City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Utilities
Meeting Date: September 15, 2025
Report #:2505-4750
TITLE
PUBLIC HEARING: Adoption of Voluntary Residential Electric Service Time-of-Use Rates (E-1 TOU) as Recommended by the Finance Committee; CEQA Status: Not a Project
RECOMMENDATION
The Finance Committee, Utilities Advisory Commission and staff recommends that the City Council adopt a resolution (Attachment A: Resolution) adding voluntary Rate Schedule E-1 Time of Use (TOU) applicable to separately metered single-family residential dwellings receiving electric service effective January 1, 2026 (Attachment B: Rate Schedule E-1 TOU).
EXECUTIVE SUMMARY
The Finance Committee, Utilities Advisory Commission and Staff recommend introducing a voluntary residential electric time-of-use rate plan effective on January 1, 2026 (E-1 TOU Rate Schedule). Separately metered single-family residential dwellings receiving electric service from the City of Palo Alto with Advanced Metering Infrastructure (AMI) meters may opt-in to this new E-1 TOU rate plan.
The proposed E-1 TOU rates align with the requirements of Article XIII C of the California Constitution (often referred to as Proposition 26) to align with the cost of electricity. The proposed E-1 TOU rates also align with the cost of electricity at the time of use. The proposed E- 1 TOU rates provide customers the opportunity to take advantage of lower-cost and lower carbon intensity time periods for electric vehicle charging or other electric uses.
TOU rates are a type of electricity pricing where the cost of electricity varies depending on the time of day the electricity is used. Under this structure, electricity prices are typically lower during off-peak hours, when demand is low, and higher during peak hours, when the grid is under more strain due to higher demand compared to available electricity supply. Staff considered the marginal cost of energy, as well as several other factors described in detail below to determine the hours of the day that each TOU rate applies.
BACKGROUND
At the December 4, 2024 UAC meeting, Staff presented preliminary rate proposals for FY 2026 and provided an update on TOU rates as an informational item for discussion purposes.1 On June 4, 2025, these TOU rate proposals were reviewed and unanimously recommended for approval by the UAC (Staff Report #2503-4361)2. On September 2, 2025, the E-1 TOU rate proposals were reviewed and unanimously recommended for approval by the Finance Committee (Staff Report #2506-4899)3
Staff recommends a January 1, 2026 implementation date for E-1 TOU to allow sufficient time for staff to prepare for its implementation. Staff estimates that 95% of residential customers will have electric AMI meters installed by the end of December 2025. The remaining 5% of residential customers are estimated to receive AMI meters by April 2026. Customers will first need to have an AMI meter installed to be eligible to participate in the E-1 TOU rate.
ANALYSIS
The Electric Utility’s rates are evaluated and implemented in compliance with cost-of-service requirements set forth in the California Constitution and applicable statutory law. This E-1 TOU recommendation reflects the proposed FY 2026 costs and revenues for the Electric Utility that are reflected in the financial forecast that was approved by the Council on June 16, 2025, and the “City of Palo Alto Electric Cost of Service and Rate Study” by EES Consulting, Inc. in 2023/2024 (FY 2024 COS Study), supplemented by EES’s April 1, 2025 memo on “Electric Time of Use Rate Design for E-1: Residential Customer Class” (Attachment C: COSA Study’s E-1 TOU Supplement).
The new E-1 TOU rates are designed to generate the same FY 2026 revenue as the standard E-1 rates, assuming customers do not change their electric usage patterns. Because the number of customers opting in to E-1 TOU will gradually increase over time, the revenue risk to the Electric Utility will be minimal as adjustments to the rate will be implemented over time as more data is available regarding changes in customers’ electric usage patterns.
These residential TOU rates align with the cost of electricity at the time of use. Residential customers may opt-in to this rate to take advantage of lower-cost time periods for electric vehicle charging and other appliances with flexible loads can also take advantage of this rate.
As presented in the COSA Study’s E-1 TOU Supplement, the hours of the day that each TOU rate applies (peak, off-peak and super off-peak) or “TOU periods” are designed with consideration of 1 The transcript from the meeting is available on the City’s website:
https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=15106&compileOutputType=1. 2 UAC Staff Report #2503-4361 on June 4, 2025
https://cityofpaloalto.primegov.com/Portal/viewer?id=0&type=7&uid=a193f374-f0af-479d-bf30-ce2b7a3c6a05 3 Finance Committee Staff Report #2506-4899 on September 2, 2025 https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment/?historyId=0b323408-c8f5-492c-9868- 673fa312763c
several factors including marginal cost of energy, distribution system capacity and peak demand, greenhouse gas intensity of market energy, and best practices in ratemaking.
