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HomeMy WebLinkAbout2026-04-21 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 16 Regular Meeting April 21, 2026 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room and by virtual teleconference at 4:00 p.m. Present In-Person: Lauing (Chair), Burt, Lu Absent: None Call to Order Chair Lauing called the meeting to order. The clerk called roll with all present. Public Comment – None Agenda Items 1. Recommendation to the City Council to Adopt a Resolution Approving the Fiscal Year 2027 Gas Utility Financial Forecast, Reserve Transfer, General Fund Transfer, and Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), and G-3 (Large Commercial Gas Service) ; CEQA Status: Not a project under CEQA Guidelines Section 15378(b)(5) Alan Kurotori, Utilities Department Director, started with a high-level overview of the gas utility, which includes about 210 miles of distribution mains, 195 miles of service lines, and 53 dedicated staff. Retail revenue is around $70M per year, which is split between Operating and Capital Improvement budgets. Part of the Capital Improvement Budget is a federal DOT grant, which allows for more gas utility replacements. Director Kurotori stated the rate adjustments are necessary to ensure long-term financial stability of the gas utility and support projects that maintain and improve safety and efficiency. Current infrastructure projects are the gas main replacements and Arastradero Creek repairs. Funds are also used for gas meter installations, leak detection and mitigation, excavation and damage control, and sub-standard material replacements. Eric Wong, Resource Planner, continued the presentation by explaining the gas cost structure and rate design. The proposed rate adjustment is a 9 percent overall increase for FY27, which means an increase of $7.30 per month for the median residential customer. The Utilities Advisory Commission (UAC) recommended a lower increase of 7 percent for FY27 and staff have explored several options for consideration. The grant-funded CIP project is expected to be under construction in FY26-27 with a projected expense of about $11M in FY26 and $5M in SUMMARY MINUTES Page 2 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 FY27. The gas utility will receive the equivalent amount as grant revenues, which is why the expenses revenue for both years is elevated. The gas main replacement (GMR) scheduled for construction in FY25 has been reallocated and split over the next 2 GMR projects with construction planned in FY27 and FY29, resulting in higher CIP costs over the next 4 years. Revenue is projected to exceed expenses in FY30 and FY31 and the resulting surplus will mainly be used to replenish depleted reserves. Under current rates, Palo Alto median residential bills are about 11 percent below PG&E's while commercial bills are higher. The main rate increase drivers are CIP expenses, lower sales revenue, and operation expenses. Gas usage for FY25 was about 8 percent lower than forecasted, which reflects warmer-than-typical weather conditions, ongoing electrification efforts, and efficiency improvements. Projected gas usage for the next 5 years is 4 percent lower than the previous forecast. The gas operation reserve is projected to dip below the risk assessment level due to lower sales revenue and elevated CIP cost, but it is expected to recover by FY28 and reach the target level by FY31. Proposed utility rate increases combined are projected to increase median residential utility bills by 8 percent overall, about $36 per month. Chair Lauing thanked Resource Planner Wong for skipping slides that had been presented previously and noted for the public that a number of items were fixed-cost reductions, such as credit card fees. Chair Lauing shared that the UAC had a good discussion on gas utility capital expenses when he was there as liaison and noted the gas utility's declining use, very high fixed costs, and increasing operating and capital costs all drive higher rates. Chair Lauing asked what options have been explored, especially those not tied to grants. Director Kurotori responded that as part of the PHMSA grant they received from DOT, they could not reduce the investment being made into the system, so it had to be above and beyond what is being done now. Director Kurotori stated this retains the City's commitment to maintain the systems in good quality and provides the benefit of federal dollars, which avoids funding capital projects via rate payers. Utility capital projects have a 2-year timeframe with alternating design and construction years. The Utilities Department looks at collaboration and coordination with other underground utilities and Public Works. They try to bundle projects together when possible and go through one area or neighborhood at a time for efficiency. As part of leak detection, they try to find leaks early and add them into the asset management system to figure out which are priority projects. They updated the gas utility distribution model and are working through a gas transition study. Director Kurotori noted a separate slide will cover ideas staff created for reducing the rate increase. Chair Lauing asked how much they factor in new development when forecasting gas usage and what metric is being used. Lisa Bilir, Assistant Director of Utilities and Resource Management, stated they are trying to coordinate electric and gas forecasts but the primary method for forecasting gas utility is a statistically adjusted end use model. They look at end uses of gas in different appliances and what is expected there and adjust that forecast based on a regression model. SUMMARY MINUTES Page 3 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 Amber Gshwend, Rates & Regulatory Director, GDS