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HomeMy WebLinkAbout2026-09-02 Utilities Advisory Commission Summary Minutes Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 1 of 17 UTILITIES ADVISORY COMMISSION MINUTES OF SEPTEMBER 2, 2026, REGULAR MEETING CALL TO ORDER Chair Mauter called the meeting of the Utilities Advisory Commission (UAC) to order at 6:00 p.m. Present: Chair Mauter, Vice Chair Phillips, Commissioners Croft, Gupta, Metz, Scharff, and Tucher Absent: None AGENDA REVIEW AND REVISIONS None. IN-PERSON PUBLIC COMMENT None. APPROVAL OF THE MINUTES ITEM 1: ACTION: Approval of the Minutes of the Utilities Advisory Commission Meeting Held on August 5, 2026 Commissioner Croft requested an edit to the August 5, 2026, minutes to reflect the wording included in the motion. MOTION: Vice Chair Phillips moved, seconded by Commissioner Scharff, to approve the minutes of the August 5, 2026, meeting including the following amendment: 1. On Packet Page 14, replace, “Commissioner Croft liked the 4 nines” with “Commissioner Croft recommended setting a goal slightly better than 4 nine since we already meet that metric.” Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 2 of 17 MOTION PASSED: 7-0 UTILITIES DIRECTOR REPORT Utilities Director Alan Kurotori stated that future Utilities Director Reports would be provided in presentation format before meetings and designed to provide sufficient context as stand-alone documents, as requested by the UAC. Mr. Kurotori thanked Commissioners Gupta, Metz, and Tucher for suggestions regarding the report content. S&P Global assigned a AAA rating to the refunding of the 2009 Water Revenue Bonds. The refunding will save approximately $309,000 through 2035, eliminate reserve requirements involving the Water, Gas, and Electric Funds, and reduce exposure to federal interest subsidy sequestration. The Finance Committee reviewed the refunding on August 18 and Council consideration is scheduled for September. Mr. Kurotori noted the favorable rating as the City prepares for upcoming Electric Fund bonds related to grid modernization. Mr. Kurotori reported that Public Works, Utilities, and IT staff participated in an EPA call regarding cybersecurity threats following reported attacks in Minnesota and subsequently found no indications of risks or penetrations into City systems. The U.S. Department of Transportation awarded the City a $16.5M grant and Palo Alto was 1 of only 2 recipient cities to receive a low-risk rating in a subsequent assessment of grant recipients. Mr. Kurotori noted that the rating could benefit the City when pursuing future grants. The statewide commercial customer survey conducted with CMUA was completed in August, with Palo Alto-specific outreach beginning September 15, results expected in November and presentation to the UAC anticipated in January. A residential customer survey will follow. Mr. Kurotori reported that the high-voltage underground electric lines in the Foothills have been energized, with only the low- voltage service lines remaining. Referencing slides, Mr. Kurotori discussed Palo Alto's participation in a CEC workshop regarding large-load projections and stated that the CEC is considering thresholds and policies similar to Palo Alto's process of grouping projected loads by confidence level. Induction cooktop rebates have been offered since March as an energy- efficiency measure funded through a dedicated fee rather than ratepayer revenues, with income-qualified customers eligible for twice the standard rebate. Palo Alto libraries have expanded an induction cooktop loaner program in response to high demand. Mr. Kurotori concluded by referencing a slide tracking outstanding UAC follow-up items and their anticipated scheduling and stated that staff will continue to update the list. Commissioner Gupta inquired about the timing of the tentative November 16 joint Council/UAC study session. Mr. Kurotori stated that the study session would be part of the City Council meeting and held in the evening. Commissioner Tucher thanked Mr. Kurotori for incorporating prior Commission suggestions into the expanded report, including updates from Council, committee, and regional agency meetings and follow-up from prior UAC meetings. Commissioner Tucher suggested that the Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 3 of 17 Commission could identify selected projects for periodic updates in future Director's Reports to help determine whether related items should be scheduled sooner for UAC consideration. NEW BUSINESS ITEM 2: DISCUSSION: Special Presentation and Discussion on Partnering Norms for Staff and Commissioners Effectiveness. CEQA – Not a Project City Manager Ed Shikada clarified that the discussion was not prompted by wrongdoing and was the 4th such discussion held with a City commission. The purpose was to support the working relationship between commissioners and staff and establish common expectations. Mr. Shikada noted that the BCC Handbook provides general guidance and suggested revisiting the discussion periodically. Referencing a slide, Mr. Shikada described tensions inherent in commission work, including individual interests versus Commission priorities, emerging issues versus public noticing and work plan requirements, governance versus management, progress reporting versus making progress, and time management. Mr. Shikada reviewed staff- generated norms addressing Commission scope and role, professional conduct and communication, time management, transparency and legal compliance, feedback on staff work, and public trust. Regarding feedback on staff work, Mr. Shikada requested that public discussion focus on the work rather than individual staff members and that concerns regarding staff