HomeMy WebLinkAboutStaff Report 2608-66683.Discussion of Baker Tilly Reserves Advisory Report and Recommendation to the City
Council of Proposed Policy Updates to the Utilities Reserve Management Policies
(ACTION: 7:00PM – 8:30PM) Late Packet Report Added, Staff Presentation
1
0
5
1
8
Utilities Advisory Commission
Staff Report
Report Type: NEW BUSINESS
Lead Department: Utilities
Meeting Date: September 2, 2026
Report #:2608-6668
TITLE
Discussion of Baker Tilly Reserves Advisory Report and Recommendation to the City Council of
Proposed Policy Updates to the Utilities Reserve Management Policies
This will be a late packet report published on Thursday, August 27, 2026.
Item No. 3 Page 1 of 15
1
0
2
1
4
Utilities Advisory Commission
Staff Report
From: Alan Kurotori, Director Utilities
Lead Department: Utilities
Meeting Date: September 2, 2026
Report #: 2606-6492
TITLE
Discussion of Baker Tilly Reserves Advisory Report and Recommendation to the City Council of
Proposed Policy Updates to the Utilities Reserve Management Practices
RECOMMENDATION
Staff recommends that the Utilities Advisory Commission (UAC) recommend the City Council
(via the Finance Committee) adopt the following:
1. Revisions to the Utilities Reserve Management Practices based on staff’s proposed
policies for the reserve targets:
a. Replace the Capital Improvement Program (CIP) Reserve minimum and
maximum guidelines with a reserve target based on the Average Annual CIP
Budget.
b. Add a Rate Stabilization Reserve (RSR) target based on 10% of operating
expenses and define rules for when reserve balance is above or below target;
and
2. Proposed 5-year timeline for achieving revised RSR policy targets; and
3. Proposed timelines for achieving revised CIP Reserve policy targets: 5 years for the Gas
and Water Utilities and 10 years for the Electric Utility; and
4. Proposed FY 2027 workflow for revising and approving the Utilities Reserve
Management Practices.
EXECUTIVE SUMMARY
Staff recommends establishing a RSR target (based on 10% of operating expenses) and a CIP
Reserve target (based on Average Annual CIP Budget). The overall combined impact of staff’s
recommendation adds an estimated 0.3% to 0.5% per year for the Electric, Gas, and Water
Item No. 3 Page 2 of 15
1
0
2
1
4
Utility’s rate trajectory forecast, as shown in Table 7.1 Staff’s recommendations balance
affordability with a measured transition to the financial practices described in this report.
2. In March 2026, Baker Tilly Advisory Group, LP (Baker Tilly), in its capacity
serving as the Office of the City Auditor, completed an assessment of the City's utility reserve
policies. This assessment resulted in the Advisory Report, which evaluated the City’s existing
reserve policies and compared them with industry best practices and peer agencies.
BACKGROUND
3, and Policy and Services Committee (P&S) accepted the results on April 14,
20264. Discussion at the P&S meeting centered on developing a plan to steadily and sustainably
increase reserves.
1 Staff’s recommendation assumes a 5-year timeline for achieving revised RSR targets for all utilities; 5-year CIP
Reserve timeline for Gas and Water Utilities; and 10-year CIP Reserve timeline for the Electric Utility.
2 City of Palo Alto Utility Reserves Advisory Report, March 27, 2026:
https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=ab3102f7-8c84-4348-a68d-
2e6bee10328c
3 City Council Staff Report #2650-6353, June 8, 2026:
https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment/?historyId=2e6cf5
71-d9f1-4ba5-b71d-a3f042acbefb; and Management Response, April 2, 2026:
https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=b4ab74b3-645b-44bb-a72c-
a5ca87b97e0c.
