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HomeMy WebLinkAboutStaff Report 2411-3825 & Staff Report 2407-3235Item No. 4. Page 1 of 1 Utilities Advisory Commission Staff Report From: Alan Kurotori, Utilities Chief Operating Officer Lead Department: Utilities Meeting Date: December 4, 2024 Report #: 2411-3825 TITLE Review and Discuss Preliminary Fiscal Year 2026 Utilities Financial Forecast and Rate Projections This report will be a late packet report published on November 27, 2024 Item No. 4. Page 1 of 7 5 0 8 5 Utilities Advisory Commission Staff Report From: Dean Batchelor, Director Utilities Lead Department: Utilities Meeting Date: December 4, 2024 Staff Report: 2407-3235 TITLE Discussion and Update on the Fiscal Year 2026 Preliminary Utilities Financial Forecast and Rate Projections RECOMMENDATION This item is for discussion, and no action is requested. These preliminary calculations reflect an initial estimate for review and feedback by the Finance Committee and Utilities Advisory Commission (UAC) on key assumptions for the Electric, Gas, Water and Wastewater Collection Utilities to inform recommended FY 2026 financial forecasts and proposed rate changes for each utility. EXECUTIVE SUMMARY The City of Palo Alto Utilities provides electricity, water, wastewater, natural gas, and fiber optics. The City’s Public Works Department also provides refuse collection and processing for recycling, compost and garbage, wastewater treatment and stormwater management services. Customers benefit from the continued safe, reliable, environmentally sustainable, and cost-effective operations of each of these utilities. FY 2026 preliminary calculations model necessary rate increases to support upkeep, infrastructure replacements, and replenishment of reserves to allow the City to continue to provide high quality utility services to the community. Preliminary forecasts reflect a need for an overall 9% or $36.40 monthly rate increase in FY 2026 for the median residential utility bill, encompassing six services (electric, gas, refuse, sewer, stormwater, water). Table 1 shows the preliminary five-year rate projections necessary to restore reserves to within guideline ranges within the five-year planning period, maintain operations given inflationary cost increases, and enable ongoing capital work necessary to provide safe, reliable, and environmentally sustainable utilities while balancing affordability. The City of Palo Alto Utilities is engaged in some infrastructure projects including modernizing the electric grid, improving resiliency, replacing water mains and reservoirs to continue to provide pristine drinking water to residents and businesses and pay toward the rebuild of the wastewater treatment plant that provides a critical service to the community 24 hours a day, 365 days per year. Item No. 4. Page 2 of 7 5 0 8 5 BACKGROUND Annually, the Utilities Department prepares recommended rates forecasts and financial plans for the UAC and Finance Committee review and ultimately City Council adoption in June. Rate adjustments are recommended to maintain each utility’s financial health. Recognizing staffing transitions, initial estimates, and feedback from the rate review process, staff has prepared a preliminary forecast for review and early feedback to better inform the official recommended forecasts expected in Spring 2025 for implementation in July 2025. The rate changes shown in this report are preliminary estimates; actual rate changes will be based on updated financial data and the cost-of-service methodologies and studies for each utility, and may differ by customer class and for individual customers depending on consumption patterns. A cost-of-service study for the Gas Utility is expected to be completed in early 2025 and will be factored into proposals for FY 2026. Cost of service studies for the Electric, Wastewater and Water Utilities were completed in 2024, 2021 and 2019 respectively. Over the past few years, utility reserve funds were drawn down due to a variety of factors. The Electric and Gas Utilities were impacted by the energy price spikes in the winter of 2022 – 2023. The Water Utility was impacted by reductions in water use during the drought in 2021 – 2023 and the subsequent recovering period as well as cool and wet weather patterns which persisted locally in 2023. The Wastewater Collection Utility experienced increased wastewater treatment costs due to a higher flow share compared to the prior year forecast and other operating cost increases. For all Utilities throughout the pandemic, the City of Palo Alto kept rate increases at minimal levels in order to alleviate the burden of utility cost hikes on residents and businesses already grappling with the pandemic's economic effects. A series of rate adjustments are necessary to restore reserves to within guidelines ranges with