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City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Utilities
Meeting Date: June 16, 2025
Report #:2411-3776
TITLE
PUBLIC HEARING & PROPOSITION 218 HEARING: Finance Committee Recommends Adoption of Six Resolutions: 1) Approving the Fiscal Year 2026 Wastewater Collection Utility Financial Forecast and Reserve Management Practices, Amending Wastewater Collection Rate Schedules S-1, S-2, S-6 and S-7, and Repealing Wastewater Collection Rate Schedules S-3 and S-4; 2) Approving the Fiscal Year 2026 Water Utility Financial Forecast, Reserve Management Practices and Reserve Transfers, and Amending Water Rate Schedules W-1, W-2, W-3, W-4, and W-7; 3) Approving the Fiscal Year 2026 Gas Utility Financial Forecast and Reserve Management Practices, Reserve Transfer, and General Fund Transfer, Approving the Distribution of a Climate Credit to Small and Medium Capacity G-2 Customers in December 2025, and Amending Gas Rate Schedules G-1, G-2, G-3 and G-10; 4) Approving the Fiscal Year 2026 Electric Utility Financial Forecast, Reserve Management Practices and Reserve Transfers, and Amending Electric Rate Schedules E- 1, E-2, E-2-G, E-4, E-4-G, E-4 TOU, E-7, E-7-G, E-7 TOU, E-14, E-16, E-EEC-1, and E-NSE-1; 5) Amending Utility Rate Schedules EDF-1 and EDF-2, and Approving the Palo Alto Fiber Broadband Internet Services Rate Schedule F-1; and 6) Amending Storm Water Utility Rate Schedule D-1; CEQA Status: Not a project under CEQA Guidelines Sections 15378(b)(4) and (5) and Exempt Under Section 15273(a)
RECOMMENDATION
Note: Resolutions are included in the packet as Attachments A – F, Attachment G reflects the Table of URLs for the Exhibits to Attachments A – F.
The Finance Committee recommends that the City Council adopt the following:
1. For the Wastewater Collection Utility, a Resolution (Attachment A):
a. Approving the Fiscal Year (FY) 2026 Wastewater Collection Utility Financial Forecast and Reserves Management Practices; and
b. Amending the Wastewater Collection Utility Rate Schedules effective July 1, 2025 (FY 2026):
i. S-1 (Residential Wastewater Collection and Disposal), ii. S-2 (Commercial Wastewater Collection and Disposal),
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iii. S-6 (Restaurant Wastewater Collection and Disposal), and iv. S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger); and
c. Repealing the Wastewater Collection Utility Rate Schedules effective July 1, 2025:
i. S-3 (Industrial Waste Laboratory and Analysis Charges), and ii. S-4 (Hauled Liquid Waste Charges);
2. For the Water Utility, a Resolution (Attachment B):
a. Approving the FY 2026 Water Utility Financial Forecast and Reserves Management Practices; and
b. Approving the transfer of up to $3 million from the Rate Stabilization Reserve to the Operations Reserve in FY 2025; and
c. Amending the Water Utility Rate Schedules effective July 1, 2025 (FY 2026):
i. W-1 (General Residential Water service),
ii. W-2 (Water Service from Fire Hydrants),
iii. W-3 (Fire Service Connections),
iv. W-4 (Residential Master-Metered and General Non- Residential Water Service), and
v. W-7 (Non-Residential Irrigation Water Service);
3. For the Gas Utility, a Resolution (Attachment C):
a. Approving the FY 2026 Gas Utility Financial Forecast and Reserves Management Practices; and
b. Approving the transfer of up to $1.5 million from the Gas Utility Operations Reserve to the Distribution Rate Stabilization Reserve in FY 2025; and c. Transferring up to 18% of gas utility gross revenues received during FY 2024 to the General Fund in FY 2026; and
d. Approving the utilization of all available FY 2025 gas utility interest income and up to $1.1 million from the Cap and Trade Reserve to provide a one-time Climate Credit of $820.17 and $201.92 to Small and Medium Capacity G-2 customers, respectively, in December 2025; and
e. Amending the Gas Utility Rate Schedules effective July 1, 2025 (FY 2026):
i. G-1 Residential Gas Service,
ii. G-2 Residential Master-Metered and Commercial Gas Service, iii. G-3 Large Commercial Gas Service, and
iv. G-10 Compressed Natural Gas Service);
4. For the Electric Utility, a Resolution (Attachment D):
a. Approving the FY 2026 Electric Utility Financial Forecast and Reserves Management Practices; and
b. Approving the transfer of up to $5 million from the Electric Utility Supply Operations Reserve to the Distribution Operations Reserve in FY 2025; and c. Amending the Electric Utility Rate Schedules effective July 1, 2025 (FY 2026):
i. E-1 (Residential Electric Service),
ii. E-2 (Small Non-Residential Electric Service),
iii. E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service,
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iv. E-4 (Medium Non-Residential Electric Service),
v. E-4-G (Medium Non-Residential Green Power Electric Service), vi. E-4 TOU (Medium Non-Residential Time of Use Electric Service), vii. E-7 (Large Non-Residential Electric Service),
viii. E-7-G (Large Non-Residential Green Power Electric Service), ix. E-7 TOU (Large Non-Residential Time of Use Electric Service), x. E-14 (Street Lights),
xi. E-16 (Unmetered Electric Service) to recover capital and maintenance costs for utility pole attachments and telecom conduit, xii. E-EEC-1 (Export Electricity Compensation) to reflect 2024 avoided cost, and
xiii. E-NSE-1 (Net Surplus Electricity Compensation) to reflect current projections of FY 2026 avoided cost;
5. For the Fiber Optics Utility, a Resolution (Attachment E):
a. Amending the Dark Fiber Optic Utility Rate Schedules, consistent with the applicable Consumer Price Index, effective July 1, 2025 (FY 2026):
i. EDF-1 (Dark Fiber Licensing Services),
ii.EDF-2 (Dark Fiber Service Connection Fees);
b.Approving the new Palo Alto Fiber Broadband Internet Services Rate Schedule F- 1, for broadband internet services;
6. For Storm Water Management, a Resolution (Attachment F):
a. Amending the Storm Water Management Fee Rate Schedule, consistent with the applicable Consumer Price Index, D-1 effective July 1, 2025 (FY 2026):
i.D-1 (General Storm and Surface Water Drainage)
EXECUTIVE SUMMARY
The City of Palo Alto Utilities (CPAU) provides electricity, water, wastewater, natural gas, and fiber optic services to the Palo Alto community. The Public Works Department also provides refuse collection and processing for recycling, compost and garbage, wastewater treatment and storm water management. The recommended resolutions will set the final rate schedules for these services in FY 2026, beginning July 1, 2025, approve the financial forecasts, reserve management practices, and additional financial adjustments to support the recommended rates.