4 Policy and Services Committee Staff Report #2509-5177, April 14, 2026:
https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment/?historyId=64580
a69-262d-4e61-b2a9-3b18cf4eccb6
Item No. 3 Page 3 of 15
1
0
2
1
4
The Advisory Report made five key recommendations that relate to the Electric, Gas, Water and
Wastewater Collection Utilities. One additional recommendation addressed outdated policies
and structures of the Wastewater Treatment, Refuse, and Stormwater reserve policies; that
recommendation is being separately addressed by the Public Works Department.
Do not eliminate any of the current reserve funds in place: This recommendation notes
that Palo Alto’s Operations, Rate Stabilization, and Capital Improvement Program (CIP)
Reserves are in line with benchmark communities and that Palo Alto’s separate reserve
funds are in place for specifically defined and valid purposes and should remain in place
until those purposes are accomplished or are no longer applicable. No action needed
Clarify CIP reserve fund language: This recommendation notes that the Electric Special
Project (ESP) Reserve is distinct from the CIP Reserve within the Electric Utility and
recommends clarity on the intended use of funds. An update on the Council-adopted
policy on the use of the ESP Reserve is appropriate. Staff plans to bring forward
proposed revised policy within a year.
Formalize reserve tracking: This recommendation proposes reporting requirements to
the City Council. As noted in the management response, staff provides information
about the reserve balances to the City Council in the Operating Budget, Annual
Comprehensive Financial Report and Utility Financial Forecasts each year, and staff
plans to continue this practice. Staff recommends exception-based reporting added to
the existing quarterly financial report to Council. Staff is in the process of implementing
this recommendation by the end of 2026. Staff plans to include this reporting in the
Utilities quarterly report that will be provided to the City Council as an informational
report going forward.
Consider adjustment to CIP reserve guideline levels: The Advisory Report recommends
maintaining the CIP reserve at 20% of 60 months of budgeted (cash-funded) CIP
expenses or alternatively one-year of depreciation expense.
Adjust RSR policy to align with bond covenants and benchmark communities: The
Advisory Report recommends establishing RSR target levels based on bond covenants,
as applicable, or a percentage of total operating revenues or operating expenses.
Item No. 3 Page 4 of 15
1
0
2
1
4
the utility’s costs, risks, and operating contingencies, which may differ for each of the Electric,
Gas, Water and Wastewater Collection Utilities.
Electric Reserves FY 2027 Projected Balance
(Target, $38.2M to $76.4 M)9
Electric Special Projects (managed in accordance with
Council guidelines set forth in Resolution 1007610)
$31.2M
Underground Loan (adjusted each year by the principal
payments made against outstanding underground loans)
$0.7M
Hydro Stabilization (used to manage the supply cost impacts
associated with variations in generation from hydroelectric
resources with a target level of $19M in accordance with the
Council Resolution 974411)
$18.8M
Electrification Reserve (tracks City’s building appliance and
vehicle electrification projects and programs)
$2.0M
Public Benefit, Low Carbon Fuel Standard, Cap & Invest
(tracks net of revenues and expenses for each of these
special revenue sources)
$18.8M
Gas Reserves FY 2027 Projected Balance
(Target, $10.1M to $20.2M)12
($4.5 million to be reserved for future short-term gas
price spikes13)
Cap & Invest
9 The FY27 financial forecast projected the Electric Operations reserve year-end balance at $54M. The FY27
adopted budget assumed higher bond revenue proceed by about $19M
10 Resolution #10076, October 3, 2022, Resolution of the Council of the City of Palo Alto Establishing an
Electrification Reserve and Amending the Electric Utility Reserves Management Practices:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=61565&dbid=0&repo=PaloAlto
11 Resolution #9744, March 19, 2018, Resolution of the Council of the City of Palo Alto Adopting Electric Rate
Schedule E-HRA (Electric Hydro Rate Adjuster) and Amending the Electric Utility Reserve Management Practices:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=54142&dbid=0&repo=PaloAlto
12 The FY27 financial forecast projected the Gas Operations reserve year-end balance at $7.3M. The FY27 adopted
budget overstated revenue by about $16M due to over-reported grant funding and Cap-and-Invest revenues
13 Resolution #10187, August 19, 2024 Resolution of the Council of the City of Palo Alto Amending the Gas Utility
Long-term Plan Objectives, Strategies and Implementation Plan, Amending the Gas Utility Reserves Management
Practices, Amending the FY 2025 Gas Fund Budget Appropriation, and Amending Rate Schedules G-1 (Residential
Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service),
and G-10 (Compressed Natural Gas Service): https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=62063
Item No. 3 Page 5 of 15
1
0
2
1
4
Water Reserves FY 2027 Projected Balance
Operations (Target, $9.2M to $18.5M)$11.86M
Rate Stabilization $4.00M
CIP Reserves $9.00M
In addition to the reserves listed above, each utility also has a reserve for commitments and
reserve for reappropriations. The reserve for commitments holds an amount equal to the
remaining spending authority for all active contracts while the reserve for reappropriations
holds the amount of all remaining budgets that will be reappropriated to the following fiscal
year.