performance be directed to the Utilities Director. Item 2 Public Comment: None. Vice Chair Phillips asked whether the staff-generated norms were intended as expectations for Commissioner conduct or as suggestions for discussion. Mr. Shikada clarified that the norms were intended as general guidance rather than requirements and could serve as a point of reference if issues arise. Vice Chair Phillips expressed concern that the norm regarding feedback on staff work could be interpreted as limiting Commissioners' ability to publicly critique or question the substance of staff presentations. Mr. Shikada clarified that criticism of the work is appropriate and summarized the intent as criticizing the work rather than the worker. Commissioner Croft asked whether the UAC could receive earlier Council feedback on its proposed work plan, noting that the UAC had devoted considerable time to developing the work plan in the prior year. Mr. Shikada stated that Council consideration of commission work plans had been inconsistent in part because of the Council's heavy docket and reported that the UAC work plan is scheduled for Council consideration in October, providing an opportunity for substantive feedback. Commissioner Croft supported receiving Council feedback, noting that the UAC has limited direct interaction with the Council. Chair Mauter asked whether she could directly ask Councilmembers about their priorities when presenting the UAC work plan. Mr. Shikada stated that there was no restriction on doing so. Councilmember Lauing noted that Council does not automatically approve commission work Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 4 of 17 plans and supported asking questions during Council consideration. Commissioner Scharff clarified that Council had substantively discussed the prior UAC work plan, including questions and concerns raised by Councilmembers. Commissioner Scharff expressed concern that Commissioners had at times been rude toward staff and supported identifying incomplete or inadequate work while providing feedback respectfully, particularly to junior staff. Mr. Shikada noted that prospective employees may watch Commission meetings when considering employment with the City. Utilities Director Alan Kurotori reported that candidates for a current Assistant Utilities Director position had watched UAC meetings to understand the Commission's interests and interactions with staff. Commissioner Scharff emphasized that respectful and functional Commission interactions can affect whether prospective employees view the City as a desirable place to work. Chair Mauter echoed Commissioner Scharff's comments and stated that the Chair has a role in maintaining respectful communication with staff. Chair Mauter encouraged Commissioners to speak up if interactions, including her own, cross that boundary. Chair Mauter emphasized that although the Commission does not manage staff time, Commissioner requests and interests can consume time needed to operate the Utilities Department. Chair Mauter supported prioritizing topics included in the Council-approved work plan and being receptive when staff indicates that time or resources are unavailable. Chair Mauter emphasized that the UAC serves in an advisory rather than managerial role and that responsibility for managing Utilities staff rests with Mr. Kurotori. Commissioner Gupta emphasized the importance of respectful communication, particularly when disagreements arise, and noted that disrespectful interactions on the UAC have been rare. Commissioner Gupta asked whether Council had participated in developing the proposed norms. Mr. Shikada stated that the norms were developed by staff without direct Council involvement, although BCC Chairs had discussed the topic with the Mayor and Vice Mayor. Commissioner Gupta encouraged periodic review of the BCC Handbook and suggested providing examples to help clarify the distinction between the UAC's advisory role and matters considered part of daily Utilities operations. Commissioner Scharff added that Council developed the BCC Handbook and characterized the guidance in the handbook as a Council directive. Commissioner Tucher questioned the purpose of discussing norms that Commissioners generally agreed were appropriate and requested specific observations from Mr. Shikada based on his review of prior UAC meetings. Mr. Shikada stated that he had observed instances in which frustration became apparent and could reflect poorly on the UAC as a whole. Mr. Shikada identified that concern as one reason for bringing the norms forward. Chair Mauter noted that UAC meetings frequently run long and emphasized more closely adhering to the agenda as a way to respect Commissioners' and staff's time. Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 5 of 17 Commissioner Tucher acknowledged the amount of time staff spends preparing and presenting materials to the UAC and Council but suggested that clearer staff reports and presentations could significantly reduce meeting length. Commissioner Tucher questioned whether lengthy meetings resulted from discussion outside the agenda, noting that the Commission may instead spend considerable time discussing agendized items. Mr. Shikada noted that Council uses timed comments to manage meeting length and suggested that Commissioners may underestimate the amount of time they spend speaking. Commissioner Scharff suggested limiting Commissioners to an initial opportunity to speak and 1 follow-up, noting that repeated rounds of comments contribute to lengthy meetings. Chair Mauter agreed and suggested that Commissioners prioritize their most important points during meetings and reserve less critical comments for appropriate follow-up outside the meeting. Commissioner