The City’s primary goals are to manage these services in a way that ensures continued safe, reliable, environmentally sustainable, and cost-effective operations. The City is proposing rate increases this year for electric, natural gas, wastewater and water services. Storm water management fees and two Dark Fiber rates will increase per the Consumer Price Index (CPI). The City is also proposing new broadband internet rates for Palo Alto Fiber as part of the phased buildout of fiber-to-the-premises (FTTP). These rate adjustments are necessary to:
•Cover operating costs: As a municipal utility, CPAU's rates are designed to recover the costs of providing services.
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•Invest in infrastructure: Funds are needed for critical projects like modernizing the electric grid, rebuilding the wastewater treatment plant (Regional Water Quality Control Plant), and maintaining the water distribution system.
•Replenish reserves: Utility reserves are currently low due to minimal rate increases during the pandemic and rising commodity prices/droughts, and need to be restored for financial stability and unexpected events.
The city aims to provide safe, reliable, environmentally sustainable, and cost-effective services, and is committed to transparency in communicating these rate changes to customers. Estimates for retail revenue impacts are included in the FY 2026 budget assumptions. The Finance Committee also recommends to the Council for staff to continue it’s review and work with both the UAC and Committee regarding the 2025 Gas cost of service study.
From December 2024 through June 2025, the Utilities Advisory Commission (UAC) and Finance Committee reviewed preliminary and proposed rate changes recommended by staff for Fiscal Year 2026. This report summarizes the meetings and incorporates UAC and Finance Committee recommendations into the recommendations for Council adoption.
The expected residential median utility bill changes are below, with the expected overall median utility bill for residential service to increase 8% in FY 2026. •20% increase for Wastewater Collection,
•10% increase for Water,
•5% increase for Gas,
•6% increase for Electric,
•2.4% increase for Storm Water Management Fee, and
•2.4% increase for Dark Fiber for pre-2006 commercial customers only
ANALYSIS
The seven rate schedules and recommended changes are summarized below, further details for each can be found in the referenced reports as reviewed by the Utilities Advisory Commission and the Finance Committee.
Wastewater Collection Utility Proposal
The Wastewater Collection Utility financial forecast proposes a 20% rate increase for FY 2026, which is equivalent to approximately $11 per residential customer per month. With this increase, Palo Alto’s rate will remain approximately 5% below neighboring cities, conservatively assuming that neighboring cities’ rates remain at current levels. This forecast also projects annual rate increases of 16% in FY 2027, 14% in FY 2028 and 5% in FY 2029 and FY 2030. Table 1 shows the projected Wastewater Collection rate trajectory from FY 2026 through FY 2030. The additional funding generated by this rate increase is required to pay for ongoing wastewater treatment costs, wastewater utility operations, and capital improvement projects. This forecast reflects deferral of some capital costs to manage the magnitude of the rate increase.
Staff updated the utility’s cost projections for the FY 2025 to FY 2030 forecast period based on 5 9
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the most recent recorded costs and rates of cost increases. Relative to last year’s financial forecast, total expenses are expected to be about 13% higher over the forecast period, due to higher treatment costs and salary and benefits and inflation assumptions. To address these challenges, similar to last year’s forecast, this projection assumes deferral of the next sewer main replacement project to FY 2028. This assumption defers the more accelerated replacement cycle adopted in the FY 2024 financial plan, intended to increase replacement from 1 mile to 2.5 miles of pipe annually starting in FY 2026. In last year’s Financial Plan, staff planned for a smaller main replacement in FY 2026 to replace 1 mile of sewer mains. In this Financial Forecast, both the accelerated main replacement project and the 1 mile sewer main replacement in FY 2026 is deferred to start in FY 2028, and this forecast defers approximately $0.45 million of sewer lateral/manhole rehabilitation and replacement work in FY 2025 to future years. This forecast reflects the minimal number of high priority capital projects to allow the Wastewater Collection Operations Reserve to return to within guideline range and avoid an even higher rate increase.
Utility rates for FY 2026 are developed concurrently with the FY 2026 budget. Due to updated cost estimates since the April 1, 2025 Finance Committee meeting, Staff reduced the rate trajectory by 1% each year in FY 2027 and FY 2028. Updates to the Wastewater Collection utility Financial Forecast are described below, and in the tables in Exhibit 1 to Attachment A, which amend the Financial Forecast presented to the Finance Committee on April 1, 2025:
1) Updated the following treatment budget assumptions:
a. The remaining unencumbered and authorized amount for future pay-as-you-go capital has been revised downward. This lowered the funding needed for treatment reserve replenishment in FY 2026 by approximately $1.1 million, and by $1.4 to $2.3 million each future year.
b. The treatment budget forecast has been revised to reflect the Regional Water Quality Control Plant’s April 2025 forecast. This revision increased Treatment O&M by approximately $0.1 million in FY 2026 and decreased Treatment Pay-as- you-go CIP expenses approximately $0.1 million, with minimal net impact on the total treatment budget forecast in FY 2026.
c. Grant reimbursement amounts have been revised to assume 30% of funds experience a one year delay in reimbursement. This decreases the grant funding assumed in FY 2025 by $0.8 million and increases the grant funding assumed in FY 2026 by $0.5 million.1
2) Added $0.33 million each year from FY 2026 – FY 2028 to transfers out to enterprise funds to reflect an estimated rent expense associated with the use of the Utilities warehouse/laydown yard. This is projected to be an expense of the Electric Utility with reimbursement from the wastewater utility for rent.2
3) Increased CIP Reserve contribution by a total of $5 million from FY 2028 through FY 2030, 1 All of the treatment budget changes described in (a) – (c) of section 1 are shown in Row 7 of Table 1, “Wastewater Collection Utility Financial Forecast”, in Exhibit 1 to Attachment A. 2 See Row 14 of Table 1, “Wastewater Collection Utility Financial Forecast”, in Exhibit 1 to Attachment A. 5 9
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allowing that reserve to remain within the guideline range from FY 2027 through FY 2030 instead of dropping to near $0 in FY 2028.3
4) Added an annual inflation factor of 5.4% to CIP budgeted amounts for unallocated salaries and benefits which added about $34K in FY 2026.4
5) As a result of changes 1 through 4 above, an additional $1.1 million is forecasted to increase the Wastewater Collection Operations Reserve replenishment in FY 2026, bringing the total projected year end FY 2026 Collections Operations Reserve balance from $1.5 million to $2.7 million 5. This Operations Reserve level is still below the target of $7.2 million and the minimum guideline of $4.1 million6. However, this change reduces the utility’s risk associated with repayment of the $3 million loan from the Fiber Utility (plus interest), which will occur during FY 2026.
Table 1: Projected Wastewater Collection Rate Trajectory from FY 2026 to FY 2030 With these changes, the Wastewater Collection Operations Reserve is projected to remain below the reserve minimum at the end of FY 2026 but is projected to be restored to within the guideline range by the end of FY 2027, and to the reserve target level by the end of the forecast period.