ANALYSIS
In its management response to the Advisory Report, staff proposed to develop a workflow
over the coming year to review and revise reserve policies for City Council consideration
with the assistance of the Utility Advisory Commission and the Finance Committee. While
the Advisory Report contains several recommendations, the most significant policy
considerations relate to the CIP Reserves and RSR Reserves due to their potential impacts
on utility financial planning and customer rates. Accordingly, this section focuses on policy
considerations for these two reserve categories as part of the FY 2027 Workflow.
Workflow to Review and Revise Reserve Policies for City Council Consideration
Table 1 lists the timeline for the workflow to review and revise reserve policies for City
Council consideration. For reference, the current reserve management practices are
available at the following links and were most recently approved by the City Council on June
15, 2026.
Electric Utility Reserves Management Practices19
Gas Utility Reserves Management Practices20
Water Utility Reserves Management Practices21
Wastewater Collection Utility Reserves Management Practices22
19 Electric Utility Reserves Management Practices: https://www.paloalto.gov/files/assets/public/v/1/agendas-
minutes-reports/agendas-minutes/city-council-agendas-minutes/2026/june/rates/attachment-d-exhibit-3-fy27-
electric-reserves-management-practices-redline.pdf
20 Gas Utility Reserves Management Practices: https://www.paloalto.gov/files/assets/public/v/1/agendas-minutes-
reports/agendas-minutes/city-council-agendas-minutes/2026/june/rates/attachment-e-exhibit-3-fy27-gas-
reserve-management-practices-redline.pdf
21 Water Utility Reserves Management Practices: https://www.paloalto.gov/files/assets/public/v/1/agendas-
minutes-reports/agendas-minutes/city-council-agendas-minutes/2026/june/rates/attachment-a-exhibit-3-fy27-
water-reserve-management-practices.pdf
22 Wastewater Collection Utility Reserves Management Practices:
https://www.paloalto.gov/files/assets/public/v/1/agendas-minutes-reports/agendas-minutes/city-council-
Item No. 3 Page 6 of 15
1
0
2
1
4
27
The staff recommendations and proposed workflow breaks up the review into two phases.
