Agenda packet — Palo Alto City Council, December 1, 2025 (part 2 of 6)

Regular Meeting
November 10, 2025
The City Council of the City of Palo Alto met on this date in the Council Chambers and by virtual teleconference at 5:30 P.M.

Present In Person: Burt, Lauing, Lu, Lythcott-Haims, Reckdahl Present Remotely:

Absent: Stone, Veenker
Special Orders of the Day

1. Proclamation Recognizing National Police Records and Support Personnel Week

NO ACTION
Closed Session

2. Public Employee Performance Evaluations
Authority: Cal. Gov. Code section 54957(b)
Title: City Clerk, City Auditor, and City Attorney

3. Conference with Labor Negotiator
Authority: Cal. Gov. Code section 54957.6
Agency Representative: Dan Rich, Municipal Resources Group Unrepresented Employees: City Attorney, City Clerk and City Manager MOTION: Councilmember Reckdahl moved, seconded by Councilmember Lythcott-Haims to go into Closed Session.

MOTION PASSED: 5-0-2, Stone, Veenker absent
Council went into Closed Session at 5:36 P.M.

Council returned from Closed Session at 8:20 P.M.

Mayor Lauing announced no reportable action.

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City Council Meeting
Draft Action Minutes: 11/10/2025
Agenda Changes, Additions and Deletions
Public Comment
Council Member Questions, Comments and Announcements
Consent Calendar
MOTION: Councilmember Reckdahl moved, seconded by Councilmember Lu to approve Agenda Item Numbers 4-5, AA1.

MOTION PASSED: 5-0-2, Stone, Veenker absent

4. FIRST READ: Adopt an Ordinance Amending PAMC Chapter 10.56 (Special Speed Zones) to Update Speed Limit Studies for Nine Streets and Approve the 2025 Traffic Survey; CEQA status – categorically exempt.

5. Approval of a Budget Amendment in the General Fund for the Planning and Development Services Department’s Deposit-Based Fee Program for Private Development Studies for a Net Zero Impact. CEQA Status: Not a Project AA1. Adopt a Resolution Deferring CPAU Late Fees and Collection Actions for Certain Customers Affected by the Ongoing Federal Government Shutdown; CEQA Status – Not a Project.

Action Items

6. PUBLIC HEARING / QUASI-JUDICIAL. 660 University Ave [21PLN-00341]: Request for Approval of a Planned Home Zoning (PHZ) on Three Parcels (511 Byron Street, 660 University Avenue, 680 University Avenue/500 Middlefield Road), to Demolish Existing Buildings and Provide a New Six Story Mixed-Use Building with Approximately 1,900 Square Feet of Office, 70 Multi-Family Residential Units, and a Two Level Below-Grade Parking Garage. CEQA Status: A Draft Environmental Impact Report Circulated for Public Review Beginning on April 2, 2024, and Ending on May 17, 2024. The City published a Final EIR in March 2025 and a revised Final EIR in October 2025. Zoning District: RM-20 (Multi-Family Residential).

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City Council Meeting
Draft Action Minutes: 11/10/2025
MOTION: Councilmember Lu moved, seconded by Mayor Lauing to, as it relates to the 70-unit proposal with balconies with modification to remove required mitigation for spillover parking:

1. Adopt the Resolution in Attachment B certifying the EIR and Adopting the Mitigation Monitoring and Reporting Program (MMRP);

2. Adopt the Resolution in Attachment C amending the Comprehensive Plan Land Use Element to modify the allowable uses in the Multiple Family Land Use Designation;

3. Adopt the Planned Community (PC) Ordinance in Attachment D rezoning the subject property and approving the development plan, uses, and public benefits; and

4. Approve the Record of Land Use Action in Attachment E with approval findings and conditions of approval.

MOTION FAILED: 3-2-2, Reckdahl, Burt no, Stone, Veenker Absent AMENDMENT: Councilmember Burt moved, seconded by Councilmember Reckdahl to restore the mitigations for spillover parking.

AMENDMENT FAILED: 2-3-2, Lu, Lauing, Lythcott-Haims no, Stone, Veenker Absent MOTION: Councilmember Burt moved, seconded by Councilmember Reckdahl to, as it relates to the 70-unit proposal with balconies:

1. Adopt the Resolution in Attachment B certifying the EIR and Adopting the Mitigation Monitoring and Reporting Program (MMRP);

2. Adopt the Resolution in Attachment C amending the Comprehensive Plan Land Use Element to modify the allowable uses in the Multiple Family Land Use Designation;

3. Adopt the Planned Community (PC) Ordinance in Attachment D rezoning the subject property and approving the development plan, uses, and public benefits; and

4. Approve the Record of Land Use Action in Attachment E with approval findings and conditions of approval.

MOTION PASSED: 4-1-2, Lu no, Stone, Veenker Absent
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City Council Meeting
Draft Action Minutes: 11/10/2025

7. Approval of the Four-Quadrant Gate System as the preferred Quiet Zone Implementation Measure at the Churchill, Meadow, and Charleston Rail Crossings as Recommended by the Rail Committee; CEQA status - categorically exempt.

MOTION: Mayor Lauing moved, seconded by Councilmember Reckdahl to approve the FourQuadrant Gate System as the Quiet Zone implementation Measure at the Churchill Avenue, Meadow Drive, and Charleston Road Rail Crossings for Quiet Zones along the Caltrain Corridor in Palo Alto.

MOTION PASSED: 5-0-2, Stone, Veenker Absent

8. REINTRODUCED FIRST READING: Adoption of an Ordinance Updating Palo Alto Municipal Code (PAMC) Section 18.40.250 (Lighting) of Chapter 18.40 (General Standards and Exceptions) and Amending Chapters 18.10, 18.12, 18.28, and Section

18.40.230 of Title 18 (Zoning) to Adopt New Outdoor Lighting Regulations; CEQA Status — Exempt pursuant to CEQA Guidelines Section 15308 (Actions for Protection of the Environment)
Agenda Item Number 8 not heard and deferred to a date uncertain.

Adjournment: The meeting was adjourned at 11:38 P.M.

ATTEST: APPROVED:
____________________ ____________________
City Clerk Mayor
NOTE: Action minutes are prepared in accordance with Palo Alto Municipal Code (PAMC)

2.04.160(a) and (b). Summary minutes (sense) are prepared in accordance with PAMC Section

2.04.160(c). Beginning in January 2018, in accordance with Ordinance No. 5423, the City Council found action minutes and the video/audio recordings of Council proceedings to be the official records of both Council and committee proceedings. These recordings are available on the City’s website.

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CITY COUNCIL

DRAFT ACTION MINUTES

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Regular Meeting
November 17, 2025
The City Council of the City of Palo Alto met on this date in the Council Chambers and by virtual teleconference at 5:30 P.M.

Present In Person: Burt, Lauing, Lu, Lythcott-Haims, Reckdahl, Stone, Veenker Lythcott-Haims arrived at 5:32 P.M.

Present Remotely:

Absent:

Closed Session

1. CONFERENCE WITH CITY ATTORNEY - EXISTING LITIGATION
Swinerton v. City of Palo Alto (JAMS Reference #:5100003409) Authority: Government Code Section 54956.9(d)(1)
ITEM REMOVED OFF AGENDA – NOT HEARD
Agenda Changes, Additions and Deletions
Public Comment
Council Member Questions, Comments and Announcements
Consent Calendar
Councilmember Lu and Vice Mayor Veenker recused from Agenda Item Numbers 5 and 7.

MOTION: Councilmember Reckdahl moved, seconded by Vice Mayor Veenker to approve Agenda Item Numbers 2-8.

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City Council Meeting
Draft Action Minutes: 11/17/2025
MOTION PASSED ITEMS 2-4, 6, 8: 7-0
MOTION PASSED ITEMS 5, 7: 5-0-2, Lu, Veenker recused

2. Approval of Minutes from November 3, 2025 Meeting

3. Climate Action and Sustainability Committee Recommendation to Approve Program Design Guidelines for Successor to Multi-family Electric Vehicle Charger Program; CEQA Status - Not a Project

4. Climate Action and Sustainability Committee Recommendation to Approve Program Design Guidelines for the Advanced Packaged HVAC Pilot Program; CEQA Status – Categorically Exempt Under CEQA Guidelines Section 15302 (Replacement of Existing Facilities)

5. Review and Approve the Williamson Act Contract Renewals Within Palo Alto City Limits (2025).

6. QUASI-JUDICIAL. 3200 Park/340 Portage: Final Map and Street Naming [25PLN-00104]:

Request for a Final Map to Merge and Subdivide 11 Existing Parcels Totaling Approximately 14.65 Acres To Create Five Resulting Parcels, Consistent with the Approved Development Agreement and to Name the New Private Streets and Rename Portage Avenue. Authorization for the City Manager to Take All Actions Necessary to Acquire a 3.25 Acre Parcel by Grant Deed. Zone District: The Site Has a Split Zoning Designation of Five Planned Community Zone Districts Where Each Zone District Aligns with the Resulting Parcels (PC 5596, PC 5597, PC 5598, PC 5599, PC 5600). CEQA Status:

Council adopted resolution 10123 certifying the EIR for the project on September 12, 2023 (SCH # 2021120444).

7. Approval of Funding Agreements with Stanford University to Receive up to $600,000 and VTA for up to $456,000 to Partially Fund Palo Alto Link through June 2026, and Related Budget Amendments in the General Fund; CEQA status – not a project.

8. Approval of Contract No. C26196096 with Soudi Consultants, Inc. in an Amount Not-toExceed of $1,500,000 over a Period of Three Years to Provide As-Needed Electric Engineering Consulting Services for System Protection Related to Palo Alto’s Electric Sub-Transmission, Substations, and Distribution Systems, and Technical Training and Peer Review Services; CEQA Status: Exempt Under CEQA Guidelines Sections 15302, 15303, and 15183.

City Manager Comments
Ed Shikada, City Manager
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Action Items

9. Approval of the Study and Assessment of Turf Systems: Findings and Recommendation for El Camino Park Synthetic Turf Replacement as Recommended by the Parks and Recreation Commission; CEQA status - categorically and statutorily exempt.

MOTION: Mayor Lauing moved, seconded by Councilmember Burt to defer item to a date uncertain and create an Ad Hoc Committee to further discuss with staff and bring back to Council.

MOTION PASSED: 7-0
SUBSTITUTE MOTION: Councilmember Lythcott-Haims moved, seconded by Councilmember Reckdahl to:

1. Direct staff to proceed with replacement of the synthetic turf at El Camino Park in a manner consistent with the Study’s findings and recommendations; and a. Risk Mitigation Measures (RMM) to include as part of the design for El Camino

2. Set Cubberley Synthetic Field as the target for the pilot natural option.

SUBSTITUTE MOTION FAILED: 3-4, Burt, Stone, Lauing, Veenker no

10. Review and Provide Feedback on an Analysis of a Conceptual Affordable Housing Project on Land to be Conveyed to the City and Associated With the Sobrato Development Agreement (340 Portage Avenue); Consideration and Possible Direction to Staff to Prepare a Future Request for Proposal for a Future Affordable Housing Project. CEQA Status: Not a Project.

NO ACTION

11. Adopt a Resolution Establishing the City Council Annual Calendar of Meetings, Recesses, and City Council Events for the Calendar Year 2026; CEQA status – not a project ITEM HEARD OUT OF ORDER BEFORE AGENDA ITEM 10.

MOTION: Councilmember Lythcott-Haims moved, seconded by Councilmember Reckdahl to:

1. Set Annual Retreat/Priority Setting Meeting date as January 24th (for meetings that fall on a holiday, schedule Special Meeting on next subsequent business day(s)); and Item 3
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2. Option 2 (4th Monday of the Month) for special City Council meetings as needed; and

3. Adopt a resolution establishing its calendar of meetings, recesses, and City Council events for calendar year 2026; and

4. Direct staff to explore also avoiding Council Committee Meetings on holidays.

MOTION PASSED: 7-0
Adjournment: The meeting was adjourned at 10:57 P.M.

ATTEST: APPROVED:
____________________ ____________________
City Clerk Mayor
NOTE: Action minutes are prepared in accordance with Palo Alto Municipal Code (PAMC)

2.04.160(a) and (b). Summary minutes (sense) are prepared in accordance with PAMC Section

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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: City Clerk
Meeting Date: December 1, 2025
Report #:2511-5395
TITLE
Policy & Services Committee Recommendation to Adopt Updates to the Advocacy Process Manual; CEQA Status - Not a Project

RECOMMENDATION
The Policy & Services Committee recommends the City Council adopt updates to the Advocacy Process Manual as discussed at the October 29, 2025 Policy & Services Committee meeting.

BACKGROUND
The City’s legislative program is guided by the Council-approved Legislative Guidelines1, the Advocacy Process Manual, and prior Council direction to strategically weigh in on legislative issues.2 The City Council last updated the Advocacy Process Manual in 2020 and in 2021, gave its direction regarding strategically weighing in.

At its April 8, 2025 meeting, the Policy & Services Committee expressed an interest in updating the City’s Advocacy Process Manual. The City Council subsequently referred to the Committee a review of the Manual and directed the Committee to forward any recommended changes to the full City Council for final consideration and adoption.

ANALYSIS
The Policy & Services Committee recommended the following changes to the manual at its October 29, 2025 meeting:3
1 City of Palo Alto’s 2025 Federal and State Legislative Guidelines:
https://www.paloalto.gov/files/assets/public/v/1/city-manager/legislation/2025-legislative-guidelines.pdf 2 June 22, 2021 City Council Action Minutes
https://portal.laserfiche.com/Portal/DocView.aspx?id=2574&repo=r-704298fc 3 October 29, 2025 Policy & Services Committee Action Minutes https://portal.laserfiche.com/Portal/Browse.aspx?id=135434&repo=r-704298fc Item 4
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• Update #2 in the Purpose section to read: “Ensure potentially impactful state and federal legislation is identified, analyzed, tracked, and possibly, the subject of City advocacy.” • Update the Legislative Guidelines section to align with current practice • Incorporate the “strategic weighing in” language
• Add language in the Role of the City Council section regarding coordinating with the City Manager’s Office when advocating on behalf of the City
• Incorporate role of the City Clerk’s Office
• Clarify language in City Advisory Commissions and Committees section regarding speaking in personal capacity vs. speaking on behalf of the City • Specify that when the City Council votes to take a position on a bill, the advocacy letters should note if/when the vote is not unanimous
• Specify that draft advocacy letters will be shared with the Mayor and Chair of the Policy & Services Committee for review and input
• Set the threshold to at least two Councilmembers for City bill sponsorship consideration • If the general ideal timeline for City-sponsored state legislation is not followed, the reason why will be shared with the City Council
Edits to the Manual are noted in redline in Attachment A. Staff also made minor formatting adjustments.

FISCAL/RESOURCE IMPACT
None

STAKEHOLDER ENGAGEMENT
Staff from the City Manager’s and City Clerk’s Offices and the City’s legislative advocates collaborated on this item in addition to the feedback from the Policy and Services Committee.

ENVIRONMENTAL REVIEW
The proposed Council action is not a project under the California Environmental Quality Act (CEQA), as it involves organizational and administrative activities. (CEQA Guidelines, Section 15378(b)(2)).

ATTACHMENTS
Attachment A: Advocacy Process Manual - Redline
APPROVED BY:

Mahealani Ah Yun, City Clerk
Ed Shikada, City Manager
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City of Palo Alto Advocacy Process Manual 20205 update

TABLE OF CONTENTS
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PURPOSE

LEGISLATIVE GUIDELINES

COORDINATION OF THE LEGISLATIVE PROGRAM
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THE ROLE OF THE CITY COUNCIL

THE ROLE OF THE CMO
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THE ROLE OF CITY DEPARTMENTS

CITY ADVISORY COMMISSIONS AND COMMITTEES

UTILITIES DEPARTMENT
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LEGISLATIVE ADVOCACY IN SPECIAL CIRCUMSTANCES SIGNATURES ON LEGISLATIVE

COMMUNICATION LOBBYING BY CITY PERSONNEL
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ADVOCACY METHODS

CITY COUNCIL MEETINGS WITH OTHER ELECTED OFFICIALS

STATE LEGISLATIVE TIMELINE

CITY-SPONSORED STATE LEGISLATION
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PURPOSE
The goals of the City of Palo Alto’s Legislative Program (Program) are to:

1. Describe the internal procedures related to state and federal advocacy, and

2. Ensure potentially impactful state and federal legislation is identified, analyzed, tracked, and possibly, the subject of City advocacy. communicated to policymakers

LEGISLATIVE GUIDELINES
Each year1 staff will suggest specific legislative priorities for City Council approval, first at a Policy and Services Committee meeting, and then once approved, before the full City Council.

Ideally, the priorities will be fully approved by City Council in December or January in advance of the upcoming state legislative session. As the priorities will have been discussed and approved by the Policy and Services Committee, they will be placed on the Council’s consent agenda, unless requested otherwise.

The Legislative Guidelines provide direction to the City Council, City staff, and the City’s state and federal legislative advocates. Each update is drafted after discussion with lobbyists and consideration of policy issues that are current and/or will most likely appear the following year.

COORDINATION OF THE LEGISLATIVE PROGRAM
Immediately after a department or the City Manager’s Office (CMO) learns of governmental action potentially affecting the City, internal communication and coordination to analyze the action begins. If warranted, a formal City position and advocacy actions are developed for recommendation to the City Council or City Manager. Departments are urged to proactively identify legislation of importance to the City, and to communicate with the CMO.

At this point, action can proceed in either of two ways:

1. If the City Council has previously adopted a legislative guideline relevant to the legislation, the CMO may act by engaging in the advocacy methods noted on page 6.

2. If there is no relevant legislative guideline or City Council direction related to a potentially impactful bill, if the issue is politically controversial, or if there is significant local 1 1
If staff recommends no guideline changes - after a review of the current year’s approved guidelines, Council’s adopted Citywide priorities, and a discussion with lobbyists - the priorities from one year will carry over to the next year with no need to return to Council for a re-affirmation of previously approved guidelines.

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interest in the issue, the proposed legislation is referred to Council for direction. (See Legislative Advocacy, on page 5)
The City strategically weighs in on issues of interest to the City. The City thoughtfully comments on a handful of bills to ensure that Palo Alto has a presence in Sacramento with meaningful contributions for or against a limited number of bills of interest while simultaneously working on other strategic initiatives outside of legislation that are important to the City. With respect to draft bills, this strategy focuses on bills that directly impact Palo Alto and have a fair or high likelihood of passage.

THE ROLE OF THE CITY COUNCIL
The City Council has ultimate responsibility for determining the City’s position on legislative issues. The Council's specific responsibilities include:
• Through a review process and staff suggestions, establish state and federal legislative priorities
• Meet with the City's State and Federal legislative advocates as needed or desired to best represent the interests of Palo Alto
• Work with external entities on issues of shared regional policy concern • Determine positions on resolutions proposed for adoption by the League of California Cities, the National League of Cities, the Santa Clara County Cities Association, and similar regional entities, as requested
• Assume an active advocacy role with legislators on behalf of the City and coordinate with the City Manager’s Office when advocating on behalf of the City. This may include travel to Washington, DC and/or to Sacramento. Any such travel will be consistent with current City travel policies.

THE ROLE OF THE CMO CITY MANAGER’S AND CITY CLERK’S OFFICES The CMOCity Manager’s and City Clerk’s Offices, through the City’s Intergovernmental Affairs Officerstaff, is are the central coordinators of the City's legislative program. The responsibilities and activities of the office include:
• Ensuring the consistency of legislative action throughout the City • Serving as a clearinghouse and record keeper for all legislation of interest and monitoring bills of interest to the City
• Coordinating contacts and communications with legislators and their staff • With departmental assistance, evaluating proposed legislation that may affect the Item 4
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• Disseminating information on public policy items of interest to City departments • Directing and overseeing the City’s lobbyists, including setting priorities for action that are consistent with Council direction
• Preparing advocacy letters for the Mayor’s signature
• Maintaining the City’s Intergovernmental Affairs web portal • Serving, as needed, as the liaison to stakeholder groups, legislative offices, and local jurisdictions concerning legislative activities
• Coordinating the regular review of Legislative Guidelines and presenting them at the Policy and Services Committee
• Coordinating, briefing, and providing support to Council members for visits with State and/or Federal legislators, as requested

THE ROLE OF CITY DEPARTMENTS
Active departmental participation is essential to the success of the Legislative Program.

Departmental employees are the subject matter experts who can provide technical assistance and unique insight into issues potentially impacting the City. Responsibilities of the departments include, but are not limited to:
• Informing the CMO of policy issues of importance to the City and any specific bills they become aware of that may impact the department
• Designating key contacts within the department or division who are responsible for evaluating legislation and/or assisting the Intergovernmental Affairs Officer with legislative analysis and advocacy letters
• Suggesting organizations, individuals, publications, and/or legislators who may be allies in advocating the City's position on certain legislation

CITY ADVISORY COMMISSIONS AND COMMITTEES
City employees who are staff or liaison to Council appointed advisory commissions and committees should encourage those bodies to bring to the CMO’s attention any proposed legislation for which they recommend a position or wish the CMO to track.

Any advisory commission or committee, or member of any such body, that wishes to represent the City in meetings or communications with a legislator or legislative staff member while under the auspicious of the commission or committee must first coordinate with the CMO. Any engagement while in an official City capacity requires approval from the City Manager, to ensure adherence to the City’s guidelines, process, and current Council priorities. City Manager approval is not necessary for commission or committee members engaging legislators in a personal capacity, provided it is clear that the member is when not Item 4
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representing the City. A notation that the member “is speaking in their personal capacity” may not be sufficient to avoid confusion, depending on the circumstances. Members are encouraged to consult their liaison in advance to ensure clarity.

UTILITIES DEPARTMENT
The Utilities Department maintains its own set of legislative guidelines, due to the heavily and separately regulated nature of the City’s utilities lines. These guidelines are reviewed, discussed, and approved by the Utilities Advisory Commission, then approved by the City Council. The Utilities legislative guidelines shall not conflict with, but will compliment, the City’s guidelines. Advocacy actions that squarely and solely affect the Utilities Department (ie: an increase in utility rates, a change in departmental operations or policies, or additional work for staff of only the Utilities Department) and that conform with approved legislative guidelines, may be approved by the Director of the Utilities Department.

LEGISLATIVE ADVOCACY IN SPECIAL CIRCUMSTANCES
The Council is the official voice of the City of Palo Alto and the final authority for determining legislative positions. The processes outlined below reflect instances when staff has no prior Council authority, or the issue is controversial, or is a current item of significant community interest.

1. Staff will place the item on a City Council agenda, including a specific bill number, if any, an analysis of the item, and a recommendation if warranted, for Council deliberation

2. Staff will follow the direction from Council related to the specific item. If the direction is to oppose or support a bill, the CMO will relay the position to the City’s lobbyist, who will take any of the advocacy methods noted below. If the City Council’s vote on a position is not unanimous, that fact shall be noted in advocacy letters regarding the legislation.

Importantly, due to the ever evolving and often fast pace of legislative amendments, it is rarely possible for staff to first appear before the Policy and Services Committee seeking direction. Timing is also a reason why staff receives Council approval on legislative priorities in advance of the next state legislative session.

SIGNATURES ON LEGISLATIVE COMMUNICATION
Letters and other communications expressing the City's position will customarily bear the signature of the Mayor. However, if the legislation's principal impact is on the City’s operating procedures, the communication may be signed by the City Manager. Draft advocacy letters shall be shared with the Mayor and Chair of the Policy & Services Committee for review and comment. In order to keep the Council and others informed of all City communication on legislation, copies of the letters will either be distributed to the Council, or placed on the City’s Intergovernmental Affairs web portal, or both.

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LOBBYING BY CITY PERSONNEL
Any meetings or communication with State of Federal elected officials must be done in a coordinated way to ensure consistency of messaging, accurate information and record keeping, and sharing of resources. Therefore, any departmental staff, including department heads, or City contractors, wishing to directly engage with a state legislator, member of Congress, legislative staff, or wishing to testify at a committee hearing shall first work with the CMO’s office.

ADVOCACY METHODS
Drafting position letters is one advocacy tool, best used in conjunction with others. The City Council, City Manager, Intergovernmental Affairs Officer, and lobbyists may use any, or a combination of the below additional advocacy methods:
• Calls to policymakers, their staff, or legislative committee staff • Meeting with legislators and their staff, stakeholders, and other groups active on the same issue or bill
• Testifying at a committee hearings regarding the City’s position and/or concerns • Building coalitions with like-minded entities

CITY COUNCIL MEETINGS WITH OTHER ELECTED OFFICIALS
From time to time, Council meets with the City’s County, State, and/or Federal representatives, whether in Palo Alto or in other towns. These meetings are an important component of building legislative relationships and sharing issues of significance to Palo Alto. These meetings should be scheduled at the appropriate times during the respective legislative calendars; City staff will work with the City’s lobbyists, as needed, to facilitate any such meeting.

STATE LEGISLATIVE TIMELINE
Generally, the State legislature is in session from December to August or September; bills must be introduced by February of each year. The Governor has 30 days after the end of session to sign passed bills, depending on when the bill passed. The CMO will convey specific legislative deadlines to the City Council as requested.

CITY-SPONSORED STATE LEGISLATION
If a department or at least two Council members would like the City to sponsor a state bill, meaning the City asks a legislator to introduce a bill making changes to state law at our request, it’s important to note the timing. The general ideal timeline, and the process for such action, is noted below.: If the general ideal timeline is not followed, the reason why will be shared with the City Council.