Figure 1 illustrates the Operations Reserve year-end levels. 3 See Row 15 of Table 1, “Wastewater Collection Utility Financial Forecast” and Row 26 of Table 3, “Wastewater Collection Utility CIP Details”, in Exhibit 1 to Attachment A. 4 See Row 15 of Table 1, “Wastewater Collection Utility Financial Forecast” and Row 17 of Table 3, “Wastewater Collection Utility CIP Details”, in Exhibit 1 to Attachment A. 5 See Row 18 of Table 1, “Wastewater Collection Utility Financial Forecast”, in Exhibit 1 to Attachment A. 6 See Row 25 and 26 of Table 1, “Wastewater Collection Utility Financial Forecast”, in Exhibit 1 to Attachment A.
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Figure 1: Operations Reserve Adequacy
Additionally, staff recommend Council repeal rate schedules S-3 (Industrial Waste Laboratory and Analysis Charges) and S-4 (Hauled Liquid Waste Charges) as an administrative clean-up item.
These rates moved to the citywide municipal fee schedule effective in 2023.
Proposed Rates
The current rates were effective July 1, 2024, when the City increased sewer rates by 15%. To align revenues with costs, CPAU proposes to increase overall rates by 20% in FY 2026, followed by 16% in FY 2027, 14% in FY 2028, and 5% in both FY 2029 and FY 2030.
CPAU has three sewer rate schedules applicable to current customers: one for residential customers (S-1), one for non-residential customers (other than restaurants) (S-2), and one for restaurants (S-6). Table 2 below summarizes the current and proposed rates for all customer classes.
Table 2 shows the current and proposed Sewer rates.
Table 2: Current and Proposed Sewer Rates
ChangeCurrent Rates
(as of 7/1/2024)
Proposed Rates
(effective 7/1/2025) $ %
Monthly Service Charges ($/Month)
S-1 (Residential) Service Charge $ 55.93 $67.11 $ 11.18 20% Water Quantity Rates ($/CCF)
S-2 (Commercial) Quantity Rates 10.44 12.52 2.08 20%
S-6 (Restaurant) Quantity Rates 15.58 18.69 3.11 20%
The proposed rates for the S-7 (Industrial Discharger) rate schedule are:
1) Collection System Operation, Maintenance, and Infiltration Inflow: $6.21 per 100 cubic feet of metered water use
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2) Advanced Waste Treatment Operations and Maintenance Charge: $2.48 per 100 cubic feet of metered water use
3) $304.18 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand) 4) $733.40 per 1000 lbs of SS (Suspended Solids)
5) $5,067.70 per 1000 lbs of NH3 (Ammonia)
6) $22,233.94 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc) Water Utility Proposal
The Water Utility needs to plan for large capital projects in the five-year budget forecast, including two reservoir replacements or rehabilitations and a large main replacement every other year, which requires rate increases. Staff plans to hold the proposed rate increase at 10% by deferring capital work. Under the proposed rate, the reservoir work will be deferred by two years from FY 2027 and FY 2028 to FY 2029 and FY 2030, and $4.6 million of main replacement work planned in FY 2026 and $2.8 million of main replacement work planned in FY 2028 will be deferred to beyond the 5-year forecast horizon. This approach is consistent with the Finance Committee and UAC’s preference for a water rate increase of no more than 10%. Deferring capital work will increase the cost to complete the same capital work because of construction inflation; additionally, deferring the work may increase maintenance costs and emergency repairs because of older water mains. The Water Utility has utilized or plans to use all available reserve funds to help offset higher costs and keep rates below the utility’s actual expenses during both the pandemic and the drought, up through the current drought recovery period. However, the reserves have now reached a point where rate increases are needed to pay for distribution system costs.
At the end of FY 2024, the operations reserve was approximately $2 million below projected levels with a balance of $7.1 million, which is below the minimum guideline level of $8.4 million.
Revenues were $2.3 million higher than forecasted last year in the FY 2025 Financial Plan (sales revenue, capacity and connection fees). This is because water purchases were higher than forecasted in the FY 2025 Financial Plan while purchases were still lower than in each of the pre- drought years (FY 2018 through FY 2022). Additionally, operating and capital expenses were $4.4 million higher than forecasted. Many of the cost increases are ongoing annual expenses. The rate stabilization reserve at the end of FY 2024 had a $4 million balance, and this financial forecast proposes to use all of that remaining funding to cover the unexpected additional costs for FY 2025 and FY 2026.
This forecast assumes the wholesale water rate in July 2025 will increase from its current level of $5.67/CCF to $5.80/CCF, an increase of 2.3%, as approved by the San Francisco Public Utilities Commission (SFPUC)’s rate hearing on May 13, 2025. SFPUC also projects a rate increase of 1% in FY 2027, 1% in FY 2028, 5% in FY 2029, and 8% in FY 2030, although the projection is highly uncertain and subject to change.
Utility rates for FY 2026 are developed concurrently with the FY 2026 budget. Due to updated cost estimates since the April 1, 2025 Finance Committee meeting, Staff updated the Water Utility Financial Forecast as described below, and in the tables in Exhibit 1 to Attachment B, which 5 9
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amend the Financial Forecast presented to the Finance Committee on April 1, 2025:
1) Updated FY 2026 water purchase costs from $5.79 per ccf to $5.80 per ccf, as approved by the SFPUC on May 13, 2025. This increased FY 2026 Water Purchase costs by $40K.7 2) Updated water purchase costs in FY 2027 through FY 2030 in accordance with the May 13, 2025 SFPUC forecast,8 as shown in Table 3.9
3)Maintained a 10% per year rate increase by deferring $0.3 of additional CIP costs in FY 2028, resulting in an increase from $2.5 million to $2.8 million of deferred costs due to increased water purchase costs.10
Table 3 shows the projected overall average system water rate increase is 10% per year from FY 2026 through FY 2030. As shown in Table 3, the Water Utility requires distribution rate increases between 11% and 17% per year through FY 2030 to provide sufficient revenues to fund annual expenses for the distribution system and capital improvements, even as deferred.
Table 3: Projected Water Rate Trajectory from FY 2026 to FY 2030 Proposed Rates
The current rates and surcharges became effective on July 1, 2024. CPAU has five water rate schedules: separately metered residential customers (W-1), commercial and master-metered multi-family residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire hydrant rental meters used for construction (W-2). All customers pay a monthly service charge based on the size of their inlet meter. This charge represents metering, billing, and other customer service costs, and also the cost of maintaining the capability to deliver a peak flow for that customer based on their meter size.