Phase 1 Workflow: Review and Revise CIP and RSR Policies
The first phase will occur this year in preparation for the FY 2028 rate setting process, focusing
on the Electric, Gas and Water Utilities. Wastewater reserve changes will be addressed
separately, since the Regional Water Quality Control Plant is in the process of conducting a
separate analysis with an outside consultant and the RWQCP’s partners, including the City of
Palo Alto. The RWQCP is developing recommendations to go to Finance Committee in October
2026. Once those recommendations are available, as part of the workflow, staff would also
present information and make recommendations for the Wastewater Collection Utility
reserves.28
Table 1: Phase 1 Workflow - Review and Revise CIP and RSR Reserve Policies
Meeting Date Governing Body Topic
Sept 2, 2026 UAC Reserve policy recommendations for Electric, Gas, and
Water (Action)
Nov 2026 UAC Reserve policy recommendations for Wastewater
Collection (Action)
Nov/Dec 2026 Finance
Committee
Reserve policy recommendations for Electric, Gas, Water
and Wastewater Collection (Action)
January 2027 Council Adoption of Reserve Management Practices for Electric,
Gas, Water and Wastewater Collection Utilities (Consent)
March/April
2027
UAC FY 2028 rates and five-year forecast for Electric, Gas,
Water and Wastewater Collection (in alignment with
January 2027 Council action) (Action)
April/May
2027
Finance
Committee
FY 2028 rates and five-year forecast for Electric, Gas,
Water and Wastewater Collection (in alignment with
January 2027 Council action) (Action)
June 2027 Council FY 2028 rates and five-year forecast for Electric, Gas,
Water and Wastewater Collection (in alignment with
January 2027 Council action) (Action)
agendas-minutes/2026/june/rates/attachment-b-exhibit-3-fy27-wastewater-collection-reserve-management-
practices.pdf
28 Because the Wastewater Collection utility is responsible for its share of treatment costs to treat Palo Alto’s
wastewater, the Wastewater Collection utility needs to contribute to reserves at the RWQCP. Additionally, the
Wastewater Collection utility needs its own reserves in alignment with the Advisory Report recommendations.
Showing the impact of the Advisory Report recommendations on the Wastewater Collection utility together with
the recommendations from the RWQCP, once those are available, will provide a more complete picture of the
impacts and risks. Table 1 shows that more information for the Wastewater Collection utility will be provided to
the UAC.
Item No. 3 Page 7 of 15
1
0
2
1
4
The second phase is planned to occur in FY 2028 potentially for the FY 2029 rate setting
process to focus on reserve specific proposals, such as the Hydro Rate Stabilization Reserve,
and Gas Price Mitigation Adder. Revisions to the Reserve Management Practices may be
needed after each phase.
Phase 2 Workflow: Refinement of Reserve-Specific Detailed Policies
UAC Fall 2027: Policy recommendations and results of rate consultant review of
Hydro Rate Stabilization Reserve, Gas Price Mitigation Adder, and ESP Reserve
Guidelines and sunset date. (Action)
Finance Committee Fall/Winter 2027: Policy recommendations and results of rate
consultant review of Hydro Rate Stabilization Reserve, Gas Price Mitigation Adder,
and ESP Reserve Guidelines and sunset date. (Action)
City Council Winter 2027/Spring 2028: Adoption of policy recommendations and
results of review of Hydro Rate Stabilization Reserve, Gas Price Mitigation Adder,
and ESP Reserve Guidelines and sunset date. (Action)
Advisory Report Recommendations
30 and guidance from the Government
Finance Officers Association (GFOA). Importantly, GFOA guidance allows for a capital reserve
level that best serves the capital needs and financial capabilities of a given organization.31
Current CIP-related CPAU Reserve Policies
30 City Council Staff Report #2605-6353, June 8, 2026:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=887085 (pg. 39-42)
31 Strategies for Establishing Capital Asset Renewal and Replacement Reserve Policies, Board approval date, Friday,
March 8, 2019: https://www.gfoa.org/materials/strategies-for-establishing-capital-asset-renewal-and
Item No. 3 Page 8 of 15
1
0
2
1
4
- Regulatory requirements
- Supply chain delays that can shift or accelerate capital investment project schedules
- Emergency infrastructure failures requiring immediate response
- Climate-related events including drought, wildfire, flooding and extreme weather that
may require unplanned capital expenditure
Currently, the Electric, Gas, Water and Wastewater Collection Utilities have a CIP Reserve
maximum guideline of average annual CIP budget for 48 months of budgeted CIP expenses, and
a minimum guideline of 20% of the maximum CIP reserve guideline level. The CIP Reserve
policies do not include a target guideline level. In recent years the CIP Reserves for the Electric
and Gas Utilities have been maintained below the current minimum guideline levels to
moderate rate increases. The Fiscal Year Ending (FYE) 2027 projected CIP Reserve balances are
shown in the table below.