Tucher discussed his use of public memoranda to provide questions in advance and suggested evaluating whether that approach is effective and constructive. Chair Mauter proposed experimenting with a 2-round approach, with Commissioners generally speaking once and using a second opportunity for necessary follow-up, while limiting each exchange to approximately 2 minutes. Commissioner Croft supported trying the approach and observed that UAC discussions have become more detailed and antagonistic during her 3 years on the Commission, expressing concern that the nature of the discussions could make staff hesitant to present to the UAC. Vice Chair Phillips suggested limiting meeting questions to matters relevant to the decision before the Commission and reserving ancillary questions for subsequent email. Commissioner Gupta was willing to try a more structured approach while preserving substantive discussion and staying on topic. NO ACTION ITEM 3: ACTION: Discussion of Baker Tilly Reserves Advisory Report and Recommendation to the City Council of Proposed Policy Updates to the Utilities Reserve Management Policies Utilities Director Alan Kurotori introduced the item and noted that 2 Baker Tilly representatives were available remotely to participate in the discussion. Assistant Utilities Director Lisa Bilir reported that Council accepted the Baker Tilly reserve advisory report in June and staff subsequently developed recommendations and a workflow for revising the Utilities Reserve Management Practices. The advisory report recommended retaining the existing reserve funds, clarifying Capital Improvement Program (CIP) Reserve language, formalizing reserve tracking, considering adjustments to CIP Reserve guideline levels, and aligning the Rate Stabilization Reserve (RSR) policy with bond covenants and benchmark Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 6 of 17 communities. Ms. Bilir stated that no action was needed on the recommendation to retain existing reserves, revisions involving the Electric Special Projects Reserve would be addressed in Phase 2, and that staff recommended exception-based reserve reporting. The current discussion focused on the CIP and RSR recommendations because they have the most significant rate impacts. Staff proposed addressing Electric, Gas, and Water reserve policies during Phase 1, with Council adoption targeted for January 2027 before FY 2028 rates are considered. Wastewater Collection recommendations are planned for separate UAC consideration in November pending analysis of the treatment component. More detailed supply-related reserve policies, including the Hydro Rate Stabilization Reserve and Gas Price Mitigation Adder, would be addressed with assistance from a rate consultant in Phase 2. Ms. Bilir reported that Baker Tilly recommended setting the CIP Reserve target at 1 year of budgeted CIP expenses, with annual depreciation expense as an alternative. The existing policy uses 1 year of budgeted CIP expenses as the maximum and establishes a separate minimum. Staff recommended simplifying the policy by replacing the minimum and maximum guidelines with a single target based on the average annual CIP budget. Ms. Bilir noted that annual depreciation is approximately 30 to 40 percent of the annual CIP budget and therefore substantially lower than annual CIP needs. Staff recommended achieving the proposed CIP target over 5 years for Gas and Water, which currently have limited reserves, and 10 years for Electric, which has additional reserves. The UAC could alternatively recommend different targets by utility. Regarding the RSR, Ms. Bilir reported that peer utility targets range from 10 to 65 percent of operating revenues or expenses. Palo Alto's existing policy has no RSR target and requires any balance to be returned to ratepayers by the end of the 5-year planning period. Staff recommended establishing a target of 10 percent of operating expenses, the low end of the peer range, and achieving the target over 5 years. Staff further recommended eliminating the requirement to draw down the entire RSR during the planning period so funds remain available to stabilize rates following unexpected events. If a rate increase is proposed, however, any RSR balance exceeding the target would be required to offset the proposed increase during the 5- year period. Ms. Bilir clarified that the current recommendation addresses the distribution component of rates and that supply-related components would be addressed in Phase 2. The Gas Utility would experience the greatest rate impact from the proposed reserve changes. Ms. Bilir summarized staff's recommendation that the UAC recommend Council revise the Utilities Reserve Management Practices to establish a CIP Reserve target based on the average annual CIP budget and an RSR target of 10 percent of operating expenses with rules governing balances above or below the target; establish a 5-year period for achieving the RSR target; establish CIP target implementation periods of 5 years for Gas and Water and 10 years for Electric; and approve the proposed FY 2027 workflow for revising the Utilities Reserve Management Practices. Item 3 Public Comment: None. Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 7 of 17 Commissioner Tucher asked whether bond- and grant-funded CIP projects were excluded from the Electric CIP Reserve calculation. Ms. Bilir confirmed that the calculation includes only the cash-funded portion of CIP projects, including grid modernization projects. Vice Chair Phillips asked how the proposed RSR for distribution operations would relate to existing supply-related reserves and whether an additional reserve would be needed for other supply costs. Ms. Bilir explained that the Gas Price Spike Mitigation Adder and Hydro Rate Stabilization Reserve were established by Council for specific purposes and require further analysis with a rate consultant. Staff recommended proceeding with the distribution-related RSR now to meet the timeline for FY 2028 rates and addressing supply-related reserves in Phase 2. The reserves ultimately could be combined into a single reserve, which would require a subsequent policy modification. Phase 2 work would begin during the current fiscal year but would not be ready for consideration within the current implementation timeline. Chair Mauter asked how interest earned on reserves is allocated and whether the proposed changes would affect transfers among reserves. Ms. Bilir stated that interest is calculated quarterly and allocated to the appropriate enterprise fund reserve. Ms. Bilir explained that staff will revise the Reserve Management Practices before Council consideration in January to specify allowable transfers among reserves and the respective approval authority of Council and staff. Staff is not currently proposing changes to existing transfer practices, although the policies could be revised based on UAC and Finance Committee feedback. Commissioner Croft asked approximately what percentage of rates is attributable to operating expenses excluding supply costs. Ms. Bilir estimated approximately 50 percent but stated that staff would need to develop a more precise estimate. Staff separated operating and supply costs to avoid establishing an overly broad RSR target before conducting a more detailed analysis of supply-related reserves. Commissioner Scharff asked about existing RSR balances and Council policies. Ms. Bilir stated that most Utilities have no RSR balance and that existing RSRs do not have a general target. The Water Utility has approximately $4M remaining from funds accumulated before the drought, which have been used during and after the drought to manage the rate trajectory. Ms. Bilir identified the Hydro Rate Stabilization Reserve and the Gas Price Mitigation Adder Reserve as reserves with specific Council-approved funding levels or purposes. Commissioner Scharff asked whether the proposed policy was intended to create larger RSRs. Baker Tilly Representative Ross Hagen stated that Baker Tilly's review of industry practices and comparable local utilities found that maintaining an RSR with a defined target or guideline is a best practice, with peer targets ranging from 10 to 65 percent of operating revenues or expenses. Mr. Hagen identified 2 concerns with Palo Alto's existing policy: the absence of defined RSR targets and the requirement to draw down existing balances during the financial planning period. Mr. Hagen explained that requiring the balances to be drawn down runs Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 8 of 17 counter to the purpose of an RSR, which is to absorb unexpected financial volatility and mitigate resulting rate increases. Baker Tilly therefore recommended establishing appropriate RSR targets and revising the policy language governing excess reserve balances. Commissioner Gupta asked why the projected rate impacts were lower than those presented in staff's initial management response to the Baker Tilly report. Ms. Bilir explained that the initial analysis modeled an immediate increase maintained over several years, while the current proposal would build reserves through smaller cumulative increases over 5 or 10 years. The total amount recovered would be the same but achieved more gradually. Ms. Bilir noted that the implementation estimates reflect rounding and cumulative effects and that staff could provide additional calculations regarding the compounded rate impact. Commissioner Gupta asked whether the total rate impact remained within the range estimated in the initial management response. Assistant City Manager Kiely Nosé stated that staff could not make an equivalent comparison because the current analysis addresses only 2 reserves. The phased process would allow staff and the UAC to evaluate the reserve policies collectively during the second year and make adjustments if necessary. Commissioner Metz supported several proposed changes to the Reserve Management Practices but questioned the rationale for increasing reserve levels based primarily on comparisons with other utilities. Commissioner Metz asked what risks the City would face without the proposed reserves and initially indicated that he could not support the recommendation without a clearer explanation of the benefits and trade-offs. Ms. Nosé stated that reserve levels are ultimately a policy decision reflecting the City's risk tolerance and that maintaining the existing reserve levels remained an option. Ms. Nosé cautioned that S&P's rating identified factors that could result in a downgrade and noted that a lower credit rating would increase borrowing costs, particularly as the Electric Utility prepares to issue significant debt. Mr. Kurotori added that Palo Alto's AAA rating reflects several strengths but that its days of cash on hand were below the median considered by the rating agency. Mr. Kurotori explained that an RSR provides greater ability to manage financial changes while stabilizing rates for residents and businesses and noted differences in the reserve structures of benchmark utilities. Commissioner Metz found the additional explanation more compelling but continued to seek clarity regarding the trade-off involved. Ms. Nosé stated that the UAC's recommendation would help establish the City's risk tolerance by balancing affordability against the amount collected and retained to mitigate future financial volatility. Commissioner Scharff distinguished between maintaining adequate reserves and