Associates, shared that the gas forecast does not contemplate new development except where it is already incorporated into historical trends, which have been showing some decline in usage. Director Gshwend clarified that the forecast methodology combines econometric forecasts with other variables, such as historical trends around increase or decrease in the number of customers and population growth. Councilmember Burt expressed uncertainty about what variables are included in the forecast and stated established reach code standards were designed to strongly discourage new gas hookups in new residential developments but they are less effective than planned. The intention was to have very little gas consumption from a significant amount of new housing but the forecast does not appear to incorporate those policies as intended. Director Gshwend clarified that the declining trend in number of customers for the gas utility is incorporated in the forecast going forward. Director Kurotori added that gas usage is expected to decline as growth continues on the electric side and some of that will be discussed in the next presentation. Bob Phillips, Utilities Advisory Commission, asked if the resolution voted in by UAC was made available; it was confirmed to be in the staff report. Commissioner Phillips noted the major difference is staff recommended a 9 percent increase while UAC recommended 7 percent. UAC also moved to remove the mention of the 18 percent transfer to the general fund because it seemed redundant and approve the transfer of up to $1.5M from the Gas Utility Operations Reserve to the Distribution Rate Stabilization Reserve. UAC had a robust discussion around gas rates. The 4 commissioners who voted for the recommendation believed keeping rate increases low in the short run was best. Of the 3 commissioners who voted against it, 1 believed in the 9 percent increase because of the City budget situation and the others were concerned about putting a lot of money into capital improvement despite decreasing demand and wanted a bottom-up look at what is appropriate. Director Kurotori explained that in terms of capital refurbishment and replacement, the federal government through the State of California comes every few years to audit the gas utility's replacement and proactive maintenance. Director Kurotori emphasized that continuing proactive repair avoids large and expensive emergency repairs. Director Kurotori stated the Utilities Department collaborates and compares with Vernon and Long Beach's natural gas utilities and current investments focus on high reliability and safety and overall cost reduction. Councilmember Lu asked for more color and a sense of when and if the capital investment in gas might taper off under the current projection. Councilmember Lu wondered if the capital improvements are a generational investment that will buy 20 years of lower capital costs and perhaps carry them over to the point of deprecating a gas utility. Director Kurotori referenced pointed to the lack of gas CIP reserves and recalled rates being kept flat during the pandemic, which meant some projects were reduced or pushed out. The gas CIP projects being planned are intended to keep pace with reliability and safety goals. SUMMARY MINUTES Page 4 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 Director Kurotori shared about the gas transition study, which includes looking at transitioning customers to electrifying in lieu of capital reinvestment, which is something the State is doing a 5-year pilot on and may be an optimal solution. Councilmember Lu pointed to Slide 6, which shows rate increases of 6 percent per year going forward, perhaps indefinitely. Director Kurotori replied they try to keep rates steady to reduce rate shock. A huge spike in natural gas cost took place a few years back and was a significant impact to customers, so the reserve will be there as a cushion in case of a similar future spike. Director Kurotori confirmed that an annual increase of 6 percent is planned. Councilmember Lu asked if any capital projects or long-term projects for gas utility can save money and should be prioritized, such as how AMI is saving electric utility money. Director Kurotori shared that AMI benefits all 5 utilities. The budget process is taking place now and they are looking at eliminating vacant Meter Reader positions. Another saving point is outsourcing bill printing services. Whenever there is a vacancy, they go through the City's hiring review committee to search for efficiencies. Councilmember Lu noted multi-family and commercial were lumped together in the presentation and asked if multi-family customers are paying more than single-family. Assistant Director Bilir explained that there are multi-family customers in 2 categories but most are mixed in with the residential category on the bill comparison slide. There is a subset of master-metered multi-family customers who are billed together with the small commercial customers. Councilmember Burt stated the system lacks incentives for reducing consumption. Councilmember Burt acknowledged the PHMSA grant required they maintain funding of the already-planned capital work for the next 5-year period and wondered if the planned capital work was typical. Assistant Director Bilir confirmed the 5-year investment period was a typical period of mains replacement. Councilmember Burt referenced Packet Page 4 under Overview, which states supply purchases are expected to be about $4M lower than last year's forecast, and asked if that is a combination of commodity and distribution costs. Assistant Director Bilir clarified that the statement is characterizing all of the different supply purchases, including commodity, environmental, transportation, carbon offset, and Cap-and- Invest charges. Councilmember