Water rates are composed of two general types of costs: commodity and distribution. For July 1, 2025, staff proposes to pass through the wholesale water rate increase approved by SFPUC and 7 See Row 31 of Table 1, “Water Utility Financial Forecast”, in Exhibit 1 to Attachment B. 8 San Francisco Public Utilities Commission Fiscal Year 2025-2026 Wholesale Water Rates, May 13, 2025, https://sfpuc.sharefile.com/share/view/se9a42370c51345bd9d2b495f8b885fc0 9 See Row 31 of Table 1, “Water Utility Financial Forecast”, in Exhibit 1 to Attachment B. 10 See Row 53 of Table 1, “Water Utility Financial Forecast”, in Exhibit 1 to Attachment B, and Row 12 of Table 3, “Water Utility Financial Forecast”, in Exhibit 1 to Attachment B.
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to increase distribution rates by 17%. Council approved the pass-through provision for a five year period, effective July 1, 2024.11
Table 4 shows the current and proposed consumption charges, which are distribution rates.
Table 4: Current and Proposed Water Distribution Charges Current Rates
(as of 7/1/2024)
Proposed Rates
(effective 7/1/2025)
Change
($/CCF)
Change
(%)
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rate 2.99 3.49 0.50 17%
Tier 2 Rate 6.96 8.14 1.18 17%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 4.21 4.92 0.71 17%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 4.21 4.92 0.71 17%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 6.41 7.49 1.08 17%
Table 5 and Table 6 show the current monthly service charges for rate schedules W-1, W-4 and W-7. These monthly service charges are also considered distribution rates.
Table 5: Current and Proposed Water Monthly Service Charges for W-1 Monthly Service Charge
($/month based on meter size) ChangeMeter
Size Current
(as of 7/1/2024)
Proposed
(effective 7/1/2025) $ %
5/8” 23.62 27.63 4.01 17%
3/4” 23.62 27.63 4.01 17%
1” 23.62 27.63 4.01 17%
1 ½” 76.31 89.28 12.97 17%
2” 118.05 138.11 20.06 17%
3” 250.22 292.75 42.53 17%
4” 445.01 520.66 75.65 17%
6” 911.09 1,065.97 154.88 17%
8” 1,676.31 1,961.28 284.97 17%
10” 2,650.21 3,100.74 450.53 17%
12” 3,485.00 4,077.45 592.45 17%
11 See Resolution 10176 “Resolution of the Council of the City of Palo Alto Approving the FY 2025 Water Utility Financial Plan and Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service),” June 17, 2024.
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Table 6: Current and Proposed Water Monthly Service Charges for W-4 and W-7 Monthly Service Charge
($/month based on meter size) ChangeMeter
Size Current
(as of 7/1/2024)
Proposed
(effective 7/1/2025) $ %
5/8” 20.65 24.16 3.51 17%
3/4” 27.62 32.31 4.69 17%
1” 41.53 48.59 7.06 17%
1 ½” 76.31 89.28 12.97 17%
2” 118.05 138.11 20.06 17%
3” 250.22 292.75 42.53 17%
4” 445.01 520.66 75.65 17%
6” 911.09 1,065.97 154.88 17%
8” 1,676.31 1,961.28 284.97 17%
10” 2,650.21 3,100.74 450.53 17%
12” 3,485.00 4,077.45 592.45 17%
Table 7 shows the current and proposed monthly service charges for fire services rate schedule W-3.
Table 7: Current and Proposed Water Monthly Service Charges for W-3 Monthly Service Charge
($/month based on meter size) ChangeMeter
Size Current
(as of 7/1/2024)
Proposed
(effective 7/1/2025) $ %
2” $4.86 5.68 0.82 17%
4” $30.11 35.22 5.11 17%
6” $87.46 102.32 14.86 17%
8” $186.39 218.07 31.68 17%
10” $335.21 392.19 56.98 17%
12” $541.46 633.50 92.04 17%
Gas Utility Proposal
During the pandemic, the City kept overall Gas Utility rate increases to 2% to 3% annually and utilized reserve funding to cover costs. In the winter of 2022-23, surging gas prices depleted the Gas Utility reserves, which were used to cover the difference between actual gas costs and the revenue generated by charging customers the Council-approved maximum gas commodity charge. Reserves need to be replenished over time to ensure funds are available for safety and reliability needs, while managing ongoing cost inflation.
The FY 2025 financial plan forecasted an overall gas rate increase of 5% for FY 2026. In this financial forecast, staff proposes the same 5% overall rate increase, which is about an 8.7% increase to distribution rates, assuming no change in supply costs, effective July 1, 2025. 5 9
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Additionally, this forecast projects overall rate increases of 6% annually from FY 2027 through FY 2030. Table 8 shows the projected gas rate trajectory for FY 2026 through FY 2030.
Table 8: Projected Overall Gas Rate Trajectory from FY 2026 to FY 2030 The City’s Gas Utility rates are based on the 2019 Natural Gas Cost of Service and Rates Study, updated with current and proposed operating costs.
Due to updated cost and revenue estimates since the April 15, 2025 Finance Committee meeting, staff updated the Gas Utility Financial Forecast as described below, and in the tables in Exhibit 1 to Attachment C, which amend the Financial Forecast presented to the Finance Committee on April 15, 2025:
1.Updated Cap and Trade expenses and reserve ending balances to align with the latest budget estimates, which reflect higher levels of spending than shown in the April 15, 2025 Finance Committee Financial Forecast.12
2.In the May 7, 2025 Finance Committee meeting, 13 Committee members recommended utilizing up to $1.1 million from the Cap and Trade Reserve to provide a Climate Credit to Small and Medium G-2 customers. 14 This is reflected as a remaining balance in the Cap and Trade Reserve in FY 2026 that is $1.1 million lower than it would have been after the estimated climate credit spending. Once the amount of available recorded interest income is known for FY 2025, staff will update the estimated Cap and Trade Reserve balance estimate in next year’s financial forecast.
3. In the May 7, 2025 Finance Committee meeting 15, Committee members also recommended to retain the current FY 2025 gas rate structure, with rate increases to meet the revenue requirement for FY 2026 in the gas utility. This change led to minor fluctuations in the sales revenue estimated in FY 2027 through FY 2030.16 General Fund Transfer
The Gas Utility's transfer to the City’s General Fund is a component of the City’s gas rates. This transfer was first authorized by voters in 1950 and reaffirmed in November 2022 with the passage of Measure L, which authorizes a transfer amount up to 18% of the gross revenues of the Gas Utility. This financial forecast proposes a transfer of $9.735 million in FY 2026, 18% of FY 12 See Row 34 of Table 1, “Gas Utility Financial Forecast”, in Exhibit 1 to Attachment C. 13 Finance Committee Meeting Agenda May 7, 2025, Item 2:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16085 14 See Row 34 of Table 1, “Gas Utility Financial Forecast”, in Exhibit 1 to Attachment C. 15 Finance Committee Meeting Agenda May 7, 2025, Item 2:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16085 16 See Row 6 of Table 1, “Gas Utility Financial Forecast”, in Exhibit 1 to Attachment C.