October: The bill idea is discussed internally, with the CMO, the affected department(s), the City’s lobbyist, and possibly, the City Attorney’s Office. Potential allies are also discussed.

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November: A fully vetted bill idea, including a summary document and amendments to the affected code section(s), is brought to a meeting with the potential author. If needed, more than one meeting with more than one legislator takes place until an author is secured.

December-February: City staff and lobbyist work with the author’s office on the specific language, as needed. The bill is sent to the State’s Legislative Council’s Office for official drafting, and the bill is formally introduced.

February to October: City staff and lobbyist work on advancing the bill, to include testifying at committee hearings, meeting with proponents and opponents, discussing amendments and strategy, meeting with the author’s staff and the Governor’s staff crafting letters and advocacy pieces, and the like.

Due to the potential workload of bill sponsorship and technical specificity required to craft bill language, it is very important that the affected department(s) designate one or two staffers who can actively assist the CMO throughout the life of the bill. For specifics about the timeline and actions required, please contact the Intergovernmental Affairs Officer.

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City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Utilities
Meeting Date: December 1, 2025
Report #:2506-4908
TITLE
PUBLIC HEARING: Finance Committee Recommends City Council Adopt a Resolution Approving the 2026 Natural Gas Cost of Service Analysis Report, Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service) and repealing G-10 (Compressed Natural Gas Service). CEQA Status: Not a Project under Public Resources Code Section 21065.

RECOMMENDATION
The Finance Committee recommends that the City Council adopt a resolution (Attachment A) that:

1. Approves the 2026 Natural Gas Cost of Service Analysis Report (Exhibit 1 to Attachment A); and

2. Amends Rate Schedules (Exhibit 2 to Attachment A) effective for gas usage beginning February 1, 2026 (FY 2026):
a. G-1 (Residential Gas Service)
b. G-2 (Residential Master-Metered and Commercial Gas Service) c. G-3 (Large Commercial Gas Service)

3. Repeals Rate Schedule G-10 (Compressed Natural Gas Service)1

EXECUTIVE SUMMARY
Staff revised the Natural Gas Cost of Service Analysis from the version reviewed in May and June 2025 in collaboration with the Utilities Advisory Commission as directed by the City Council. Council approval of this report and resolution would approve the 2026 Natural Gas Cost of Service Analysis Report (2026 Report) shown in Exhibit 1 to Attachment A and adopt 1 Rate Schedule G-10 (Compressed Natural Gas Service)
https://www.paloalto.gov/files/assets/public/v/10/utilities/rates-schedules-for-utilities/city-facility-utility-rates/g10-effective-2025-07-01.pdf Item 5
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revised gas rate schedules shown in Exhibit 2 to Attachment A, resulting in revised Gas rates for customers effective February 1, 2026.

The 2026 Report does not propose any budget or overall revenue increase; instead, the focus of the 2026 Report is on a proportional rebalancing through rate design changes. Specifically, updates to the allocation of costs among customer classes and a refined G-2 rate schedule better reflect the cost to serve customers with different meter capacities. The proposed rate adjustments are designed to ensure equity among rate classes, maintain compliance with costof-service principles under California law, and align with the City’s financial and policy objectives for affordability, transparency, and long-term sustainability. The proposed rate adjustments are also consistent with the City Council-approved design principles.3 The Gas Utility implemented an across-the-board rate increase on July 1, 2025 to meet the higher costs of providing service to its customers. These rebalanced rates are proposed to be effective on February 1, 2026, and the 2026 Report also provides the analytical basis for allocating costs among classes to meet revenue requirements in future years. In summary, key changes from the last cost of service study adopted by City Council in 2020 include:
1) Updating the weighted meter cost - the 2026 Report refreshes the Gas Utility’s rates with the best possible cost information, which is necessary to achieve fair and costbased rates. 2) Updating the Average & Excess (A&E) Method – the 2026 Report’s cost allocation approach better aligns rates with how the distribution system is designed and built in light of declining average gas use. Infrastructure is sized based on energy usage and peak demand which supports the A&E classification as both “demand” and “energy.” This change is necessary to develop a fair and appropriate allocation of expenses across customer classes.
3) Applying the Base & Excess Method for Residential Tier Rate – the 2026 Report’s calculations present the best method for the G1 tiered rate design because the usage profile supports measuring excess demand using the highest peak month and because system infrastructure is designed to meet a single January peak. 4) Refining the G-2 (Multi-family Master-Metered and Commercial) Rate Schedule – the 2026 Report recommends separating this class into three meter capacity groupings by Standard Cubic Feet per Hour (scfh), because the larger meters require a higher cost to serve. This refinement results in a higher monthly service charge for larger capacity meters to better reflect customer-related fixed costs in the fixed monthly service charge.
3 Staff Report 2507-4958, September 15, 2025 outlines the five design principles:
https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment/?historyId=043ab d5a-f59f-4702-ad04-845541a8133f
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The overall bill impact to the median use residential customer from the recommendations in the 2026 Report is an 8% increase, while the bill impact for commercial customers ranges from a 58% decrease for small commercial customers to a 7% increase for the largest G-2 commercial customers. Table 6 below shows additional bill impact details.

Staff worked closely with guidance from the Utilities Advisory Commission Gas COSA Subcommittee on developing the recommendations in the 2026 Report. Staff appreciates the extensive efforts of the Subcommittee members including meeting four times between August and October 2025. Gas COSA Subcommittee members provided a verbal report to the full UAC at the November 5, 2025 meeting. Ultimately, after much discussion, a majority of the UAC recommended approval of the resolution and corresponding rates (5 approved, 1 dissent, 1 absent). On November 18, 2025 the Finance Committee reviewed the 2026 Report, heard a verbal report from a UAC Gas COSA Subcommittee member, and unanimously recommended that the City Council adopt a resolution approving the 2026 Report and revised rate schedules.

BACKGROUND
In June 2025, the City Council (Council) approved the overall gas utility rate increase for FY 2026 but deferred approval of the Cost of Service Analysis (COSA) pending further UAC review.5 On July 9, 2025, the Utilities Advisory Commission (UAC) considered Design Principles for the Gas and Electric Cost of Service Rates and voted to move forward with Proposition 26 as the Gas COSA design principles and to form a UAC Subcommittee to work with staff and the consultant to develop a new 2026 gas COSA and provide regular report-outs to the full UAC.6 Subsequently, staff worked closely with the UAC Gas COSA Subcommittee to review key study assumptions and recommendations.

On September 15, 2025, the Council directed staff to follow the reasonable-cost analysis required by Proposition 26 and to collaborate with the UAC to develop revised gas rates to be effective in January 2026, based on the following design principles:

1. Rates must be based on the reasonable cost to serve customers. This is the overriding principle for the cost-of-service analysis (COSA); all other rate design considerations are subsidiary to this basic premise.

2. The COSA should involve a review of all existing rate schedules for applicability in the COSA.
5 On June 16, 2025, the City Council voted 5-1-1, (Lythcott-Haims no, Stone absent) to return the updated COSA to the UAC for further review. See June 16, 2025 action minutes for action item 22, Gas Utility item e:
https://cityofpaloalto.primegov.com/Public/CompiledDocument?meetingTemplateId=16148&compileOutputType =1
6 July 9, 2025, UAC voted 6-1 with Gupta voting no; see action minutes https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment/?historyId=40dc6 4ea-7e0c-4dca-9235-61e1a6516b07
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3. The impact of any proposed changes on low-income customers should be evaluated in alignment with state law, including, without limitation, Public Utilities Code sections 890 and 898.

4. Determine the proper allocation of fixed and variable costs and how those can be implemented in various rate designs.

5. Review non-rate revenue sources that may be available for rate discounts or rebates.

These design principles form the basis for the 2026 Gas Cost of Service Analysis Report presented as Exhibit 1 to Attachment A. Each design principle is discussed below in the “Analysis - Gas COSA Design Principles” section.

The Utilities Advisory Commission (UAC) considered this item at its November 5, 2025 meeting, agenda item 49. Ultimately, a 5-1 majority of the UAC recommended Finance Committee and City Council approval. The UAC Subcommittee reported that staff and the cost-of-service consultant had met multiple times over several months, and answered every question the UAC Subcommittee members had, which built confidence in the process and resulted in a clear and transparent staff report and cost-of-service report that achieves a reasonable cost allocation.

Additionally, the UAC Subcommittee members noted that by updating the mechanics of the cost-of-service analysis, the resulting rates are more affordable for residential customers than if the mechanics of the 2020 cost-of-service study were retained. The UAC Subcommittee members also approved of the fact that the use of “green” funds10 are no longer being proposed to subsidize gas service. The UAC Subcommittee members raised a question for discussion in the context of future potential gas decommissioning about what the reductions in the G2 service charges means for the city’s decarbonization and electrification efforts. A minority of commissioners articulated concern with a lack of understanding of reducing the small G2 meter charge by approximately 80% and one commissioner expressed a concern that this disincentivizes electrification measures for small businesses. A representative from the UAC Subcommittee will be available to aid in the Finance Committee discussion as well.

ANALYSIS
This project is a study to update the City’s Natural Gas Cost of Service Analysis (2026 Report), which provides the analytical foundation for and recommends adopting new City gas rates that continue to be fair and legally compliant. The 2026 Report evaluates the gas utility’s revenue requirements, allocates costs among customer classes based on cost-causation principles, and proposes updated rate designs for each class based on the most up-to-date information available to the City.
9 November 5, 2025 UAC meeting item 4,
https://cityofpaloalto.primegov.com/Portal/Meeting?meetingTemplateId=17466 10 By “green” funds the Commissioner was referring to Cap and Trade auction revenue.

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The 2026 COSA includes an updated financial forecast (consistent with the Council-approved FY2026 Gas Utility Financial Forecast),13 refined cost allocation methodologies, and new meter capacity groupings for the G-2 rate schedule. The proposed rate changes ensure rates are aligned with actual service costs.

Natural Gas Cost of Service Analysis
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 2026.14 A copy of the FY 2026 COS study titled “City of Palo Alto 2026 Natural Gas Cost of Service Analysis Report,” (2026 Report), November 2025 is included as Exhibit 1 to Attachment A to this report. The study examines and allocates the Gas Utility’s costs to each rate class to develop proposed FY 2026 distribution rates and includes a recommendation to refine the G-2 rate schedule as explained below.

Distribution Revenue Requirement
The 2026 Report contains gas sales forecasts and estimates for Gas Utility assets and expenses (including estimated contributions to reserves). The 2026 Report allocates these assets and expenses estimates using updated classification and allocation factors to ensure that the Gas Utility’s costs are properly assigned to each rate class. The 2026 Report uses the same estimate of total distribution revenue requirement of $41.3 million for FY 2026 that was approved by Council on June 16, 2026 as part of the FY 2026 Gas Utility Financial Forecast.15 This distribution revenue requirement includes operating expenses, capital costs and reserve contributions. At current rates, projected revenues also equal $41.3 million for FY 2026, so there is no overall rate or revenue increase required as part of the 2026 Report for the Gas Utility as a whole.

However, individual customer class rates will change as a result the realignments as summarized in Table 1.

Table 1 illustrates the projected revenue collected from each customer class using current distribution rates (for the full year of FY 2025-2026 assuming the rates were effective all year) and using the rates resulting from the 2026 Report. The total revenue requirement is the same as that shown in the Council-approved FY 2026 Gas Utility Financial Forecast. This revenue requirement estimate includes distribution costs, certain supply costs (such as administrative charges allocated to gas supply), and additional reserve contributions required to restore the Gas Utility’s operations reserve to within the guideline range in FY 2026. Supply-related costs that are collected via a pass-through charge are not included. 13 Staff Report 2411-3776, June 16, 2025,
https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment/?historyId=35104f 06-6925-4fe3-89c7-b0e53e6eec42;
Resolution 10232 https://portal.laserfiche.com/Portal/DocView.aspx?id=200675&repo=r-704298fc 14 Since FY 2021, the City adjusted its distribution rates annually based on the COS study for FY 2020, which was also conducted by EES.
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The 2026 Report updates and adjusts the cost-of-service classification and allocation factors, which leads to revenue requirements for the rate classes that differ from the projected FY 2026 revenues at current rates. The percentage of revenue increase needed varies by customer class —ranging from -10.6% for G-2 to 8.3% for G-1 and 7.9% for G-3.

Table 1: Projected Revenues, Revenue Requirement and Revenue Changes Needed Key Changes in 2026 Report
During the development of the 2026 Report, staff worked collaboratively with EES to update the Gas Utility’s costs and usage information and refresh the model inputs with current data.

Some of the key changes described in more detail below are:
1) Updates to the customer weighting factors for meter costs; 2) Updates to the Average & Excess classification and allocation factor for G2 and G3 customers, while changing some of the methods used to calculate that factor and changing some of the cost categories it is applied to for improved consistency; 3) The use of the Base & Excess Methodology to develop residential (G1) tiered rates; 4) Refinement of the G2 (Residential Master-Metered and Commercial Gas Service) rate schedule; and
5) Elimination of the supply charge ranges for the Cap-and-Trade Compliance Charge and the Transportation Charge.

During 2025 public meetings on the Gas COSA before the UAC, Finance Committee, and Council, and in letters from the public, the February 2025 draft of the Gas Utility’s cost-ofservice study was critiqued, and stakeholders suggested that the 2026 Report retain prior costof-service calculation methods. The UAC’s Gas COSA Subcommittee guided staff and EES to examine this closely. Under this approach (retaining prior study methods and only updating costs and revenues to current levels) the median residential monthly bill would be approximately $80.88, which is $1.55 (or 2%) higher than the median bill under the 2026 Report method shown in Table 1. Staff and EES do not recommend retaining the existing rate model because it is not updated with relevant cost updates and is not updated with recent load, usage and other relevant information); it would also result in a higher median residential customer bill.

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Customer Weighting Factors for Meter Costs
The 2026 Report ensures that the fixed portion of rates more accurately reflects customer related costs, such as metering, by including the cost of each customer’s meter and accounting for it in a comprehensive calculation of weighted average meter cost. The 2026 Report updates the number of customers weighed by meter costs, which determine how certain costs are assigned among customer classes. The weighting factors are based on current replacement cost of meters, including materials and installation costs. The weighted average meter cost calculation is appropriate because it considers all of the meter types used by customers in each customer class and the total costs for each class.

Table 2 shows the meter costs used in the 2026 Report and in the prior study (May 2019) for comparison.

Table 2: Customer Weighting for Meter Costs: FY 202619
G1 G2 G3
PRIOR VALUES (MAY 2019)
Meter Costs (Materials) $72.84 $888.00 $1,505.00
Weighting $1,549,452 $2,029,080 $52,675
Resulting Allocator 42.7% 55.9% 1.5%
UPDATED VALUES (OCT 2025)
Meter Costs (Materials and Labor) $414 $1,262 $10,473
Weighting $8,761,310 $2,772,869 $308,954
Resulting Allocator 74.0% 23.4% 2.6%
The 2026 Report method is comprehensive and takes into account the current costs of labor and materials for each customer’s meter (compared to material costs only in the prior study).

The changes to the customer weighting for meter costs results in a larger share of meter values being allocated to the residential G1 customer class and a relatively smaller share of meter values allocated to the G2 commercial customer class, compared with the 2020 study. The prior approach relied on representative meter costs that did not reflect the totality of service demands of different meter sizes as fully as the 2026 COSA method.20 This customer weighting for meter costs update is one of the primary drivers for the rate rebalancing recommended in this study. This update is necessary to refresh the Gas Utility’s rates using the best available information and to reflect the latest costs so that rates remain fair and cost-based. 19 This table has been updated here and in the 2026 Report (Exhibit 1 to Attachment A) to correct a typographical error in the resulting allocator. This correction does not impact the cost allocation or rates. 20 The representative meters for the G1, G2, and G3 used in the 2020 COSA study were the CL250 House, 8C/175 Rotary and 5000 Rotary meters, respectively.

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Average & Excess (A&E) Method for G2 and G3 Rates
The 2026 Report refines and improves the A&E cost allocation methodology to better align with how the distribution system is designed and built, in light of declining average gas use. In the 2026 Report, costs assigned to A&E are classified as both energy and demand to accurately reflect how the City’s distribution system is designed and built. The Gas Utility’s capital work focuses on upgrading and maintaining aging infrastructure, rather than on expanding the system for growth. When evaluating the sizing of gas mains, City engineers examine peak demand as well as energy usage. This means that both energy and demand are important factors in considering capacity investments in the system and supports the A&E classification as both demand and energy. In previous studies, costs assigned to the A&E allocation and classification factor were distributed primarily based on demand. This is appropriate for systems experiencing growth. Now that the system is experiencing declining use, and because capacity sizing is determined based on both energy and demand, the 2026 Report A&E method modifications are appropriate and result in a fair allocation of expenses across customer classes.

Base & Excess Methodology for Residential Tiered G1 Rates The 2026 Report uses the Base & Excess methodology to calculate the Tier 1 and Tier 2 rates for Residential (G1) customers. This methodology is slightly different from the method used in the 2020 Study. While both studies use a measurement of baseline (or average) and excess demand to apportion demand costs to the Tier 2 rate, the studies differ in the calculation of the demand/excess portion.

The 2020 study allocated a share of distribution demand costs to Tier 2 based on the Average & Excess calculation. The A&E excess portion was based on a measurement of average and excess (peak) use in all 12 months. Alternatively, this study uses the Base & Excess method to assign 79% of the demand costs to the Tier 2 rate based on a single annual peak. The details of how this calculation is computed is in the 2026 Report (Exhibit 1 to Attachment A) described in Section

4.1.1 and illustrated in Tables 4-3 and 4-4.

The shift to the Base & Excess method is appropriate for two reasons. The first is that the usage profile for G1 supports an apportionment based on a single annual peak rather than all 12 months. Because the usage profile shows that there is significant difference in seasonal use, this supports measuring excess demand using the highest single peak rather than summing 12 monthly peaks, as was done with A&E. Second, the Base & Excess method is supported by how City engineers design the system. The engineers design the system capacity to meet annual customer demands during a single January peak. Therefore, using Base & Excess is the best method for the G1 tiered rate design as reflected in the high-demand winter month and in how the system capacity is determined.

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Refinement of G-2 (Residential Master-Metered and Commercial Gas Service) Rate Schedule The G2 customer class includes a wide range of customer types including restaurants, other types of small business, office space and master-metered multi-family properties. This class includes a wide range of meter types and capacities. Based on a review of existing G-2 services’ meter capacities, associated costs and recorded sales, the Study recommends refining the rate schedule into three meter capacity groupings using Standard Cubic Feet per Hour (scfh), with a higher monthly service charge for larger meter capacity. The larger meters require a higher cost to serve because generally they have higher average use, require larger service lines to connect the meter to the distribution system, and impose greater demand on the system. This meter capacity grouping refinement will better reflect customer-related fixed costs in the fixed monthly service charge. The volumetric distribution charge is the same for all G-2 customers.

Table 3 presents the meter capacity groupings recommended for G-2 monthly service charge application. EES analyzed average consumption for various meter capacities in the G-2 rate class and developed three meter capacity ranges and customer-related costs for each range.

Table 3: G-2 Service by Maximum Meter Capacity23
G-2 Service by Maximum
Meter Capacity Range
# of
Services
G-2: ≤ 220 scfh Less than 220 standard cubic feet per hour (scfh) 1,134 G-2: > 220 and < 4,000 scfh More than 220 scfh and less than 4,000 scfh 942 G-2: ≥ 4,000 scfh 4,000 scfh and above 116
Review of Multi-Family Analysis
Staff and EES analyzed whether separating multifamily customers from existing G-1 and G-2 rate classes would improve cost alignment. The analysis found limited justification for creating a new class at this time. Usage patterns, load factors, and service characteristics among multifamily customers were not sufficiently distinct to warrant separate treatment. Therefore, no additional subclassification is recommended.

Supply Charge Ranges
There are four pass-through supply charges: 1) Commodity Charge (monthly market based), 2) Cap-and-Trade Compliance Charge, 3) Transportation Charge and 4) Carbon Offset Charge.

While the focus of the 2026 Report is the gas distribution charges, staff is proposing some administrative modifications to the two of the gas supply pass-through costs that vary based on external factors and market conditions. The 2026 Report recommends continuing to pass through the Cap-and-Trade Compliance Charge and the Transportation Charge but eliminating the range mechanism for each. There are no rate impacts of this change. 23 Meter capacities in this staff report are all at an assumed pressure of 7 inches of water column (equivalent to

0.25 pounds per square inch).

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The Cap-and-Trade Compliance Charge recover the costs of the City’s obligation under the California Air Resources Board’s Cap-and-Trade Program to purchase allowances for all greenhouse gas emissions associated with natural gas use within the City’s service territory.

Because these costs are regulatory, nondiscretionary, and beyond the City’s control, maintaining a range is unnecessary.

Similarly, the Transportation Charge represents the amount the City pays Pacific Gas and Electric Company (PG&E) to transport gas from the PG&E Citygate to the City’s distribution system. These charges are entirely outside the City’s control and lack alternative suppliers.

Removing the ranges simplifies billing and aligns with cost transparency goals.

Proposed Rates
Table 4 shows the current and proposed monthly service charges, while Table 5 shows the volumetric charges related to distribution for all rate schedules. As previously noted, supplyrelated charges are pass-through charges that update periodically. The latest charges are shown in the City’s Rates website25. The proposed rates reflect the 2026 Report adjustments. 25 City’s Rates Website https://www.cityofpaloalto.org/files/assets/public/v/25/utilities/rates-schedules-forutilities/residential-utility-rates/monthly-gas-volumetric-and-service-charges-residential-3.pdf Item 5
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Table 4: Current and Proposed Monthly Service Charges
Rate Schedule Current Rates
(as of 7/1/25)
Proposed Rates
(effective
2/1/26)
Change
($)
Change
(%)
G-1 (Residential) $18.40 $19.58 $1.18 6%
G-2 (Residential Master-Metered and Commercial)
G-2 (≤ 220 scfh) $170.55 $29.24 $(141.31) (83%)
G-2 (> 220 and < 4,000 scfh) $170.55 $94.56 $(75.99) (45%) G-2 (≥ 4,000 scfh) $170.55 $419.08 $248.53 146%
G-3 (Large Commercial) $780.34 $1,712.36 $932.02 119%
Table 5: Current and Proposed Gas Distribution Charges
Rate Schedule Current Rates
(as of 7/1/25)
Proposed Rates
(effective 2/1/26)
Change
($)
Change
(%)
G-1 (Residential)
Tier 1 Rates ($/therm) $0.8944 $1.0456 $0.15 17%
Tier 2 Rates ($/therm) $2.2873 $2.5203 $0.23 10%
G-2 (Residential Master-Metered and Commercial)
Uniform Rate $1.1749 $1.2204 $0.05 4%
G-3 (Large Commercial)
Uniform Rate $1.1633 $1.1874 $0.02 2%
Bill Impacts
Table 6 shows the impact of the proposed February 1, 2026 rate changes on the median monthly residential bill for representative average winter and summer bills, excluding supplyrelated cost changes.

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Table 6: Bill Impacts of Proposed Rebalancing and Rate Design in 2026 Report Monthly Bill1
Rate Schedule Monthly Usage (Therms) Current
Rates
Recommended
FY2026 Rate
Bill
Impact

RESIDENTIAL
Summer: 10; Winter: 30 $50.78 $54.73 8%
Summer: 17; Winter: 51
(median)
$73.44 $79.33 8%
Summer: 30; Winter: 80 $127.24 $134.60 6%
G-1
Summer: 45; Winter: 150 $247.31 $263.50 7%

COMMERCIAL AND RESIDENTIAL MASTER METER
Small: 35 $242.74 $103.05 (58%)
Medium: 280 $739.59 $676.33 (9%)
G-2
Large: 2,648 $5,558.74 $5,927.83 7%
G-3 20,834 $42,696.69 $44,131.74 3%
The annual gas bill for the median residential customer is projected to be 8% higher due to the cost-of-service adjustments. The actual impact may be different because customer gas usage varies and commodity price changes monthly.

Bill Comparisons/Competitiveness
Table 7 presents the median residential bills for Palo Alto and PG&E customers from FY 2022 to FY 2026. The bill calculations for PG&E customers are based on PG&E Climate Zone X, an area which includes Palo Alto’s surrounding communities.

In FY 2025, the estimated annual gas bill for the median Palo Alto residential customer was about 16% lower than that of a PG&E customer with equivalent consumption. With the implementation of the 2026 Report, Palo Alto median residential bills are expected to be about 8% lower than PG&E bills in FY 2026. This projection assumes PG&E does not implement additional rate increases between now and July 2026.

Table 7: Residential Annual Natural Gas Bill Comparison ($/year) Time Period Median Usage Palo Alto PG&E Zone X % Difference FY 2022 $657.83 $724.24 (9%)
FY 2023 $891.89 $845.03 6%
FY 2024 $753.28 $764.70 (1%)
FY 2025 $836.93 $991.24 (16%)
FY 2026 Current $881.31 $1,040.18 (15%)
FY 2026 Recommended
Annual
(374 Therms)
$952.02 $1,040.18 (8%)
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Table 8 presents the median commercial bills for Palo Alto and PG&E customers from FY 2022 to FY 2026. Palo Alto bills have been higher than PG&E’s bills over the years, mainly due to higher customer charges. With the recommendations from the 2026 Report, commercial customer charges have been adjusted downward for the majority of commercial customers, making bills more competitive with PG&E. With the implementation of the 2026 Report and the proposed rate increases, Palo Alto median commercial bills are expected to be about 16% higher than PG&E bills in FY 2026, assuming PG&E does not implement additional rate increases.