Burt asked about Page 7 under Supply Costs, which says market forecasts currently indicate gas prices will remain relatively steady over the next several years. Councilmember Burt noted the U.S. Information Administration's national projection is for a SUMMARY MINUTES Page 5 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 slight dip in FY26 and a big spike in FY27 and asked if the utility projections are based on current or recently outdated projections. Assistant Director Bilir said they are monitoring those events closely and working together with the team that monitors supply costs. Palo Alto does not see those changes in the forecast or current prices. Commodity charges have been declining in recent months and they are not expecting changes to the forecast included in the packet. Lena Perkins, Acting Deputy Director of Resources, stated this is a unique situation because California restored nearly full storage at Aliso Canyon, is physically disconnected from the rest of the U.S. grid, had a cooler summer with lower AC demands, and had 3 good hydro years. Director Kurotori added that a finite number of facilities can process liquefied natural gas, which Palo Alto is largely disconnected from in the larger market. Councilmember Burt asked about consumption projections shown at the bottom of Packet Page 2, which says FY25 usage was 8 percent below forecast and is projected to continue dropping about 1.1 percent annually for the next 5 years. Councilmember Burt expressed concern about the 1.1 percent decrease seeming low, especially with incentives that are in place. Assistant Director Bilir stated changes from year-to-year and month-to-month are primarily weather-related. When looking at long-term trends, they used regression and did a robust and statistically valid analysis, which is why they recommend the forecast they have. Councilmember Burt voiced disagreement with the UAC's recommendation to reduce the general fund transfer, which was approved by the voters in Measure L. Councilmember Burt added that the City general fund is facing its largest deficit in 6 years and stated the UAC should not make recommendations that are oblivious of these facts. Commissioner Phillips responded that the UAC is not oblivious to these factors and noted the combination of reducing and other mechanisms in their recommendation. Commissioner Phillips added that Measure L is up to 18 percent and the Council adopted a lower transfer rate in the last year or two, which Councilmember Burt replied was a 1-time transition. Chair Lauing asked about Cap-and-Invest compliance costs shown on Page 7 of the staff report and asked what those costs are and how they know they are going to go up 12 percent. Assistant Director Bilir explained that they participate in the State's Cap-and-Invest program, which has very specific amounts of allowances that they receive and need to purchase in order to balance out the amount of gas used in the City of Palo Alto, so they have to pay the cost of complying with purchasing those allowances. They calculate the compliance costs each year and pass them through to customers. Assistant Director Bilir clarified that the 12 percent annual increase forecasted is based on broker quotes and regulations expected. SUMMARY MINUTES Page 6 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 Chair Lauing noted the residential bills relative to PG&E are 11 percent lower and it is the opposite for commercial. Chair Lauing highlighted that residential customers more often look at percentages rather than dollars. Chair Lauing asked for a broader conversation on the UAC recommendation on Packet Page 23. Assistant Director Bilir explained that UAC asked to use a combination of lowering reserves, other levers, or reducing the general fund transfer and so staff has thought about that and generated some ideas, which Assistant Director Bilir shared. Decreasing the rate increase to 7 percent could be accomplished by reducing the general fund transfer from $10.7M to $9.3M. Reserves are not available and not included on the list of options. Other levers to consider are 1) slow recovery of the gas price spike mitigation reserve over 32 months instead of 16, resulting in a 1 percent reduction; 2) utilizing Cap-and-Invest funds to provide a climate credit for customers instead of sustainability and climate action, which is something the Council considered last year and did not support; and/or 3) pause or stop paying for carbon offsets and not have a carbon-neutral gas utility, which could accomplish a 1 percent gas bill reduction. They also looked at using the base electrification load forecast from the discussion. If they used a higher load forecast, it would not impact the rate increase needed. Director Kurotori emphasized that staff came up with any ideas they could but there are not many levers left to pull and these are not necessarily being recommended. Chair Lauing expressed appreciation for the stretch staff made to gather these ideas. Chair Lauing suggested that the 2 percent decrease may be reached by combining a slowed reserve recovery with a $700K reduction of general fund transfer. Chair Lauing noted increases are especially hard for people on fixed incomes and wondered what could be done to help them. Councilmember Lu stated that while the general fund point is well taken, none of these options is particularly appealing, so he is comfortable moving forward with the 9 percent increase. Councilmember Lu opined the slow recovery is the most viable option but still feels like a band- aid. Councilmember Lu wanted to see a rate design in the future that separates multi-family residential from commercial so the discount compared to PG&E for residential is proportional to all residents. Councilmember Burt stated the spike