the 5- year planning period. ANALYSIS Staff seeks input from the UAC prior to finalizing the Utilities Financial Forecasts and developing recommendations for rate changes that would be effective July 1, 2025. The proposed rate adjustment recommendations, along with each utility’s Financial Forecasts, are currently scheduled to be presented to theUAC in Spring 2025. Staff’s preliminary system average rate adjustment recommendations are: Table 1: Preliminary Projected Residential Rate Changes 1. FY 2025 incorporates results of cost-of-service analysis Item No. 4. Page 3 of 7 5 0 8 5 2. Gas rate in FY 2026 based on General Fund transfer of 18% of gross revenues in FY 2024; changes shown with commodity rates held constant; actual gas commodity rates vary monthly 3. Stormwater fees increase by CPI index annually per approved 2017 ballot measure (2.6% in FY 2025) 4.Based on projected FY 2025 monthly residential bill of $402 Electric The preliminary electric forecast maintains the same annual 5% rate increase presented in last year’s FY 2025 financial plan. Net electric supply purchase costs are anticipated to be in line with the FY 2025 Financial Plan; revenues from surplus system Resource Adequacy and Renewable Energy Certificates further reduce supply costs. On the expense side, transmission costs continue to rise, and capital spending and distribution system maintenance spending is rising due to grid modernization, fiber- related investments and an upgrade to the Hanover Substation which will benefit all electric rate payers. Staff expects some of these costs to be offset with debt service through a bond issuance in FY 2026. On balance, the net effect of these various one-time costs and revenues is expected to be positive, enabling the utility to refill reserves to target levels; the Hydroelectric Rate Stabilization Reserve was repaid in FY 2024 and had a balance of $17.4 million at the end of FY 2024. Replenishing this reserve reduces the risk that, in the event of a significant degradation in hydro conditions, the City will need to use the Hydro Rate Adjuster to recover higher supply costs. In FY 2025, the forecasts anticipate the Electric Special Projects Reserve will also be repaid $7.5 million, bringing the balance from $22.6 million to $30.1 million. This will fully repay the monies borrowed for the supply fund to cover higher costs during the pandemic, the drought, and high winter energy prices during 2022-2023. In the longer term (FY 2027 through FY 2030), projected increases in electric costs related to stricter resource adequacy requirements, increasing transmission costs, and capital investment and operational cost increases are expected to result in system average rate increases of 5% per year. Due to the positive net ending position in FY 2024 and CIP reappropriation, the electric utility is able to defer debt financing for grid modernization until FY 2026 and use existing balances for pay-go costs until financing is needed. The current year (FY 2025) financial plan for the Electric Utility (approved June 17, 2024) is available at: https://www.cityofpaloalto.org/files/assets/public/v/2/agendas-minutes-reports/reports/city-manager- reports-cmrs/attachments/2024-rates/electric-utility-financial-plan-fy25.pdf Gas Gas fund expenses are typically one-third supply-related and two-thirds distribution system-related. Supply costs are market driven, change monthly according to market conditions, and are passed through to customers. Distribution costs include distribution operations and maintenance, capital investment, and the general fund transfer. During the pandemic, the City kept overall gas utility rate increases at 2% to 3% annually and utilized reserve funding to cover costs. In the winter of 2022-23, surging gas prices depleted the gas utility reserves, which covered the gap between actual gas costs and the Council-approved maximum gas commodity charge. Reserves need to be replenished over time to ensure funds are available for safety Item No. 4. Page 4 of 7 5 0 8 5 and reliability needs, while managing ongoing cost inflation. In the FY 2025 financial plan, a gas rate increase of 5% was forecasted for FY 2026. However, due to FY 2024 year-end financials which resulted in lower sales revenues and higher operations and overhead costs, staff preliminary forecasts a 6% overall rate increase for the Gas Utility effective July 1, 2025. Water 1 1 Finance Committee April 23, 2024, Action Minutes https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=15050&compileOutputType=1 Item No. 4. Page 5 of 7 5 0 8 5 At the end of FY 2024, the operations reserve was approximately $2 million below projected levels with a balance of $7.1 million, which is below the minimum guideline level of $8.4 million. While revenues were $2.3 million higher than forecasted (sales revenue, capacity and