Table 8: Commercial Annual Natural Gas Bill Comparison ($/year) Time Period Median Usage* Palo Alto PG&E Zone X % Difference FY 2022 $6,507.57 $5,602.19 16%
FY 2023 $ 8,844.11 $6,506.91 36%
FY 2024 $ 7,426.78 $6,022.59 23%
FY 2025 $ 8,395.81 $6,734.69 25%
FY 2026 Current $8,875.07 $6,989.03 27%
FY 2026 Recommended
Annual G-2
(3,356
Therms)
$ 8,115.89 $6,989.03 16%
*Calculated based on G-2 with meter capacity of >220 and <4,000 scfh Gas COSA Design Principles
The following discussion outlines each of the Council’s adopted Gas COSA Design Principles and addresses how the 2026 Report addresses the Design Principles.

Design Principle 1: Rates must be based on the reasonable cost to serve customers. This is the overriding principle for the cost-of-service analysis (COSA); all other rate design considerations are subsidiary to this basic premise.

The 2026 Report uses actual costs and adopted budgets, applying industry-accepted allocation methods to assign fixed and variable costs based on each class’s use of the system.

Design Principle 2: The COSA should involve a review of all existing rate schedules for applicability in the COSA.

All existing rate schedules were reviewed for relevance and cost alignment. Customers with similar usage characteristics remain grouped together, and the study recommends refining the G2 class as described earlier. The study reviewed the separation of multifamily from G1 and the separation of master-metered multifamily from G2 and did not find a strong basis for splitting these groups further.

Staff also reviewed the G10 rate schedule, which applies to gas sold at the City’s Compressed Natural Gas refueling station at the Municipal Services Center. This facility does not utilize the Item 5
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distribution system, rather it is directly connected to the City’s intertie with PG&E. Since the sole customer is the Public Works department, it is more efficient to recover fueling costs via an interdepartmental cost recovery transfer than a separate rate schedule, and the City is separately developing a cost-based fee for service administration.27 Changes in this fee do not materially impact the COSA results.

Design Principle 3: The impact of any proposed changes on low-income customers should be evaluated in alignment with state law, including, without limitation, Public Utilities Code sections 890 and 898.

The study evaluated rate impacts on low-income residential customers. Approximately 400 customers participate in the City’s low-income program which is ratepayer funded, consistent with Public Utilities Code Sections 890 and 898, with average monthly usage of 30 therms. Most customers would see bill impacts under $5 per month, and the total cost to mitigate all bill impacts of the 2026 Report on low-income customers who are enrolled in the Low-Income Rate Assistance program or the Low Income Home Energy Assistance Program would be approximately $30,000 per year.

Design Principle 4: Determine the proper allocation of fixed and variable costs and how those can be implemented in various rate designs.

All rate classes include a fixed monthly charge to recover customer-related costs such as metering, billing, and service connections. The 2026 Report recommends a scaled fixed charge in the G-2 customer class to reflect the diversity within that class. The G-1 class includes a tiered variable rate structure that distributes capacity costs between Tier 1 and Tier 2 using the base and excess method to appropriately collect demand costs from customers impacting system capacity costs. The G-2 and G-3 classes recover capacity costs through uniform volumetric charges, maintaining simplicity while reflecting consistent cost drivers.

Design Principle 5: Review non-rate revenue sources that may be available for rate discounts or rebates
The 2026 Report also reviewed non-rate revenue sources that could potentially fund rate discounts or rebates. In FY 2025, an estimated $0.399 million in interest income was available for this purpose. At the end of FY 2025 there was $15.046 million available in the gas utility’s Cap & Trade Reserve. The Cap & Trade Reserve holds revenues from the auction of freely allocated Gas Utility greenhouse gas emission allowances. Cap & Trade reserve funds must be spent in accordance with California Air Resources Board regulations as well as with the City Council’s policies in Resolution 9487 and 10077.28 CARB’s regulations require that the City utilize the auction sale proceeds exclusively for the benefit of the City’s natural gas retail ratepayers and consistent with the goals of AB 32.29 The City Council’s policy allows for the use 27 The CNG station has a public station that is currently non-operational and a CNG station for refueling City vehicles. Both portions of the station are operated by the Public Works department. 28 Resolution 9487 https://portal.laserfiche.com/Portal/DocView.aspx?id=10165&repo=r-704298fc; Resolution 10077 https://portal.laserfiche.com/Portal/DocView.aspx?id=38224&repo=r-704298fc 29 Title 17 California Code of Regulations Sections 95892 (d)(2) and 95893 (d)(3).

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of Gas Cap and Trade revenue for investment in energy efficiency programs for the natural gas portfolio and retail customers, purchases or investment in cost-effective renewable biogas resources for the gas portfolio, fuel switching from natural gas to electricity that reduces greenhouse gas emissions, investment in other carbon reduction activities for the natural gas utility, including system maintenance or replacement to reduce fugitive gas emissions; and rebates to natural gas retail ratepayers. The policy expresses a preference for greenhouse gas reduction activities over rebates.

FISCAL/RESOURCE IMPACT
There is no increase to the City’s revenues as a result of the implementation of the 2026 Report.

STAKEHOLDER ENGAGEMENT
The UAC reviewed staff’s proposals for the Electric and Gas utilities at its April 2, 2025 meeting.

Regarding staff’s 2025 COSA and Gas Utility proposal, the UAC recommended approval of staff’s 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 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 2026.33 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 Electric and Gas Utilities at its April 15, 2025 meeting. The Finance Committee 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.34
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 33 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)). 34 Staff presented the 2025 City of Palo Alto Natural Gas Cost of Service and Rate Study to the UAC and Finance Committee.

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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 revenue37 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 was calculated to make the G-2 small and medium customer groups pay the same net amount as a result of retaining the current FY 2025 rate structure from July through December 2025, 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 City Council on this topic and Council members asked questions and discussed the item but did not take any action.

On June 16, 2025 the City Council returned the issue of a one-time credit to the UAC to be considered at the time they review the updated COSA.

On September 2, 2025, the Finance Committee considered the UAC’s recommendation to direct staff to use Proposition 26 as the Design Principle for the Gas Cost of Service Analysis and work with the UAC on review of a recommended gas rate schedule effective by January 2026. The Finance Committee voted unanimously to recommend the City Council direct staff to follow the reasonable-cost analysis required by Proposition 26, and that staff work with the UAC on a recommendation to the Council on revised gas rates effective January 2026.

On September 15, 2025, (Staff Report 2507-4958) the City Council directed staff to follow the reasonable-cost analysis required by Proposition 26, and that staff collaborate with the UAC to develop revised gas rates effective January 2026, based on the following design principles: (1) Rates must be based on the reasonable cost to serve customers. This is the overriding principle for the cost of service analysis (COSA); all other rate design considerations are subsidiary to this basic premise; (2) The COSA should involve a review of all existing rate schedules for 37 May 7, 2025 Finance Committee Meeting
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applicability in the COSA; (3) The impact of any proposed changes on low-income customers should be evaluated in alignment with state law, including, without limitation, Public Utilities Code sections 890 and 898; (4) Determine the proper allocation of fixed and variable costs and how those can be implemented in various rate designs; (5) Review non-rate revenue sources that may be available for rate discounts or rebates.

Upon Council approval of the Gas rates from the 2026 Report, staff plans to conduct outreach and communication to customers about the rate increases through 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.

The Utilities Advisory Commission (UAC) considered this item at its November 5, 2025 meeting, agenda item 439. Ultimately, a majority of the UAC recommend Finance Committee and City Council approval. More details are described above in the “Background” section and a video recording of the meeting is available here: https://www.youtube.com/watch?v=1e6NrB2KDCw.

The Finance Committee considered this item during its November 18, 2025 meeting, agenda item 1. A representative from the UAC Gas COSA Subcommittee provided comments to the Finance Committee on the 2026 Report. The Commissioner reported that every question the UAC Gas COSA Subcommittee had was answered by staff and the cost-of-service consultants, that the 2026 Report is more transparent and clear and results in a reasonable cost allocation, and that controlling for underlying data, the updated mechanics of the 2026 Report leads to a more affordable result for Palo Alto residents than retaining the mechanics of the cost-ofservice study used to develop the rates currently in effect. The Finance Committee members expressed appreciation for the UAC Commissioner attending the meeting and stated that staff’s work with the UAC Gas COSA Subcommittee was time well spent. The Finance Committee unanimously voted to approve the staff recommendation that the City Council adopt a resolution that approves the 2026 Report, amends rate schedules G-1, (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), and G-3 (Large Commercial Gas Service) shown in Exhibit 2 to Attachment A, effective February 1, 2026, and repeals Rate Schedule G-10.

ENVIRONMENTAL REVIEW
The Finance Committee’s review and recommendation to the Council on the 2026 Natural Gas Cost of Service Analysis Report and revised gas rate schedules does not meet the California 39 November 5, 2025 UAC meeting item 4,
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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
APPROVED BY:

Alan Kurotori, Director Utilities
Staff: Karla Dailey, Assistant Director of Utilities, Resource Management Staff: Lisa Bilir, Senior Resources Planner
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Attachment A
* NOT YET APPROVED *
1 6059692
Resolution No.

Resolution of the Council of the City of Palo Alto Approving the 2026 Natural Gas Cost of Service Analysis Report, Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), and G-3 (Large Commercial Gas Service), and repealing G-10 (Compressed Natural Gas Service).

R E C I T A L S
A. The City of Palo Alto (“City”) periodically conducts a Natural Gas Cost of Service Analysis to follow the reasonable-cost analysis required by Proposition 26.

B. Pursuant to Chapter 12.20.010 of the Palo Alto Municipal Code, the Council of the City of Palo Alto may by resolution adopt rules and regulations governing utility services, fees and charges.

C. On December 1, 2025, the City Council heard and approved the proposed rate increase at a noticed public hearing.

The Council of the City of Palo Alto does hereby RESOLVE as follows:

SECTION 1. The Council hereby approves the 2026 Natural Gas Cost of Service Analysis Report (Exhibit 1);
SECTION 2. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-1 (Residential Gas Service) is hereby amended to read as attached and incorporated.

Utility Rate Schedule G-1, as amended, shall become effective February 1,2026 (Exhibit 2); SECTION 3. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-2 (Residential Master-Metered and Commercial Gas Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule G-2, as amended, shall become effective February 1, 2026 (Exhibit 2);
SECTION 4. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule G-3 (Large Commercial Gas Service) is hereby amended to read as attached and incorporated. Utility Rate Schedule G-3, as amended, shall become effective February 1, 2026 (Exhibit 2);
SECTION 5. Pursuant to Section 12.20.010 of the Palo Alto Municipal Code, Utility Rate Schedule Rate Schedule G-10 (Compressed Natural Gas Service) is hereby repealed, effective February 1, 2026.

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SECTION 6. The City Council finds as follows:
a. Revenues derived from the gas rates approved by this resolution do not exceed the funds required to provide gas service.
b. Revenues derived from the gas rates approved by this resolution shall not be used for any purpose other than providing gas service, and the purposes set forth in Article VII, Section 2, of the Charter of the City of Palo Alto.

SECTION 7. The Council finds that the fees and charges adopted by this resolution are charges imposed for a specific government service or product provided directly to the payor that are not provided to those not charged, and do not exceed the reasonable costs to the City of providing the service or product.
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SECTION 8. The Council finds that approving the FY 2026 Natural Gas Cost of Service Analysis Report does not meet the California Environmental Quality Act’s (CEQA) definition of a project under Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(5), because it is an administrative governmental activity which will not cause a direct or indirect physical change in the environment, and therefore, no environmental assessment is required.

The Council finds that changing gas 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.

INTRODUCED AND PASSED:

AYES:

NOES:

ABSENT:

ABSTENTIONS:

ATTEST:

City Clerk Mayor
APPROVED AS TO FORM: APPROVED:

Assistant City Attorney City Manager
Director of Utilities
Director of Administrative Services
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22213852.2
Natural Gas Cost of Service
Analysis Report
City of Palo Alto

PREPARED BY EES CONSULTING
November 6, 2025
Exhibit 1
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16701 NE 80th Street  Suite 102  Redmond, WA 98052  425-889-2700  Fax 866-611-3791  www.eesconsulting.com Georgia  Texas  Alabama  New Hampshire  Wisconsin  Mai ne  Washington  California Amber Gschwend, Director
[email protected]
direct 425-655-1042
November 6, 2025
Lisa Bilir, Senior Resource Planner
City of Palo Alto
250 Hamilton Avenue
Palo Alto, CA 94301
SUBJECT: Draft 2026 Natural Gas Cost of Service Analysis Report Dear Ms. Bilir:

Attached please find the draft 2026 Natural Gas Cost of Service Analysis (2026 Report) for the City of Palo Alto (City) prepared by EES Consulting (EES), a GDS Associates company.

We based the conclusions and recommendations contained within this report on industry practice and accepted rate setting principles consistent with California law. The assumptions are based upon the financial and metering data provided by the City. The results are consistent with the cost of service and rate making principles considered by the City.

EES developed this study in consultation with the City’s staff and legal counsel, and we appreciate the internal efforts that have helped to refine the study. We also would like to thank the Utility Advisory Commission subcommittee members for their input and feedback. Collaboration among all these stakeholders hasimproved the recommendations and strengthened the foundation in this utility planning effort. The findings, conclusions, and recommendations of this report supply the basis for the recommended, fair and equitable rates.

Very truly yours,
Amber Gschwend
Director, EES Consulting Director, EES Consulting
[email protected] [email protected] Exhibit 1
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CITY OF PALO ALTO Natural Gas Cost of Service Analysis
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TABLE OF CONTENTS
1 EXECUTIVE SUMMARY................................................................................................... 1

1.1 System Description............................................................................................................................................. 2

1.2 Rate Study Overview.......................................................................................................................................... 3

1.2.1 Revenue Requirement .................................................................................................................. 3

1.2.2 Cost of Service Analysis ............................................................................................................... 5

1.2.3 Rate Design Recommendations .................................................................................................. 5

1.2.4 Rate Change Recommendations ............................................................................................... 10 2 REVENUE REQUIREMENT DEVELOPMENT................................................................. 12

2.1 Overview of the City’s Revenue Requirement Methodology........................................................... 12

2.2 Supply Costs....................................................................................................................................................... 12

2.3 Distribution Costs............................................................................................................................................. 13

2.4 Debt Service and Rate-Funded Capital Improvement Program (CIP) .......................................... 13

2.5 General Fund Transfer .................................................................................................................................... 14

2.6 Miscellaneous/Other Revenues .................................................................................................................. 14

2.7 Transfers to/from Reserves........................................................................................................................... 14

2.8 Summary of Revenue Requirement........................................................................................................... 14 3 COST OF SERVICE ANALYSIS....................................................................................... 16

3.1 COSA Definition and General Principles.................................................................................................. 16

3.2 City Natural GAs Distribution COSA Methodology............................................................................. 17

3.2.1 Functionalization........................................................................................................................ 17

3.2.2 Classification and Allocation of Costs ..................................................................................... 17

3.3 Average & Excess (A&E) ................................................................................................................................ 22

3.3.1 Average & Excess Calculation................................................................................................... 23

3.4 Customer Weighting for Meter Costs ...................................................................................................... 26

3.5 Customer Classes of Service......................................................................................................................... 27

3.6 Cost of Service Results ................................................................................................................................... 27 4 RATE DESIGN ................................................................................................................ 32

4.1 Recommended Rate Design: Distribution............................................................................................... 32

4.1.1 Residential (G1) .......................................................................................................................... 32

4.1.2 Small Commercial and Residential Master-Metered (G2) ..................................................... 35

4.1.3 Large Commercial (G3).............................................................................................................. 37 Exhibit 1
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4.2 Supply Charges ................................................................................................................................................. 38 Exhibit 1
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CITY OF PALO ALTO Natural Gas Cost of Service Analysis
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1 Executive Summary
The City of Palo Alto (City) retained EES Consulting (EES), a GDS Associates company, to perform a natural gas cost of service analysis (COSA) and rate study for Fiscal Year 2025-2026 (FY 2025-2026) 1 (2026 Report)
as part of its ongoing efforts to maintain fiscally prudent, fair, cost-based rates for its natural gas customers. This 2026 Report is primarily concerned with the development of natural gas distribution rates.

While distribution rates are the primary focus of this study, the City also charges four supply-related rates.

These supply-related rates recover the costs that are outside of the immediate control of the City, such as the cost of purchasing gas and transporting it to the City’s distribution system. These four rates are: 1) the gas commodity rate, which represents the cost of buying gas in the markets, 2) the gas transportation rate, which represents the cost of transporting purchased gas to Palo Alto, 3) the Cap and Trade compliance rate, which represents the cost of mandated participation in the State’s cap and trade program, and 4) the carbon offset rate, which represents the cost of buying offsets for the City’s Carbon Neutral Gas Portfolio. These four charges are discussed at the end of this report.

The recommendations from this report are the second step in a 2-step rate adjustment process. The City adopted this 2-step approach as a phase-in of rate changes. The first adjustment was an 8.7% across the board rate increase effective July 1, 2025. This second adjustment is a rebalancing adjustment across rate classes based on the results of this study.

The starting point for this analysis was the study completed for FY 2019-2020 (2020 Study). The City updated the 2020 COSA model for FY 2020-2021 period (2021 Study), with some assistance by EES. Since then, the City has implemented distribution system rate adjustments by uniformly adjusting distribution rates using the percent change in the distribution revenue requirement; thus, distribution ratessince 2021 have reflected the 2020 Study framework with an 8.7% increase to all rate schedules in July of 2025 based on the City’s budget increase.

This 2026 Report is a comprehensive update to the 2020 Study. All assumptions and inputs have been updated and new rate designs incorporated into the recommendations. This 2026 Report also incorporates the City’s design principles in its recommendations. 2 EES worked closely with the City’s technical staff, management, and Utility Advisory subcommittee membersto refine data inputs for gas sales, expenses, and assets. EES had no issues obtaining appropriate 1 July 2025 through June 2026.
2 On September 15, 2025, (Staff Report 2507-4958) the City Council directed staff to follow the reasonable-cost analysis required by Proposition 26, and that staff collaborate with the UAC to develop revised gas rates effective January 2026, based on the following design principles: (1) Rates must be based on the reasonable cost to serve customers. This is the overriding principle for the cost of service analysis (COSA); all other rate design considerations are subsidiary to this basic premise.; (2) The COSA should involve a review of all existing rate schedules for applicability in the COSA; (3) The impact of any proposed changes on low-income customers should be evaluated in alignment with state law, including, without limitation, Public Utilities Code sections 890 and 898; (4) Determine the proper allocation of fixed and variable costs and how those can be implemented in various rate designs; (5) Review non-rate revenue sources that may be available for rate discounts or rebates.

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data responses or clarification when necessary and commends the transparency of the process and the capability of internal resources.

1.1 SYSTEM DESCRIPTION
The City’s gas utility serves approximately 23,386 customer accounts over an area of approximately 26 square miles. The gas utility is responsible for the operations and maintenance of the distribution system, and it purchases all gas from outside suppliers. Total gas consumption in the City forecasted for FY 2025- 2026 is 25.8 million therms. It is expected for sales to continue near their current weather-adjusted level of 25 to 26 million therms per year and near the current volume of services. Table 1-1 shows the number of services and annual gas use for each rate class.

TABLE 1-1: NUMBER OF SERVICES UNDER CURRENT RATE SCHEDULES AND FORECASTED ANNUAL USE IN FY 2025-2026
Rate Schedule Services Annual Use, therms
G1 Residential 21,163 9,762,524
G2 Residential Master Metered and Commercial 2,193 11,506,051 G3 Large Commercial 30 4,510,914
Total 23,386 25,779,489
Gas utility rate schedules consist of a fixed Monthly Service Charge ($/meter/month) and a volumetric Distribution Charge ($/therm), which vary by rate class. Volumetric charges recover the proportional costs of both commodity purchases and variable distribution (infrastructure) costs.

Table 1-2 summarizes the rate classes and current rate design for the distribution portion of the rate schedule. It does not include these volumetric supply charges: Commodity Charge (Monthly Market Based), Cap and Trade Compliance Charge, Transportation Charge, and Carbon Offset Charge.

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TABLE 1-2: CURRENT DISTRIBUTION RATE DESIGN
Utility Rate Schedule Description Current Rate Design
G1: Residential Separately metered:

Single-family residential customers
Multi-family residential customers
Service Charge, $/meter/month
2-Tier Volumetric Charge with seasonal
lower-cost tier 1 quantities
Tier 1 Summer:1 20 therms/30-day-billing
Tier 1 Winter: 60 therms/30-day-billing
Tier 2: All other therms
G2: Residential Master-
Metered and
Commercial (“Small
Commercial”)
Commercial customers who use less
than 250,000 therms per year at one
site, and master-metered residential
customers in multifamily residential
facilities
Service Charge, $/meter/month
Volumetric Charge, $/therm
G3: Large Commercial Commercial customers who use at
least 250,000 therms per year at one
site.
3 Service Charge, $/meter/month
Volumetric Charge, $/therm

1. Summer rates are effective April 1 through October 31. Winter rates are effective November 1 through March

31. 1.2 RATE STUDY OVERVIEW
The purpose of this report is to discuss the data inputs, assumptions, and results that were part of developing the rate study. A comprehensive rate study generally consists of three separate, yet interrelated analyses. These three analyses include a revenue requirement, COSA, and rate design.

1. Revenue Requirement Analysis: This analysis examines the various sources and uses of funds for the utility, and it determines the overall revenue required to operate the utility.

2. Cost-of-Service Analysis (COSA): COSA is used to determine the fair allocation of the total revenue requirement to the various customer classes of service (e.g., residential, small commercial, large commercial). This analysis provides a determination of the level of revenue responsibility of each class of service and the adjustments from current revenues required to meet the cost of service.

3. Rate Design Analysis: The third analysis involves evaluating the rate design options available and designing rate schedules that can be applied to each rate class to collect revenues to cover the cost to serve customers in that class.

1.2.1 Revenue Requirement
The first step in completing a rate study is to develop the revenue required from rates. A revenue requirement analysis compares the overall rate revenue demands of the utility based on its forecasted or budgeted expenses less any sources of non-rate revenue. Over the course of the study period, the City prepared several financial analyses that included a forecast of FY 2025-2026 sales, revenues, and expenses. The City has an in-depth accounting and data system that keeps track of ongoing and budgeted or approved expenditures. EES based the forecasts on projected FY 2026 expenses and sales estimates for the natural gas utility. The 2026 Report uses a cash-basis method for determining the City’s revenue 3 In addition to these standard rate classes, City of Palo Alto Utilities (CPAU) provides service to its CNG facility. This facility does not utilize the distribution system, rather it is directly connected to the intertie with PG&E. As such, the City is separately developing a cost-based fee for service administration. Changes in this fee do not materially impact the COSA results.

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requirement based on the City’s financial forecast. The cash-basis revenue requirement is appropriate because it is consistent with how the City forecasts expenses for the natural gas utility.

FY 2025-2026 natural gas commodity costs are included in City’s financial plan. However, these costs are adjusted monthly to passthrough actual commodity rates charged to the City by its wholesaler. Therefore, commodity charges are not set based on the 2026 Report; the 2026 Report only evaluates appropriate distribution charges for the year.

Table 1-3 summarizes the FY 2025-2026 distribution revenue requirement totaling $41.3 million. Rates were adjusted on July 1, 2025 to meet this requirement using the straight-line inflator approach. Because the rate levels have been adjusted to collect the FY2026 revenue required from rates, the proposed rebalancing and rate design changes recommended in the 2026 Report do not require an overall increase in rate revenue. The 2026 Report recommends rebalancing between rate classes based on the COSA results, and this rebalancing has rate and bill impacts to individual customers and across rate classes, as summarized in Table 1-4.

TABLE 1-3: GAS DISTRIBUTION SYSTEM REVENUE REQUIREMENT: FY 2025-2026 Revenue Requirement
Distribution O&M $9,797,408
Customer Accounts and Services $3,208,008
Administration and General $5,002,927
Debt Service & CIP from Rates $8,339,643
General Fund Transfer $9,734,580
Total Expenses $36,082,566
Transfers to Reserves $5,874,887
Other Revenues ($689,111)
Total Revenue Required from Rates (Revenue Requirement) $41,268,342 Revenues Based on Rates Currently in Effect $41,268,342 Additional Rate Revenue Needed $0
Total Required Rate Revenue Increase (Decrease) 0%
TABLE 1-4 BILL IMPACTS OF PROPOSED REBALANCING AND RATE DESIGN Rate Schedule Monthly Usage (Therms)
Current
Rates
Recommended
FY2025-2026 Rate
Bill
Impact
Residential
G-1 Summer: 10; Winter: 30 $50.78 $54.73 8%
Summer: 17; Winter: 51 $73.44 $79.33 8%
Summer: 30; Winter: 80 $127.24 $134.60 6%
Summer: 45; Winter: 150 $247.31 $263.50 7%
Commercial
G-2 Small: 35 $242.74 $103.05 (58%)
Medium: 280 $739.59 $676.33 (9%)
Large: 2,648 $5,558.74 $5,927.83 7%
G-3 20,834 $42,696.69 $44,131.74 3%

1. Includes supply-related costs; assumes 12-month impact.

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1.2.2 Cost of Service Analysis
Cost-of-service is important for the fair allocation of the revenue requirement to the various customer classes of service. The revenue requirement shown in Table 1-3 for the City was functionalized, classified and allocated.
 Functionalization is the attribution of each cost line-item to one of four different functional parts of gas service: (1) production (commodity), (2) transportation, (3) distribution, or (4) shared services.