mitigation spread over 32 months is worth consideration except there are concerns about the global energy market potentially moving into a period of volatility. Councilmember Burt emphasized the need to demonstrate and include in presentations how rates were frozen during COVID, which depleted reserves. Councilmember Burt wanted to make sure rate payers understand the rate increases are required in part because of playing catch-up from frozen rates during the pandemic. Chair Lauing asked for clarification on the process of making recommendations to Council and wondered when they will get a chance to discuss options with the Council. Two options were determined. Option 1 is to continue this item and discuss it with Council in the context of other things. The next meeting with the full Council is May 4, when they receive the proposed budget SUMMARY MINUTES Page 7 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 in a study session. Option 2 is to come out with a recommendation now and still have this conversation in June, though without all options on the table. Chair Lauing moved for a 32-month spread of the general fund transfer, which would result in a lower rate increase of 8 percent. Councilmember Lu expressed alignment with the original 9 percent increase. Councilmember Burt recalled the commodity price spike, which was very painful and meant community members had huge increases as a result of the City not having enough reserves and/or not responding quickly enough. Councilmember Burt expressed concern about risking a repeat of that if reserves are not replenished. Chair Lauing wondered if the City would be in a position to respond quickly to another commodity spike and what would happen if it hits while reserves are not replenished. Kiley Nose, Assistant City Manager, noted the City is not a long-term purchaser as much as they were, which is another reason why they are susceptible to spikes. They do not have many buffers other than the reserve. Assistant Director Bilir confirmed the reserve was put in place by Council for exactly this reason. The target is $4M in this reserve at the end of the recovery period, which was going to be in 2028. Extending the replenishment would push the end of recovery into 2029. Whether to stick with original timeline or adjust it is a risk tolerance assessment the Council would have to grapple with. Councilmember Burt agreed it is a risk tolerance question and emphasized that while this increase is significant, it is not as bad as the past spike, which was a severe pain for residents. Councilmember Burt agreed with the staff recommendation of a 9 percent increase. Item 1 Public Comment – None MOTION: Councilmember Burt moved, seconded by Councilmember Lu, to recommend the City Council adopt a resolution (Attachment A): 1. Approving the Fiscal Year 2027 Gas Utility Financial Forecast shown in this staff report and attachments, which includes amending the Gas Utility Reserve Management Practices; and 2. Approving the transfer of up to $1.5 million from the Gas Utility Operations Reserve to the Distribution Rate Stabilization Reserve at the end of FY 2026; and 3. Transferring up to 18% of gas utility gross revenues received during FY 2025 (up to $10.7 million) to the General Fund in FY 2027; and 4. Amending Rate Schedules (Attachment A, Exhibit 1) effective July 1, 2026 (FY2027): a. G-1 (Residential Gas Service) b. G-2 (Residential Master-Metered and Commercial Gas Service) SUMMARY MINUTES Page 8 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 c. G-3 (Large Commercial Gas Service) MOTION PASSED: 2-1, Lauing no 2. Staff and the Utilities Advisory Commission Recommends the Finance Committee Recommend that the City Council Adopt a Resolution Approving the FY 2027 Electric Financial Forecast, Approving a Reserve Transfer, and Amending Electric Rate Schedules E-1 (Residential Electric Service), E-1 TOU (Residential Time of Use Electric Service), E-2 (Residential Master-Metered and Small Non-Residential Electric Service), E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service), E-4 (Medium Non-Residential Electric Service), E-4-G (Medium Non-Residential Green Power Electric Service), E-4 TOU (Medium Non-Residential Time of Use Electric Service), E-7 (Large Non- Residential Electric Service), E-7-G (Large Non-Residential Green Power Electric Service), E-7 TOU (Large Non-Residential Time of Use Electric Service), E-14 (Street Lights), E-EEC-1 (Export Electricity Compensation), and E-NSE-1 (Net Metering Net Surplus Electricity Compensation); CEQA Status: Not a project. Terry Crowley, Utilities Chief Operating Officer, provided background on the electric utility and reasons for the proposed rate adjustments. The electric utility provides over 900 million kWh annually via 317 miles of high-voltage distribution lines, employs 127 staff, and is 100 percent carbon neutral. The purpose of rate adjustments is to preserve fair cost recovery for services provided, maintain long-term financial stability, adjust for changes in carbon free energy costs, and support Council goals for electrification and wildfire mitigation. Fund uses include preventative maintenance, grid modernization, Advanced Metering Infrastructure (AMI), and locally driven programs for electrification and Greenhouse Gas reduction. Assistant Director Bilir walked through the electric utility cost structure. About half of the retail rate is supply-related costs, totaling $79M. The rest of the rate is based on the City's cost for operating and maintaining the system, which totals $69M. The projected electric cost for 2027 includes bond reimbursement costs. The City's electric bills are 40+ percent lower than PG&E, shown on Slide 7, and the electric utility's operations reserve is forecasted to remain around the reserve