1. Marginal cost of energy
The TOU periods are structured to reflect the marginal cost of energy, which refers to the cost of producing or purchasing one additional unit of electricity. This cost fluctuates throughout the day based on overall demand, fuel availability, and market dynamics. By aligning TOU pricing periods with periods of higher or lower marginal cost, utilities can send price signals that encourage consumers to shift their energy usage to times when electricity is cheaper to purchase. This not only reduces strain on the grid but also improves overall economic efficiency in the energy market. Because of the large penetration of solar resources in California, the lowest priced periods typically occur in the sunny mid-day hours, while the highest priced periods typically occur in the evening hours just after sunset.
2. Distribution system capacity and peak demand
TOU periods are influenced by the capacity of the distribution system and the timing of peak demand. Electricity systems must be built to meet the highest expected load, even if those peaks occur infrequently. Shifting consumption away from peak periods enhances grid reliability and optimizes use of existing infrastructure, delaying or reducing the need for costly infrastructure upgrades. This also reduces the utility’s need to purchase additional local and system resource adequacy capacity, as these procurement requirements are set based on the utility’s actual peak demand levels.
3. Greenhouse gas intensity of market energy
Energy generated during peak hours often comes from fossil-fuel-based plants that produce higher emissions compared to cleaner sources like solar, which are more prevalent during mid- day hours. TOU rates can incentivize customers to use electricity when the grid is powered by cleaner energy, thereby supporting emissions reductions and climate goals. (Note that although CPAU has a carbon neutral electricity supply, the utility is still responsible for countering the effects of the marginal emissions that occur as a result of its electricity consumption through the purchase of additional renewable energy; therefore, it lowers the utility’s costs to have customers use electricity primarily in lower emissions periods.)
4. Best practices in ratemaking
TOU rate plans also reflect established best practices in utility ratemaking, which aim to balance fairness, efficiency, and transparency. This involves designing rates that are cost-reflective, encourage customer responsiveness, and promote long-term sustainability of the electric system. Best practices ensure that TOU pricing is not only effective in achieving grid and environmental objectives, but also understandable and equitable for customers, including protections for vulnerable populations.
It has been shown that consumers are more able to shift energy use to lower-priced periods when the high-priced period is shorter in duration. The recommended peak period is from 4 pm to 9 pm. This 5-hour period captures the highest marginal energy costs, the highest average GHG intensities, and the timing of both the distribution system peak and residential class peak demand.
The Residential TOU program will enable CPAU to gauge customer interest in electric TOU rates and assess the behavioral changes of customers who opt into these TOU rates. In the absence of any E-1 TOU customer data, the TOU rate design assumed the E-1 customer class load profile and the TOU rates were designed to recover the same revenue requirement.
Table 1 shows the proposed E-1 TOU rates, compared to the proposed E-1 rates for FY 2026.
Table 1: FY 2026 Rates for E-1 and E-1 TOU
Commodity Distribution Public
Benefits Total
E-1 TOU Rate Schedule – Proposed in this Staff Report, effective date January 1, 2026 E-1 TOU Volumetric Rate, $/kWh (No Baseline)
Summer: June 1 – September 30
Peak: 4pm to 9pm 0.23354 0.09351 0.00604 0.33309
Off-Peak: 9pm to 9am, 3pm to 4pm 0.08249 0.09351 0.00604 0.18204 Super Off-Peak: 9am to 3pm 0.06690 0.09351 0.00604 0.16645 Winter: October 1 – May 31
Peak: 4pm to 9pm 0.16705 0.09351 0.00604 0.26660
Off-Peak: 9pm to 9am, 3pm to 4pm 0.11033 0.09351 0.00604 0.20988 Super Off-Peak: 9am to 3pm 0.07835 0.09351 0.00604 0.17790 E-1 TOU Customer Charge
Customer Charge, $/month 5.15
E-1 Rate Schedule – Effective date July 1, 2025
E-1 Volumetric Rate, $/kWh (Baseline at 450 kWh)
E-1 Tier 1 (up to 450 kWh) 0.10373 0.09593 0.00604 0.20570 E-1 Tier 2 (over 450 kWh) 0.13372 0.08968 0.00604 0.22944 E-1 TOU and E-1 Customer Charge
Customer Charge, $/month 5.15
Figures 1 and 2 below show the E-1 and E-1 TOU volumetric rates for summer and winter for FY 2026.