This 2026 Report evaluates only distribution costs and distribution-related overhead (shared services).  Classification is the determination of whether the costs associated with a functionalized line item are most appropriately allocated based on energy use (therms), demand (maximum system capacity), or customer (simply having a service).
 Allocation is the process of using the classification for each functionalized line item to assign costs to each customer class. For example, a cost item classified as “energy use” might be allocated based on annual therm use. This means that the line-item cost is directly correlated to the quantity of energy used by each customer class annually. This process is described in more detail in the section titled “Cost of Service Analysis.”
Ultimately, the COSA process requires analysis of how each customer class contributes to the expenses incurred by the utility to provide service. Table 1-5 shows, by customer class, the revenue requirement and revenue change needed for FY 2025-2026.

TABLE 1-5: DISTRIBUTION COSA RESULTS: FY 2025-2026
Projected FY 2025-
2026 Revenues
Revenue
Requirement
Projected
FY 2025-2026
Deficiency/
(Surplus)
Revenue
Change Needed
G1 – Residential $17,738,316 $19,210,223 ($1,471,907) 8.3% G2 – Small Commercial $18,006,240 $16,095,484 $1,910,756 (10.6%) G3 – Large Commercial $5,523,787 $5,962,635 ($438,848) 7.9% Total $41,268,342 $41,268,342 $0 0.0%

1.2.3 Rate Design Recommendations
The final step in the rate study process is to design rates for each class of service. In California, local governments are subject to Article XIII C of the California Constitution, as amended by Proposition 26, which requires that gas rates and charges must not exceed the reasonable costs of providing gas service, and requires that the City’s costs of gas service are allocated to each customer in a manner that bears a fair or reasonable relationship to the customer’s burdens on, or benefits received from, the gas utility. As a result, the City sets rates based on COSA results. The goal of rate design is to create rates that recover costs from customers within each class based on the utility’s cost of providing service. The basis for each rate design recommendation is provided in this section followed by the recommended rates.

All rate classes are charged a monthly service charge and volumetric charge to recover distribution costs.

EES does not recommend changes to this basic rate design structure, except for a refinement in the development of the Monthly Service Charge for G2 customers. The refinement is based on additional analysis of G2 class usage and costs. Section 1.2.3.2, Commercial provides more details on this change.

Exhibit 1
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CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 6

1.2.3.1 Residential
The G1 distribution rates consist of a monthly service charge and a 2-tiered volumetric rate: the Tier 1 rate applies to usage up to the baseline quantity and the Tier 2 rate applies to all usage above the baseline.

The G1 rate structure proportionately recovers energy and demand (capacity) costs incurred by the class.

Specifically, individual residential customers have usage characteristics that are similar in both usage profile and baseline usage. For the purposes of this 2026 Report, “Baseline” usage is defined as average use and “usage profile” is defined as the shape of energy use over time. Figure 1-1 shows that the daily usage profiles for residential customers are consistent between individual customers despite different overall usage level (low, low-medium, medium-high, and high). Second, seasonal baseline usage within the residential class is relatively uniform across individual customers. As such, a tier threshold can be applied to customers without being discriminatory toward customers with higher use, because higher-use customers only pay their proportional fair share of the incremental cost of serving that 2nd tier of use.

FIGURE 1-1: RESIDENTIAL DAILY GAS USE BY USAGE LEVEL:

DAILY SHARE (%) OF ANNUAL USE4
While the tier rates do not change between seasons, the baseline quantity above which Tier 2 rates apply does change and is higher in winter than in the summer because natural gas-based heating is used more in the winter and causes higher gas consumption.
5 Therefore, the class average therms are higher in the winter than in the summer. This tiered structure ensures that all G1 customers pay for their Tier 1 demand, but that all the costs of Tier 2 service are only borne by the customers that have Tier 2 demand. EES calculated the G1 tiered rates using the Base and Excess method (discussed in more detail in Section 4.1) and proposes a modest increase of summer baseline from 20 to 23 therms per thirty-day billing period. 4 CALMAC Customer Load Shapes - PG&E. https://www.calmac.org/customer_load_shapes_pge.asp 5 Usage above the Tier 1 baseline quantity is charged Tier 2 rate. The current quantity is 20 therms/30-day-billing in summer and 60 therms/30-day-billing in winter.

Exhibit 1
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Attachment A - Resolution
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CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 7
Table 1-6 summarizes the costs to be recovered in each rate component for G1.

TABLE 1-6: G1 RATES AND COST RECOVERY
Rate Component Recovers The Following Costs:

Monthly Service Charge Customer-related costs such as customer service, billing, and overhead adders Tier 1 Volumetric Rate Energy-related costs plus 21% of demand-related distribution unit costs1 Tier 2 Volumetric Rate Energy-related costs plus 79% of demand-related distribution unit costs1 1 See calculations in Section 4.1.1. Residential (G1) Rate Design, Table 4-3.

G1 usage patterns are distinguishable from G2 and G3 usage, and that difference in usage patterns is the cause for a tiered approach to allocate costs among customers in the G1 (residential) class, but not in the G2 or G3 classes. Average use is much more consistent (less variable) among all individually metered residential customers in comparison to G2 or G3 customers. As shown in Table 1-7 below, G1 therm consumption has a small variation between the median (midpoint consumption) and the average, and the spread across all the data is relatively low compared with G2 and G3. To illustrate the relative variability, the average is divided by the spread to produce 0.88 for G1. A higher value indicates that data is more closely centered around the average value. The spread around G2 and G3 average use is much greater (showing more variability), as indicated by the lower values of 0.33 and 0.41, respectively.

TABLE 1-7: AVERAGE THERMS/MONTH BY SERVICE ACCOUNT
G1
Residential
G2
Small Commercial
G3
Large Commercial
Average 33 462 13,534
Median 27 78 3,530
% Difference between Average and Median 23% 494% 85%
Spread (Standard deviation) 38 1,382 33,362
Average/Spread (coefficient of variation) 0.88 0.33 0.41 When average usage across individual customers in a class is similar, a certain threshold is associated with a consistent or baseline share of system capacity that is used relatively proportionately by all customers; usage above that threshold creates additional system capacity costs that are caused by only a small portion of the customer base. Average use is an equitable threshold in a relatively low-spread environment because it identifies the average consistent demand placed on the system by all users. Use that exceeds the average creates a demand for additional capacity used by only a fraction of the customers. A tiered system then allocates the additional (“excess”) capacity costs only among the customers that placed the Tier 2 excess demands on the system. By structuring the rate this way, average users are not forced to subsidize the costs of larger infrastructure they do not use. At the same time, the initial average increment of usage is charged identically – so all users pay the same rate for usage up to the baseline.

Natural gas is a service. Customers must pay not only for the commodity (the natural gas itself) that is served to their property, but also for all of the infrastructure necessary to distribute the natural gas to the property. For example, when all houses are the same size and have the same end-use systems, customers who use an average or below-average amount of natural gas should not only pay proportionally less for the commodity than high users because they are using proportionally fewer molecules of natural gas; they should also pay proportionally less of the additional costs incurred by the utility to serve the customers Exhibit 1
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who use excess energy at peak times(such as the incremental additional cost of a larger pipeline). A tiered rate ensures that the City’s incremental additional costs to serve Tier 2 demands are charged to the cause of those costs. Higher users therefore pay a marginally higher rate – but only for the portion of their use that exceeds the average or baseline threshold.

1.2.3.2 Commercial
EES does not recommend changing the volumetric rate structure for G2 and G3 because the current structure reasonably recovers individual customer energy and demand components according to how each customer uses the system. While there are inherent differences in consumption across individual customers within the G2 and G3 rate classes, the shape of these consumption profiles within each class are relatively consistent as illustrated in Figure 1-2. Figure 1-2 illustrates the annual usage profiles for different types of businesses. The differences in average consumption between customers are due primarily to the type of business operation (end-use of natural gas i.e., refrigeration, heating, etc.) and building footprint (square footage). Grocery store use averages 8 therms per day during the summer, whereas government buildings average approximately 2 therms per day in the summer. Winter usage is also significantly different between these business types, where grocery stores average 14 therms per day and government buildings average closer to 8 therms per day. These differences in baseline usage mean that a tiered rate applied to all customers within the class would result in subsidies between customers with different baseline use. Because customers with higher baseline use would more often exceed the threshold, those customers would pay more than their fair share of costs.

FIGURE 1-2: COMMERCIAL DAILY GAS USE BY BUILDING TYPE6
While these customers vary significantly in total gas usage, the usage profiles for commercial and industrial customers are similar within each class (G2 or G3), as shown in Figure 1-2. Because customers 6 CALMAC Customer Load Shapes - PG&E. https://www.calmac.org/customer_load_shapes_pge.asp. The above example profiles are included in G2 and G3 classes according to Table 3-4. 0 2
4 6
8 10
12 14
16 18
20 Therms
Retail Religious Construction Office Government Grocery Health Exhibit 1
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within each class have similar usage profiles, the cost to serve individual customers within each class is similar from a volumetric perspective ($/therm). The similar cost of service is determined from the COSA methodology which allocates costs based on class usage profile. Therefore, a uniform variable charge is an equitable rate design for both G2 and G3 classes.

This 2026 Report updated input, assumptions, and calculations of fixed charges. The methodology and supporting assumptions are detailed in Section 3. In addition to the methodology review, the 2026 Report provides additional analysis for G2 meter capacity-related costs by comparing the average consumption for various meter capacities. Fixed costs are higher for customers with larger capacity service because of the larger and more expensive equipment required to provide higher capacity service. Three G2 subclasses are defined based on meter capacity, as shown in Table 1-8. The recommended monthly service charge is developed based on the COSA methodology which, in part, allocates costs to each customer class based on meter costs.

With the recommended rates, G2 customers would be charged a Monthly Service Charge based on maximum meter capacity; customers with lower-capacity meters would pay a lower Monthly Service Charge than those with higher capacity meters. For example, a customer with a meter capacity of 200 standard cubic feet per hour (scfh) would pay the lowest Monthly Service Charge, at $29.24.

TABLE 1-8: G2 MONTHLY SERVICE CHARGES: FY 2025-2026
CPAU Approved Maximum
Meter Capacity (scfh7)
Number of
Services
Current Monthly
Service Charge
$/Meter/Month
Recommended
Monthly Service
Charge
$/Meter/Month
Up to 220 1,136 $170.55 $29.24
Above 220 but Below 4,000 940 $170.55 $94.56
4,000 and Above 117 $170.55 $419.08
Total G2 2,193
While Table 1-8 shows the lower Monthly Service Charge for smaller G2 customers (defined as customers with meter capacity up to 220 scfh), Table 1-9 illustrates that this same group of customers should also receive an overall rate decrease. The rate decrease is primarily achieved through the lower monthly service charge. The column “Revenue Requirement” in Table 1-9 presents the total revenue requirement amounts (including fixed and variable costs) that correspond to the recommended Monthly Service Charges shown in Table 1-8 above. The recommended rates for G2 are provided in Section 1.2.4. 7 All meters have a manufacturer-rated capacity and an approved for engineering maximum capacity. The CPAU approved capacity is typically slightly lower than the manufacturer maximum capacity due to connected characteristics and other variable conditions.

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TABLE 1-9: G2 REVENUES AND REVENUE REQUIREMENT: FY 2025-2026 CPAU Approved Maximum
Meter Capacity (scfh)
Projected FY
2026 Revenues
at Current
Monthly Service
Charge
Revenue
Requirement
Projected
FY 2026
Deficiency/(Surplus)
Revenue
Change
Needed
Up to 220 $3,251,805 $1,740,448 ($1,511,358) (46.5%)
Above 220 but Below 4,000 $8,235,944 $7,630,668 ($605,276) (7.3%) 4,000 and Above $6,518,490 $6,724,368 $205,878 3.2%
Total G2 $18,006,240 $16,095,484 ($1,910,756) (10.6%)
Customers that exceed 250,000 therms per year in consumption are placed on the G3 rate schedule. For this level of consumption, the service sizes and meter costs are much more uniform within the class compared with G2. For example, the cost for the smallest meters in G3 is 56% of the cost for the largest capacity meters. The same comparison for G2 results in the smallest capacity meter cost at less than 2% of the cost of the largest capacity meter. Meter cost uniformity within a customer class is a factor in determining a cost-based rate design for each class. Customers with larger meters are charged a higher monthly Service Charge. Because individual customers within G3 have relatively uniform meter sizes and costs, it is reasonable to charge the same monthly service charge to all G3 customers.

1.2.4 Rate Change Recommendations
Table 1-10 provides a comparison of current rates and recommended rates for FY 2026, including the newly developed G2 Monthly Service Charge by meter capacity.

Exhibit 1
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prepared by EES CONSULTING 11
TABLE 1-10: CURRENT AND RECOMMENDED RATES
Current
Rate
Recommended
FY 2025-2026
Rate $ Change
Percent
Change
G1: Residential
Monthly Service Charge $18.40 $19.58 $1.18 6.4%
Distribution Charge ($/therm)
Tier 1
For Winter: first 60 therms/30-day-billing
For Summer: first 20 therms/30-day-billing
(current); first 23 therms/30-day-billing
(recommended)
$0.8944 $1.0456 $0.1512 16.9%
Tier 2
For Winter: over 60 therms/30-day-billing
For Summer: over 20 therms/30-day-billing
(current); over 23 therms/30-day-billing
(recommended)
$2.2873 $2.5203 $0.2330 10.2%
G2: Small Commercial (Total)
Monthly Service Charge $170.55 $78.03 ($92.52) (54.2%)
Distribution Charge ($/therm) $1.1749 $1.2204 $0.0455 3.9% G2: Meter Capacity ≤ 220 scfh
Monthly Service Charge $170.55 $29.24 ($141.31) (82.9%) Distribution Charge ($/therm) $1.1749 $1.2204 $0.0455 3.9% G2: Meter Capacity > 220 scfh and < 4,000 scfh
Monthly Service Charge $170.55 $94.56 ($75.99) (44.6%)
Distribution Charge ($/therm) $1.1749 $1.2204 $0.0455 3.9% G2: Meter Capacity ≥ 4,000 scfh
Monthly Service Charge $170.55 $419.08 $248.53 145.7%
Distribution Charge ($/therm) $1.1749 $1.2204 $0.0455 3.9% G3 Large Commercial
Monthly Service Charge $780.34 $1,712.36 $932.02 119.4% Distribution Charge ($/therm) $1.16330 $1.1874 $0.0241 2.1% Exhibit 1
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2 Revenue Requirement Development
This section presents the development of the natural gas revenue requirement in the 2026 Report. A revenue requirement analysis compares the overall revenues of the utility to its projected expenses and determines the overall adjustment to rate levels required for the utility’s revenues to meet those expenses.

2.1 OVERVIEW OF THE CITY’S REVENUE REQUIREMENT METHODOLOGY The City utilizes the cash basis approach for determining its revenue requirement. The revenue requirement for the City’s natural gas utility includes the elements shown in Table 2-1.

TABLE 2-1: ELEMENTS OF A CASH BASIS REVENUE REQUIREMENT + Operating Expenses
 Natural Gas Supply Expense
 Distribution O&M Expense
 Customer Accounting Expenses
 Administrative and General Expense
+ Capital Improvements Funded from Rates
+ General Fund Transfer
= Total Revenue Requirement
- Transfers from Reserves
- Miscellaneous Revenue Sources
= Net Revenues Required From Rates (or Net Revenue Requirement) In this basic analytical framework, the first step in determining the revenue requirement is to select a period over which to review revenues and expenses. This 2026 Report uses a future fiscal year test period to correspond with the City’s budget year. The revenue requirement in this 2026 Report reflects the Cityprovided financial forecast (budget) for FY 2025-2026.

The next step in the analysis was to translate the City-budgeted costs into the system of accounts used by a natural gas utility.

2.2 SUPPLY COSTS
While this 2026 Report does not include an analysis for gas supply costs, a summary of these costs is provided here for reference. As with most natural gas utilities, a major expense associated with operating the utility is the cost of natural gas supply. The City is projecting FY 2025-2026 gas supply costs at $29.2 million or 42 percent of the total FY 2025-2026 revenue requirement. Supply costs are charged to customers via four pass-through rate components. The following rate components are adjusted monthly to reflect actual costs:

1. Gas commodity: This represents the cost of buying gas in the market.

2. Gas transportation: This reflects the cost of transporting purchased gas from the delivery points to Palo Alto.

3. Cap and Trade compliance: This covers the cost of mandated participation in the State’s cap and trade program.

4. Carbon offset charge: This accounts for the cost of buying offsets needed to comply with the City’s Carbon Neutral Gas Portfolio Program.

Exhibit 1
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Attachment A - Resolution
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CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 13
While the cost of natural gas supply is included in the 2026 Report, it is treated as a separate category because the cost of natural gas supply is collected through separate rate components. A description of these separate rates is provided in Section 4.2.

2.3 DISTRIBUTION COSTS
Total FY 2025-2026 revenue requirement for distribution is projected to be $41.3 million. Distribution operating expenses include the following (other expenses are discussed in Sections 2.4 through 2.7):
 Physical system costs of $9.8 million. These costs include the operation and maintenance of distribution system infrastructure such as distribution mains, regulators, and meters.  Customer service-related costs of $3.2 million. These costs include meter reading, billing, key account representatives and general customer service.
 Administrative and general costs of $5.0 million. These costs include functions like accounting, purchasing, legal, and other administrative functions provided by the City’s General Fund staff, as well as Utilities Department administrative overhead, insurance, rent, and transfers to city non-enterprise funds for items such as utility building improvements and to other enterprise funds for items such as the gas utility’s share of Geographic Information System project costs.

The customer service category includes $0.5 million in expenses for energy efficiency, conservation (demand side management), and low-income assistance programs. These expenses are incurred by the gas enterprise as part of a program established by the City pursuant to California Public Utilities Code Section 898. By virtue of this program, gas customers are exempted from a state surcharge that would otherwise be collected on utility bills pursuant to Public Utilities Code Section 890. The City’s energy efficiency and demand-side management programs reduce customer gas demand and are designed to reduce the need for capital expenditures that would otherwise be needed to expand the capacity of the gas distribution system.

2.4 DEBT SERVICE AND RATE-FUNDED CAPITAL IMPROVEMENT PROGRAM (CIP) The City must cover its capital improvement projects (CIP) through either debt, cash from rates, or external sources such as grants or loans.

For FY 2025-2026, the City has debt service payments of $0.8 million for past borrowings to fund CIP, specifically the 2011 Series A Utility Revenue Refunding Bonds. This bond issuance was to refinance the $18 million principal remaining on the Utility Revenue Bonds, 2002 Series A issued for the Gas and Water Utilities to finance various improvements to the distribution systems.

The majority of CIP is funded from rate revenues. For FY 2026, the budgeted CIP is $7.5 million. This amount is partially offset by contributions made by new customers in the form of connection fees. The $0.7 million in connection fees is included in other revenues, which is further discussed below. Total FY 2025-2026 debt service and rate-funded CIP is $8.3 million before customer contributions.

Exhibit 1
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CITY OF PALO ALTO Natural Gas Cost of Service Analysis
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2.5 GENERAL FUND TRANSFER
The City calculates the equity transfer from its natural gas utility based on a methodology approved by voters in November 2022.
8 The General Fund Transfer is estimated to be $9.7 million in FY 2025-2026.

2.6 MISCELLANEOUS/OTHER REVENUES
The City receives additional operating and non-operating revenues. These revenues include interest earned on City reserves, connection fees (customer charges that recover the cost of capital facilities necessary to accommodate increased demand on the system) and other miscellaneous service revenues.

Miscellaneous revenues include customer discounts and uncollectible bills. These are recovered from nonrate revenues, including interest income from investments. For FY 2025-2026, the projection for the total miscellaneous/other revenues is $0.7 million. The miscellaneous/other revenues are separate from fixed and volumetric charges for natural gas service and are therefore considered an offset to the total revenue required from retail rates.

2.7 TRANSFERS TO/FROM RESERVES
In its FY 2025-2026 natural gas financial forecast, the City is anticipating that $5.9 million of rate revenues will need to be added to the reserves in FY 2025-2026 to restore both the operating and CIP reserves. The operating reserve balance is adjusted to meet future debt service requirements as projected from the City’s financial plan. Additionally, the City plans to make contributions to the CIP reserve fund to balance year-to-year fluctuations in CIP expenditures. The use of the reserve fund allows the City to have more stable and gradual rate increases over time.

2.8 SUMMARY OF REVENUE REQUIREMENT
The City’s Distribution revenue requirement for the FY 2025-2026 test period is summarized in Table 2-2.

No overall rate increase is required to meet projected FY 2025-2026 costs, due to current overall rate levels.
8 In November 2022, voters approved Measure L, amending the Municipal Code, Section 2.28.185, “Natural Gas Utility Transfer” states: “Each fiscal year the City Council may transfer from the natural gas utility to the general fund an amount equal to 18% of the gross revenues of the gas utility received during the fiscal year two fiscal years before the fiscal year of the transfer. At its discretion, the City Council may decide to transfer a lesser amount. The projected cost of the transfer shall be included in the City’s retail natural gas rates as part of the cost of providing gas service.” Exhibit 1
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TABLE 2-2: SUMMARY OF NATURAL GAS DISTRIBUTION REVENUE REQUIREMENT: FY 2025-2026 Revenue Requirement
Distribution O&M $9,797,408
Customer Accounts and Services $3,208,008
Administration and General $5,002,927
Debt Service & CIP from Rates $8,339,643
General Fund Transfer $9,734,580
Total Expenses $36,082,566
Transfers to Reserves $5,874,887
Other Revenues ($689,111)
Total Revenue Required from Rates (Revenue Requirement) $41,268,342 Revenues Based on Rates Currently in Effect $41,268,342 Additional Rate Revenue Needed without Gas Supply $0
Total Required Rate Revenue Increase (Decrease) 0.0%
Exhibit 1
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CITY OF PALO ALTO Natural Gas Cost of Service Analysis
prepared by EES CONSULTING 16
3 Cost of Service Analysis
The objective of the cost-of-service analysis (COSA) is to allocate the costs in the revenue requirement to each customer class of service to determine the cost to serve those customers. An essential principle of cost allocation is the concept of cost-causation. Cost-causation evaluates which customer or group of customers causes the utility to incur certain costs by linking system facility investments and the operating costs to serve certain facilities to the way customers use those facilities and services. This section of the report discusses the general approach used to allocate the City’s costs and presents a summary of the results.

3.1 COSA DEFINITION AND GENERAL PRINCIPLES
A COSA study allocates the costs of providing utility service to the various customer classes served by the utility based upon the cost-causal relationship associated with specific expense items. This approach is taken to develop a fair and equitable designation of costs to each class of service. The COSA allocates joint and common costs among the various classes using factors appropriate to each type of expense. The COSA is the second step in a traditional three-step process for developing natural gas service rates, after development of the revenue requirement but before designing rates.

This COSA study is an embedded cost analysis. Embedded costs generally reflect the actual costs incurred by the utility and closely track the costs kept in its accounting records.

There are three basic steps to follow in developing a COSA: functionalization; classification; and allocation.

Functionalization separates costs into major categories that reflect the different services provided to customers and the types of assets used to provide those services. The primary functional categories for the City’s natural gas utility are supply and distribution.

Classification determines the portion of each cost that is related to specific cost-causal factors, or “classifiers.” These classifiers might be demand-related (related to the class of service’s peak energy usage over a given period), energy-related (related to the total energy used by the class of service over a given period), or customer-related (costs incurred as a result of receiving service, regardless of the energy use or peak demand). Natural gas supply or commodity costs are related to the amount of natural gas purchased and are therefore considered energy-related. The distribution system is designed to extend service to all customers attached to the system and to meet both the peak day demand and the annual energy requirement of each customer, meaning that costs are both demand-related and energy-related.

Some operational costs, such as billing, are generally customer-related. Costs can also be classified based on whether they are system-wide or specifically assigned to a customer or group of customers, if appropriate.

Allocation of costs to specific classes of service happens after those costs have been classified. Allocation factors are chosen to allocate the costs assigned to each classification, and the share of costs allocated to each class of service are based on the class’s contribution to the specific allocation factor selected. For example, certain distribution costs might be classified as partially demand-related and partially energyrelated. The demand-related costs could be allocated to the classes of service using each class’s contribution to the annual system peak day demand (the highest day for the system as a whole at any time during the year), while the energy-related costs would be allocated to classes based on their annual energy usage. In this example, the allocation factors are 1) each class of service’s contribution to the Exhibit 1
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annual system peak day demand, and 2) the annual energy usage of each class of service. An analysis of customer requirements and usage characteristics is completed to develop allocation factors reflecting each of the classifiers employed within the COSA.

3.2 CITY NATURAL GAS DISTRIBUTION COSA METHODOLOGY

3.2.1 Functionalization
As mentioned previously, this rate study addresses only the distribution portion of the City’s gas utility.

As such, all costs included in the revenue requirement have already been functionalized as Distribution.

Distribution costs include are allocated based on the depreciated value of all the physical assets (“rate base”) and all operating costs required to transport the natural gas commodity from the point of interconnection across the City’s distribution system to customers at their meters.

3.2.2 Classification and Allocation of Costs
The classification and allocation factors used for each component of the rate base and revenue requirement are shown in Table 3-1 and Table 3-2 and are discussed in more detail below. The purpose of looking at the rate base in the COSA is to set the cost causation associated with the physical assets, which are then used to guide the allocation of the annual expenses. The rate base for the City’s natural gas utility consists of the net value of its physical assets – both the distribution system itself (“Distribution Plant”) and the natural gas utility’s fair share of general City facilities, equipment, and other capital such as software that provide for the administration and general costs of the utility (“General Plant”). The rate base is taken from audited fiscal 2025 physical asset/plant values. The revenue requirement is a forecasted future year.