connection fees), operating and capital expenses were $4.4 million higher than forecasted. Many of the cost increases are ongoing and the utility will need to continue to pay them annually. The rate stabilization reserve at the end of FY 2024 has $4 million remaining and the financial forecast plans to use all of that remaining funding to cover costs in FY 2025 and 2026. Wastewater Collection Item No. 4. Page 6 of 7 5 0 8 5 recent recorded costs and rates of cost increase. Relative to last year’s financial forecast, this increased the total operating costs by $6.2 million or 14% over the five-year forecast. Over the five-year forecast, treatment costs are approximately $14.2 million higher due to additional minor CIP expenses and Section 115 Pension Trust expenses inadvertently excluded from the RWQCP’s forecast. To address these challenges, the Wastewater Collection Utility preliminary forecast assumes deferral of the next sewer main replacement budget to FY 2028 and reflects investments in minimally necessary projects to allow the Wastewater Collection fund to recover and mitigate an even higher rate increase. This assumption would defer the more aggressive replacement cycle adopted in the FY 2024 financial plan to increase replacement from 1 miles to 2.5 miles of pipe annually starting in FY 2026. FISCAL/RESOURCE IMPACT STAKEHOLDER ENGAGEMENT Staff is presenting the preliminary rate information to the Finance Committee on December 3, 2024. Staff will summarize the Finance Committee feedback during the UAC meeting. An excerpt of the minutes from the Finance Committee’s December 3, 2024 meeting will be located at the City’s Agenda’s and Minutes website. ENVIRONMENTAL REVIEW ATTACHMENTS Attachment A: Presentation Item No. 4. Page 7 of 7 5 0 8 5 AUTHOR/TITLE: Dean Batchelor, Director of Utilities Staff: Lisa Bilir, Senior Resource Planner December 4, 2024 www.cityofpaloalto.org PRELIMINARY FY 2026 RATE CHANGES Utilities Advisory Commission 2 Preliminary Residential System Average Rate Projections 1)FY 2025 incorporates results of cost -of-service analysis 2)Gas rate in FY 2026 based on General Fund transfer of 18% of gross revenue in FY 2024; changes shown with commodity rates held constant; actual gas commodity rates vary monthly 3)Stormwater fees increase by CPI index annually per approved 2017 ballot measure (2.6% in FY 2025) 4)Based on projected FY 2025 monthly residential bill of $402 3 ONGOING COST CONTAINMENT for All Utilities •Consistent with the Utilities Strategic Plan, cost containment is being instituted as an ongoing priority and annual cycle •Ongoing management review of personnel actions •Regular review of performance metrics and expenditures RECENTLY IMPLEMENTED COST CONTAINMENT 4 •Expanded use of bank draft to reduce credit card fees •Scheduled larger CIP projects every other year achieving efficient project management and lower construction costs (estimated $50K per CIP project) •Implemented mobile workforce applications, reducing administrative data entry time, freeing up staff for other work Water, Gas, and Wastewater •Established cross-functional field crew to install water, gas, and sewer services simultaneously at new construction sites, reducing hours spent in the field by minimum 20% Electric Utility •Selling surplus Resource Adequacy and Renewable Energy Credits ($20+ million/year) •Negotiated improvements to Western hydroelectric contract ($2 million/year) •Negotiated layoff of transmission asset generating $550k/year Water Utility •Agreement with Valley Water yielded $16 million in funding for reverse osmosis facility to improve recycled water quality and $250K to $1M/year •BAWSCA water bond refunding in 2023 achieved lower debt service payments ($185K/year 2023 - 2034) 5 FUTURE POTENTIAL COST CONTAINMENT •Implement new customer information system with reduced support costs •Increase water and energy end use technical training for Customer Service Representatives, reducing transferred phone calls and staff time Water, Gas, and Wastewater •Cluster gas main replacements to reduce mobilization costs for construction contractors ($5K - $10K for each project group) Electric Utility •Prepay of renewable power purchase agreements to monetize municipal tax- exempt debt •Optimize debt issuance timing and amount for Grid Modernization to minimize debt service costs to electric customers •Additional value from Western federally- owned transmission ($500K/year) •Challenge transmission rates via Northern California Power Agency ($500K/year) ELECTRIC UTILITY (Preliminary) www.cityofpaloalto.org 7 FY 2026 PRELIMINARY PROJECTION •5% rate increase across all customer classes in FY 2026 •Significant investment in grid modernization, but able to delay bond issuance to FY 2026 •Reserves recovering from 2020-2022 drawdown •Repaid Hydroelectric Rate Stabilization in FY 2024 •Repaying