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2024 gross revenues. This transfer of 18% is in alignment with the assumptions in the FY 2025 Adopted Budget process.
Proposed Rates
Table 9 shows the current and proposed monthly service charges, while Table 10 shows the volumetric charges related to distribution for all rate schedules. Supply-related charges are pass-through charges that update periodically. The latest charges are shown in the City’s Rates website17, 18.
Table 9: Current and Proposed Gas Monthly Service Charges Rate Schedule Current Rates
(as of 7/1/2024)
Proposed Rates
(effective 7/1/2025)
Change
($)
Change
(%)
G-1 (Residential) $ 16.93 $ 18.40 $ 1.47 8.7%
G-2 (Small Commercial) 156.90 170.55 13.65 8.7%
G-3 (Large Commercial) 717.89 780.34 62.45 8.7%
G-10 (CNG) 106.11 115.34 9.23 8.7%
Table 10: Current and Proposed Gas Distribution Charges Rate Schedule Current Rates
(as of 7/1/2024)
Proposed Rates
(effective 7/1/2025)
Change
($)
Change
(%)
G-1 (Residential)
Tier 1 Rates $ 0.8229 $ 0.8944 $ 0.0715 8.7%
Tier 2 Rates 2.1043 2.2873 0.1830 8.7%
G-2 (Residential Master-Metered and Small Commercial)
Uniform Rate $ 1.0809 $ 1.1749 $ 0.0940 8.7%
G-3 (Large Commercial)
Uniform Rate $ 1.0702 $ 1.1633 $ 0.0931 8.7%
G-10 (Compressed Natural Gas)
Uniform Rate $ 0.0175 $ 0.0190 $ 0.0015 8.6%
17 Finance Committee Meeting Agenda May 7, 2025, Item 2:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16085 18 City’s Rates Website https://www.cityofpaloalto.org/files/assets/public/v/25/utilities/rates-schedules-for- utilities/residential-utility-rates/monthly-gas-volumetric-and-service-charges-residential-3.pdf 5 9
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Electric Utility Proposal
The Electric Utility rate forecast proposes a 5.1% system wide rate increase for FY 2026. Last year’s forecast projected 5% annual rate increases from FY 2027 to FY 2029. The updated forecast now projects a 6% increase in FY 2027, 8% increases in FY 2028 and FY 2029, and a 6% increase in FY 2030. Table 1 shows the proposed rate increases for FY 2026 through FY 2030. The drivers for this increase relative to last year’s forecast include a new warehouse and laydown yard for grid modernization, replacement of emergency generators, and an update to the General Fund Transfer forecast from $15.6 million to $17.4 million beginning in FY 2026. The General Fund Transfer increase is a result of the estimated grid modernization asset value increase (capital assets are an input to the Council-adopted General Fund Transfer methodology and when capital assets increase, General Fund Transfer also increases). Although the General Fund Transfer is funded by non-rate revenue, a larger General Fund Transfer results in less non-rate revenue projected to be available to pay for other costs, and so a larger rate increase is necessary. The rate increases in the outer years of the forecast could change as the Council finalizes plans for debt financing grid modernization costs. Utility rates for FY 2026 are developed concurrently with the FY 2026 budget. Due to updated cost estimates since the April 15, 2025 Finance Committee meeting, staff updated relevant expenses and revenues that are reflected as updates to the Electric Utility Financial Forecast. The changes are described below, and in the tables in Exhibit 1 to Attachment D, which amend the Financial Forecast presented to the Finance Committee on April 15, 2025:
1) Removed $2.9 million in FY 2027 for the MSC remodel. 19 This project is no longer planned during this forecast period.
2)Updated Low Carbon Fuel Standard reserve, Cap & Trade, and Public Benefits reserves, to reflect the latest budget estimates.20
In the current year, FY 2025, power supply costs are expected to be slightly lower than forecasted a year ago; the main driver for this shift is extremely high market prices for resource adequacy capacity and renewable energy credits, which have yielded higher wholesale revenues for the City. The City’s load (consumption) for the current year is projected to be about 10% higher than previously forecasted, but is then expected to be relatively flat over the next several years.
Meanwhile, output from the City’s hydroelectric resources is projected to be roughly equal to long-term average levels over the next few years. Hydroelectric revenue continues to be a large source of uncertainty in the City’s supply cost projections. In the next five years, staff expects increasing transmission access charges, rising renewable portfolio standard requirements, and tightening resource adequacy requirements to steadily increase electric supply costs. Capital spending and distribution system maintenance spending is rising due to grid modernization, fiber-related investments and an upgrade to the Hanover Substation which will benefit all electric rate payers. Staff expects grid modernization and related capital costs to be offset with a series 19 See Row 31 of Table 1 “Electric Utility Financial Forecast”, in Exhibit 1 to Attachment D. 20 See Row 34 of Table 1 “Electric Utility Financial Forecast”, in Exhibit 1 to Attachment D for the expense changes combined and Rows 51, 52, and 54 for the ending reserves for Low Carbon Fuel Standard, Cap & Trade, and Public Benefits reserves, respectively.
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of debt financing with the first bond issuance in FY 2026. The Hydroelectric Rate Stabilization Reserve has a balance of $17.4 million, approaching the reserve’s target level of $19 million. This level will allow the City to avoid activating the hydroelectric rate adjuster if an upcoming winter is drier than average. In FY 2025, this forecast anticipates the Electric Special Projects Reserve will also be repaid $7.5 million from the Electric Supply Operations Reserve, bringing the balance in the Electric Special Projects Reserve from $22.6 million to $30.1 million. This will fully repay the monies borrowed from the Electric Special Projects Reserve to the Electric Supply Operations Reserve to cover higher costs during the pandemic, the drought, and high winter energy prices during 2022-2023. Table 11 shows the projected electric utility rate trajectory from FY 2026 to FY 2030.