Descriptions of each factor are included in Table 3-3. In general, this COSA employs the same methodology used in the 2020 Study but with changes to allocation factors based on updated cost-causation.

Specifically, the distribution rate base classification was updated as discussed in Section 4.3 below.

Distribution costs are classified into the following components: demand, energy, customer, and direct assignments. The demand component reflects the portion of costs driven by peak demand for natural gas.

The energy component is related to costs incurred to provide the annual amount of gas to customers or groups of customers. The customer component covers the facility and operating costs that vary with the number of customers, such as meters and billing. Directly assigned costs are costs that can be attributed to just one or more rate classes. The following are the specific classifiers used for the City’s distribution function:
 Demand. Demand-related costs are those that vary with the peak demand or the maximum rates of natural gas supply to classes of service. Customer and system demands for this analysis are measured in peak day therms. Demand costs are generally related to the size of facilities needed to meet a customer’s maximum daily demand. Generally, the rate base is allocated based on the Average & Excess method which involves a demand component (see Section 3.3). The allocated rate base is then used to allocate certain revenue requirement expenses.
 Energy. Energy-related costs are those that vary with the total amount of natural gas consumed by customer class. Usage measured in therms is used in this portion of the analysis. Energy costs are the costs of consumption over a specified period, such as a month or year. Reserve fund contributions are an example of a cost item that is allocated to customer classes based on therms used. This ensures that each customer contributes to the reserve fund based on their proportional use of the system.

Exhibit 1
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 Customer. Customer-related costs are those that vary with the number of customers. Customer costs are weighted to account for differences in the cost of providing services to those customers. For example, the service line and metering associated with serving a large commercial customer is larger and more costly and requires substantially more work and material than the service line and meter for a small residential customer. Customer service expenses are typically allocated to customers based on some measure of number of customers or weighted customer service factors based on the amount of time and complexity to provide service to different types of customers.  Direct Assignment. Some costs are directly assigned to specific classes of service. For example, costs associated with specific account representatives to large commercial customers are allocated directly to the G3 rate class. In exchange, G3 does not share in other customer service costs incurred by the other classes.

The methodology for classification and allocation of the City’s rate base is summarized in Table 3-1. All line items in this table are functionalized as Distribution.

Note that the rate base does not reflect the annual expenses associated with running the utility but instead reflects the capital investments made by the utility for the physical assets in the distribution system or that are part of the general administration of the utility. The purpose of looking at the rate base in the COSA is to set the cost causation associated with the physical assets, which are then used to guide the allocation of the annual expenses.

Working capital is traditionally added to cover the cash on hand needed to run the utility. An estimate of 1/8th of operating costs is typically used to reflect the lag time between revenue collections and accounts payable. This metric, 1/8th of annual expenses, or 45 days,9 is common because it accounts for the operating expenses that need to be paid prior to the collection of revenues after metering and billing. 9 One eighth of 365 days is 45.

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TABLE 3-1: DISTRIBUTION RATE BASE
Asset Description
Asset Value
FY 2021-202210
Classification
and Allocation
Factor Description
Distribution Plant
Equipment-Meters
$12,334,716 CUSTM
Number of Services
Weighted by Meters and
Services
Equipment-Services $59,109,371 AE Average & Excess
Equipment-Misc. $2,729,148 AE Average & Excess
Equipment-Regulators $976,067 AE Average & Excess
Equipment-Distribution Mains $77,559,779 AE Average & Excess Equipment-Measuring $2,869,793 AE Average & Excess
Total Distribution Plant $155,578,873 (Distribution Rate Base) General Plant
Building-General Plant
$1,910,425 GPLT
Gross Plant without General
Plant
And Intangibles
Equipment-General Plant
$2,911,310 GPLT
Gross Plant without General
Plant
And Intangibles
Total General Plant $4,821,735 (General Plant Rate Base) Total Gross Plant in Service $160,400,608 (Gross Plant) Less: Accumulated Depreciation
Distribution Plant $49,833,503 RBD Distribution Rate Base General Plant $3,812,789 RBGP General Plant Rate Base
Total Accumulated Depreciation $53,646,292
Total Net Plant $106,754,316 (Net Plant)
Working Capital: 1/8 Operating Costs
$2,251,043 OMWOP
Operation & Maintenance
Expense
without Production
TOTAL RATE BASE $109,005,358 (Rate Base)
Constructions Working in Progress
(CWIP)
Distribution Plant $6,127,014 RBD Distribution Rate Base General Plant $1,902,306 RBGP General Plant Rate Base
Total CWIP $8,029,320
TOTAL RATE BASE plus CWIP $117,034,679
Next, the methodology for classification and allocation for the City’s Natural Gas Distribution revenue requirement can be found in Table 3-2. More detail on the classification and allocation factor codes used in the classification and allocation process can be found in Table 3-3. Two changes were made to the allocation factor assumptions since the prior study:

1. The general fund transfer allocation was updated from net plant to revenue. This update reflects a policy change approved by the voters via Measure L, approved in 2022 where the transfer is calculated as a share of rate revenue.
10 Fiscal year ending June 30, 2022 was the audited asset values available for the study period.

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2. Reserves contributions or transfers are allocated based on therms. The reserves are used to stabilize supply costs. Supply costs are 100% energy related; therefore, this line item should be classified and allocated based on energy.

TABLE 3-2: DISTRIBUTION REVENUE REQUIREMENT
FY 2025-2026
Classification
and Allocation
Factor Description
Distribution Operation &
Maintenance
Engineering Support 768,861 RBD Distribution Rate Base
Operations & Maintenance 9,028,547 RBD Distribution Rate Base Total Distribution 9,797,408
Customer Service, Accounts, & Sales
Admin - Customer & Marketing
$227,967 CUSTW
Number of Services
Weighted for
Accounting/Metering
Meter Reading $485,915 CUSTM Number of Services
Weighted for Meters & Services
Utility Billing
$543,152 CUSTW
Number of Services
Weighted for
Accounting/Metering
Credit & Collections
$9,850 CUSTW
Number of Services
Weighted for
Accounting/Metering
Key & Major Accounts $155,106 DA1 Direct Assignment to Large Commercial (G3)
Customer Service
$1,266,689 CUSTW2
Number of Services
Weighted for
Accounting/Metering excluding G3
Low Income Programs $53,792 therm Annual Energy (therms) Efficiency - Demand Side Mngmt $465,537 therm Annual Energy (therms) Total Customer Service, Accounts &
Sales $3,208,008
Administrative & General
Administrative & General Salaries11 $1,451,715 OMAG O&M Expense without Production and Admin & General Expense
Allocated Charges12 $2,735,638 OMAG O&M Expense without Production and Admin & General Expense
Rents $574,830 OMAG O&M Expense without Production
and Admin & General Expense
Transfers to Non-Enterprise Funds $59,411 OMAG O&M Expense without Production, and Admin & General Expense
11 Administrative and General Salaries includes salaries and benefits for staff assigned directly to Gas Utility Administration.
12 Allocated charges are general costs incurred on behalf of all of the City’s utilities (water, wastewater, fiber, electric and gas) that are individually determined and allocated to each business line, as well as salaries and benefits allocated based on Capital Improvement Project cost centers.

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FY 2025-2026
Classification
and Allocation
Factor Description
Transfers to Enterprise Funds $181,333 OMAG O&M Expense without Production, and Admin & General Expense
Administrative & General Salaries $5,002,927
Total Costs with A&G $18,008,343
Interest and Debt Service Expense
Interest on Long-Term Debt $23,348 NETPLT Net Plant
Principal on Long-Term Debt $778,250 NETPLT Net Plant
System Improvement $7,538,046 NETPLT Net Plant
Total Debt Service /Capital
Improvement $8,339,643
General Fund Transfer $9,734,580 REV Current Rate Revenues Reserves Contribution $5,874,887 therm Annual Energy (therms) Revenue Requirement Before Other
Revenues $41,957,453
Other (Revenues) & Expenses
Customer Discounts13 $318,105 NETPLT Net Plant
Connection Fees ($700,000) NETPLT Net Plant
Misc. Revenue and other
contributions (Other) $449,823 NETPLT Net Plant
Transfer Credits ($131,346) NETPLT Net Plant
Interest Income (Loss) from
Investments ($625,693) NETPLT Net Plant
Total Other Revenues ($689,111)
REVENUE REQUIREMENT for COST
ALLOCATION $41,268,342
Table 3-3 shows how each factor code classifies then allocates the costs to classes of service. The Average & Excess (AE) allocator is described in greater detail below the table. 13 This includes uncollectible accounts for bad debt, low-income rate assistance discounts, and pre-1970s retired employee discounts on utility bills at a primary residence. These are funded through non-rate revenues and Public Utilities Code 890 revenues.

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TABLE 3-3: NATURAL GAS DISTRIBUTION REVENUE REQUIREMENT Factor Code Factor Name Classification Allocation Basis AE Average and Excess 63% Demand
37% Energy
Demand portion calculated as % of Average
and Above Average (Excess) coincident
peak demand. Energy portion is remaining
share of A&E attributed to average
demand/energy.

Therm Annual Energy (therm) 100% Energy Energy consumption of each class of service in annual therms
CUSTW Customers Weighted for
Accounting/Metering
100% Customer Number of services weighted for cost of
accounting and metering
CUSTM Customers Weighted for
Meters and Services
100% Customer Number of services weighted for cost of
installing, maintaining and reading meters
CUSTW2 Customers Weighted for
Accounting/Metering w/o G3
100% Customer Number of services weighted for cost of
accounting and metering but excluding G3
costs
DA1 Direct Assignment for Large
Commercial
100% Customer Direct assignment of key account costs to G3, large commercial class
RBD On the Basis of Distribution
Rate Base
58% Demand
34% Energy
8% Customer
Classified and allocated to classes of service
based on the net book value of all shared
services assets and other capital assets
assigned to each class of service
OMAG On the Basis of O&M (w/o
Gas Supply and A&G)
43% Demand
30% Energy
27% Customer
Allocated based on O&M expenses without
Gas Supply and A&G expenses
RBGP On the Basis of General Plant
Rate Base
58% Demand
34% Energy
8% Customer
Classified and allocated to classes of service
based on the book value of all general plant
assets assigned to each class of service
GPLT On the Basis of Gross Plant
(w/o General Plant &
Intangible)
58% Demand
34% Energy
8% Customer
Allocated on the basis of the gross book
value of all capital assets (initial cost)
assigned to each class of service.

NETPLT On the Basis of Net Plant 58% Demand
34% Energy
8% Customer
Allocated on the basis of the net book
value of all capital assets (initial cost less
accumulated depreciation) assigned to
each class of service.

OMWOP On the Basis of O&M (w/o
Purchased Gas Supply)
43% Demand
30% Energy
27% Customer
Allocated based on O&M expenses without
the cost of Purchased Gas Supply

3.3 AVERAGE & EXCESS (A&E)
The classification and allocation of several rate base line items in Table 3-1 are based on the Average & Excess (A&E) method. This 2026 Report improves the A&E methodology to better align with how the distribution system is designed and built for reliable service. The 2020 Study classified A&E costs as 100% demand-related and then used each customer’s share of demand to allocate those distribution costs across customer classes. In this study, A&E is classified as both energy and demand to more accurately reflect how the City’s distribution system is designed and built. The previous A&E method primarily attributed system costs entirely to demand, which is an appropriate option for systems experiencing growth. Now that the system is expected to exhibit declining use, and because capacity sizing is determined based on both energy and demand, the revised A&E method is recommended. The system planning criteria and the associated recommended A&E method are described below.

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The natural gas utility’s capital plan is primarily focused on upgrading and maintaining aging infrastructure rather than expanding the system for growth. When evaluating the sizing of mains, City engineers model the annual maximum demand (i.e., highest gas consumption during a January cold spell) to determine the optimal system size to meet customers’ peak demand. The modeling also incorporates an analysis of energy usage depending on the physical structure of the distribution system. The energy component is particularly important to analyze when a network of mains result in endogenous impacts when one or more of the pipes is replaced or resized. For example, the City’s engineers evaluate main sizing when planning for replacement projects. In areas where a portion of the system has more than one main providing service, engineers model the sizing of the main being replaced based on locational energy use and available capacity of adjacent mains. Depending on the capacity and energy available from the other mains, the replacement main can be resized to minimize cost on the system. This is particularly important where usage has declined (or expected to decline) since the system was originally put into service.

Because both demand and energy use are important factors in considering current and future capacity investments in the system, the distribution rate base is classified as both demand and energy under the revised A&E method. Demand-related costs are then allocated to customer classes based on each class’s contribution to peak demand. Energy-related costs are allocated to customer classes based on therms.

The revised A&E classification to demand and energy is based on a comparison of the energy used (the “average”) against the maximum demand (the “excess”). Maximum demand is equal to the highest daily usage for the class in each month or the non-coincident peak (NCP). The NCP is the sum of individual customer peaks within the class independent of the system peak timing.

Overall, the A&E method makes the following assumptions:

1. Average energy represents the capital investment needed to serve the average customer in each class;

2. Excess use is the additional investment needed to serve customers with demands that vary by season.

Those customers with higher excess use require a larger investment in the system compared with customers whose usage remains close to the average use year-round.14 Allocating excess use costs only to excess users reasonably places those increased costs on only the customers that created the need for capacity above their average use; otherwise, customers with lower use would arguably be subsidizing customers higher use.

3.3.1 Average & Excess Calculation
As explained above, the A&E method classifies (splits) distribution costs between energy and demand components. This classification recognizes that a portion of the distribution system is engineered to serve a customer with average energy. In addition, another portion of the distribution system investment is needed to meet customer maximum use (excess demand).

In order to develop the A&E calculation, daily or hourly load profile data is needed to calculate class load factors. A load factor is the ratio of average use to peak use over a given time period. A low load factor (for example 30%) indicates that average natural gas usage for that customer is relatively low compared 14 A good example of this type of customer is an individually metered multi-family unit. These customers have low average use and the services needed for each unit are lower in cost compared with services needed to serve a single family home (not shared).

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to that customer’s peak usage. A low load factor customer is more costly to serve on a $/therm basis since there are fewer therms over which to spread system capacity costs. Due to the relationship between load factors and cost of service, these factors are key components of the recommended cost allocation methodology from the COSA.

The City does not yet have hourly or daily meter data from which to calculate load factors. In lieu of specific Palo Alto data, daily load profiles were developed using public data available from California Management Advisory Council (CALMAC).
15 These load profiles are a good approximation for Palo Alto customers because they are developed by a neighboring utility for the portion of its service area that has similar weather conditions to Palo Alto as well as similar building attributes (based on California building codes for example).

The overall method applies Palo Alto monthly usage data by class to the daily curves from CALMAC. The CALMAC data is based on PG&E load research data for calendar year 2024 and specifically for the coastal region. This data is applied to the City’s FY2026 load data. Next, maximum day demands are calculated for each rate class and for the system as a whole.

For the G1 class, several residential load shapes were aggregated to produce a class load curve. Figure 3- 1 illustrates the sample daily load curves for 4 usage groups ranging from low annual use (less than 235.4 therms) to high annual use (above 575.7 therms). The curves are similar in shape and differ primarily in magnitude.

FIGURE 3-1: PG&E AVERAGE RESIDENTIAL DAILY LOAD BY HOME TYPE Commercial building load shapes were aggregated to develop G2 and G3 class load shapes. In many cases, building/business types can range in usage level; therefore, profiles may be included in more than one class. Table 3-4 details the building segments included for each class. 15 CALMAC Customer Load Shapes - PG&E. https://www.calmac.org/customer_load_shapes_pge.asp

0.0 0.5

1.0 1.5

2.0 2.5

3.0 3.5

4.0 4.5

5.0 Therms
0 - 235.37 therms 235.37 - 378.83 therms 378.83 - 575.72 therms > 575.72 therms Exhibit 1
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TABLE 3-4: COMMERCIAL INDUSTRY SEGMENT ASSIGNMENT TO CLASSES Segment
G2 –
Small
G2 –
Medium
G2 –
Large
G3 –
Large Commercial
Multifamily Included Included Included
Automotive and Repair Included Included Included Included Construction Included Included Included Included
Education Included Included Included Included
Full Service Restaurants Included Included
Gas Station & Convenience Stores Included Included
Government (Institutional) Included Included Included Included Grocery Included Included Included Included
Health Included Included Included Included
Limited Service Restaurants Included Included
Lodging Included Included Included Included
Manufacturing Included
Office Included Included Included Included
Personal Care Services Included Included
Religious Included Included Included Included
Retail Included Included Included Included
Transportation & Utilities Included Included Included Included Warehouse Included
Figure 3-2 compares the resulting daily therm usage by class after the class profiles are applied to monthly Palo Alto use. Notably, the G1 profile is characterized by a much larger increase in peak winter demand compared with G2 and G3 classes. This relationship is observed even after adjusting for relative load sizes across classes.

FIGURE 3-2: PALO ALTO CLASS LOAD
0 20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
7 8 9 10 11 12 1 2 3 4 5 6
Therms/day
Month
G1 G2 Small G2 Medium G2 Large G3 Total System
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3.3.1.1 Load Factor Calculations
Monthly class load factors were calculated from monthly usage, each month’s individual maximum day usage (demand or non-coincident peak) and the number of days per month. Load factors are calculated for each month according to the equation below where usage is the total therms per month, demand is the maximum daily therms in that month, and days is the number of days in the month. So, a residential customer who uses 60 therms in January, and has a maximum daily use of 2.74 therms, has a load factor of 70.6% for January.16
𝑳𝑳𝑳𝑳𝑳𝑳𝑳𝑳 𝑭𝑭 𝑭𝑭𝑭𝑭 𝑭𝑭 =
𝑼𝑼𝑼𝑼 𝑼𝑼𝑼𝑼
(𝑫𝑫 𝑫𝑫 𝑫𝑫 ∗ 𝑫𝑫 𝑫𝑫 )
Table 3-5 contains the monthly load factor results by class. A lower load factor indicates that peak daily use is relatively high compared to the average use over the same period. These customers typically have a higher cost to serve because more capacity is needed to serve them, but energy use is relatively lower, all else equal. The G1 rate class has the lowest average monthly load factor. The lower load factor is also illustrated in Figure 3-2 where there is a larger difference in winter use compared with summer use. Lower load factors result in higher volumetric rates because costs associated with the required system capacity are spread over a lower number of therms. For example, two customers groups with the same maximum consumption but different load factors will have different $/therm rates. Both groups use the same share of system capacity; however, the customer group with lower energy use will have a higher rate in $/therm.

TABLE 3-5: LOAD FACTOR BY CLASS
CY Month G1 G2 – Small G2 – Medium G2 – Large G3
2025 7 70.6% 89.8% 90.0% 87.9% 87.6%
2025 8 73.8% 89.0% 89.1% 86.1% 90.6%
2025 9 74.8% 82.1% 82.1% 79.0% 83.2%
2025 10 55.7% 68.5% 68.3% 60.5% 68.8%
2025 11 59.5% 72.6% 72.4% 67.7% 72.1%
2025 12 65.1% 74.8% 74.5% 70.1% 74.0%
2026 1 75.4% 81.8% 81.8% 79.1% 81.9%
2026 2 59.7% 72.4% 72.2% 68.5% 71.7%
2026 3 63.2% 72.4% 72.3% 69.4% 71.8%
2026 4 58.7% 75.9% 75.6% 70.8% 75.5%
2026 5 65.0% 78.2% 78.2% 74.3% 78.7%
2026 6 75.5% 86.8% 86.8% 83.2% 87.1%
The load factors are used to calculate each class’s NCP (sum of individual customer peaks). The NCP is used to measure the “excess” demand portion in the A&E calculation. The NCP is appropriate because the system sizing is based on the sum of individual customer peaks regardless of when the peaks occur.

3.4 CUSTOMER WEIGHTING FOR METER COSTS
The number of customers weighted by meter costs is used in the study to allocate meter asset value in the rate base. Weighted meter costs are appropriate for allocating meter asset values in the rate base because they represent the relative cost of replacing meters for each class as infrastructure ages. “Meter 16 Load factor = 60 therms divided by (31 days x 2.74 therms) = 70.6%.

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costs” for each customer class are equal to the current replacement cost of the meters (equipment) plus labor costs for installation. Utilities typically do not record original meter and installation costs by customer or location; therefore, the next best measure for service cost is the current replacement cost.

Table 3-6 compares the resulting meter costs. This 2026 Report uses an average of meter replacement costs based on the count of all meter types currently in service within each class. This weighted average cost is most appropriate because it considers all of the meter types and requisite costs used by each class of service.

TABLE 3-6: CUSTOMER WEIGHTING FOR METER COSTS: FY2026
G1 G2 G3
Meter Costs1 $414 $1,262 $10,473
Service Accounts 21,163 2,193 30
Weighting $8,761,310 $2,772,869 $308,954
Resulting Allocator 74.0% 23.4% 2.6%

1. Meter Costs include both the cost of the assets and labor costs for installation. Costs are based on current replacement costs and labor rates.

The meter cost weighting from Table 3-6 results in a larger share of meter values from the rate base being allocated to G1 and a relatively smaller share of meter rate base allocated to G2 compared with the 2020 Study. This update is one of the primary drivers for the rate rebalancing recommended in this study. Note that the G2 class is later disaggregated into 3 subgroups based on meter size and usage. Meter costs for G2 small, medium, and large are $313, $1,709, and $6,935, respectively. Taken together, the average G2 meter cost is $1,262 as shown in Table 3-6.

3.5 CUSTOMER CLASSES OF SERVICE
Customer classes of service refer to the arrangement of customers into groups that reflect common usage characteristics or facility requirements.17 The classes of service used within this 2026 Report were as follows: Residential (G1); Small Commercial (G2); and Large Commercial (G3). The City also serves its own Compressed Natural Gas (CNG) meter. The costs for the CNG service are paid by the City’s Public Works department. The City is developing a cost-based fee to recover the CNG service’s fair share of metering costs, service administration, and directly assigned costs. The estimated fee revenue is small (0.01% of the total revenue requirement), and changes do not materially impact the results of this study.

3.6 COST OF SERVICE RESULTS
Given the key assumptions and updates discussed above, the COSA was completed. Tables 3-7 and 3-8 provide a summary of the Rate Base and Revenue Requirement amounts allocated to the various customer classes.18 These schedules are calculated by multiplying the applicable classification and allocation factors to each cost in the rate base and revenue requirement. 17 Breakpoints between or within rate classes are sometimes referred to as segmentation in rate making. 18 The rate base and revenue requirement tabs of the COSA model also show the rate base and revenue requirement allocated to each class of service.

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TABLE 3-7: DISTRIBUTION RATE BASE ALLOCATION RESULTS: FY 2025-2026 Asset Description Total G1 Residential
G2 Small
Commercial
G3 Large
Commercial
Distribution Plant
Equipment-Meters $12,334,716 $9,124,973 $2,364,799 $844,943 Equipment-Services $59,109,371 $25,762,073 $22,504,632 $10,842,665 Equipment-Misc. $2,729,148 $1,189,465 $1,039,065 $500,618 Equipment-Regulators $976,067 $425,406 $371,617 $179,044 Equipment-Distribution Mains $77,559,779 $33,803,451 $29,529,232 $14,227,096 Equipment-Measuring $2,869,793 $1,250,763 $1,092,612 $526,417 Total Distribution Plant $155,578,873 $71,556,132 $56,901,957 $27,120,784 General Plant
Building $1,910,425 $878,671 $698,726 $333,029
Equipment $2,911,310 $1,339,013 $1,064,793 $507,505
Total General Plant $4,821,735 $2,217,684 $1,763,518 $840,533 Total Gross Plant in Service $160,400,608 $73,773,815 $58,665,476 $27,961,317 Less: Accumulated Depreciation
Distribution Plant ($49,833,503) ($22,920,160) ($18,226,279) ($8,687,064) General Plant ($3,812,789) ($1,753,634) ($1,394,503) ($664,652) Total Accumulated Depreciation ($53,646,292) ($24,673,795) ($19,620,781) ($9,351,716) Total Net Plant $106,754,316 $49,100,021 $39,044,694 $18,609,601 Working Capital
1/8 Operating Expenses $2,251,043 $1,160,297 $761,319 $329,427 Total Working Capital $2,251,043 $1,160,297 $761,319 $329,427 TOTAL RATE BASE $109,005,358 $50,260,318 $39,806,013 $18,939,027 Total CWIP $8,029,320 $3,692,963 $2,936,671 $1,399,685
TOTAL RATE BASE plus CWIP $117,034,679 $53,953,281 $42,742,685 $20,338,713 Exhibit 1
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TABLE 3-8: DISTRIBUTION REVENUE REQUIREMENT ALLOCATION RESULTS: FY 2025-2026 Plant Description FY 2026 Total G1 Residential
G2 Small
Commercial
G3 Large
Commercial
Distribution
Engineering Support $768,861 $353,626 $297,780 $117,455 Operations & Maintenance $9,028,547 $4,152,543 $3,496,760 $1,379,245 Total Distribution $9,797,408 $4,506,169 $3,794,540 $1,496,700 Customer Service, Accounts, & Sales
Admin - Customer & Marketing $227,967 $179,343 $41,874 $6,750 Meter Reading $485,915 $359,470 $113,769 $12,676
Utility Billing $543,152 $427,300 $99,769 $16,082
Credit & Collections $9,850 $7,749 $1,809 $292
Key & Major Accounts $155,106 $0 $0 $155,106
Customer Service $1,266,689 $1,026,917 $239,772 $0
Low Income Programs $53,792 $20,372 $24,005 $9,415
Efficiency - Demand Side Management $465,537 $176,305 $207,750 $81,482 Total Customer Service $3,208,008 $2,197,456 $728,749 $281,803 Administrative & General
Administrative & General Salaries $1,451,715 $748,284 $504,907 $198,523 Allocated Charges $2,735,638 $1,410,081 $951,456 $374,101 Rents $574,830 $296,295 $199,926 $78,608
Transfers to Non-Enterprise Funds $59,411 $30,623 $20,663 $8,125 Transfers to Enterprise Funds $181,333 $93,468 $63,068 $24,798 Total Administrative & General $5,002,927 $2,578,752 $1,740,020 $684,155 Total Costs with A&G $18,008,343 $9,282,376 $6,263,309 $2,462,658 Interest and Debt Service Expense
Interest on Long-Term Debt $23,348 $10,738 $9,042 $3,567 Principal on Long-Term Debt $778,250 $357,944 $301,417 $118,889 System Improvement $7,538,046 $3,467,009 $2,919,488 $1,151,549 Total Debt Service /CIP Expense $8,339,643 $3,835,692 $3,229,947 $1,274,004 General Fund Transfer $9,734,580 $4,184,201 $4,247,401 $1,302,978 Reserves Contribution $5,874,887 $2,224,899 $2,621,721 $1,028,266 Revenue Requirement Before Other
Revenues $41,957,453 $19,527,169 $16,362,377 $6,067,907 Other (Revenues) & Expenses
Customer Discounts $318,105 $146,308 $123,202 $48,595
Connection Fees ($700,000) ($321,954) ($271,110) ($106,935) Misc. Revenue (Other) $449,823 $206,889 $174,217 $68,717 Transfer Credits ($131,346) ($60,411) ($50,870) ($20,065) Income (Loss) from Equity Investments ($625,693) ($287,778) ($242,331) ($95,584) Total Other Revenues ($689,111) ($316,946) ($266,893) ($105,272) NET REVENUE REQUIREMENT $41,268,342 $19,210,223 $16,095,484 $5,962,635 Exhibit 1
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Table 3-9 provides a summary of the COSA results with the recommended revenue changes. These results are the basis for the recommended distribution charges provided in the next section.