target over the next 5 years. The hydro rate stabilization reserve has about $18M, which is close to the target level but the plan is considering moving $6M, if available, into that hydro rate stabilization reserve in anticipation of poor hydro years due to climate change. Slide 9 provides an overview of electric utility CIP spending, including a breakdown showing cost per key grid modernization project and what portion is needed for aging infrastructure, system reliability, and increased capacity. Slide 11 shows key messages and outreach strategies the City Electric Utility is using to communicate with the public. Slide 14 outlines the estimated impact of various proposed budget reductions for the electric utility, including eliminating vacant Meter Reader positions and outsourcing bill printing and mailing. The electric rate is proposed to increase 6 percent overall, which is equivalent to $5.10 for the median residential customer. The UAC voted in favor of this recommendation. SUMMARY MINUTES Page 9 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 Commissioner Phillips noted this recommendation is much less controversial than the gas utility and only one UAC commissioner voted against it because of a lack of strategy for incorporating uncertainty into the rates. The UAC was very satisfied with the analysis and investments, particularly in terms of grid modernization. Commissioner Phillips applauded staff's efforts to find ways to delay or stretch out projects to keep rates low. Councilmember Lu asked about the trajectory beyond 2031 for electric costs, revenue, and rate increases. Assistant Director Bilir offered that this is a 5-year forecast and the further they attempt to forecast beyond that, the more uncertain the forecast becomes. Many things could change in terms of commodity, policies, and regulations, so they do not forecast beyond those 5 years. Director Kurotori added that one item they look at when forecasting is potential growth of electric usage. More commercial activity and businesses moving in because of competitive rates and new capacity should help the overall rate trajectory. They look 10 to 20 years out in terms of transmission planning process and projected incoming loads and work with the California Energy Commission on some factors. The State is looking to electrify everything and projections reflect that. On a cost level, they are showing increased sales over time but because of the unknowns in terms of economy, administration, and resources mix, they will have to revisit the forecast again. Councilmember Lu acknowledged the current load projection will be revisited at the end of 2026 and it is basically flat. Councilmember Lu noted load was 14 percent higher this year than forecasted and asked how sensitive rates are to the load forecast. Director Kurotori stated this is one of the prime questions UAC asked. If another 8 to 10 megawatt, medium-sized customer came in, that reduces rate requirements to 3 or 4 percent because some investments are already booked into the infrastructure. Those customers have a higher utilization rate and are predictable and efficient in power use, so the utility can more efficiently provide them service. Councilmember Lu asked how a residential increase of 1,000 more electric cars, hundreds of home electrifications, and a couple thousand all-electric homes compare to a commercial increase. Councilmember Lu wanted to see an increase of 5 percent instead of 6. Acting Deputy Director Perkins offered that this load forecast is revisited multiple times a year for hedging as well as benchmarking for the annual budget. They are not locked into future year rate increases but if they overestimate load, they set themselves up for a double-digit rate increase if it does not show up. Acting Deputy Director Perkins expressed cautious optimism for lower increases in outer years, mostly from small, existing office space data center customers. Acting Deputy Director Perkins noted the scale of electrification Councilmember Lu described would have a similar impact, especially if they flatten their load. SUMMARY MINUTES Page 10 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 Director Kurotori estimated that a 10-megawatt increase for commercial may be an 8 to 10 percent load increase. Residential is roughly 20 percent of energy demand in the City, so more EVs and electrification may create a 1 or 2 percent increase, which is not much of an effect. Councilmember Lu referenced Table 2 on Packet Page 5 and noted operational costs in the last year were around $8.4M less than expected and there are many more operational efficiencies are proposed. Councilmember Lu wondered how sustainable those savings are and asked if they are baked into the FY26 rate assumption. Dave Yuan, Utilities Strategic Business Manager, stated some efficiencies are sustainable, such as eliminating vacant Meter Reader positions and outsourcing billing, which are permanent changes. Physical meter readers are not needed because the new AMI transmits those readings digitally every month. Manager Yuan suggested the majority of the $8.4M savings in 2025 may be related to commodity costs, so it is more seasonal/annual versus ongoing. Assistant Director Bilir offered to look into the story around the $8.4M in savings and report back with more details. Councilmember Burt pointed out that the staff report states 2 decades of decline in electric consumption because of efficiency programs. Councilmember Burt noted efficiency is still occurring as electrification takes place and the AMI meters should empower individual users to improve their efficiency because they can look at their consumption in a more granular way. Councilmember Burt asked if there are any estimates on how much that will move the dial on efficiency