Table 11: Projected Overall Electric Rate Trajectory from FY 2026 to FY 2030 Proposed Rates
The City adopted its current electric rates effective July 1, 2024. At that time, the City did not increase the overall revenue but did implement a series of rate adjustments by customer class in accordance with the City of Palo Alto Electric Cost of Service and Rate Study, completed by EES Consulting in April 2024.21 The current and proposed FY 2026 rates are reflected in Table 12 below:
21 Palo Alto Electric Cost of Service and Rate Study
https://www.cityofpaloalto.org/files/assets/public/v/3/agendas-minutes-reports/reports/city-manager-reports- cmrs/attachments/2024-rates/electric-cosa.pdf
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Table 12: Current and Proposed Electric Rates
Rate Schedule Current Rates
(as of 7/1/2024)
Proposed Rates
(effective 7/1/2025)
Change
($)
Change
(%)
E-1 (Residential)
Tier 1 Energy ($/kWh) 0.19461 0.20570 0.01109 5.7%
Tier 2 Energy ($/kWh) 0.21868 0.22944 0.01076 4.9%
Customer Charge ($/month) 4.64 5.15 0.51 11.0%
E-2 & E-2-G (Small Non-Residential)
Summer Energy ($/kWh) 0.25210 0.26485 0.01275 5.1%
Winter Energy ($/kWh) 0.16414 0.17290 0.00876 5.3%
Customer Charge ($/month) 5.60 6.22 0.62 11.1%
E-4 & E-4-G (Medium Non-Residential)
Summer Energy ($/kWh) 0.15387 0.16171 0.00784 5.1%
Winter Energy ($/kWh) 0.11018 0.11579 0.00561 5.1%
Summer Demand ($/kW) 45.29 47.59 2.30 5.1%
Winter Demand ($/kW) 23.73 24.94 1.21 5.1%
Customer Charge ($/month) 113.73 119.53 5.80 5.1%
E-7 & E-7-G (Large Non-Residential)
Summer Energy ($/kWh) 0.13570 0.14262 0.00692 5.1%
Winter Energy ($/kWh) 0.08797 0.09245 0.00448 5.1%
Summer Demand ($/kW) 40.36 42.41 2.05 5.1%
Winter Demand ($/kW) 27.79 29.20 1.41 5.1%
Customer Charge ($/month) 520.80 547.36 26.56 5.1%
Table 13 shows the current and proposed NEM Buyback rates effective July 1, 2025.
Table 13: Current and Proposed Electric NEM Buyback Rates Rate Schedule Current Rates
$/kWh
Proposed Rates
$/kWh
Net Surplus Electricity (E-NSE-1) $0.1427 $0.1012
Export Electricity (E-EEC-1) $0.1420 $0.1206
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Figure 2 Administration Costs FY 2018 – 2024
During the Finance Committee meeting on April 15, 2025, a Council member asked how much electric utility administration costs were increasing and what the drivers of those increases were.
Staff reviewed the administration costs provided in the April 15, 2025 staff report, Figure 6, and noted that there is an error in the administration costs in that figure and the costs are not comparable from year to year. Figure 2 shows updated and corrected administration costs.
Administration costs over the past 5 years have grown on average 8% per year. The primary driver of the increase are city centralized support (i.e., Administrative Services, Attorney, HR, Facilities, IT services for security, infrastructure replacement, and software applications (i.e. AMI, FTTP, GIS, OMS, SAP), rent for substations, Municipal Services Center and City Hall, electrification of fleet vehicles when feasible, higher salaries due to new FTEs, filled vacancies and market adjustments, benefits including proactive funding of pension, and general liability and insurance premiums.
Fiber Utility Proposal
Since 2007, the EDF-1 and EDF-2 rates for Dark Fiber customers have increased annually by the annual December change in the Consumer Price Index for All Urban Consumers (CPI-U) in the San Francisco area, as stated in their dark fiber license agreements. Based on prior Utilities Advisory Commission and City Council direction, these rate changes are routinely included as part of the Budget adoption process rather than in a separate staff report. This year’s change in CPI-U was
2.4%, as reported by the Bureau of Labor Statistics. The City has four customers remaining on the pre-2006 EDF-1 rate schedule. All other dark fiber customers are on the EDF-3 rate schedule.
Additionally this year, the City is launching its Palo Alto Fiber broadband internet service in a pilot area. A new rate schedule F-1 includes proposed broadband internet services and rates, based on extensive market research, evaluation of customer demand, and competitive benchmarks. A well-defined yet adaptable rate structure is essential for the success of the FTTP project in today’s rapid evolving and competitive landscape. To support a timely and responsive rollout, staff recommends an initial offering focused on simple service packages that are easy to understand $ M
$2 M
$4 M
$6 M
$8 M
$10 M
$12 M
$14 M
$16 M
2018 2019 2020 2021 2022 2023 2024
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and to fulfill. Staff also recommends approving a range of rates and packages, which can be easily adapted, compared with fixed-rate offerings. This strategic approach offers several key advantages. First, limiting the number of core packages simplifies the initial deployment and provisioning processes, allowing staff to grow in-house expertise while relying on contracted services to concentrate on efficient installations and customer onboarding. Second, it reduces complexity in customer support efforts and marketing and outreach, enabling the Fiber utility to clearly communicate the value proposition of each plan and focus on providing services. In a market where customers are often overwhelmed by numerous offerings, simplicity and transparency can be a significant differentiator. With a well-defined range for the rates and packages, staff can adapt offerings to target different customer segments.
Proposed Rates (Schedule F-1)
Table 14 shows the proposed maximum monthly service charges for Palo Alto Fiber broadband internet services. The rate range and service package list the maximum price and allow flexibility in setting standard and promotional rates as needed to be competitive in offering internet services to phase 1 customers. The maximum prices are competitive with non-promotional standard internet rates from AT&T and Xfinity.
Table 14: Proposed Palo Alto Fiber Broadband Internet Rates Residential Service Plan Pricing
500 Mbps - Rate Assistance Up to $30
500 Mbps Up to $75
1 Gbps Up to $95
2 Gbps Up to $175
5 Gbps Up to $265
Commercial Internet Service Plan Pricing
500 Mbps Up to $125
1 Gbps Up to $185
2 Gbps Up to $195
5 Gbps Up to $295
Additional Equipment Pricing
Calix GigaSpire Up to $5
Calix Blast Mesh Extender Up to $5
Calix Gig Wan Port Up to $600
Other Service Offerings Pricing
Fixed Wireless - 100 Mbps Up to $75/Month
Protect IQ Up to $10/Month
Experience IQ Up to $10/Month
Smart Home - Calix Up to $10/Month
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Smart Biz - Calix Up to $30/Month
Smart MDU - Calix Up to $10/Month per subscriber
Commercial Dedicated 1 Gbps Internet Access (DIA) Up to $1,500/Month Commercial Dedicated 10 Gbps Internet Access
(DIA) Up to $7,500/Month
Other Contract Terms
Data Allowance - Unlimited
Month to month contract term
Storm Water and Surface Water Drainage Proposal
On April 11, 2017, a majority of Palo Alto property owners approved a ballot measure approving a monthly Storm Water Management Fee. This fee funds thirteen storm drainage capital improvement projects listed in the ballot measure, enhanced maintenance of the storm drainage system, and a variety of storm water quality protection programs. The approved ballot measure allows for an annual adjustment based on the Consumer Price Index (CPI) or 6%, whichever is less. The Storm Water and Surface Drainage Rate will increase 2.4%, increasing the monthly charge per Equivalent Residential Unit by $0.41, $17.20 to $17.61 for Fiscal Year 2026, effective July 1, 2025, to reflect the annual CPI change. See Staff Report 2501-408222 for more information.