Table 2: FY 2027 CIP Reserve Projected Balances, Minimum and Maximum Guidelines ($
Millions)
Electric Gas Water
CIP Reserve Balance $ 5.88 $ 0 $ 9.00
CIP Reserve Minimum $ 5.66 $ 2.82 $ 3.43
CIP Reserve Maximum $ 28.31 $ 14.09 $ 17.13
While calculated from different base periods, the City's current CIP Reserve maximum guideline
and the Advisory Report recommendation of 20% over 60 months are both equivalent to
maintaining average annual CIP budget in reserve. For simplicity, this report refers to both
approaches as Average Annual CIP Budget. Table 3 compares the current reserve policy
guidelines with the Advisory Report recommendations.
Table 3: Policy Targets by Utility Based on FY 2032 Projections (5 years) ($ Millions)
Electric Gas Water
Average Annual CIP Budget
(Current Maximum Guideline &
Advisory Report Recommendation)
$ 35.32 $ 15.51 $ 15.93
Annual Depreciation Expense
(Advisory Report Alternative
Recommendation)
$ 13.60 $ 5.60 $5.16
20% of Average Annual CIP Budget
(Current Minimum Guideline)
$ 7.06 $ 3.10 $3.19
Estimated Rate Impacts
Staff estimates that adopting the Average Annual CIP Budget recommendation as the CIP target
reserve level would require rate increases for the Electric and Gas Utilities. This policy
recommendation would not require rate increases for the Water Utility as it is already
Item No. 3 Page 9 of 15
1
0
2
1
4
forecasted to achieve this target level by 2031. Table 4 shows estimated rate impacts to the
Electric and Gas Utilities under two phase-in scenarios, over a five (5) or ten (10) year period. In
each scenario, a fixed percentage rate increase is applied annually throughout the period so
that the incremental revenue collected each year, compounded over the period, equals the
necessary funds needed by the end of each phase-in period.
Table 4: Estimated Annual Rate Impacts of Advisory Report CIP Reserve Target
Recommendation of Average Annual CIP Budget
Electric Gas
5-year Implementation
10-year Implementation
34 After the fifth year,
and assuming all else is equal, these incremental adjustments would be removed from the rate.
However, in practice, rather than resulting in a decrease in rates, customers would likely see a
reduced magnitude of future rate increases that would otherwise be needed. The incremental
adjustment can also be reevaluated annually based on financial performance, market
conditions, and the extent to which reserve funds are needed to respond to market events or
other financial needs. This approach allows for flexibility to adjust the rate increments over
time while continuing to make gradual progress toward the target reserve levels.
Policy Considerations, Recommendations and Next Steps
34 This example is for illustration only and does not take into account the compounding effects of rate increases
but it is provided to clarify that this is not a sustained 0.3% increase and rather is an additional 0.3% added each
year.
Item No. 3 Page 10 of 15
1
0
2
1
4
to manage capital risks. The calculation of the Average Annual CIP Budget only includes cash-
funded CIP and it does not include CIP projects funded by grants or customer connection fees.
Advisory Report Recommendations
36. The Advisory Report observed that Palo
Alto’s Electric, Water, and Gas Utilities lack guideline levels, whereas peer utilities tend to have
defined targets. The Advisory Report includes peer examples for reference and recommends
that CPAU management set its targets based on the amount desired to be held in the fund to
help stabilize future rate increases.
36 City Council Staff Report #2605-6353, June 8, 2026:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=887085 (pg. 32-35). The Advisory Report also
recommends aligning RSR guidelines with the bond covenants of the City’s 2009 Series A Water Revenue Bonds
(2009 Revenue Bonds) and 2011 Utility Refunding Bonds (2011 Revenue Bonds). As staff outlined in the
management response, staff plans to refund the 2009 Revenue Bonds under a new bond indenture in FY 2027,
which would eliminate the current bond covenant reserve requirements. The 2011 Revenue Bonds fully matured in
FY 2026. As a result, this eliminates the need to modify the minimum guideline levels solely for bond covenant
considerations.