in coming years. Manager Yuan stated they are launching time-of-use rates and will get a better sense of how much savings it will produce in coming years. There is a small pilot right now but a full launch is estimated for July/August 2026. The customer modifying their behavior for savings is when the reduction will happen. On the operational side, they will be getting better transformer data, so they can upsize or downsize transformers appropriately based on demand. They can also measure the full pitch to prevent power loss in delivery. Councilmember Burt stated that prior grid mod discussions highlighted that is lowers systems outages, which has been an important discussion. Grid mod was first discussed for capacity reasons but now the understanding is it enables better reliability and resiliency because it replaces older equipment and is better technology. Councilmember Burt asked for an update on setting goals for reliability. Utilities COO Crowley responded they are looking at grid modernization to not only increase capacity and prepare for electrification but also to look at legacy systems, improve system reliability, and avoid failures that happen as systems age. Staff's plan is to come back to the UAC in August or September to talk about reliability goals and find metrics that make sense for Palo Alto. Utilities COO Crowley stated it is important to benchmark against neighboring agencies but the direction from Council is to look at what Palo Alto wants those goals to be and simplify the message for the community so they understand what reliability means for them. SUMMARY MINUTES Page 11 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 Councilmember Burt said that if the community is being asked to electrify, they will question reliability when there is no longer gas. Councilmember Burt wanted to make sure the community understands things like space heating already depend on electricity to push hot air into the home. Councilmember Burt pointed out language in the packet that says, "continuing to advocate for the Ames transmission source," which makes it sound like it is not settled. Utilities COO Crowley responded that the Ames transmission source is not settled because it is not built yet. The Council approved PG&E to build starting in 2034 or after, so the City wants to provide direction and support PG&E as much as possible in moving that forward. They have committed pre-construction dollars to it, so they have a project manager assigned and are starting to look at permitting and environmental reviews that would allow them to construct it. Councilmember Burt encouraged the staff to put more depth on the Ames transmission project progress in reports to the Council and the community. Councilmember Burt asked for an explanation of language on Packet Page 151: "Increases in market resource adequacy requirements minus resource adequacy revenue projected to decrease $4.4M from FY26 to FY28." Councilmember Burt noted this terminology is hard for many folks to understand. Acting Deputy Director Perkins explained that there are regulatory changes in how Western Resource is planned to be treated in the expanded Day-Ahead Market. The City normally has extra reliability which the City can sell but they will have to use more to meet increasing compliance requirements, so there will not be excess to sell. The City is working with the California ISO and the CEC on the requirements and how Western federal hydroelectric power can be an asset to the grid. It is a new market rolling out in May 2026, so there are hiccups with the federal and state folks working together. Director Kurotori added that, on a higher level, the City needs to have enough capacity and reserves as part of the greater CAISO grid in California, so they have projects available to make sure that they have high reliability, which is called resource adequacy. Councilmember Burt encouraged using the proper term along with a good description going forward. Councilmember Burt stated the bottom line is how much additional revenue Palo Alto gets because of their green electricity. Councilmember Burt noted it is important for residents to know that when the City went green early and at low cost, they also got the additional benefit of being paid for it on top of that, which is an important story to communicate. Councilmember Burt referenced where Slide 15 says renewable energy targets are rising and asked how that affects Palo Alto, given the City is carbon neutral. Acting Deputy Director Perkins explained that they hit a 60 percent RPS renewable percentage 5 or so years ago and then Council approved selling the extra renewable credits in order to lower costs and help facilitate electrifying everything. By 2030, the required percentage of renewables will be 60 percent, so the surplus green attributes that are being monetized to lower costs will not be there on an average basis. SUMMARY MINUTES Page 12 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 Councilmember Burt asked about the hydro stabilization reserve's status and why it needs to be replenished by about $6M? Assistant Director Bilir explained the reserve is currently at $18.7M, which is around the target level but they are looking at increasing the target level by $6M for FY27 to mitigate future hydro risks such as drought creating pricing spikes. Councilmember Burt wondered if the reserve increase of $6M could be spread over 2-3 years instead of 1 year. Assistant Director Bilir reemphasized that when there was a previous drought, they implemented a hydro rate adjuster, which had a significant impact on customer bills. From a staff perspective, they are trying to make sure they do not have price impacts to customers all at once. It was noted that the previous rate spike was in 2023, when the