Timeline
Water and Wastewater Collection Rates
After the June 16th Public Hearing is opened and testimony from members of the public accepted, City Council may choose to:
1. Close the hearing and take action; or
2. Close the hearing and defer action until the close of the Budget Adoption Hearing on June 16th; or
3. Continue the hearing until the end of the Budget Adoption Hearing (should the Budget Adoption Hearing be continued to another Council meeting), and then reconvene the hearing, take any additional water and wastewater collection rate testimony, close the hearing, and take action.
The latter option has been used in prior years when the Budget Adoption process has spanned multiple City Council meetings. It is customary in such circumstances to continue to accept written protests up until the hearing is closed. Unless written protests are filed by a majority of affected water and wastewater customers, Council may vote on the proposed rate actions. If approved, the water and wastewater rates will become effective July 1, 2025. The City Council 22 Staff Report 2501-4082;
https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment/?historyId=fd5397 32-a768-43d7-9049-29efa6c31d09
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will also consider changes to the Financial Forecasts for the wastewater collection and water utilities, and should they take action to approve these forecasts, they will also become effective July 1, 2025.
Electric, Gas, Fiber and Storm Water Management rates, as well as Utility Financial Forecasts The electric, gas, fiber and storm water management rates will be considered at the June 16, 2025 public hearing. Should the City Council take action to approve any or all of these rates, they will become effective July 1, 2025.
FISCAL/RESOURCE IMPACT
The resource impact of the recommendations and rate increases summarized in this report is the continued financial solvency of the various utilities through the revenue increases described below. Table 15 shows the estimated FY 2026 revenue impacts of the recommendations in this report, relative to projected revenue for FY 2026 without changing utility rates. Streetlight expenses (which are paid from the General Fund) are projected to increase by 11% or $0.22 million.
Table 15: Median Residential Bill Increase and Revenue Impact Utility
Median Residential
Bill Increase
FY 2026 Estimated
Overall
Revenue Impact
Wastewater Collection 20% $4.9 million
Water 10% $5.6 million
Gas 5% $3.3 million23
Electric 6% $9.2 million
Storm Water Management 2.4% $0.2 million
Utility rate increases impact the general fund because the City is a non-residential utilities customer, and impact revenues (due to the General Fund Transfers). The impact to the general fund of these rate increases from the adopted 2025 budget to the proposed 2026 budget is:
•Wastewater Collection: The impact to the general fund from the proposed wastewater collection rate increase is an expense decrease of $0.01 million relative to what was anticipated for FY 2026 last year.
•Water: The impact to the general fund of the water rate increase is a $0.1 million expense increase in FY 2026.
•Gas: The impact to the general fund from the proposed gas rate increase is a $0.07 million expense increase in FY 2026. The General Fund transfer would decrease from $10.917 million in FY 2025 to $9.735 million in FY 2026, a decrease of about $1.183 million. FY 2025 transfer was elevated due the higher than normal commodity revenue received 23 Not including fluctuations in commodity revenue/cost. 5 9
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from the high gas commodity prices in the winter 2022-23. •Electric: Street light expenses (which are paid from the General Fund) are projected to increase by 11% or $0.22 million. The impact to the general fund from the proposed rate increases is $0.3 million. The General Fund revenues from the General Fund Transfer would increase from an estimate of $15.985 million in FY 2025 to an estimated $17.407 million in FY 2026, an increase of $1.422 million.
Resource impacts to City departments and funds of the recommended rate adjustments are programmed in the FY 2026 Proposed Operating Budget. If the final rates adopted by Council in June differ from those proposed in this report, further adjustments may be brought forward as part of the annual budget process.
Staff estimates the Dark Fiber Optics rate increase will increase revenue $12,565 from the four remaining customers on the EDF-1 rate schedule. For Fiber broadband internet services, the revenue increase will depend on the number of customers that sign up.
Policy Implications
Policy implications related to the proposed electric, gas, water, wastewater collection, fiber and storm water management fee rate actions are detailed fully in the attached Resolutions and associated exhibits.
STAKEHOLDER ENGAGEMENT
On December 3, 2024, staff discussed the preliminary rate proposals at the Finance Committee meeting. The Finance Committee did not take any action on this item.24 On December 4, 2024, staff discussed the preliminary rate proposals at the UAC meeting. The UAC took no action.25
The UAC reviewed staff’s proposals for the Wastewater Collection and Water at its March 5, 2025 UAC meeting 26, which both passed unanimously. The UAC reviewed staff’s proposals for the Electric and Gas utilities at its April 2, 2025 meeting. The UAC approved the electric proposal unanimously. Regarding staff’s Gas Utility proposal, the UAC recommended approval of this proposal with a 5-1 vote with one abstention. The Commissioner who voted against the staff proposal expressed concern about the cost of service study results and in particular the increase in rates for the residential (G-1) customer class. The UAC also recommended through a 6-1 vote 24 December 3, 2024 Finance Committee Meeting, Staff Report https://portal.laserfiche.com/Portal/DocView.aspx?id=111748&repo=r-704298fc, Minutes https://portal.laserfiche.com/Portal/DocView.aspx?id=117363&repo=r-704298fc, Video https://www.youtube.com/watch?v=-tshOdaDA3A%3Ffeature%3Dshare 25 December 4, 2024 Utilities Advisory Commission, Staff Report https://cityofpaloalto.primegov.com/Portal/viewer?id=0&type=7&uid=d7cd6030-1d05-412e-a96b-cabd33557bc1, Minutes
https://portal.laserfiche.com/Portal/DocView.aspx?id=123724&repo=r-704298fc, Video https://www.youtube.com/watch?v=tfznidSYXiU%3Ffeature%3Dshare 26 March 5, 2025 UAC meeting; https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=13458 5 9
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to recommend to the Finance Committee and Council to approve the use of approximately $1.6 million of Cap-and-Trade allowance auction proceeds to provide a one-time flat climate credit of $73.20 to each residential (G-1) customer only in FY 2026.27 The Commissioner who voted against the climate credit option said that green funds should not be used to subsidize the use of fossil fuels. The video of the meeting is available on the City’s website at the following link:
https://www.youtube.com/watch?v=021zJQHLADI
The Finance Committee reviewed staff’s proposals for the Wastewater Collection and Water Utilities at its April 1, 2025 meeting and the Finance Committee unanimously approved both proposals.
The Finance Committee reviewed staff’s proposals for the Electric and Gas Utilities at its April 15, 2025 meeting. The Finance Committee unanimously approved the Electric Utility proposal and did not take any action on the Gas Utility proposal and continued the discussion of that proposal to May 7, 2025. During the discussion of the Gas Utility proposal on April 15, Finance Committee members expressed concern about the bill impact to median and low usage residential (G-1) gas customers resulting from the 2025 Natural Gas Cost of Service and Rate Study. 28 Finance Committee members requested additional information on whether the Gas Utility could continue to rely upon the 2020 Natural Gas Cost of Service and Rate Study for another year, what would a higher one-time climate credit look like for G-1 customer bills and whether it is possible to spread the one-time climate credit across customer bills for a year. Committee members requested additional examples and cost drivers.