using reserves to stabilize rates. Maintaining only the cash reserves and liquidity necessary to protect the City's bond rating and address emergencies would be preferable to using reserves to suppress price signals or subsidize future ratepayers with funds collected from prior ratepayers. Commissioner Scharff suggested slowing noncritical CIP projects during periods of unusually high rate increases, noting that the existing Hydro Rate Stabilization Reserve mitigates some Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 9 of 17 electric supply risk. Commissioner Scharff noted he could not support the motion as currently presented. Ms. Nosé stated that no formula identifies the reserve level necessary to maintain a AAA rating because ratings reflect multiple factors. Staff therefore sought a moderate approach that considered affordability, including an RSR target at the low end of the peer range and excluding supply-related reserves from the current analysis. Mr. Kurotori noted the need to replenish the Gas Utility's insufficient CIP reserves and stated that grant funding requires the City to maintain existing project commitments, limiting the ability to defer projects without jeopardizing eligibility for additional grants. Ms. Bilir stated that the City's cash levels are below those identified in the Baker Tilly report as extremely strong and associated with AAA ratings. Establishing reserve levels based solely on protecting the rating would require substantially higher rate increases, while staff's recommendation was intended to balance affordability with peer practices and industry guidance. Mr. Hagen explained that liquidity and reserves account for 25 percent of S&P's rating scorecard for electric and gas utilities. The final rating considers additional factors, including confidence in the City's governance and management and their ability to make necessary rate and reserve decisions to meet debt service obligations. Mr. Hagen noted that S&P may therefore assign a rating above that indicated by the scorecard based on its broader evaluation. Commissioner Croft asked what risks associated with operating expenses, excluding supply costs, would require an RSR. Mr. Hagen distinguished an O&M reserve, which supports short- term liquidity and continued operations during unexpected events, from an RSR, which provides medium- to long-term protection of the rate plan. Commissioner Croft questioned whether the O&M reserve could serve the rate-stabilization function rather than creating a separate reserve, asked whether the existing O&M reserve levels would be sufficient for that purpose, and questioned differences in the reserve balances shown in the report. Ms. Bilir explained that the figures reflect FY 2027 projected ending balances from the budget and that differences from the financial forecast are explained in the footnotes, which incorporate additional information available during the forecasting process. Ms. Bilir confirmed that O&M reserve funds could be used for rate stabilization but noted that maintaining separate reserves is more consistent with the peer practices and industry guidance identified by Baker Tilly. Ms. Nosé agreed that the City could establish a policy allowing the O&M reserve to serve O&M and rate-stabilization purposes but stated that staff had not determined whether the existing targets would be sufficient. Mr. Hagen explained that separate O&M and rate stabilization reserves provide clearly defined purposes for the funds and greater assurance that each reserve will be used as intended. Commissioner Metz asked how replacing the existing minimum and maximum reserve guidelines with a single target would help protect the City's bond rating and debt coverage. Ms. Nosé stated that using a target rather than a range would not affect debt coverage and was a Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 10 of 17 policy choice intended to provide greater simplicity and clarity based on Baker Tilly's assessment. Commissioner Metz asked how staff would respond if planned rate increases failed to achieve the reserve targets. Ms. Bilir stated that staff would reevaluate reserve levels annually through the rate forecast, report the results, and revise the approach as appropriate. Ms. Nosé added that the UAC could choose not to recommend making up lost ground toward the target when other financial challenges arose, similar to decisions Council regularly makes regarding proactive pension funding. Mr. Kurotori confirmed that the annual process would provide an operational feedback loop. Commissioner Gupta emphasized evaluating reserve policies based on their cumulative rate impacts rather than individual annual increases and requested that future presentations include the cumulative impact over a 5-year period. Commissioner Gupta expressed concern about growing customer sensitivity to utility costs and the potential effect of recurring 6 to 7 percent annual rate increases on affordability. Ms. Bilir clarified that the rate impacts presented by staff reflect the combined effect of the proposed CIP and RSR changes, which would increase projected rates by less than 1 percentage point for the Electric and Water Utilities and approximately 0.5 percentage point annually for the Gas Utility. Ms. Bilir stated that staff sought to balance affordability with appropriate reserve levels and that any additional reserve changes considered in Phase 2 would be incorporated into the overall rate impact before further decisions were made. Commissioner Tucher questioned why staff proposed the same CIP Reserve methodology for all 3 Utilities rather than considering different approaches based on each Utility's circumstances, noting the substantial difference between the