reserves were low from a combination of drought and COVID rate freezes. Director Kurotori emphasized the importance of the electric utility having reserves. Acting Deputy Director Perkins opined that spreading the reserve increase over 2-3 years was reasonable and added that the reserve was established 6 or 7 years ago and there are differences in dispatch for hydro and increasing volatility in California, so they will have increased exposure over the long term with their current portfolio. Even if it is spread over 2-3 years, it might delay a larger increase later when the reserve guidelines are updated. Councilmember Burt Councilmember Burt reiterated he supports raising the reserve but wondered if it can be spread over 2-3 years. Chair Lauing agreed with this idea and noted his desire to have a broader conversation on reserve depths and where funds can be shared between reserves because that will help manage the mini-crises they are intended to address. Assistant City Manager Nose reminded the Committee that this is the one fund that will go out to the public or private financial markets in the next 6 to 9 months. The cash on hand, reserve policies, risk, and committee discussions will influence the very first rating for this utility for the grid mod bond. Director Kurotori said it is important to have positive revenue going back into the reserves to show the market that the City is prepared for the grid mod and taking the necessary steps to ensure they are financially sound. Councilmember Lu noted that $3M is 1.5 percent of the total budget. He wondered if spreading the reserve replenishment over 2 years, $3M per year, would mean they could move for a 4.5 percent rate increase instead of 6 percent. Acting Deputy Director Perkins confirmed. Item 2 Public Comment – None MOTION: Councilmember Burt moved, seconded by Councilmember Lauing, to recommend the City Council adopt a Resolution (Attachment A): 1. Approving the Fiscal Year 2027 Electric Utility Financial Forecast shown in this staff report and attachments; and SUMMARY MINUTES Page 13 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 2. Approving the transfer at the end of FY 2026 of up to $5 million from the Electric Utility Distribution Operations Reserve to the Electric Utility Capital Reserve; and Amending Electric Rate Schedules (Attachment A, Exhibit 1) effective July 1, 2026 (FY 2027): a. E-1 (Residential Electric Service) b. E-1 TOU (Residential Time of Use Electric Service) c. E-2 (Residential Master-Metered and Small Non-Residential Electric Service) d. E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service e. E-4 (Medium Non-Residential Electric Service) f. E-4-G (Medium Non-Residential Green Power Electric Service) g. E-4 TOU (Medium Non-Residential Time of Use Electric Service) h. E-7 (Large Non-Residential Electric Service) i. E-7-G (Large Non-Residential Green Power Electric Service) j. E-7 TOU (Large Non-Residential Time of Use Electric Service) k. E-14 (Street Lights) l. E-EEC-1 (Export Electricity Compensation) to reflect forecasted avoided cost for FY 2027, and m. E-NSE-1 (Net Metering Net Surplus Electricity Compensation) to reflect avoided cost for CY 2025. 3. Increase the hydro reserve up to $6 million over a 2 year period ($3 million per year) with a corresponding reduction in the rate increase MOTION PASSED: 3-0 3. Recommendation to the City Council to: Adopt a Resolution Approving the Fiscal Year 2027 Schedule of Airport Rates and Charges; Accept the Palo Alto Airport Rates and Charges Study; and Authorize Annual Adjustments to Airport Fees and Charges Based on the Airport Benchmark Index (ABI), as Described in the Study; CEQA Status – Exempt Under Section 15061(b)(3) Michael Luetgens, Manager of Palo Alto Airport Operations, presented the staff recommendation related to airport rates and charges FY27. The City entered into a contract with Ascension Group Partners (AGP) for a fee study to determine appropriate fees to sufficiently cover the budgeted expenses for the Airport Enterprise Fund. AGP has an in-depth knowledge of aviation fee structures and they provided recommendations to allow for a self- sustaining fund. Multiple considerations were taken into account. An overview of the fee study recommendations was shown on Slides 3 and 4. The fee methodology used was a hybrid SUMMARY MINUTES Page 14 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 compensatory-residual approach that included market-based pricing, fair market value, and landing fee structure. There are 2 grant assurances in place saying the airport should be self- sustainable, have reasonable fees, and use revenue for the airport. The airport plans to fund $12.5M in capital improvements through 2030. Federally funded projects are essential for safety and include runway, taxiway, and electrical upgrades. Other projects are self-funded by the Airport Enterprise Fund and include solar or vehicle charging stations. Slide 7 shows a fee comparison between Palo Alto and other airports in the Bay Area. Palo Alto sits at the high end of the local fee range, especially tie-down and hangar rates, which are not being proposed to increase. The Airport Benchmark Index fees are raised annually based on the CPI of San Francisco/Oakland Bay Area. Chair Lauing asked how transient fees are collected. Airport Operations Manager Luetgens responded that the airport entered into a contract with Altaport, who collect fees through flight tracking or ADS-B, which records when the aircraft lands and takes off and automatically sends a bill afterward. Chair Lauing appreciated the staff report and recognized they are pushing the envelope to get more expensive relative to other areas and using the right tone in communicating these changes. Councilmember Burt expressed thanks for the report