On May 7, 2025 staff presented additional information to the Finance Committee, including an interim alternative recommendation to continue the current FY 2025 rate structure based on the 2020 Cost Study, with rate increases to meet FY 2026 revenue requirements, and provide a climate credit to some of the G-2 small commercial customers (small and medium meter capacities), using approximately $1.1 million in funding from the City’s Cap and Trade program revenue.29
If the 2025 COSA had been implemented July 1, 2025, G-2 small and medium customers would have received a reduction in their monthly service charges, as well as an increase in the distribution charge per therm. The climate credit amount is calculated to make the G-2 small and medium customer groups pay the same net amount (after taking into account the climate credit) as a result of retaining the current FY 2025 rate structure from July through December 2025, 27 The Gas Utility is a covered entity under California’s Cap-and-Trade program. California Air Resources Board’s Cap-and-Trade regulations authorize utilities to distribute Cap-and-Trade auction proceeds to some or all ratepayers in a non-volumetric manner. (See CA. Code of Regs. Tit. 17 Sec. 95893(d)(3)(C)). 28 The Gas Utility’s rates are evaluated and implemented in compliance with cost-of-service requirements set forth in the California Constitution and applicable statutory law. Staff engaged the services of EES Consulting (EES) to review and revise the Gas Utility’s Cost of Service (COS) for FY 2026. Staff presented the City of Palo Alto Natural Gas Cost of Service and Rate Study, February 2025 to the UAC and Finance Committee. 29 May 7, 2025 Finance Committee Meeting
https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment/?historyId=530a4f 25-5455-4cec-a95c-5190d95d9a4f; Video: https://youtube.com/watch?v=kW97GWkgaY0?feature=share; Item
2.a., 3.b. Supplemental Report
https://youtube.com/watch?v=kW97GWkgaY0?feature=share; Video 5 9
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relative to what G-2 small and medium customers would have paid under the 2025 COSA rates.
The total cost of this climate credit is $1.1 million. After discussion, the Committee voted unanimously to recommend the City Council:
1) Revise the proposed FY 2026 rates to retain the current FY 2025 rate structure, with rate increases to meet the revenue requirement for FY 2026 in the gas utility; 2) In FY 2026 only, apply a combination of climate credit (using Cap and Trade auction revenues) and FY 2025 gas utility interest income to G-2 customers (small and medium meter capacities) in the total amount of $1.1 million and 3) Refer staff to return to the Utilities Advisory Commission (UAC) to further review the FY 2025 Cost of Service Study (COSA) assumptions and principles.
On May 12, 2025 staff briefed the Council on this topic and Council members asked questions and discussed the item but did not take any action.
Upon Council approval, the one-time climate credit will be distributed to small and medium G-2 customers in December 2025, such that each “small” G-2 customer with a CPAU-approved maximum meter capacity up to 220 standard cubic feet per hour will receive a one-time credit of $820.17, and each “medium” G-2 customer with a CPAU approved maximum meter capacity above 220 but below 4,000 will receive a one-time credit of $201.92.30 The credit will be provided to G-2 small and medium customers that are active customers as of December 1, 2025.
During the discussion on May 7th, Finance Committee members expressed a preference for using any available gas utility interest income for the climate credit, before using Cap and Trade auction revenues. At the end of FY 2025, staff will use the actual FY 2025 gas utility interest income less any funds reserved for other purposes (e.g., interest earned on Cap and Trade auction revenue that must be transferred to the Cap and Trade Reserve) to pay for the climate credit, with Cap and Trade auction revenues for the remainder, up to $1.1 million.
The UAC reviewed staff’s proposals for Palo Alto Fiber broadband internet rates at its May 7, 2025 UAC meeting. The UAC approved the proposed maximum fiber rate structure and product offerings (6-1), which enables staff to structure rates for special promotions, service packages, and other means to be competitive in offering fiber services to our pilot customers. This also helps the City maintain its competitive edge over the incumbent providers. One commissioner did not recommend the proposed range of rates, preferring the exact pricing of the various service offerings.31
30 CPAU approved maximum meter capacities are all at an assumed pressure of 7 inches of water column (equivalent to 0.25 pounds per square inch).
31 May 7, 2025, Utilities Advisory Commission, Staff Report https://cityofpaloalto.primegov.com/Portal/viewer?id=0&type=7&uid=45348753-32c1-464e-9861-d8905d16f318 5 9
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The Finance Committee reviewed staff’s proposals for Palo Alto Fiber broadband internet rates at its June 3, 2025 meeting. The Finance Committee recommended offering promotional rates to attain more customers in the pilot.
Note that there were no specific stakeholder engagement meetings on Dark Fiber rates because there are only a few impacted customers and the rate is increasing by CPI based on contractual EDF-1 terms and consistent with past practice.
Exhibit 4 to Attachments A - D contains examples of CPAU’s communication and outreach methods including the use of the utilities website, utility bill inserts, messaging on utility bills and MyCPAU online account management platform, email newsletters, print and digital ads in local publications, social media, community messaging platforms, and through direct mailings of the Home Water Reports and online WaterSmart portal.
ENVIRONMENTAL REVIEW
Adoption of the attached Financial Forecasts and budgeted transfers does not meet the California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(4) and (5), because it is a governmental fiscal and administrative activity which will not cause a direct or indirect physical change in the environment. Adoption of the proposed wastewater collection, water, gas, electric, storm water management fee, and fiber rates to meet operating expenses, purchase supplies and materials, meet financial reserve needs and obtain funds for capital improvements necessary to maintain service is not subject to the California Environmental Quality Act (CEQA), pursuant to California Public Resources Code Sec. 21080(b)(8) and Title 14 of the California Code of Regulations Sec. 15273(a). After reviewing the staff report and all attachments presented to Council, the Council incorporates these documents herein and finds that sufficient evidence has been presented setting forth with specificity the basis for this claim of CEQA exemption.
ATTACHMENTS
Attachment A: Resolution for the FY 2026 Wastewater Collection Utility Attachment B: Resolution for the FY 2026 Water Utility
Attachment C: Resolution for the FY 2026 Gas Utility
Attachment D: Resolution for the FY 2026 Electric Utility Attachment E: Resolution for the FY 2026 Fiber Optic Utility Attachment F: Resolution for the FY 2026 Storm Water Management Fee Rates Attachment G: Table of URLs for Exhibits to Attachments A - F APPROVED BY:
Alan Kurotori, Director of Utilities