Item No. 3 Page 11 of 15
1
0
2
1
4
The Advisory Report also recommends revising the RSR policy to state that “if a Utility Financial
Plan proposes a rate increase, the funds in the RSR Fund in excess of the target amounts must
be drawn down to offset the proposed rate increase.”38
Current CPAU Reserve Policies
The Reserves Management Practices outline the purpose for each utility’s RSR. These reserves
are intended to manage the trajectory of future year rate increase and to mitigate temporary
fluctuations in revenues or expenses from events such as:
- Volatility in electricity rates resulting from fluctuations in power costs
- The impact of short-term gas market price spikes
- The impacts of drought or changing demand
- Economic downturns that reduce customer demand or increase bad debt expense
The existing RSR policy does not include a target level or guideline range. The projected RSR
balances for the Electric, Gas, and Water Utilities are shown in the table below.
Table 5: Projected RSR Balances ($ Millions)
Electric Gas Water
FY 2027 Projected Balance $ 0 $ 039 $ 4.00
FY 2032 Projected Target Based on
10% of Operating Expenses $ 11.01 $ 4.09 $ 3.13
For each of the RSRs, the Reserves Management Practices currently state that the utilities must
plan to withdraw all the funds from the reserve by the end of the next financial planning period
(unless Council approves an exception to this requirement). The Hydro Rate Stabilization
Reserve funds are separate from the RSR in the Electric Utility.
Estimated Rate Impacts
Staff analyzed the rate impacts of a 10% of operating expenses (excluding supply expenses) RSR
target scenario and estimates that this RSR target level would require additional rate increases
for each utility. Table 6 shows estimated rate impacts to the Electric, Gas and Water Utilities
under two phase-in scenarios, over a five- or ten-year period. In each scenario, a fixed
percentage rate increase is applied annually throughout the period, so that the incremental
revenue collected each year, compounded over the period, equals the necessary funds needed
by the end of each phase-in period. This analysis assumes that the funds in the Hydro Rate
38 City Council Staff Report #2605-6353, Attachment A, p. 6:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=887085.
39 The projected balance excludes funds being collected through the Gas Price Spike Mitigation Adder in the Gas
Rate Stabilization Reserve for price spike mitigation purposes.
Item No. 3 Page 12 of 15
1
0
2
1
4
Stabilization Reserve as well as the Gas Price Spike Mitigation Adder accumulated funds are
excluded and addressed separately in Phase 2.
Table 6: Estimated Annual Rate Impacts of 10% of Operating Expense RSR Target
Electric Gas Water
5-year Implementation
10-year Implementation
42
Policy Recommendations, Considerations and Next Steps
Establish a target level of 10% of operating expenses (excluding supply expenses).
Remove the current provision from the Reserves Management Practices that states that
the utilities must plan to withdraw all the funds from the RSR by the end of the planning
period.
Require that if a Utility Financial Plan proposes a rate increase, the funds in the Rate
Stabilization Reserve in excess of the target amounts must be drawn down to offset the
proposed rate increase.
42 This example is for illustration only and does not take into account the compounding effects of rate increases
but it is provided to clarify that this is not a sustained 0.3% increase and rather is an additional 0.3% added each
year.
Item No. 3 Page 13 of 15
1
0
2
1
4
Credit Rating Considerations
44 and
plans to issue refunding bonds (Series 2026A Water Revenue Refunding Bonds45) to refinance
the Water Fund’s 2009 Revenue Bonds in fall of FY 2027.