and asked how demand versus supply looks for hangars and tie-downs. Councilmember Burt recalled a historic shortage on hangars and asked how much of a wait list there is. Airport Manager Swanson replied that there are different levels of demand for each hangar size. There are 60 non-commercial hangars on the field, all occupied. There are 3 hangar wait lists. The large T-hangar wait list has about 10 people on it but none have turned over in years. There are 12 box hangars and the wait list is 25. There are 42 small T-hangars and that wait list is about 30 individuals. Councilmember Burt suggested hangar pricing should increase, since demand exceeds supply. Airport Operations Manager Luetgens responded that Grant Assurance 24 states their rates must be reasonable and fair. AGP looked at other airports and found Palo Alto to be at the high end of the price range, so price increase for hangars was not recommended. Councilmember Burt asked what the P&L projection is with the proposed increases. Brad Eggleston, Public Works Department Director, shared that the airport has been operating at a loss of around $200K for the last few years and these pricing increases should bring in around $210K. Councilmember Burt noted the airport operates lean in addition to having higher fees and asked for an explanation of them operating at a loss. Airport Manager Swanson responded that part of them operating at a loss of $200K is due to what they inherited when the City took the airport back, including a general fund loan and deferred maintenance. Annual revenues for the airport are a little over $3.2M while the general fund loan payback is $272K annually until around 2032. SUMMARY MINUTES Page 15 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 Councilmember Lu acknowledged the fees have to be reasonable and fair and asked if there any specific restrictions on hangar prices not increasing. Airport Manager Swanson reiterated that the fees have to be fair and consistent with the rates that are charged around the area at comparable airports, which is what the AGP study looked at. Councilmember Lu agreed with Councilmember Burt that a higher hangar fee could be justified and is something he wants to see next time. Airport Manager Swanson added that the hangars are very old and there is maintenance with downtime and repairs, so a challenge is the quality of hangars being provided. Ryan Lieck, AGP Partners, provided more insight into the hangar fees. When it comes to rates and charges, the FAA's guidance is keeping the methodology fair, consistent, and transparent. They do not prescribe a particular methodology for aeronautical use, so AGP used a hybrid approach of looking at comparable values and balancing the budget based on landing fees. For non-aeronautical use, the FAA is very specific that it has to be fair market value and they have a document that provides guidance on the appraisal method for determining that. AGP made sure aeronautical rates were regionally competitive and used the landing fee for transient users. Councilmember Lu opined fees should be more aggressive and noted the transient fees may still be undercharged, given they are 27 percent of landed weight but only about 1 percent of fees charged. AGP Partners Lieck added that with the new fees proposed, it is hard to forecast revenue because there is no current usage. In 1 or 2 years, there will be data on those to get more insight into revenue and what can be charged and forecast revenue better going forward. Director Eggleston added that the authorization from the City Council upon takeover of the airport was that these fees were set and gave authorization to increase them by CPI every year, which is what has been done since 2014. The current recommendation includes putting them in the municipal fee schedule after this year, which gives more leverage and leeway to look at how this is working and make more adjustments to tweak as they go. Councilmember Burt liked the proposed change in methodology going forward and Burt agreed with Councilmember Lu's interest in transient fees increasing going forward. Councilmember Burt stated the transient planes have been undercharged while affecting the airport and the community in terms of more landings and takeoffs, so charging them more is better for the budget and community. Chair Lauing added that residents will be happy about shifting more charges to non-residents. Item 3 Public Comment: Marie-Jo Fremont, Palo Alto resident, was glad the analysis was done and the City is concerned about the lack of profitability of PAO. Marie-Jo Fremont stated the airport lost $200K in FY25 and is projected to lose another $175K in FY26 and noted there is no published historical report on the airport's profitability since the City became the owner in 2014. Marie-Jo Fremont asserted this data should be made public and this fee analysis SUMMARY MINUTES Page 16 of 16 Finance Committee Meeting Summary Minutes: 04/21/2026 reinforces the need for disclosing PAO-related financial information for every year since 2014. Marie-Jo Fremont said that financial information disclosure is critical, given that the airport is engaged in long-range planning activities and such disclosures must occur before Council is asked to approve further capital investments. MOTION: Councilmember Lu moved, seconded by Councilmember Lauing, to recommend the City Council: 1. Adopt a resolution approving the Fiscal Year 2027 Schedule of Airport Rates and Charges; 2. Accept the Palo Alto Airport Rates and Charges Study; and 3. Authorize annual adjustments to airport fees and charges based on the Airport Benchmark Index (ABI), as described in the Study, as part of the annual Municipal Fee Schedule adoption. MOTION PASSED: 3-0 Adjournment: The meeting was adjourned at 6:50 p.m.