TABLE 3-9: DISTRIBUTION COSA RESULTS: FY 2025-2026
Projected FY 2026
Revenues
Revenue
Requirement
Projected FY
2026 Deficiency
Revenue
Change
Needed
G1 – Residential $17,738,316 $19,210,223 ($1,471,907) 8.3% G2 – Small Commercial $18,006,240 $16,095,484 $1,910,756 (10.6%) G3 – Large Commercial $5,523,787 $5,962,635 ($438,848) 7.9% Total $41,268,342 $41,268,342 $0 0.0%
Residential and Large Commercial classes require rate increases and the Small Commercial class requires a rate decrease. EES compared this study with the previous analysis (FY 2019-2020) and found the following significant drivers for these results:

1. Overall, the FY 2025-2026 Distribution revenue requirement is 171% of the FY 2019-2020 revenue requirement. The increase is due to multiple years of significant inflationary pressures and planned reserve fund contributions.
19 However, because the rate was adjusted on July 1, 2025, the overall revenue level does not need to be increased at this time.

2. The allocation of the General Fund Transfer was updated from Net Plant to Revenue. As a result, G1 is being allocated a larger share of the General Fund Transfer. Despite the adverse impact on G1 rates, this update better aligns the expense item with cost since the General Fund Transfer is calculated based on gross revenues.20

3. Customer allocators, such as customers weighted for meter costs, were updated to reflect current meter cost and billing cost information. More detail on this analysis can be found in Section 3.3.2.

Further, the method for calculating the meter costs for each class was changed from using a representative meter to using a weighted average for all meters in each class. These updates resulted in larger shares of expenses allocated to G1 and G3. The development of these allocators included a detailed analysis of the average cost of the average capacity meter for each rate class and rate class grouping.

4. Previous studies relied on Average & Excess for some aspects of Distribution System Allocation, and that is maintained in the current revision. However, the Rate Base Allocation of Distribution assets was updated to reflect updated Average & Excess calculations. This change moved some asset value from G1 to G2 and G3 based on the classes relative share of total sales. The 19 Resolution 10232 https://portal.laserfiche.com/Portal/DocView.aspx?id=200675&repo=r-704298fc approving the Reserves Management Practices (Exhibit 3 to Resolution 10232) https://www.paloalto.gov/files/assets/public/v/3/agendas-minutes-reports/agendas-minutes/city-councilagendas-minutes/2025/june-16/rates-attachments/finalized-attachment-c-exhibit-3-fy26-gas-reservemanagement-practices.pdf) 20 In November 2022, voters approved Measure L, amending the Municipal Code, Section 2.28.185, “Natural Gas Utility Transfer” states: “Each fiscal year the City Council may transfer from the natural gas utility to the general fund an amount equal to 18% of the gross revenues of the gas utility received during the fiscal year two fiscal years before the fiscal year of the transfer. At its discretion, the City Council may decide to transfer a lesser amount. The projected cost of the transfer shall be included in the City’s retail natural gas rates as part of the cost of providing gas service.” Exhibit 1
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classification to both energy and demand better reflects how the system is planned and its current operation, as discussed previously in the report. More detail on this update can be found in Section 3.3.1.

5. Total use for all classes is lower in FY 2025-2026 compared with FY 2019-2020. Total G1 use declined from 10.3 million therms to 9.8 million therms, G2 usage declined from 12.5 million therms to 11.5 million therms, and G3 use declined from 5.6 million to 4.5 million therms. When total use declines, fixed costs are spread across a smaller number of therms impacting the $/therm rate.

In addition, all rate change aspects in this report are for distribution charges only and do not include changes to supply. When considering overall rate impacts, it is important to note that most of these rate changes are forecasted to be less than a 10% impact when considering combined commodity and distribution charges.

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4 Rate Design
The final step in the rate study process is to design rates for each class of service or customer class. In California, local governments are subject to Article XIII C of the California Constitution, amended by Proposition 26 (2010), which requires gas rates and charges to not exceed the reasonable costs of providing gas service, and requires that the City’s costs of gas service are allocated to each customer in a manner that bears a fair or reasonable relationship to the customer’s burdens on, or benefits received from, the gas utility. As a result, the City has set rates to match the COSA results for each customer class.

The results of the revenue requirement and COSA study are based on forecasted load data estimates and usage pattern assumptions. Actual load and usage patterns may differ from the forecast. For this 2026 Report, rates are developed based on the forecast loads and observed historical usage patterns for each customer class.

The rates for the Residential and Commercial customers are designed to reflect the differences in costs among the various customer classes. The costs per customer class differ based on the seasonal shape of consumption (referred to as energy use) as well as the daily peak demand for each customer class.

Differences in energy use by season and the level of peak demand have an impact on the utility’s need for distribution facilities and the costs to operate and maintain those facilities.

4.1 RECOMMENDED RATE DESIGN: DISTRIBUTION
This section of the report reviews the present rate structures for the City and provides a comparison with the recommended rates based on this cost of service study. Table 4-1 summarizes the current rate design for each rate schedule and recommended rate design updates. As mentioned previously, the recommended rate design is the same as the current rate design with the exception of some updates and refinement as described below.

TABLE 4-1: NATURAL GAS DISTRIBUTION RATE DESIGN RECOMMENDATION OVERVIEW Rate Schedule Current Rate Design Recommended Rate Design Residential G1 Fixed Monthly Charge
Seasonal Tiered Rate with
Inclining Blocks
 Update fixed and volumetric charges to cost of service unit costs  Calculate tiered rates based on Base and Excessmethodology  Update Tier 1 summer baseline quantity
Small Commercial G2 Fixed Monthly Charge
Volumetric Charge
 Update fixed and volumetric chargesto cost of service  Implement three separate fixed monthly charges based on meter’s maximum capacity
Large Commercial G3 Fixed Monthly Charge
Volumetric Charge
 Update fixed and volumetric charges to cost of service unit costs Table 1-10 in Section 1.2.3, Rate Recommendations, summarizes the current and FY 2025-2026 recommended rates for each class. The rate recommendations and bill impacts by rate class are provided below.

4.1.1 Residential (G1)
The G1 distribution rates consist of a monthly service charge and volumetric tier rates: The Tier 1 rate applies to usage up to the baseline quantity and the Tier 2 rate applies to all usage above the baseline.

While the tier rates do not change between seasons, the baseline quantity varies by season and is higher in winter than in the summer because natural gas-based heating is used more in the winter. Therefore, the class average therms are higher in the winter than in the summer. The tiered rate structure ensures Exhibit 1
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that those customers contributing to higher seasonal demand are paying appropriately for their share of the demand-related cost.

The current G1 Tier breakpoints (baselines) were evaluated using sales data for several test periods. Based on average winter monthly use for 2022-2024, the winter baseline of 60 therms/30-day-billing is appropriate. However, the most recent data supports increasing the summer baseline from 20 to 23 therms/30-day-billing. Table 4-2 shows the current baseline and average consumption values supporting the recommendation.

TABLE 4-2: BASELINE QUANTITY ASSESSMENT
Tier 1 Baseline Assessment Therms/30-Day-Billing
Summer Winter
Current Baseline 20 60
Average Consumption
FY 2022 Actual 22 60
FY 2023 Actual 24 70
FY 2024 Actual 21 53
Gas Forecast FY 2026 24 56
Average of 3 Historical Years and 1 Forecast Year 23 60 Summer Winter
Recommended Baseline 23 60
The recommended baselines are used in the tiered rate calculations. The tiered rates recover all energyrelated distribution costs plus a share of demand-related distribution costs from each tier. The Base and Excess capacity methodology is used to determine the portion of distribution demand costs collected from each tier.21 The Base and Excess method first calculates G1 maximum annual use by applying G1 peak day usage over the entire year. This assumes that the full capacity of the system is utilized year-round, which is the basis for apportioning annual system capacity costs to Base use (Tier 1) and Excess use (Tier 2). If all customers used this maximum amount of therms per day for the entire year, then the $/therm rate would be a uniform rate. Because customers do not use the full capacity of the system year-round, the portion of system capacity costs needed to serve demands above the base use level, are apportioned to the Tier 2 rate. Base level demand is thus collected in the Tier 1 rate by dividing distribution demand costs by the annual use calculated at full capacity. The resulting $/therm is included in the Tier 1 rate. All excess (remaining) demand costs are included in the Tier 2 rate. Table 4-3 illustrates the calculation of first tier rate. Table 4-4 illustrates the calculation of the Tier 2 rate. 21 The Average & Excess methodology is used to apportion system costs to each rate class. The Base & Excess is used only in the G1 tiered rate design.

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TABLE 4-3: G1 RATE CLASS TIER 1 RATE CALCULATION: BASE & EXCESS CAPACITY Formula/Line Value Cost Share
Tier 1 Therms A 7,029,018
Distribution Demand Costs B $5,742,961 100%
Class Peak, therms/day C 89,733
Annualized Usage based on Peak
Demand, Therms
d = 365 × c 32,752,486
Tier 1 Demand Component, $/therm e = b ÷ d $0.1753
Tier 1 Demand Cost f = a × e $1,237,498 21%
Distribution Energy Costs g $8,495,630
Total Therms h 9,762,524
Energy, $/therm i = g ÷ h $0.8702
Tier 1 Total, $/therm j = e + i $1.0456
TABLE 4-4: TIER 2 RATE CALCULATION: BASE & EXCESS CAPACITY Formula/Line Value Cost Share
Tier 2 Therms k 2,733,507
Excess Demand Costs l = b – f (Table 4-3) $4,510,463 79% Tier 2 Demand
Component, $/therm
m =l ÷ k $1.6501
Energy, $/therm i (Table 4-3) $0.8702
Tier 2 Total, $/therm n = m + i $2.5203
Table 4-5 shows the distribution bill impacts for average customer use in summer and winter.

TABLE 4-5: G1 BILL IMPACTS AT AVERAGE CUSTOMER USE, DISTRIBUTION ONLY At Current
FY 26 Rates
At
Recommended
FY 26 Rates $ Change % Change
Average Use
Therms/30-day-billing
G1 Summer $40.86 $42.58 $1.72 4.2% 22.0
G1 Winter $74.58 $85.08 $10.50 14.1% 61.1
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Table 4-6 shows the impacts for a range of customer bills under various low, median and high usage levels.

TABLE 4-6: G1 BILL IMPACTS AT VARIOUS USAGE LEVELS, DISTRIBUTION ONLY Season
Usage
(Therms/month)
At
Current FY 26 Rates
At
Recommended
FY 26 Rates
Distribution
Bill Impact
$/Month
Distribution
Bill Impact
(%)
Summer 10 $27.34 $30.03 $2.69 9.8%
(Median) 17 $33.60 $37.35 $3.75 11.2%
30 $54.98 $61.27 $6.29 11.4%
45 $89.29 $99.07 $9.78 11.0%
Winter 30 $45.23 $50.94 $5.71 12.6%
(Median) 51 $64.01 $72.90 $8.89 13.9%
80 $117.81 $132.72 $14.91 12.7%
150 $277.92 $309.14 $31.22 11.2%
Annual (Median) 31 $56.68 $64.16 $7.49 13.2%

4.1.2 Small Commercial and Residential Master-Metered (G2) The current G2 distribution rate design is composed of a fixed monthly service charge and a volumetric charge. The fixed monthly service charge for a given rate schedule (customer class) is set to recover the customer-related costs allocated to that schedule. As described in Section 1.2, Rate Study Overview, EES recommends refinement in the development of the Monthly Service Charge for G2. Due to the diversity in G2 meters and service sizes, and the methodology in the COSA that allocates fixed customer costs based on meter costs, it is recommended to implement three separate Monthly Service Charges for G2 based on service size. These service charges more precisely reflect the different services provided and the associated costs for each of the three subclasses.

The creation of G2 subclasses (Small, Medium, and Large – defined below) is necessary to avoid intra-class subsidies that exist from a single monthly service charge applied to customers that range in size from 36 therms per month to over 11,000 therms per month. G2 is unique in that the types of meters (and meter costs) and customer usage represents a much wider range. To address the potential subsidies within the class, G2 meter types and corresponding usage data is analyzed to determine G2 monthly service charges that more precisely reflect customer-related fixed costs among differentiated subclasses within the class.

Figure 4-1 shows G2 meter capacity and associated average consumption. Meter size is positively correlated with average use. This finding is expected and indicates that larger meters have higher average use.22 Larger capacity meters also require larger service lines (connecting the meter to the distribution system) and generally impose greater demand on the system. Recall that usage for commercial buildings are uniform in shape but differ in relative size (Figure 1-3). 22 This is expected because meter capacity is sized to match the customer’s demand. City of Palo Alto, Utility Rule and Regulation 15, Section B.6: Meter Installations, Capacity of Meters, April 2023.pdf https://www.cityofpaloalto.org/files/assets/public/v/2/utilities/rules-and-regulations/rule-15-metering-april2023.pdf Exhibit 1
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FIGURE 4-1: AVERAGE MONTHLY USAGE BY METER CAPACITY
Figure 4-1 shows distinct patterns and separations in average usage levels that support 3 G2 meter groupings based on maximum meter capacity. Figure 4-2 shows the distinct average usage levels associated with the following three groupings by maximum meter capacity (in standard cubic feet per hour or scfh).

1. Up to 220 scfh (≤ 220 scfh)

2. Above 220 scfh and below 4,000 scfh (> 200 scfh and < 4,000 scfh)

3. 4,000 scfh and above (≥ 4,000 scfh)
FIGURE 4-2: G2 – AVERAGE MONTHLY USAGE BY METER CATEGORY Exhibit 1
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The above G2 meter ranges were chosen based on a detailed examination of the use across different meter types and capacities, according to summary data in Figures 4-1 and 4-2. This same rigor was also applied to determine appropriate meter costs for G1 and G3.

The calculation for the G2 volumetric charge remains unchanged. As mentioned previously, the uniform shape in G2 usage profiles supports a uniform volumetric rate. Recommended rates for G2 can be found in Table 1-6, G2 Monthly Service Charges: FY 2025-2026, and Table 1-10, Current and Recommended Rates.

Table 4-7 shows the G2 bill impacts for representative accounts in each G2 subgroup. Impacts for average use and for 50% of average use are provided.

TABLE 4-7: G2 BILL IMPACTS, DISTRIBUTION ONLY
At Current
FY 2026-2027
Rate
At Recommended
FY 2025-2026
Rate $ Change % Change
Average
Therms/Mo
# of
Accounts
G2 Total $684.29 $628.21 -$56.08 -8.2% 437 2,193
G2: ≤ 220 scfh 1,136
Average Use $235.17 $96.36 -$138.81 -59.0% 55
50% of Average Use $202.86 $62.80 -$140.06 -69.0% 28
G2: > 220 and ˂ 4,000 scfh 940
Average Use $739.20 $685.24 -$53.96 -7.3% 484
50% of Average Use $454.88 $389.90 -$64.97 -14.3% 242
G2: ≥4,000 scfh 117
Average Use $4,615.20 $5,035.93 $420.74 9.1% 3,783
50% of Average Use $2,392.87 $2,727.51 $334.63 14.0% 1,892

4.1.3 Large Commercial (G3)
The present G3 rate design is composed of a monthly service charge and a volumetric charge. As noted earlier, this class generally has large capacity meters and a high consumption threshold for service. G3 rate schedule applies to commercial customers who use at least 250,000 therms per year at one site.23 This threshold, which defines the rate class, results in a group of customers with similar services and usage characteristics, but very different usage levels. The service size and service cost uniformity means that fixed customer-related costs are also uniform within the rate class. Therefore, as a single charge fairly recovers the fixed customer-related charges from each customer. And, for tiered rates to be nondiscriminatory, the class would need to be both uniform in usage profile and average use. Individual customer baseline use is not uniform within this rate class. Therefore, tiered rates are not appropriate as they would result in higher-use customers subsidizing lower-use customers. No change is recommended in the overall design of these charges.

For illustrative purposes, Table 4-8 presents the G3 bill impact at 20,833 therms, which is 1/12 of the annual threshold level for G3 service.
23 Utility Rate Schedule G-3.

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TABLE 4-8: G3 BILL IMPACTS, DISTRIBUTION ONLY
At Current FY
2024-2025 Rate
At Recommended
FY 2025-2026
Rate $ Change % Change
G3 Large Commercial $25,015.37 $26,450.39 $1,435.02 5.7%

4.2 SUPPLY CHARGES
The primary focus of the rate study was the distribution charges which vary based on budgets and operating needs. The City also must pass through costs that vary based on external factors and market conditions. These appear in the rate schedules as Supply Charges. Supply charges include the Commodity, Cap and Trade Compliance, Carbon Offset, and Transportation Charges. These charges are on a $/therm basis and require frequent updates due to the variable nature of the underlying costs.

Currently, the City has a range included in the rate schedules. Table 4-9 shows the current ranges.

TABLE 4-9: SUPPLY CHARGES
Supply Charges $/therm

1. Commodity (Monthly Market Based) $0.10-$4.00

2. Cap and Trade Compliance Charges $0.00-$0.25

3. Transportation Charge $0.00-$0.30

4. Carbon Offset Charge $0.00-$0.10
EES examined both the current calculation of each charge and the basis for that calculation, as well as whether the charge should remain a pass-through and whether or not a range of values is appropriate.

EES does not recommend any changes to the Commodity charge range. For the Commodity supply charge, Council amended the Gas Utility Long-term Plan (GULP) Objectives, Strategies and Implementation Plan including collecting funds via a gas price mitigation adder to manage potential future short-term natural gas price spikes above the $4.00 per therm maximum charge (Resolution 101187, August 9, 2024). The Commodity charge range, therefore, is consistent with the Council-approved strategy.

The City’s gas utility is a covered entity under the California Air Resources Board (CARB) Cap-and-Trade program, under which the City is obligated to purchase allowances to cover all greenhouse gas emissions resulting from natural gas use within Palo Alto’s service territory. EES recommends eliminating the ranges for the Cap and Trade Compliance charge and instead converting this charge to a pass-through of the City’s actual costs because the City has little to no control over them, and they are largely nondiscretionary. The Cap and Trade Compliance Charge is calculated based on the Cap-and-Trade program quarterly auction allowance closing prices.

Likewise, EES recommends eliminating the ranges for the Transportation Charge and passing through these charges. The Transportation charge is the rate the City pays Pacific Gas and Electric Company (PG&E) to transport gas from the PG&E Citygate to the City of Palo Alto distribution system. PG&E is regulated by the California Public Utilities Commission. Palo Alto has no control over these charges and no alternatives Exhibit 1
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for transporting gas to its distribution system. The Transportation Charge is based on PG&E’s wholesale tariff (G-WSL)24.

Recently, the transportation charge exceeded the published range and the Council increased the upper limit on the Transportation Charge.
25 This is likely to occur for both the Transportation Charge and the Cap and Trade Compliance Charges in the future. Because the true costs can vary outside of the ranges provided, the ranges do not appear to provide material value to customers. If the costs vary outside the upper limit of the range the costs above the limit are paid for by the gas utility’s reserves unlessthe Council increased the upper limit. Updating the ranges with a wider spread would also provide less practical information to customers. Therefore, EES recommends eliminating the ranges for the Cap and Trade Compliance and Transportation charges. Two years of historical monthly values for the Transportation Charge and Cap and Trade Compliance Charge are posted publicly on the City’s website for reference.26 EES does not recommend changes to the Carbon Offset Charge range. In December 2020 Council adopted Resolution 99303, amending the Carbon Neutral Gas Plan. This program is voluntary in the sense that it is a local program approved by the City Council rather than a compliance obligation imposed by the state or another governing body. The amended plan limited the purchase price of offsets to $19 per ton CO2e, consistent with the original maximum 10 cents per therm rate impact, therefore the range is consistent with the Council-approved program.

Second, EES recommends providing more detailed information on the source costs and calculation for all four of the supply charges. Recommended additions include language in Table 4-10. 24 https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_G-WSL.pdf 25 On October 7, 2024, Council adopted resolution 10190 increasing the upper limit on the Transportation Charge on all of the City’s gas rate schedules from $0.25 per therm to $0.30 per therm effective November 1, 2024. 26 Residential: https://www.cityofpaloalto.org/files/assets/public/v/25/utilities/rates-schedules-forutilities/residential-utility-rates/monthly-gas-volumetric-and-service-charges-residential-3.pdf and Non-Residential and Residential Master-Metered:
https://www.cityofpaloalto.org/files/assets/public/v/24/utilities/business/business-rates/monthly-gas-volumetricand-service-charges-commercial-3.pdf Exhibit 1
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TABLE 4-10: SUPPLY LANGUAGE
Supply Charges Description

1. Commodity (Monthly Market Based) This charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, adjusted to account for delivery losses to the customer’s meter. The Commodity Charge also includes adjustments to account for Council-approved programs implemented to reduce the cost of Gas, including a municipal purchase discount (Adopted via Resolution 9451, on September 15, 2014), and $0.055 per therm for mitigating the impact of short-term natural gas market price spikes.

The Commodity Charge calculation formula is:

PG&E Citygate Monthly Bidweek Price ($/MMBtu)
+ Gas Supplier Adder ($/MMBtu)
– Municipal Gas Discount ($/MMBtu)
× (1+ Distribution Loss Multiplier)
+ Gas Price Spike Mitigation Charge ($/MMBtu)
÷ 10 (conversion from MMBtu to therm) (MMBtu/therm)
= Commodity Rate ($/therm)
Where :

PG&E Citygate Monthly Bidweek Price is the monthly price for PG&E Citygate as reported in the first issue of the month of Natural Gas Intelligence’s Bidweek Survey as published by Intelligence Press Inc.

The Gas Supplier Adder is the premium or discount applied to the Bidweek Price Index, based on the City's actual transactions with its natural gas suppliers.

The Distribution Loss Multiplier, updated annually, is calculated by the variances of gas supply purchases and gas retail sales for the past three fiscal years.

2. Cap and Trade Compliance Charge The Cap and Trade Compliance Charge reflects the City’s cost of regulatory compliance with the State’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge is adjusted in response to market conditions, retail sales volumes, and the quantity of allowances required. The calculation formula is based on carbon allowance auction prices and allowances needed to comply with state law. One allowance is equal to 1 metric ton (MT) of CO2.

The Cap and Trade Compliance Charge calculation formula is:

Most Recent Auction Price ($/MT CO2)
x Number of Allowances Required (%)
x (conversion from MT CO2 to therm) (MT CO2/therm)
= $/Therm
Where:

Number of Allowances Required (%) =
(Projected Emissions for Current Year- Palo Alto’s Allocated Allowances for Current Year)
÷ Projected Emissions for Current Year
Exhibit 1
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3. Transportation Charge The Transportation Charge is based on the current PG&E G-WSL rate for Palo Alto, accounting for delivery losses to Customer Meters. The current rates are shown in this tariff https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_GWSL.pdf, provided by PG&E. Additionally, there is a distribution loss factor (updated annually), which is calculated by the variances of gas supply purchases and gas retail sales for the past three fiscal years.

The Transportation Charge calculation formula is:

PG&E G-WSL Transportation Charges ($/therm)
- Cap and Trade Cost Exemption ($/therm)
× (1+ Distribution Losses Multiplier)
= Transportation Charge ($/therm)
Where:

The Distribution Loss Multiplier, updated annually, is calculated by the variances of gas supply purchases and gas retail sales for the past three fiscal years.

4. Carbon Offset Charge The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced when Gas is burned. The Carbon Offset Charge will change in response to market conditions, sales volumes, and the quantity of offsets purchased within the Council-approved cap of $19 per MT CO2e, calculated annually.