Figure 1: E-1 (Tier 1 and Tier 2) and Summer E-1 TOU Volumetric Rates for FY 2026 Figure 2: E-1 (Tier 1 and Tier 2) and Winter E-1 TOU Volumetric Rates for FY 2026 Customers electing the E-1 TOU rate plan must remain on the plan for a minimum of six months. After six months, E-1 TOU customers may request a change to any applicable rate schedule; however, once a customer switches to a rate schedule other than E-1 TOU, they cannot re-elect E-TOU for the next 12 billing cycles. Other utilities have similar restrictions regarding customers switching between rate plans 4. For Palo Alto, six months is a reasonable balance between offering flexibility to customers and protecting the utility from customers switching rate plans frequently based upon which season the rate plan benefits the customer, thereby generating additional administration for the utility.
4 This proposed rule is slightly different from that implemented by California’s three largest electric utilities. For PG&E, customers may request a rate plan change up to two times in a rolling 12-month period; however, once a customer makes the 2nd rate change, they will have to remain on that plan for the next 12 billing cycles. For Southern California Edison and San Diego Gas & Electric Company, customers switching to TOU rate will not be able to make another switch for a full 12 months.
Net Energy Metering (NEM) customers5 will not be eligible to opt-in to the Residential TOU rate plan due to existing constraints in the billing system. Staff is working to address these constraints.
Implementation Plan
Staff has begun the process of updating the billing system to accept energy consumption data from the AMI system to compute electric TOU customer bills. Planning and implementation activities include modifying the billing system and developing logistics related to customer enrollment, customer informational tools and communication plan. To ensure a smooth roll-out of this new rate, staff anticipates an initial testing period with a small group of beta customers beginning in January 2026 followed by a modulated increase in customer enrollments. Staff plans to present marketing and communication and customer-centric details of this new rate implementation to the UAC in Fall 2025.
FISCAL/RESOURCE IMPACT
The rate level of E-1 TOU is based on the FY 2026 cost estimates and is therefore designed to produce the same revenue increase percentage as that expected from the standard E-1 rates adopted by Council effective July 1, 2025.
STAKEHOLDER ENGAGEMENT
Utility Advisory Commission
Staff provided an update on the development of E-1 TOU rates at the December 4, 2024 UAC meeting. On June 4, 2025, staff presented the TOU rate proposals to the UAC. Commissioners reported that the UAC subcommittee had met with staff twice and commented that it is important to communicate to customers why it is important to use electricity during the solar production hours (energy is cleaner and cheaper) potentially using appropriate naming or branding and that E-1 TOU rates would be even more impactful if the dollar impact of shifting load to the super-off peak was greater. One Commissioner asked whether staff had considered maximizing the price differential between the super off-peak and peak in order to provide more of a financial incentive to customers and staff responded that different TOU periods were examined and that changing the TOU periods did not change the resulting rates very much. The UAC unanimously recommended approval of this proposal. The details of the meeting are available on the City’s website at the following link:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=17431 Since the June 4, 2025 UAC meeting staff added the requirement that residential customers must have an AMI meter installed in order to participate in the E-1 TOU rate schedule. This is reflected in Attachment B. Staff plans to present a more detailed implementation plan to the UAC in Fall 2025.
5 NEM customers are those who receive compensation for the energy generated by photovoltaic systems installed at their residences.
Finance Committee
On September 2, 2025, staff presented the TOU rate proposals to the Finance Committee.
Finance Committee members asked about the financial implications as a result of behavioral changes and rate revenues with this new schedule, communications and marketing plans, and recommendations for shifting usage to off-peak and super off-peak lower priced time periods.
The Committee expressed an understanding that the slow ramp period will enable staff to monitor changes in usage mitigating and immediate risk to the financials of the utility. Staff have committed to monitoring these impacts to inform future financial forecasts and rate setting to ensure the utility is adapting to the true cost of service and fiscal health.
Finance Committee members recommended that staff promote the use of smart panels and smart appliances that can be programmed to run during off-peak and super off-peak times of day. Some of the ways referenced that customers could change usage times included charge their Electric Vehicles, dishwashers and clothes washers to run during off-peak times. The Finance Committee voted unanimously to recommend approval of the E-1 TOU proposal. The details of the meeting are available on the City’s website at the following link:
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=16203.
ENVIRONMENTAL REVIEW
The City Council’s adoption of the E-1 TOU Rate Plan does not meet the California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section 21065. Thus, no environmental review is required.
ATTACHMENTS
Attachment A: Resolution
Attachment B: Rate Schedule E-1 TOU
Attachment C: COSA Study’s E-1 TOU Supplement
APPROVED BY:
Alan Kurotori, Director Utilities
Staff: Lisa Bilir, Senior Resource Planner