Electric Special Projects Reserves in FY 2025 •Net supply costs forecast in line with FY 2025 Financial Plan •Revenues from surplus system Resource Adequacy and Renewable Energy Certificates further reducing supply costs FUTURE YEARS •5% rate increase per year projected for FY 2027-FY 2030 •Issue debt for Grid Modernization in first half of FY 2026 Preliminary Electric Rate Projection 8 Preliminary Electric Cost and Revenue Projections Co s t / R e v e n u e Grid Mod CIP (pay as you go) Debt Financing in 2026 9 Preliminary Electric Supply Operating Reserve Projections Received $24M Overcharges Refund 10 Preliminary Electric Distribution Operating Reserve Projections Maintained rates with no increases in FY2021 and FY2022, and utilized the operating reserve to cover expenses 11 Electric Residential Bill Comparisons *PG&E and Santa Clara Rates Effective November 2024; Palo Alto proposed rates July 2025 GAS UTILITY (Preliminary) www.cityofpaloalto.org 13 FY 2026 PRELIMINARY PROJECTION •6% overall rate increase in FY 2026, due to 10% distribution rate increase •6% overall rate increases annually in FY 2027 -30 •Gas General Fund Transfer in FY26 is estimated at $9.735M, calculated from 18% of FY24 gross revenue Drivers •Reserves $1.5 million lower than forecast due to lower retail sales and connection fee revenues •Projection reflects lower sales projection, higher other operating costs Preliminary Gas Rate Projections *excludes supply -related rate changes 14 Preliminary Gas Cost and Revenue Projections *Revenue excludes Cap-and-Trade auction sales revenue, which goes directly to the Cap -and-Trade reserve **FY25 Commitments and Reappropriations reserves balances for Operations and Capital Investment are anticipated to be utilized in FY26 and FY27 ***The grant-funded $16.5M CIP project is anticipated to be under construction in FY26 and FY27 14 Spike in gas prices 15 Preliminary Gas Operations Reserve Projections 16 Preliminary Gas CIP Reserve Projections 16 Projections for reserve level needs reflect the significant increase in capital investment costs and prior planned projects in FY 2025 deferred to future years 17 Gas Bill Comparisons ($/Mo.) Staff is currently conducting a Cost-of-Service Study and will provide an update in 2025 Residential Commercial 10 33.46 11.58 189% (Median) 17 45.03 29.20 54% 30 78.84 66.35 19% 45 122.85 109.22 12% 30 64.75 81.27 (20%) (Median) 51 98.23 143.27 (31%) 80 169.57 228.88 (26%) 150 370.86 435.55 (15%) Annual (Median) 31 67.20 76.73 (12%) PG&EPalo AltoUsage (Therms)Season Summer PA/PG&E (%)Rate Winter G-1 WATER UTILITY (Preliminary) www.cityofpaloalto.org 19 Preliminary Water Rate Projections FY 2026 PRELIMINARY PROJECTION •14% overall rate increase in FY 26 (26% distribution rate increase) •Operations Reserve and CIP Reserve projected to be below minimum guideline range in FY 2026 and return within guideline range in FY 2027 •Commodity rate increase projection: 0% in FY 2026, 3.4% in FY 2027, 7.5% in FY 2028 and 5.4% in FY 2029 (SFPUC rate notice April 2024); highly uncertain and subject to change Projected Water Distribution Rate Trajectory Projected Total Water Rate Trajectory 19 20 Preliminary Water Cost and Revenue Projections * Includes changes due to commitments/reappropriations and funds transferred to the CIP Reserve 21 Preliminary Water Operations Reserve Projections 22 Preliminary Water CIP Reserve Projections Note: Prior to FY21, CIP reserve guidelines were set at 12-24 months of budgeted CIP expenses, with FY20 spiking due to high CIP budgets. In FY21, the reserve guidelines policy updated to a 48 -month of average budgeted CIP expenses 23 Water Bill Comparisons ($/Month) Single-Family Residential Palo Alto is 18% above comparison city average Palo Alto is 6% above comparison city average Commercial WASTEWATER COLLECTION (Preliminary) www.cityofpaloalto.org 25 Preliminary Wastewater Rate Projections FY 2026 PRELIMINARY PROJECTION •18% rate increase in FY 2026, approximately $10/month increase for residential customers •15% rate increase in FY 2027 and FY 2028, 7% in FY 2029 and FY 2030 Drivers •Treatment operational cost increases (budgets uncertain and subject to change) •Reserves very low, operations reserve balance negative $1 million at year end, need to restore reserves to within guideline range 26 Preliminary Wastewater Cost and Revenue Projections *FY25 Commitments and Reappropriations reserves balances for Operations and Capital Investment are anticipated to be utilized in FY26 and FY27 27 Preliminary Wastewater Operations Reserve Projections 28 Preliminary Wastewater CIP Reserve Projections 29 Wastewater Bill Comparisons ($/Month) October 2024 Residential General Commercial Palo Alto is 13% higher than comparison city average Restaurant – Palo Alto is 7% below comparison city average Palo Alto is 21% below comparison city average