The Carbon Offset Charge calculation formula is:

Weighted Average Cost of Carbon Offset ($/MT CO2)
x (conversion from MT CO2 to therms) (MT CO2/therms)
= Carbon Offset Charge ($/therm)
Where:

Purchase Price of Carbon Offset ≤ $19/MT CO2e
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RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1

CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-1 Effective 27-1-20265
dated 0711-1-20254 Sheet No G-1-1
A. APPLICABILITY:

This schedule applies to the following Customers receiving Gas Service from City of Palo Alto Utilities:

1. Separately-metered single-family residential Customers;

2. Separately-metered multi-family residential Customers in multi-family residential facilities.

B. TERRITORY:

This schedule applies everywhere the City of Palo Alto provides Gas Service.

C. UNBUNDLED RATES: Per Service
Monthly Service Charge: ..............................................................................................$ 19.5818.40 Tier 1 Rates: Per Therm
Supply Charges:

1. Commodity (Monthly Market-Based) ......................................... $0.10-$4.00

2. Cap and Trade Compliance Charge ............................................ $0.00- $0.25Pass-through

3. Transportation Charge ................................................................. Passthrough$0.00-$0.30

4. Carbon Offset Charge .................................................................. $0.00-$0.10 Distribution Charge:....................................................................................... $

1.04560.8944
Tier 2 Rates: (All usage over 100% of Tier 1)
Supply Charges:

1. Commodity (Monthly Market-Based) ......................................... $0.10-$4.00

2. Cap and Trade Compliance Charge ............................................. $0.00- $0.25Pass-through

3. Transportation Charge ................................................................. $0.00- $0.30Pass-through

4. Carbon Offset Charge .................................................................. $0.00-$0.10 Exhibit 2
Item 5
Attachment A - Resolution
Item 5: Staff Report Pg. 67 Packet Pg. 235 of 828

RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1

CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-2 Effective 27-1-20265
dated 0711-1-20254 Sheet No G-1-2
Distribution Charge:............................................................................................. $

2.52032.2873
D. SPECIAL NOTES:

1. Calculation of Cost Components
The actual bill amount is calculated based on the applicable rates in Section C above and adjusted for any applicable discounts, surcharges and/or Taxes. On a Customer’s bill statement, the bill amount may be broken down into appropriate components as calculated under Section C.

The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, adjusted to account for delivery losses to the Customer’s Meter. The Commodity Charge also includes adjustments to account for Councilapproved programs implemented to reduce the cost of Gas, including a municipal purchase discount1 and $0.055 per tTherm for mitigating the impact of short-term natural gas market price spikes2.

The Cap and Trade Compliance Charge is a pass-through charge that reflects the City’s cost of regulatory compliance with the state’s Cap and Trade Program, including the cost of acquiring compliance instruments sufficient to cover the City’s Gas Utility’s compliance obligations. The Cap and Trade Compliance Charge changes in response to changing market conditions, retail sales volumes and the quantity of allowances required, and is calculated based on the Cap-and-Trade Program’s quarterly auction allowance closing prices.

The Carbon Offset Charge reflects the City’s cost to purchase offsets for greenhouse gases produced when Gas is burned. The Carbon Offset Charge changes in response to changing market conditions, sales volumes and the quantity of offsets purchased within the Council-approved per Ttherm cap.
1 Adopted via Resolution 9451, on September 15, 2014.
2 Adopted via Resolution 10187 on August 19, 2024.

Exhibit 2
Item 5
Attachment A - Resolution
Item 5: Staff Report Pg. 68 Packet Pg. 236 of 828

RESIDENTIAL GAS SERVICE
UTILITY RATE SCHEDULE G-1

CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-1-3 Effective 27-1-20265
dated 0711-1-20254 Sheet No G-1-3
The Transportation Charge is a pass-through charge based on the current PG&E G-WSL3 (Gas Transportation Service to Wholesale/Retail Customers) rate for Palo Alto, accounting for delivery losses to the Customer’s Meter.

The Commodity and, Cap and Trade Compliance, Carbon Offset and Transportation Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic per tTherm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website. 4 2. Seasonal Rate Changes:

The Summer period is effective April 1 to October 31 and the Winter period is effective from November 1 to March 31. When the Bbilling Pperiod includes use in both the Summer and the Winter periods, the usage will be prorated based on the number of days in each seasonal period, and the charges based on the applicable rates for each period. For further discussion of bill calculation and proration, refer to Rule and Regulation 11.

3. Calculation of Usage Tiers
Tier 1 Nnatural Ggas usage is calculated and billed based upon a level of 0.667 therms per day23 Ttherms per 30 day Billing Period during the Summer period, and 60 tTherms per 30 day Billing Period during the Winter period, based on Meter reading days of Service, and rounded to the nearest whole tTherm. As an example, Tier 1 Natural Gas is calculated at 0.767 tTherms per day during the Summer period (.767 tTherms per day x 30 days = 23 tTherms) and 2.0 tTherms per day during the Winter period (2 tTherms per day x 30 days = 60 tTherms). , rounded to the nearest whole therm, based on meter reading days of service. As an example, for a 30 day bill, the Tier 1 level would be 20 therms during the Summer period and 60 therms during the Winter period months. For further discussion of bill calculation and proration, refer to Rule and Regulation 11. {End}
3 https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_G-WSL.pdf 4 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.paloalto.gov/files/assets/public/utilities/rates-schedules-for-utilities/residential-utility-rates/monthly-gasvolumetric-and-service-charges-residential.pdf Exhibit 2
Item 5
Attachment A - Resolution
Item 5: Staff Report Pg. 69 Packet Pg. 237 of 828

RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-2

CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-2-1 Effective 27-1-20265
dated 711-1-20245 Sheet No G-2-1
A. APPLICABILITY:

This schedule applies to the following Customers receiving Gas Service from the City of Palo Alto Utilities:

1. Commercial Customers who use less than 250,000 tTherms per year at one site;

2. Master-Mmetered residential Customers in multi-family residential facilities.

B. TERRITORY:

This schedule applies everywhere the City of Palo Alto provides Gas Service.

C. UNBUNDLED RATES: Per Service
Monthly Service Charge:

For Meters with maximum capacity:

1. Up to 220 Standard Cubic Feet per Hour (scfh) .......................................................$ 29.24

2. Above 220 scfh and less than 4,000 scfh ................................................................$ 94.56

3. 4,000 scfh and above ...................................................................................$ 419.08170.55 Per Therm
Supply Charges:

1. Commodity (Monthly Market Based) ......................................................... $0.10-$4.00

2. Cap and Trade Compliance Charges ........................................................... $0.00- $0.25Pass-through

3. Transportation Charge .................................................................................. $0.00- $0.30Pass-through

4. Carbon Offset Charge ................................................................................... $0.00-$0.10 Distribution Charge: .................................................................................................. $

1.17491.2204

D. SPECIAL NOTES:

The Mmeter’s maximum capacity used to determine the applicable Monthly Service Charge for G-2 Gas Service is the installed Meter’s City of Palo Alto-approved Exhibit 2
Item 5
Attachment A - Resolution
Item 5: Staff Report Pg. 70 Packet Pg. 238 of 828

RESIDENTIAL MASTER-METERED AND COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-2

CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-2-2 Effective 27-1-20265
dated 711-1-20245 Sheet No G-2-2
maximum capacity in standard cubic feet per hour (scfh), measured at 7 inches of water column or equivalent to 0.25 pounds per square inch.

The Transportation Charge is a pass-through charge based on the current PG&E G-WSL3 (Gas Transportation Service to Wholesale/Retail Customers) rate for Palo Alto, accounting for delivery losses to the Customer’s Meter.

The Commodity, Cap and Trade Compliance, and Carbon Offset and Transportation Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic per Ttherm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website.4

{End}
1 Adopted via Resolution 9451, on September 15, 2014.
2 Adopted via Resolution 10187 on August 19, 2024.
3 https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_G-WSL.pdf 4 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.paloalto.gov/files/assets/public/utilities/business/business-rates/monthly-gas-volumetric-and-service-chargescommercial.pdf Exhibit 2
Item 5
Attachment A - Resolution
Item 5: Staff Report Pg. 71 Packet Pg. 239 of 828

LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3

CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-3-1 Effective 27-1-20265
dated 711-1-20254 Sheet No G-3-1
A. APPLICABILITY:

This schedule applies to the following Customers Commercial Customers receiving Gas Service from the City of Palo Alto Utilities, who use at least 250,000 Ttherms per year at one site.:

1. Commercial Customers who use at least 250,000 therms per year at one site;

2. Customers at City-owned generation facilities including the City’s Natural Gas fueling station at the Municipal Services Center.

B. TERRITORY:

This schedule applies everywhere the City of Palo Alto provides Gas Service.

C. UNBUNDLED RATES: Per Service
Monthly Service Charge: $ 780.341,712.36
Per Therm
Supply Charges:

1. Commodity (Monthly Market Based) .................................................... $0.10-$4.00

2. Cap and Trade Compliance Charges ................................ $0.00-$0.25Pass-through

3. Transportation Charge .......................................................................... $0.00- $0.30Pass-through

4. Carbon Offset Charge ........................................................................... $0.00-$0.10 Distribution Charge: .................................................................................................$ 1.16331.1874 D. SPECIAL NOTES:

The Commodity Charge is based on the monthly natural gas Bidweek Price Index for delivery at PG&E Citygate, adjusted to account for delivery losses to the Customer’s Meter. The Commodity Charge also includes adjustments to account for Councilapproved programs implemented to reduce the cost of Gas, including a municipal Exhibit 2
Item 5
Attachment A - Resolution
Item 5: Staff Report Pg. 72 Packet Pg. 240 of 828

LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3

CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-3-2 Effective 27-1-20265
dated 711-1-20254 Sheet No G-3-2
purchase discount1 and $0.055 per Ttherm for mitigating the impact of short-term natural gas market price spikes2.

The Commodity and , Cap and Trade Compliance, Carbon Offset and Transportation Charges will fall within the minimum/maximum ranges set forth in Section C. Current and historic per Ttherm rates for the Commodity, Cap and Trade Compliance, Carbon Offset and Transportation Charges are posted on the City Utilities website.4

2. Request for Service
A qualifying Customer may request Sservice under this schedule for more than one Aaccount or Mmeter if the Aaccounts are located on one site. A site consists of one or more contiguous parcels of land with no intervening public right-of- ways (e.g. streets).

3. Changing Rate Schedules
Customers may request a rate schedule change at any time to any applicable City of Palo Alto full-service rate schedule.
1 Adopted via Resolution 9451, on September 15, 2014.
2 Adopted via Resolution 10187 on August 19, 2024.
3 https://www.pge.com/tariffs/assets/pdf/tariffbook/GAS_SCHEDS_G-WSL.pdf 4 Monthly gas and commodity and volumetric rates are available here, or by visiting https://www.paloalto.gov/files/assets/public/utilities/business/business-rates/monthly-gas-volumetric-and-service-chargescommercial.pdf Exhibit 2
Item 5
Attachment A - Resolution
Item 5: Staff Report Pg. 73 Packet Pg. 241 of 828

LARGE COMMERCIAL GAS SERVICE
UTILITY RATE SCHEDULE G-3

CITY OF PALO ALTO UTILITIES
Issued by the City Council
Supersedes Sheet No G-3-3 Effective 27-1-20265
dated 711-1-20254 Sheet No G-3-3
{End}
Exhibit 2
Item 5
Attachment A - Resolution
Item 5: Staff Report Pg. 74 Packet Pg. 242 of 828
City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: IT Department
Meeting Date: December 1, 2025
Report #:2509-5266
TITLE
Approval of Purchase Order C26196043 with Carahsoft, Utilizing a General Services Administration Cooperative Agreement, to Procure S/4 Hana Implementation Services, for a term of Twelve Months and a Total Amount Not-To-Exceed of $5,839,230, including $4,399,300 for Basic Services and $439,930 for Additional Services, and Approval of Budget Amendments to the Information Technology; CEQA Status – Not a Project.

RECOMMENDATION
The Finance Committee and staff recommend the City Council:

1. Approve and authorize the City Manager or their designee to execute PO C26196043 with Carahsoft, utilizing a General Services Agreement (GSA) Cooperative Agreement Contract Number 47QSWA18D008F, to procure SAP S/4HANA implementation services for a total not-to-exceed amount of $5,839,230, including $4,399,300 for basic services, $439,930 for additional services, for a term of 12 months (Attachment A)

2. Amend the Fiscal Year 2026 Budget Appropriation for the Information Technology Fund by [requires a two-thirds approval by the Council]:
a. Increasing the expenditure appropriation for the Enterprise Resource Planning Upgrade 2026 Project (TE-19000) in the Information Technology Department by $5,839,230 ($4,839,230 to fund this PO and up to $1,000,000 to fund existing SAP on-call agreements for additional implementation support), and b. Decreasing the Technology Reserve by $5,839,230.

EXECUTIVE SUMMARY
Approval of these consulting services in combination with the Council previously approved purchase of S/4 Hana licensing on September 29, 2025 will result in the upgrade of the City’s Enterprise Resource Planning (ERP) system, currently SAP, to the most current version. This contract specifically, working alongside City staff, will help implement the new version and provide increased functionality for City staff.

Item 6
Item 6 Staff Report
Item 6: Staff Report Pg. 1 Packet Pg. 243 of 828
This project (Phase I) is critical to ensure the City’s Finance, Payroll/HR, and Utilities systems remain secure, reliable, and supported beyond 2027 when the current platform support will end on January 1, 2028. In total, the upgrade is estimated to cost $13.3 million over five years.

BACKGROUND
SAP is the City’s core business system, also known as our Enterprise Resource Planning (ERP) system. It supports essential functions including Finance, Payroll/HR, and Utilities billing. The City has relied on SAP as its core Enterprise Resource Planning (ERP) system since 2003, enabling integration and support for key business functions such as Finance, Human Resources, Payroll, Procurement, Budgeting, and Utilities. Over time, the City has continued to invest in the platform—most notably with a major upgrade in 2021 that transitioned the system to SAP HANA, enabled cloud hosting, improved performance, and introduced single sign-on (SSO).

These improvements have delivered meaningful gains in efficiency, accuracy, and user experience.

SAP has announced that support for the current SAP ERP platform will end on January 1, 2028.

Running the system beyond this date would introduce increased risk, including the loss of vendor support, potential security vulnerabilities, and limited access to future enhancements.

The Finance Committee heard staff’s recommendation at its meeting on September 16, 20251, and unanimously recommended City Council approval of the recommendation to migrate to SAP S/2HANA – SAP’s latest cloud-based ERP platform. The Committee commented on the importance of being on a fully support version and innovations using features such as AI to improve process efficiencies. City Council approved the upgraded licensing costs for five years of $6.6 million unanimously on September 29, 20252. The Committee review and Council approval acknowledged the total cost of $13.3 million once implementation and transition costs, recommended in this report, and additional temporary staffing costs were included.

ANALYSIS
In 2021, staff issued a competitive Request for Proposals (RFP 182051) for cloud hosting and SAP support services. Sixteen proposals were received and carefully reviewed. After extensive evaluation, EPI-USE was identified as the top vendor. The City plans to contract with EPI-USE through Carahsoft, an established government contracting vehicle. Key qualifications include:
• Strong track record and expertise in SAP cloud migrations • Experience with public-sector clients
1 Finance Committee, September 16, 2025, Item #3, Staff Report # 2507-5015 https://portal.laserfiche.com/Portal/DocView.aspx?id=223086&repo=r-704298fc&searchid=96d03863-2689-4821- 84f0-a01b93b3e812
2 City Council Meeting, September 29, 2025, Item #AA1, Staff Report # 2509-5240 https://portal.laserfiche.com/Portal/DocView.aspx?id=225755&repo=r-704298fc&searchid=ad3bba21-91d9-4fbc8881-e510025f460d Item 6
Item 6 Staff Report
Item 6: Staff Report Pg. 2 Packet Pg. 244 of 828
• Qualified staff and proven customer references
• Competitive pricing and partnership with SAP
Project Approach:

The migration will take place in two phases:

Phase I – Migration and Upgrade (Contract through Carahsoft) Timeline: Approximately 12 months from project start
Scope:
• Upgrade to the latest SAP software to ensure long-term support and stability • Move the City’s SAP systems and data to the secure S/4 HANA cloud platform • Identify potential enhancements and efficiencies to be considered for Phase II • Provide “train-the-trainer” sessions so staff can guide end users on the updated system • Deliver one month of post Go-Live support
• Engage limited-term staff as part of phase I to assist with implementation and transition activities in preparation of Phase II
Phase II – Enhancements
Timeline: To be determined after Phase I.

Scope:
• Implement business process improvements and new SAP tools (such as AI features and WalkMe for user support)
• Enhance productivity and streamline workflows
Costs for Phase II will be refined as part of Phase I planning. Staff will return to Council for approval once solidified.

FISCAL/RESOURCE IMPACT
Funding for this purchase order is available in the Information Technology Fund, specifically the Technology Reserve. This Reserve is intended to cover system upgrades costs such as these.

The FY 2026 forecasted ending balance for the Technology Reserve is $16.4 million. If this budget amendment is approved, the reserve balance is anticipated to be $10.5 million at yearend. There are no ongoing costs associated with this purchase order.

The Phase I five-year estimated project cost of $13.3 million is comprised of licensing costs $6.6 million, implementation and transition services $5.8 million, and approximately $900,000 in other costs such as limited-term staffing backfill costs. Additional one-time funding for limitedterm staffing to support Phase I enhancements is anticipated to be requested as part of the FY 2027 budget process. These temporary costs will be funded by the Information Technology Reserve and will not increase the City’s authorized FTE count.

Item 6
Item 6 Staff Report
Item 6: Staff Report Pg. 3 Packet Pg. 245 of 828
The Information Technology (IT) Department is funded by an Internal Service Fund (ISF) that allocates costs across the City to provide technology-related services to other departments and funds. Approximately 49% of services are provided to the General Fund, with the remaining 51% supporting Enterprise, special revenue, and other internal service funds.

STAKEHOLDER ENGAGEMENT
The services were coordinated with internal stakeholders and the service provider.

ENVIRONMENTAL REVIEW
The approval of these contracts is exempt from review under the California Environmental Quality Act (CEQA) under CEQA Guidelines section 15061(c)(3) because it can be seen that there is no possibility that the activity in question may have a significant effect on the environment.

ATTACHMENTS
Attachment A: Carahsoft_EPI-USE S4 HANA Implementation; C26196043 APPROVED BY:

Darren Numoto, Chief Information Officer
Staff: Lisa Bolger, Assistant Director Information Technology/CTO Item 6
Item 6 Staff Report
Item 6: Staff Report Pg. 4 Packet Pg. 246 of 828

PRICE QUOTATION

CARAHSOFT TECHNOLOGY CORP
11493 SUNSET HILLS ROAD | SUITE 100 | RESTON, VIRGINIA 20190 PHONE (703) 871-8585 | FAX (703) 871-8505
WWW.CARAHSOFT.COM | [email protected]
TO: Jitendra Kulkarni
IT Enterprise Systems Manager
City Of Palo Alto
250 Hamilton Ave
2nd Floor
Palo Alto, CA 94301 USA
EMAIL: [email protected]
PHONE: (925) 216-6256
FROM: Jonathan Gutierrez
Carahsoft Technology Corp.
11493 Sunset Hills Road
Suite 100
Reston, Virginia 20190
EMAIL: [email protected]
PHONE: (571) 662-3375 FAX: (703) 871-8505
TERMS: GSA Schedule No: 47QSWA18D008F
Term: August 22, 2018 - August 21, 2028
FTIN: 52-2189693
Shipping Point: FOB Destination
Credit Cards: VISA/MasterCard/AMEX
Remit To: Same as Above
Payment Terms: Net 30 (On Approved Credit)
Cage Code: 1P3C5
DUNS No: 088365767
UEI: DT8KJHZXVJH5
Business Size: Other than Small
Sales Tax May Apply
QUOTE NO: 55316029
QUOTE DATE: 11/07/2025
QUOTE EXPIRES: 12/31/2025
RFQ NO:

SHIPPING: ESD
TOTAL PRICE: $4,399,299.34
TOTAL QUOTE: $4,399,299.34
LINE NO. PART NO. DESCRIPTION - QUOTE PRICE QTY EXTENDED PRICE

PMO & ARCHITECTURE
1 CON-SPM-611 Senior Project Manager (Per Hour)
Client Partner/QA
Carahsoft Technology Corporation - CON-SPM
Start Date: 01/05/2026
End Date: 02/28/2027
$263.16 GSA 408 $107,369.28
2 CON-SPM-611 Senior Project Manager (Per Hour)
Project Manager
Carahsoft Technology Corporation - CON-SPM
Start Date: 01/05/2026
End Date: 02/28/2027
$221.05 GSA 1,760 $389,048.00
3 CON-SPM-611 Senior Project Manager (Per Hour)
S/4HANA Technical Solution Architect
Carahsoft Technology Corporation - CON-SPM
Start Date: 01/05/2026
End Date: 02/28/2027
$210.53 GSA 1,640 $345,269.20
PMO & ARCHITECTURE SUBTOTAL: $841,686.48
S/4HANA - TECHNICAL & DATA MIGRATION
4 CON-IA-611 Information Architect (Per Hour)
S/4HANA ABAP Developer Lead
Carahsoft Technology Corporation - CON-IA
Start Date: 01/05/2026
End Date: 02/28/2027
$105.26 GSA 1,240 $130,522.40
5 CON-IA-611 Information Architect (Per Hour)
S/4HANA ABAP Developer
Carahsoft Technology Corporation - CON-IA
Start Date: 01/05/2026
End Date: 02/28/2027
$84.21 GSA 800 $67,368.00
6 CON-IA-611 Information Architect (Per Hour)
Fiori Architect
Carahsoft Technology Corporation - CON-IA
Start Date: 01/05/2026
End Date: 02/28/2027
$105.26 GSA 600 $63,156.00

CONFIDENTIAL
PAGE 1 of 3
QUOTE DATE: 11/07/2025
QUOTE NO: 55316029
Item 6
Attachment A -
Carahsoft_EPI-USE S4 HANA
Implementation;
C26196043
Item 6: Staff Report Pg. 5 Packet Pg. 247 of 828

PRICE QUOTATION

CARAHSOFT TECHNOLOGY CORP
11493 SUNSET HILLS ROAD | SUITE 100 | RESTON, VIRGINIA 20190 PHONE (703) 871-8585 | FAX (703) 871-8505
WWW.CARAHSOFT.COM | [email protected]
LINE NO. PART NO. DESCRIPTION - QUOTE PRICE QTY EXTENDED PRICE 7 CON-IA-611 Information Architect (Per Hour)
Reporting Remediation & Development (BW 7.5)
Carahsoft Technology Corporation - CON-IA
Start Date: 01/05/2026
End Date: 02/28/2027
$200.00 GSA 1,320 $264,000.00
8 CON-IA-611 Information Architect (Per Hour)
S/4 BASIS
Carahsoft Technology Corporation - CON-IA
Start Date: 01/05/2026
End Date: 02/28/2027
$189.47 GSA 2,530 $479,359.10
9 CON-IA-611 Information Architect (Per Hour)
S/4 Security Remediation
Carahsoft Technology Corporation - CON-IA
Start Date: 01/05/2026
End Date: 02/28/2027
$200.00 GSA 700 $140,000.00
S/4HANA - TECHNICAL & DATA MIGRATION SUBTOTAL: $1,144,405.50 S/4HANA - FUNCTIONAL - UTILITIES & WORK MANAGEMENT
10 CON-CE-611 Consulting Engineer (Per Hour)
S/4HANA - ISU - Architect Functional
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$210.53 GSA 1,440 $303,163.20
11 CON-CE-611 Consulting Engineer (Per Hour)
S/4HANA - ISU - FI-CA Functional
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$121.05 GSA 1,360 $164,628.00
12 CON-CE-611 Consulting Engineer (Per Hour)
S/4HANA - ISU - Billing
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$121.05 GSA 1,360 $164,628.00
13 CON-CE-611 Consulting Engineer (Per Hour)
S/4HANA - ISU - Device Management, AMI and Integration
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$121.05 GSA 1,440 $174,312.00
14 CON-CE-611 Consulting Engineer (Per Hour)
S/4HANA - CRM or UI5 (per decision)
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$121.05 GSA 1,520 $183,996.00
S/4HANA - FUNCTIONAL - UTILITIES & WORK MANAGEMENT
SUBTOTAL:
$990,727.20
S/4HANA - FUNCTIONAL - HCM/PAYROLL
15 CON-CE-611 Consulting Engineer (Per Hour)
HCM Architect and Spot Consulting
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$200.00 GSA 1,000 $200,000.00
S/4HANA - FUNCTIONAL - HCM/PAYROLL SUBTOTAL: $200,000.00

CONFIDENTIAL
PAGE 2 of 3
QUOTE DATE: 11/07/2025
QUOTE NO: 55316029
Item 6
Attachment A -
Carahsoft_EPI-USE S4 HANA
Implementation;
C26196043
Item 6: Staff Report Pg. 6 Packet Pg. 248 of 828

PRICE QUOTATION

CARAHSOFT TECHNOLOGY CORP
11493 SUNSET HILLS ROAD | SUITE 100 | RESTON, VIRGINIA 20190 PHONE (703) 871-8585 | FAX (703) 871-8505
WWW.CARAHSOFT.COM | [email protected]
LINE NO. PART NO. DESCRIPTION - QUOTE PRICE QTY EXTENDED PRICE S/4HANA - FUNCTIONAL - FINANCE/PROCUREMENT
16 CON-CE-611 Consulting Engineer (Per Hour)
New GL Migration Architect
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$210.53 GSA 320 $67,369.60
17 CON-CE-611 Consulting Engineer (Per Hour)
FI Architect and Spot Consulting
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$210.53 GSA 1,520 $320,005.60
18 CON-CE-611 Consulting Engineer (Per Hour)
S/4HANA Funds and Grants Management
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$200.00 GSA 1,360 $272,000.00
19 CON-CE-611 Consulting Engineer (Per Hour)
S/4HANA Supply Chain/Procurement/EAM
Carahsoft Technology Corporation - CON-CE
Start Date: 01/05/2026
End Date: 02/28/2027
$200.00 GSA 1,520 $304,000.00
S/4HANA - FUNCTIONAL - FINANCE/PROCUREMENT SUBTOTAL: $963,375.20

TRAINING SERVICES
20 CON-IA-611 Information Architect (Per Hour)
Train-the-Trainer Development & Delivery
Carahsoft Technology Corporation - CON-IA
Start Date: 01/05/2026
End Date: 02/28/2027
$184.21 GSA 576 $106,104.96
TRAINING SERVICES SUBTOTAL: $106,104.96

ESTIMATED TRAVEL & EXPENSE
21 121-TE-2 Travel & Expenses
QTY = Number of Trips
Carahsoft Technology Corporation - 121-TE
Start Date: 01/05/2026
End Date: 02/28/2027
$1,800.00 OM 85 $153,000.00
ESTIMATED TRAVEL & EXPENSE SUBTOTAL: $153,000.00
SUBTOTAL: $4,399,299.34
TOTAL PRICE: $4,399,299.34
TOTAL QUOTE: $4,399,299.34
Quote Notes:

City of Palo Alto must reference Carahsoft Quote Number 55316029 and GSA MAS 8F : 47QSWA18D008F on any resulting purchase order.