average annual CIP budget and depreciation methodologies. Ms. Nosé explained that historical CIP costs are not a reliable indicator of future costs because capital costs for materials, labor, and supply-chain challenges have increased substantially. Commissioner Tucher requested greater clarity regarding policies governing transfers among Utilities and between CIP and operating reserves and questioned whether the combined reserve levels could exceed what is necessary. Commissioner Tucher suggested that future presentations identify the specific risks the reserves are intended to address and explain how those risks differ among the Gas, Electric, and Water Utilities. Chair Mauter stated that the discussion had persuaded her that separate reserves could appropriately address different risks. Chair Mauter supported staff's relatively conservative 10 percent RSR target and emphasized balancing adequate reserves and favorable bond ratings against rate impacts. Chair Mauter requested stronger justification for applying different approaches among the Utilities and information regarding the financial implications of a lower bond rating, particularly as the City moves forward with wastewater investments. Vice Chair Phillips questioned whether the individual risks could be sufficiently identified and quantified and suggested focusing instead on the total reserve level and policies necessary to Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 11 of 17 provide high confidence in maintaining the City's AAA rating under a range of circumstances. Vice Chair Phillips understood the rationale for maintaining reserves for different purposes but favored consolidating them into fewer reserves. Concern about acting before the forthcoming Wastewater Collection reserve analysis led Vice Chair Phillips to indicate that he was leaning against the current proposal. Commissioner Croft expressed concern about the low Gas CIP Reserve balance and proposed using annual depreciation expense as the target for replenishing the reserve. Commissioner Croft suggested the same methodology for the Electric CIP Reserve but questioned whether that amount would be sufficient given upcoming large projects. Commissioner Croft placed greater priority on funding the CIP Reserves than establishing an RSR and proposed deferring a separate RSR until the hydro analysis and IRP provide a more complete understanding of exposure to market price volatility and potential rate impacts. In the interim, Commissioner Croft suggested using the O&M Reserve for rate stabilization and having staff determine the reserve level needed to support future financing requirements. Commissioner Scharff distinguished the need for sufficient reserves to support the City's bond rating from the purpose of an RSR and opposed establishing an RSR under the current proposal. Commissioner Scharff supported increasing the O&M Reserve if additional reserves were needed for financing purposes and could consider an RSR in the future if its use were limited to temporary, extraordinary events rather than offsetting ongoing cost increases. Commissioner Scharff supported the proposed CIP Reserve changes and was open to using annual depreciation expense as the target for the Electric and Gas Utilities if staff determined that approach was sufficient. Commissioner Scharff supported the proposed FY 2027 workflow and suggested developing a recommendation that could gain broader Commission support. Vice Chair Phillips asked what would occur if the UAC did not provide a recommendation or alternative proposal. Ms. Nosé stated that staff would forward the item to the Finance Committee with a summary of the UAC discussion and note that the UAC had not provided an alternative. Chair Mauter proposed moving the staff-recommended motion and then considering amendments based on the Commission's discussion. The Commission and staff discussed potential modifications to the staff recommendation and worked together to develop the motion language. The Commission informally polled its members regarding use of the annual depreciation expense methodology for the CIP Reserve and further discussed incorporating that approach into the motion. MOTION: Chair Mauter moved, seconded by Commissioner Scharff, to 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: Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 12 of 17 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 5. Recommend that staff return with the pros and cons of the Rate Stabilization Reserve FRIENDLY AMENDMENTS INCORPORATED INTO THE MOTION WITH THE CONSENT OF THE MAKER AND SECONDER MOTION PASSED: 5-2, Gupta, Tucher no [The Commission took a 9-minute break] ITEM 4: DISCUSSION: Update on Electric System Long Duration Resiliency; CEQA Status – Not a Project Utilities Chief Operating Officer Terry Crowley reported that Council considered local energy resources and long-duration resiliency in March 2026 and determined that local utility-scale microgrids were not sufficiently cost-effective to pursue additional studies or site development. Council directed staff to continue engaging the UAC, Climate Action and Sustainability Committee (CASC), and Council during 2026. Mr. Crowley reported that utility-scale microgrid costs remain high relative to their benefits. Citing estimates from the National Laboratory of the Rockies, Mr. Crowley stated that a 4 MW, 4-hour battery costing approximately $5.4M could serve approximately 300 single-family homes for 24 hours, representing approximately 1 percent of Palo Alto's residential customers. The estimate excludes the solar generation needed to recharge the battery, which would require approximately 20 acres and cost an additional $12M to $15M. Battery costs are projected to