46 outlining its rationale for the rating. The press release stated that the stable outlook
reflects their view that the utility will “sustain historically robust liquidity” and adjust rates to
sufficiently fund capital needs without materially drawing on reserves. The press release also
stated that they “could lower the rating over the next two years if the utility’s debt service
coverage or liquidity materially decline to levels observed in the past few years, either due to
insufficient rate adjustments or unexpected capital needs that require additional debt or
significant cash draws.”
44 Resolution #10209 A Resolution of the City of Palo Alto Declaring Intention to Reimburse Expenditures Relating
to Modernization of the Electric Utility System Infrastructure from the Proceeds of Tax-Exempt Debt:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=62094&dbid=0&repo=PaloAlto&cr=1
45 Finance Committee Staff Report #2603-6099:
https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=9d997ec2-d7ef-4322-bd41-
8904e984d6a2
46 S&P Global Ratings Press Release, August 17, 2026: https://www.spglobal.com/ratings/en/regulatory/article/-
/view/type/HTML/id/3612769
Item No. 3 Page 14 of 15
1
0
2
1
4
more cumulative revenue and reducing the annual rate impact needed to reach the reserve
target.
FISCAL/RESOURCE IMPACT
Table 7: Estimated Annual Rate Impacts for Proposed Reserve Targets (FY 2028 – FY2031)*
Electric†
Gas
Water
Electric
Gas
Water
Electric
Gas
Water
Table 8: Rate Forecasts as Adopted by the City Council in the Financial Forecasts in June 2026
Electric
Gas
Water
Item No. 3 Page 15 of 15
1
0
2
1
4
Because these adjustments are rounded to the nearest whole percentage, this change only
impacts the overall rate trajectory for the Gas Utility, as shown in Table 9.
Table 9: Rate Forecasts Including Staff Recommendations for CIP and RSR Reserves
Electric
Gas
Water
STAKEHOLDER ENGAGEMENT
ENVIRONMENTAL REVIEW
AUTHOR/TITLE:
September 2, 2026
Baker Tilly Reserves Advisory Report & Reserve Policy Recommendations
Utilities Advisory Commission
PaloAlto.gov
2
Agenda
•Proposed workflow to review and revise reserve policies for
Council consideration
•Brief overview of the Utility Reserves Advisory Report
recommendations (Advisory Report)
•Staff recommendations, policy considerations, and rate
impacts for Capital Improvement Program and Rate
Stabilization Reserves
3
Workflow to Review and Revise Capital Improvement
Program and Rate Stabilization Reserve Policies
Date Meeting Topic
Sept. 2, 2026 UAC Reserve Policy Recommendations for Electric, Gas, and Water (Action)
Nov. 2026 UAC Reserve Policy Recommendations for Wastewater Collection (Action)
Nov./Dec.
2026
Finance
Committee
Reserve Policy Recommendations for Electric, Gas, Water and Wastewater
Collection Utilities (Action)
Jan. 2027 Council Adoption of Reserve Management Practices for Electric, Gas, Water and
Wastewater Collection Utilities (Consent)
Mar. - May
2027
UAC & Finance
Committee
FY 2028 rates and five year forecast for Electric, Gas, Water and Wastewater
Collection (in alignment with Jan 2027 Council action) (Action)
Jun. 2027 Council FY 2028 rates and five year forecast for Electric, Gas, Water and Wastewater
Collection (in alignment with Jan 2027 Council action) (Action)
Second phase to occur in FY 2028 potentially for the FY 2029 rate setting process to focus on reserve-specific
proposals, such as the Hydro Rate Stabilization Reserve and Gas Price Mitigation Adder. Revisions to the Reserve
Management Practices may be needed after each phase.
