
(Gas Transportation Service to Wholesale/Retail Customers) rate for Palo Alto,
accounting for delivery losses to the Customer’s Meter.
The Commodity and , Cap and Trade Compliance, Carbon Offset and Transportation
Charges will fall within the minimum/maximum ranges set forth in Section C. Current
and historic per Ttherm rates for the Commodity, Cap and Trade Compliance, Carbon
Offset and Transportation Charges are posted on the City Utilities website.4
2. Request for Service
A qualifying Customer may request Sservice under this schedule for more than one
Aaccount or Mmeter if the Aaccounts are located on one site. A site consists of one or
more contiguous parcels of land with no intervening public right-of- ways (e.g. streets).
3. Changing Rate Schedules
Customers may request a rate schedule change at any time to any applicable City of Palo
Alto full-service rate schedule.
1 Adopted via Resolution 9451, on September 15, 2014.
2 Adopted via Resolution 10187 on August 19, 2024.
3 https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_G-WSL.pdf
4 Monthly gas and commodity and volumetric rates are available here, or by visiting
https://www.paloalto.gov/files/assets/public/utilities/business/business-rates/monthly-gas-volumetric-and-service-charges-
commercial.pdf
Exhibit 2Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3
CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-3-3 Effective 27-1-20265
dated 711-1-20254 Sheet No G-3-3
{End}
Exhibit 2Docusign Envelope ID: 101A68AB-3548-4E03-B40D-12FA10DCC947
Certificate Of Completion
Envelope Id: 101A68AB-3548-4E03-B40D-12FA10DCC947 Status: Completed
Subject: RESO 10262 - Gas COSA and Amended Gates Rate Schedules G-1, G-2, G-3, G-10
Source Envelope:
Document Pages: 56 Signatures: 6 Envelope Originator:
Certificate Pages: 5 Initials: 0 Christine Prior
AutoNav: Enabled
EnvelopeId Stamping: Enabled
Time Zone: (UTC-08:00) Pacific Time (US & Canada)
250 Hamilton Ave
Palo Alto , CA 94301
Christine.Prior@PaloAlto.gov
IP Address: 165.225.242.91
Record Tracking
Status: Original
12/5/2025 2:30:37 PM
Holder: Christine Prior
Christine.Prior@PaloAlto.gov
Location: DocuSign
Security Appliance Status: Connected Pool: StateLocal
Storage Appliance Status: Connected Pool: City of Palo Alto Location: Docusign
Signer Events Signature Timestamp
Amy Bartell
Amy.Bartell@paloalto.gov
Assistant City Attorney
City of Palo Alto
Security Level: Email, Account Authentication
(None)
Signature Adoption: Pre-selected Style
Using IP Address: 136.226.60.114
Sent: 12/5/2025 2:33:42 PM
Viewed: 12/8/2025 11:50:03 AM
Signed: 12/8/2025 11:54:39 AM
Electronic Record and Signature Disclosure:
Accepted: 7/16/2015 5:52:40 AM
ID: d8ecb53d-ef81-4016-8886-1560c48de42a
Lauren Lai
Lauren.Lai@paloalto.gov
Director Administrative Services/CFO
COPA
Security Level: Email, Account Authentication
(None)
Signature Adoption: Drawn on Device
Using IP Address:
2601:647:c182:5d10:d870:dea5:2980:349d
Sent: 12/8/2025 11:54:41 AM
Viewed: 12/8/2025 2:40:45 PM
Signed: 12/8/2025 2:40:54 PM
Electronic Record and Signature Disclosure:
Not Offered via Docusign
Alan Kurotori
Alan.Kurotori@paloalto.gov
Director of Utilities
City of Palo Alto
Security Level: Email, Account Authentication
(None)
Signature Adoption: Pre-selected Style
Using IP Address: 108.147.93.15
Sent: 12/8/2025 2:40:56 PM
Viewed: 12/11/2025 11:10:59 AM
Signed: 12/11/2025 11:11:33 AM
Electronic Record and Signature Disclosure:
Not Offered via Docusign
Ed Shikada
Ed.Shikada@paloalto.gov
City Manager
City of Palo Alto
Security Level: Email, Account Authentication
(None)
Signature Adoption: Pre-selected Style
Using IP Address: 199.33.32.254
Sent: 12/11/2025 11:11:34 AM
Viewed: 12/12/2025 2:43:42 PM
Signed: 12/12/2025 2:43:51 PM
Electronic Record and Signature Disclosure:
Not Offered via Docusign
Signer Events Signature Timestamp
Ed Lauing
Ed.Lauing@paloalto.gov
Security Level: Email, Account Authentication
(None)
Signature Adoption: Pre-selected Style
Using IP Address:
2601:647:6880:a6f0:c0cf:fb35:49b:3d2
Sent: 12/12/2025 2:43:52 PM
Viewed: 12/12/2025 3:12:54 PM
Signed: 12/12/2025 3:13:12 PM
Electronic Record and Signature Disclosure:
Not Offered via Docusign
Mahealani Ah Yun
Mahealani.AhYun@paloalto.gov
City Clerk
Security Level: Email, Account Authentication
(None)Signature Adoption: Pre-selected Style
Using IP Address: 199.33.32.254
Sent: 12/12/2025 3:13:14 PM
Viewed: 12/17/2025 7:49:40 AM
Signed: 12/17/2025 7:49:49 AM
Electronic Record and Signature Disclosure:
Not Offered via Docusign
In Person Signer Events Signature Timestamp
Editor Delivery Events Status Timestamp
Agent Delivery Events Status Timestamp
Intermediary Delivery Events Status Timestamp
Certified Delivery Events Status Timestamp
Carbon Copy Events Status Timestamp
Witness Events Signature Timestamp
Notary Events Signature Timestamp
Envelope Summary Events Status Timestamps
Envelope Sent Hashed/Encrypted 12/5/2025 2:33:42 PM
Certified Delivered Security Checked 12/17/2025 7:49:40 AM
Signing Complete Security Checked 12/17/2025 7:49:49 AM
Completed Security Checked 12/17/2025 7:49:49 AM
Payment Events Status Timestamps
Electronic Record and Signature Disclosure
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Unless you tell us otherwise in accordance with the procedures described herein, we will provide
electronically to you through your DocuSign user account all required notices, disclosures,
authorizations, acknowledgements, and other documents that are required to be provided or
made available to you during the course of our relationship with you. To reduce the chance of
you inadvertently not receiving any notice or disclosure, we prefer to provide all of the required
notices and disclosures to you by the same method and to the same address that you have given
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described below. Please also see the paragraph immediately above that describes the
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Electronic Record and Signature Disclosure created on: 10/1/2013 8:33:53 AM
Parties agreed to: Amy Bartell
How to contact City of Palo Alto:
You may contact us to let us know of your changes as to how we may contact you electronically,
to request paper copies of certain information from us, and to withdraw your prior consent to
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To advise City of Palo Alto of your new e-mail address
To let us know of a change in your e-mail address where we should send notices and disclosures
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To request delivery from us of paper copies of the notices and disclosures previously provided
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