decline significantly by 2035 and staff will continue monitoring costs and address local renewable energy and battery storage projects in the IRP scheduled for 2027. Mr. Crowley stated that resiliency planning must account for system damage that could prevent customers from accessing stored energy during an outage. Staff is considering rapid repairs, redundant facilities, and resilient infrastructure as part of grid modernization CIP planning and will identify relevant hazards and potential mitigation measures. Staff recommended continuing to monitor local utility-scale battery storage costs, Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 13 of 17 providing an update with the next IRP, and proposing reasonable hazard mitigation measures through recommended CIP projects. Item 4 Public Comment: None. Commissioner Metz asked what hazard mitigation measures staff anticipated proposing. Mr. Crowley identified potential measures addressing flooding and sea-level rise at the Colorado Substation, liquefaction and earthquake risks associated with new foundations, and capacity needs related to grid modernization. Staff would evaluate these and other hazards, including cybersecurity and pandemics, assess the costs and propose reasonable mitigation measures through the CIP budget. Chair Mauter inquired whether staff was requesting a motion supporting the recommendations. Mr. Crowley stated that staff was seeking clarification or advice regarding how to proceed. Commissioner Gupta sought clarification regarding whether the estimate of 300 homes assumed normal or reduced electricity use. Mr. Crowley stated that the estimate assumes normal customer usage and that reduced consumption could extend the duration or number of customers served. Mr. Crowley reiterated that battery storage would provide limited benefit if an event damaged the grid and prevented power from reaching customers. Commissioner Tucher requested clarification regarding Council's purpose in directing staff to engage the UAC on battery storage. Mr. Crowley recalled that Council was interested in exploring microgrids of varying sizes and the potential use of battery technology to provide long-duration resiliency. Mr. Crowley understood resiliency to be the sole focus of Council's direction. Commissioner Metz stated that the key question was what CPAU should be doing to prepare for long-term resilience. He supported continuing efforts to improve grid resilience, including grid modernization and improvements to the system's ability to remain connected to the transmission grid. He stated that CPAU should work towards long-term resilience in worst-case emergencies. Commissioner Metz stated that CPAU should first recognize the need to invest in electrical resilience and noted that the Water Utility already has emergency preparedness measures, such as wells and diesel generators. Commissioner Metz suggested working with the Office of Emergency Services (OES) to define the emergencies the Electric Utility should be prepared to address. He stated that OES has strong opinions regarding anticipated emergencies and their effects on the community, while CPAU has special domain knowledge regarding how emergencies such as fires, earthquakes, and floods could affect the electric utility. If CPAU could work together with OES, it would be very valuable for the community. Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 14 of 17 Commissioner Metz also recommended explicitly considering risk and developing scenarios for potential CPAU responses to a major emergency, including different levels of action. He suggested evaluating the benefits, risks, and costs of the alternatives and presenting them to the City Council and the community. Finally, he stated that CPAU should develop stronger internal competencies in emergency preparedness, reliability, and resilience, which he identified as important long-term strategic areas for the Utility. Commissioner Scharff expressed concern that the presentation did not clearly convey the scale and cost of battery storage or the specific resiliency problem it was intended to address. Commissioner Scharff questioned whether protection against a 24-hour outage would justify a multimillion-dollar investment and requested that staff provide Council with clearer cost information and identify the types and magnitude of outages the proposed resiliency measures would address. Vice Chair Phillips supported continued monitoring of battery costs and emerging technologies but questioned whether microgrids would play a significant role in a broader resiliency plan. Vice Chair Phillips supported staff's recommendation and encouraged continued coordination with the OES. Commissioner Croft supported clearly defining the resiliency goal, including whether battery storage would provide backup power broadly to residents or serve critical emergency needs. Commissioner Croft suggested that future analysis consider solar generation with battery storage for long-duration resiliency and evaluate whether batteries could provide economic benefits through energy arbitrage while providing backup power as an ancillary benefit. Commissioner Croft supported deferring investment while incorporating these issues into disaster mitigation planning and returning to the UAC with a clearer definition of the resiliency objectives. Commissioner Gupta agreed that battery storage was not currently cost-effective and emphasized near-term mitigation measures. Commissioner Gupta noted that residents may be unprepared for extended power outages and suggested increasing communication regarding emergency preparedness, particularly for residents dependent on medical devices or refrigerated medications, while staff continues monitoring battery costs. Commissioner Tucher supported staff's recommendation but suggested that Council consider a broader analysis of where large-scale battery storage could provide value in Palo Alto rather than focusing solely on resiliency. Commissioner Tucher referenced prior analysis of solar and storage applications and recommended evaluating where battery projects would be most beneficial and their value proposition. Commissioner Tucher requested that future staff reports provide additional context regarding Council's specific direction, including a link to the relevant Council discussion. Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 15 of 17 An informal poll indicated interest in moving a motion. Commissioner Metz proposed amending the motion to focus future efforts on what CPAU should be doing to achieve long-term resiliency. Commissioner Tucher proposed directing staff to return to the UAC with an analysis of potential large-scale battery applications, including substation and distributed installations with or without solar. Chair Mauter expressed concern that the proposal would direct specific staff work rather than provide policy guidance and supported framing the motion more broadly around long-term resiliency. The Commission further discussed and refined the motion language. MOTION: Vice Chair Phillips moved, seconded by Commissioner Scharff, to recommend the following 1. Staff continue monitoring and provide updated estimates for local utility scale battery storage and update the UAC with the next Integrated Resource Plan 2. Recommend staff review and propose reasonable hazard mitigations with recommended capital improvement projects 3. Recommend that the focus of future efforts should be what CPAU should do for long term resilience FRIENDLY AMENDMENT INCORPORATED INTO THE MOTION WITH THE CONSENT OF THE MAKER AND SECONDER MOTION PASSED: 7-0 ITEM 5: ACTION: City of Palo Alto Utilities Wildfire Mitigation Plan (WMP) 2026 Update: CEQA – Not a Project Utilities Chief Operating Officer Terry Crowley reported that the City is required by the Public Utilities Code to prepare a Utility Wildfire Mitigation Plan (WMP) focused on reducing the risk of utility-caused wildfires, present the plan at a public meeting, and receive public comments. The 2026 WMP is due to the California Wildfire Safety Advisory Board (WSAB) by October 2, 2026, with the next update due in October 2028. Palo Alto's highest-risk area identified by the California Public Utilities Commission (CPUC) is primarily in the Foothills, where high winds and low fuel moisture increase wildfire risk. Mr. Crowley identified undergrounding overhead electric lines as the City's primary wildfire mitigation measure, supplemented by vegetation management, equipment inspections and monitoring, public safety power shutoff policies, and customer education and notification. The City has completed 9 miles of undergrounding in the wildfire area, including the high-voltage lines, with remaining low-voltage connections to homes targeted for completion by the end of 2026. Future work includes establishing inspection and vegetation management practices for underground facilities, updating public safety power shutoff policies for the underground system, and evaluating additional mitigation Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 16 of 17 work adjacent to the wildfire area. Staff requested that the UAC review the WMP, receive public comments, and recommend submission of the plan to the California WSAB. Item 5 Public Comment: None. Commissioner Scharff inquired about using drones for vegetation management and utility inspections. Mr. Crowley stated that inspections are currently conducted visually from the road and that City use of drones for surveillance would require a policy or Council authorization. Utilities Director Alan Kurotori noted that undergrounding reduces the potential benefit of drones in the wildfire area but that drones can be used for substation and other inspection work. Mr. Kurotori reported that staff is evaluating use of drone surveillance. Vice Chair Phillips sought clarification regarding vegetation management for underground facilities. Mr. Crowley explained that vegetation must be maintained at least 3 feet from pad- mounted equipment and inspected for encroachment or debris following events such as heavy windstorms. Commissioner Croft requested that the WMP performance metrics on Packet Page 50 quantify the percentage of vegetation cleared and equipment inspected annually. Commissioner Croft questioned whether staff was comfortable submitting the existing public safety power shutoff (PSPS) plan given that it was developed for the overhead system. Mr. Crowley described the plan as a living document and stated that staff would continue revising the PSPS standard to reflect the underground system rather than relying on provisions that no longer fit current conditions. Mr. Kurotori reiterated that the remaining low-voltage lines would be undergrounded within a few months. Commissioner Croft commended staff on the milestone of de-energizing the overhead lines before the rainy season. MOTION: Vice Chair Phillips moved, seconded by Chair Mauter, to recommend the City of Palo Alto Utilities submit the 2026 Wildfire Mitigation Plan to the California Wildfire Safety Advisory Board (WSAB) in accordance with Public Utilities Code Section 8387. MOTION PASSED: 7-0 COMMISSIONER COMMENTS AND REPORTS FROM MEETINGS/EVENTS None. VIRTUAL PUBLIC COMMENT None. ADJOURNMENT Utilities Advisory Commission Summary Minutes – September 2, 2026 Page 17 of 17 Chair Mauter noted that the 12-month rolling calendar was included in the packet and would be discussed the following month. The meeting adjourned at 9:49 p.m.