4
Advisory Report Recommendations
The Advisory Report made five key recommendations:
1.Do not eliminate any of the current reserve funds in place
2.Clarify Capital Improvement Program (CIP) reserve fund language
3.Formalize reserve tracking
4.Consider adjustment to CIP reserve guidelines levels
5.Adjust Rate Stabilization Reserve (RSR) policy to align with bond covenants and
benchmark communities
Discussion and recommendations apply to Electric, Gas and Water utilities
Wastewater Collection impacts are pending completion of a separate
Wastewater Treatment utility reserve analysis
5
CIP Reserve
Advisory Report Recommendations
•Set CIP Reserve target
•Option 1: 20% of 60 months/average annual budgeted (cash funded) CIP
expenses (equivalent to one year of budgeted CIP expense)
•Option 2: Annual depreciation expense
Existing Reserve Policy
•Maximum guideline of average annual CIP budget for 48 months of budgeted CIP
expenses (equivalent to one year of budgeted CIP expense)
•Minimum guideline of 20% of the maximum CIP reserve guideline level
6
CIP Reserve Rate Impacts and Recommendations
Rate Impacts
•Option 1 (Annual Average CIP Budget):
•Option 2 (Annual Depreciation): Requires no additional rate increase
Staff Recommendations
•Replace the CIP Reserve policy minimum and maximum guidelines with a reserve target
based on the Average Annual CIP Budget
•Implement rate increases to achieve this target over a 5-year timeline for Gas and Water
Utilities and a 10-year timeline for Electric Utility
Alternative
•Consider varying targets by utility
Utility 5-year Implementation*10-year Implementation*
Electric 0.3%0.1%
Gas 0.2%0.1%
Water No rate impact
7
Rate Stabilization Reserve (RSR)
Advisory Report Recommendations
•Set RSR target to align with bond covenants and benchmark communities
Peer utilities tend to have defined targets, some have min. and max. guidelines
•Peer utility targets range from 10% to 65% of operating revenues or expenses.
Existing Reserve Policy
•No target or guideline levels
•If reserve has a balance, any subsequent Utility Financial Plan must result in the
withdrawal of all funds by the end of the next planning period (unless Council
approves an exception to this requirement)
8
Rate Stabilization Reserve Rate Impacts and Recommendations
Rate Impacts
•Reserve target of 10% of operating expenses:
Staff Recommendations
•Establish a target level of 10% of operating expenses
•Remove the current provision that utilities must withdraw all funds from the RSR by the end of the planning
period
•Require that if a Utility Financial Plan proposes a rate increase, the funds in the RSR in excess of the target
amounts must be drawn down to offset the proposed rate increase
•Implement rate increases to achieve this target over a 5-year timeline
•Address supply-related RSR in Phase 2 of staff’s proposed workflow
Utility 5-year Implementation*10-year Implementation*
Electric 0.3%0.1%
Gas 0.3%0.1%
Water 0.3%0.1%
9
Five-Year Rate Forecasts
FY 2028 est. FY 2029 est. FY 2030 est. FY 2031 est.
Electric 7% 7% 7% 6%
Gas 7% 6% 6% 6%
Water 9% 9% 7% 6%
As Adopted by the City Council June 2026
Updated with Staff Recommendations for CIP and RSR Reserves
FY 2028 est. FY 2029 est. FY 2030 est. FY 2031 est.
Electric 7% 7% 7% 6%
Gas 8% 7% 7% 7%
Water 9% 9% 7% 6%
10
Recommendation
Staff recommends that the Utilities Advisory Commission (UAC) recommend the City Council
(via the Finance Committee) adopt the following:
1.Revisions to the Utilities Reserve Management Practices based on staff’s proposed policies
for the reserve targets:
a.Replace the Capital Improvement Program (CIP) Reserve minimum and maximum
guidelines with a reserve target based on the Average Annual CIP Budget.
b.Add a Rate Stabilization Reserve (RSR) target based on 10% of operating expenses and
define rules for when reserve balance is above or below target; and
2.Proposed 5-year timeline for achieving revised RSR policy targets; and
3.Proposed timelines for achieving revised CIP Reserve policy targets: 5 years for the Gas and
Water Utilities and 10 years for the Electric Utility; and
4.Proposed FY 2027 workflow for revising and approving the Utilities Reserve Management
Practices.
Discussion
PaloAlto.gov