By providing a purchase order referencing Carahsoft quote #55316029, City of Palo Alto hereby agrees to the terms and conditions as outlined in the order form below.

CONFIDENTIAL
PAGE 3 of 3
QUOTE DATE: 11/07/2025
QUOTE NO: 55316029
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Statement of Work:

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Source and destination
Sender(s)
From Carahsoft Technology Corporation
Author Jonathan Gutierrez
Capacity Senior Account Representative
Contact details  571-662-3375
 [email protected]
Address 11493 Sunset Hills Rd. Suite 100, Reston, VA 20190 Receiver(s)
Entity City of Palo Alto, CA
Recipient Jitendra Kulkarni
Capacity Information Technology Enterprise Systems Manager Contact details  650-329-2466
 [email protected]
Address 250 Hamilton Avenue, Palo Alto, CA 94301.

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Legal notice
The information in this SOW is confidential and may not be disclosed outside of City of Palo Alto (CoPA), however, subject to regulatory requirements CoPA may disclose this as required to regulatory authorities or interveners and will request that the document be considered confidential. Except as otherwise provided herein, the SOW and its contents may not be duplicated, used, or disclosed in whole or in part.

EPI-USE, the EPI-USE logo, Data Sync Manager, Variance Monitor, and Query Manager are trademarks or registered trademarks of EPI-USE Systems. All other trademarks mentioned are the property of their respective owners.

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TABLE OF CONTENTS

1. Introduction................................................................................................................. 6

2. Project Scope ............................................................................................................... 7

2.1 Organizational Scope ......................................................................................................................7

2.2 Functional Scope ............................................................................................................................8

2.2.1 Finance Scope..........................................................................................................................8

2.2.2 Procurement Scope.................................................................................................................9

2.2.3 Utilities and Work Management Scope.................................................................................10

2.2.4 HCM and Payroll Scope .........................................................................................................12

2.3 Technical and Data Migration Scope ............................................................................................13

2.3.1 Integration Scope ..................................................................................................................13

2.3.2 Upgrade Scope ......................................................................................................................13

2.3.3 Fiori Scope.............................................................................................................................13

2.4 Basis and Infrastructure Scope .....................................................................................................14

2.4.1 Infrastructure ........................................................................................................................14

2.4.2 Basis.......................................................................................................................................14

2.5 Security Scope ..............................................................................................................................15

2.6 Reporting and Analytics Scope .....................................................................................................16

2.7 Training Scope...............................................................................................................................18

2.8 Organizational Change Management Scope.................................................................................19

2.9 Project Management Scope .........................................................................................................19

3. Project Approach, Timeline, and Effort ....................................................................... 20

3.1 Approach, Methodology and Phases............................................................................................20

3.1.1 Stages of the Activate+ Methodology ...................................................................................22

3.2 Estimated Timeline and Staffing Levels........................................................................................25

3.3 System Migration and Conversion Strategy..................................................................................26

3.3.1 System Migration and Conversion.........................................................................................27

3.3.2 Data Migration ......................................................................................................................27

3.3.3 S/4 System Migration ............................................................................................................27

3.3.4 Functional Preparation..........................................................................................................27

3.3.5 Realization.............................................................................................................................28

3.3.6 Cut-over.................................................................................................................................29

4. Project Organization................................................................................................... 30

4.1 Project Governance ......................................................................................................................30

4.2 Project Sites..................................................................................................................................31

4.3 Roles and Responsibilities ............................................................................................................32

5. Project Fees ............................................................................................................... 37

5.1 Total Implementation Cost ...........................................................................................................37

5.2 Travel Expenses.............................................................................................................................37

5.3 Payment Terms.............................................................................................................................38

6. Assumptions.............................................................................................................. 39

7. Contact Persons ......................................................................................................... 41

8. Acceptance and Approvals.......................................................................................... 42 Item 6
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9. Appendix A Pricing detail and rate card ...................................................................... 43

9.1 Pricing Detail.................................................................................................................................43

9.2 Rate Card ......................................................................................................................................44

10. Appendix B – Project Procedures................................................................................ 45 B.1 Project Change Control Procedure....................................................................................................45 B.2 Project Escalation Procedure.............................................................................................................45 Item 6
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1. INTRODUCTION
This Statement of Work (“SOW”) is by and between Carahsoft Technology Corporation (“Carahsoft”) and City of Palo Alto (“CoPA”, the “City” or “Client”) with services being provided by EPI-USE America, (“EPI-USE”). This SOW is effective as of August 31, 2025 (“Effective Date”.) This SOW defines the scope, services, responsibilities, estimated timeline, estimated level of effort, fees, assumptions, and other items for the implementation of RISE with SAP S/4HANA Migration (the “Project”).

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2. PROJECT SCOPE
The following components are in scope for this Project and the sections/ tables below provide the detailed scope for each component:

1. Finance;

2. Procurement;

3. Utilities and Work Management;

4. HCM and Payroll;

5. Integration;

6. Conversion;

7. Training Delivery: Conduct Train-the-Trainer sessions;

8. Project Management Office.

2.1 Organizational Scope
The scope of this Project includes employees only in the US and CoPA has union contracts affecting employees.

Country Code Flag Language Approx. number of employees
United States of America US English 1,100
Total 1,100
Table 1: Organizational Scope
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2.2 Functional Scope

2.2.1 Finance Scope
The City of Palo Alto will migrate to S/4HANA as a Brownfield migration utilizing the base premise of “lift and shift” where possible. Additions and Enhancements to existing functionality will not be implemented as part of the migration project but will be addressed in a future Phase 2 or project(s). New GL has not been implemented but will be completed as part of the migration to S/4HANA. There is some additional complexity that must be addressed as part of the migration since the go-live will not coincide with the Fiscal Year (July – June). As part of the S/4 Readiness Check analysis, open items from prior years need to be cleaned, managed, and considered prior to and during the migration.

Component Detailed Scope
Finance
Migration of the existing Financial Scope: FICO (GL, AP, AR, Fixed Assets, Funds Management, Cost Center Accounting, Order Accounting; Treasury (BAI Banks Statements only); Project Systems • Custom tables being utilized to develop custom
hierarchies (2 Balance Sheet and 2 Profit & Loss) and use of interfaces will need to be tested and remediated, if necessary.
• In Controlling, the custom table for capturing labor
distribution will be tested/addressed.
• In AP, there are a large number of vendors blocked
(30,000) that should be cleaned prior to the migration
• The custom procurement card process and other custom
transactions will be reviewed, as necessary.

During the Design/Process Review phase, workshops will be conducted to validate the processes in S/4 and configured during Realize for those needing attention.

New GL Migration: As part of the system conversion, SAP recommends the migration from Classic General Ledger to the New General Ledger without activating document splitting during the initial go-live. This phased approach allows the client to maintain existing business continuity while transitioning foundational finance structures to the Universal Journal (ACDOCA). The current Special Ledger setup and document splitting logic, will remain in place post-go-live. Existing GUI transactions and reports are Item 6
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expected to function as they did prior to the migration, minimizing end-user disruption. Financial reporting will require validation by the CoPA team as part of each system build.

As part of Phase 2, document splitting within the New S4 GL structure using the “Subsequent Implementation of Document Splitting” functionality will be activated. The activation of document splitting should be timed as close as possible to the start of a new fiscal year to minimize reconciliation complexity and facilitate clearer financial reporting segmentation.

There are other options available to CoPA that we can explore prior to commencement of the project. These will be discussed in the coming months.

EPI-USE does recommend that a Proof of Concept New GL
migration be executed prior to the start of the project.

Data Conversion
Business Partner conversion will need to be completed for Vendors, Customers, and Employees during the implementation.

There is some added complexity due to overlapping number ranges based on the EPI-USE initial analysis. Business Partner numbering schemas will be determined during the design phase.

Other
The project will migrate the existing SAP Financial system to S/4 using a lift and shift strategy. No functional enhancements or structural redesigns are in scope unless identified as necessary. The goal is to maintain current-state processes and integrations with minimal disruption.

Table 2: Functional Scope

2.2.2 Procurement Scope
Component Detailed Scope
Procurement
The current processes and functionality will be migrated to standard S/4 Operational Procurement. Existing functionality for Purchase Orders, Blanket Orders and Framework Orders will be maintained. Though Contracts are not currently utilized, there may be an opportunity to use in S/4 as part of standard.

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Inventory Management functionality for using Serialization of Assets, Materials Requirements Planning (MRP)
Data Conversion
Business Partner conversion for vendors is required during the implementation. Open PR’s, PO’s, etc.

Other
The project will migrate the existing SAP Procurement system to S/4 using a lift and shift strategy. No functional enhancements or structural redesigns are in scope unless identified as necessary. The goal is to maintain current-state processes and integrations with minimal disruption.

Table 3: Functional Scope

2.2.3 Utilities and Work Management Scope
Component Detailed Scope
Utilities and Work
Management
• Validation of all migrated processes related to the current IS-U environment into S4 for Utilities.
• Configuration and corrective development to ensure
migrated processes work as they do in the current
environment where possible.
• The use of Fiori views will be used where functional screens do not exist in the S4 for Utilities. For Fiori available screens, see Section 2.3.3 Fiori for scope.
• Develop or modify existing test scripts and execute SIT testing of processes in the S4 environment for existing IS-U processes. Assist with User Acceptance Testing.
• Migration, validation, and necessary corrections of the CIC0 screen and current front office processes into S4 for Utilities Embedded Customer Services.
• EPI-USE will guide determination of utilizing CoPA’s custom Customer Overview screen or adoption of the SAP
delivered version and commercially reasonable
modification to provide “like” functionality
• Migration and validation of all open Meter Read, Billing, and Invoicing exception management cases.

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• Coding related to custom development programs and
interfaces in the current environment will be identified and led by EPI-USE while actual code mitigation will be done by CoPA developers. It is recommended to implement SAP’s
BTP Integration Suite in Phase 2.
• The Embedded Customer Service Request will be used to be consistent with current functionality. The S4 Service Order with Advanced Execution will be in Phase 2.
• All process changes will be the responsibility of CoPA with assistance from EPI-USE in a “Train the Trainer”
methodology
Data Migration
• Migration, validation, and correction of all IS-U master data
• Migration, validation, and correction of all IS-U
transaction data or the agreed upon subset. Transactional data not migrated is to be left in legacy environment for reference until an archiving environment is established.

Other
The following web interface objects do not exist in the S4 environment. Usage is currently unknown. An evaluation of each will be done to determine if loss of functionality exists. EPI-USE will make a commercially reasonable effort to address these on a priority basis if they are tied to critical business functions. • S4TWL - Enterprise Services for SAP for Utilities (IS-U) The object CO_ISU_UTILITIESTIMESERIECRTCO does not exist in the target SAP S/4HANA release.
• S4TWL - Enterprise Services for SAP for Utilities (IS-U) The object CO_ISU_UTILITIESTIMESERIECRTRQ does not exist in the target SAP S/4HANA release.
• The object CO_ISU_UTILITIES_CONNECTION_RC does not
exist in the target SAP S/4HANA release. S4TWL - Enterprise Services for SAP for Utilities (IS-U)
• The object CO_ISU_UTILITIES_CONNECTION_S1 does not
exist in the target SAP S/4HANA release. S4TWL - Enterprise Services for SAP for Utilities (IS-U)
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• The object CO_ISU_UTILITIES_CONNECTION_ST does not
exist in the target SAP S/4HANA release. S4TWL - Enterprise Services for SAP for Utilities (IS-U)
• ISU_EL40 for function module ISU_IDOC_INPUT_ISU not
currently used and will not be utilized in the S4
environment
Table 4: Functional Scope

2.2.4 HCM and Payroll Scope
Component Detailed Scope
HCM and Payroll
Support
Migration of current OM, PA, PT/CATS, BN, and PY configuration and functionality.

Inventory all standard/custom Infotypes; confirm data migration strategy
Review compatibility of custom Infotypes and schemas.

Inventory all custom transactions and validate compatibility Inventory all custom reports and validate compatibility Inventory all inbound and outbound interfaces and create plan for regression testing
Regression testing of all current HCM functionality
Payroll posting to S4
Payment Medium Workbench: Retest file generation and layout in H4S4
Data Conversion Business Partner Conversion
Other
The project will migrate the existing SAP HCM system using a lift and shift strategy. No functional enhancements, schema changes, or structural redesigns are in scope. The goal is to maintain current-state processes and integrations with minimal disruption.

Table 5: Functional Scope
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2.3 Technical and Data Migration Scope

2.3.1 Integration Scope
Component Detailed Scope
Integration
Existing integrations will not be redesigned or re-written as part of this initiative.

SFTP access to existing AL11 directories on the S4 system will be enabled via RISE service requests.

Any required connection outbound, via RFC or web service, will be requested via RISE service requests.

Other SAP BTP Business Integration Suite is out of scope Table 6: Technical Integration Scope

2.3.2 Upgrade Scope
Component Detailed Scope
Upgrade Preparation
Checks
Required SAP OSS notes for the S/4HANA pre-check reports and required notes for the upgrade itself will be validated and installed if required.

SPAU/SPDD SPAU and SPDD functions during the upgrade to S/4HANA will be performed with inputs needed from the City.

Code Remediation
ABAP code remediation for items that will block the S/4HANA upgrade will be analyzed and adjusted.

Other
ABAP code remediation for items that will not block the S/4HANA upgrade are out of scope.

Table 7: Technical Upgrade Scope

2.3.3 Fiori Scope
Component Detailed Scope
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deployed. Any additional Fiori App requirements will be considered additional scope and will be estimated on a time and material basis.

Other
Will perform analysis of moving to embedded Fiori and
decommissioning the stand-alone Fiori Gateway during the design phase.

Table 8: Technical Fiori Scope

2.4 Basis and Infrastructure Scope

2.4.1 Infrastructure
With the RISE with SAP construct, CoPA and SAP are responsible for the networking, VPN and infrastructure scope and related activities for this Project. The EPI-USE team will provide guidance where required to ensure the network connectivity needed for the project is in place.

2.4.2 Basis
BASIS support for the SAP ECC 6.0 Suite on HANA to S/4HANA 2024 migration on RISE will encompass the planning, design, and execution of all foundational technical activities necessary to support the migration. This includes initial system landscape planning and architecture design, followed by the technical migration of the Sandbox environment to validate migration process. The DEV and QA systems will then be built and configured in alignment with SAP and RISE standards to support subsequent development, testing, and validation activities. Two mock conversion runs will be executed to refine the technical migration approach, validate data consistency, and confirm runtime estimates. The BASIS team will lead the technical execution of the production cutover, ensuring a stable and secure transition to the new S/4HANA environment. Post go-live, Basis will provide ongoing support during the hyper care phase to monitor system performance, resolve technical issues, and ensure overall system stability.

Component Detailed Scope
Systems in Scope Sandbox, Development, Quality Assurance and Production Exclusions
• Setup/configure target VM’s
• Setup/configure network on target systems
• Setup/configure Linux on target VM’s
• All Infrastructure setup excluded
• Desktop installations/setup excluded
• Interfaces configuration
• ABAP Functional fixes
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• SAP HANA Code remediations
• SAP User Security/Authorization management
• Source/Target backups
• Documentation (Only Blueprint documentation to be
provided if required)
• DR and HA setup and testing excluded
• Travel costs are excluded
BASIS Assumptions
• SAP to set up WD's and CC, EPI-USE Labs to configure
• Work will be conducted remotely
• Labs do technical migrations only
• Access to Source systems required - O/S + DB + SAP access • Access to Staging server in RISE - O/S
• Access to DB in Rise (via HANA-Studio)
Table 9: BASIS and Infrastructure Scope

2.5 Security Scope
This section outlines the security scope of the SAP S/4 migration. Security consists of the components used to provide users access and authorization to appropriate areas of the SAP application. In preparation of the migration to S/4, SAP IAG will be deployed for the purposes of risk identification and remediation, user access provisioning, privileged access management, and entitlement management. The implementation will be executed in two major phases. The details of these phases are outlined in the subsequent section.

Phase #1 – Security Migration Preparation
Primary focus will be review of current security design, identification of legacy and nonmigratable authorizations, and the definition of role-based provisioning model.

Phase #2 – SAP Identity Access Governance (IAG) Implementation Primary focus will be the deployment of SAP IAG solution to address/provide functionality for emergency access management, entitlement management, risk identification/remediation and access request provisioning. In addition, the support of all security role creations, updates, and deletions.

Component Detailed Scope

Discovery
• Review current security role design/strategy
• Examine role assignment strategy; including security
control points
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• Examine provisioning model for SAP; user life cycle
management
• Assess/prepare security role library for migration
Definition
• Define new security role design strategy for S/4
• Identify user provisioning triggers; including conditional attributes
• Develop security role provisioning logic (based on
function)
Delivery
• Execute pre-migration role level risk analysis
• Documentation and knowledge transfer
Phase #2
SAP IAG & Role
Validation including
Role Definition and
Testing
Subscribe and Configure SAP IAG:
• Access Risk Analysis for compliant user provisioning and compliant role maintenance
• Privilege Access Management to provide auditable and
temporary elevated access
• Access Request Provisioning to support automated user provisioning
• Entitlement Management to enforce a repeatable process for security role maintenance
Deploy SAP IAG in hybrid-architecture
• Integration with SAP Cloud Applications and SAP OnPremise Applications • Leverage customized role provisioning logic for automated access provisioning
Test and Validate IAG
• Confirm deployed and configured components
Unit, Integration, User Acceptance Testing for Security Roles • Test/validate all new and changed security roles
Support testing cycles for authorization validation
Table 10: Security Scope

2.6 Reporting and Analytics Scope
This section defines the services required to migrate the existing SAP BW 7.5 environment to BW4HANA in SAP Business Data Cloud (BDC), transition BW data models from reliance on Item 6
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Classic GL to New General Ledger (New GL) structures and preserve reporting continuity using the existing SAP BusinessObjects (BOBJ) platform.

Objectives
• Migrate the BW 7.5 environment into BW4HANA in SAP Business Data Cloud via lift and shift
• Realign BW data models, transformations, and reporting layers with New GL dimensions, hierarchies, and fields already active in the source S/4HANA system. • Ensure continued availability and consistency of SAP BusinessObjects reports postmigration.

Component Detailed Scope
SAP BW
BW 7.5 Migration to SAP Business Data Cloud
• Conduct system readiness and inventory of BW objects
(InfoProviders, DataSources, transformations, DTPs,
queries).
• Migration approach:
• Full system migration of BW 7.5 to the cloud
infrastructure within the BDC framework.
• Establish connectivity to other systems where applicable.

New GL Alignment in SAP BW
• Identify BW InfoProviders, Multiproviders,
CompositeProviders, and queries that rely on Classic GL structures.
• Replace outdated extractors with ODP-enabled standard extractors or CDS views aligned to the New GL.
• Modify transformation logic and routines to ensure
compatibility with new field structures and document
splitting behavior.
• Update BW hierarchies and characteristic relationships to reflect New GL structural changes.

Table 11: Reporting and Analytics Scope
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Assumptions
• New GL will be active and operational in the source SAP S/4HANA development system before BW development work commences.
• Legacy Classic GL fields will be decommissioned in reporting scope, if necessary. • BW 7.5 is not being converted to Datasphere in this phase.

2.7 Training Scope
Train-the-Trainer Course Development Approach
As part of the end-user readiness strategy for your brownfield S/4HANA RISE migration, we recommend a targeted Train-the-Trainer (TTT) approach that equips internal trainers to train and support end users across key functional areas. Given the minimal changes to core business processes, training will focus on:
• Navigating updated user interfaces
• Understanding new terminology or transaction paths where applicable • Becoming familiar with relevant system enhancements
We estimate the need for approximately up to seven (7) TTT courses, based on the lift and shift approach utilized:

Functional Area Training Focus Areas
Estimated
TTT Courses
Finance New GL/Month End Close
SAP BW Reporting
2 Procurement General Procurement Course 1
Utilities & Work
Management
Customer Service Request
Service Order
Fiori Views
CRM
4 HCM & Payroll
No changes to processes, functions or
User Interface due to lift and shift
approach
0 Business
Warehouse
No changes to processes, functions or
User Interface due to lift and shift
approach
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Table 12: Train-the-Trainer Scope
These TTT courses will be designed for internal trainers and super users, with clear facilitation guides, role-based scenarios, and supporting materials to ensure consistent and confident knowledge transfer.

Training Delivery Support
We will provide:
• Advice as to the Training Needs Assessment, Training Strategy and Training Design Plan, as well as to end user training materials such as Reference Guides created by CoPA. • Instructor-ready training decks and lesson plans
• Delivery of live/virtual Train-the-Trainer sessions to teach City of Palo Alto selected trainers how to utilize the instructor led training decks and lesson plans to deliver training to end users
• Provide feedback to City of Palo Alto trainers to maximize their ability to support end users
This focused TTT strategy will help accelerate end-user confidence while maximizing training efficiency during your transition to S/4HANA.

2.8 Organizational Change Management Scope
Organizational Change Management aspects are out of scope for this SOW and will be CoPA’s responsibility.

2.9 Project Management Scope
Component Detailed Scope
Project Management
Office (“PMO”)
• Provide coordination and planning for this Project
• Develop and maintain the project plan in collaboration with the CoPA Project Manager
• Provide input to weekly status reporting
• Co-lead PMO meetings and co-manage project budget
• Provide input to Issue and Risk logs
• Serve as escalation point
• Manage overall quality of the implementation
Table 13: Project Management Scope
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3. PROJECT APPROACH, TIMELINE, AND EFFORT

3.1 Approach, Methodology and Phases
EPI-USE will utilize a blend of SAP Activate and EPI-USE tailored methodology, which incorporates our lessons learned from other implementations, best practices and extensions which are required to meet the needs of an organization similar to CoPA. Our methodology is a framework to drive completeness of the project, rather than a hard and fast rule that activities must be done in a certain way. We tailor our approach to meet your business and project needs while incorporating project management, quality assurance, documentation, and best practice documentation. This methodology and approach are a combination of our methods and tools that represent an overall integrated project approach resulting in a repeatable, high-quality experience for our clients. This methodology provides the foundation for a holistic solution that responds to your needs across strategy, people, processes, and technology with a constant focus on quality.

Our approach and experience produce practical solutions that yield measurable results as defined and benchmarked at the onset of the solution lifecycle. EPI-USE plans to use our Activate+ methodology and iterative approach, which combines aspects of Agile and Waterfall methodologies. The following graphic depicts the Activate+ methodology phases:

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Figure 1: Activate+ Methodology Phases
Activate+ guides the project’s quality and efficiency and incorporates continuous improvement while utilizing the major components of SAP’s Activate methodology. In addition, this methodology brings along templates, accelerators, and overall deliverables which have been honed, modified, and advanced over our 40 years of experience.

Activate+ defines the full life cycle of project management and presents processes, tools, techniques, templates, and example artefacts that enable effective execution of engagements for complex operational environments. It also provides a consistent discipline for managing engagements across workstreams, minimizes risk, and reduces the total cost of the implementation.

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3.1.1 Stages of the Activate+ Methodology
The Activate+ methodology delivers the solution in five stages: Prepare, Design, Realize, Validate, and Launch. Each phase involves key activities/deliverables throughout the project as explained below. We develop deliverables to help stakeholders make informed decisions and to provide the foundation for decisions and efforts in subsequent phases.

Figure 2: Stages of Activate+

3.1.1.1 Prepare
Initial stage where teams and roles are established. High-level project planning, including setting key milestone dates, is completed. Initial system access is granted.

Task Description
Project Schedule Project document listing tasks, owners, durations, and start/end dates.

Kick off Presentation
PowerPoint presentation to communicate the goals of the project, team structure, implementation methodology timeline and next steps.

Project Readiness Checks
Understand current environment (data and technical).

Establish early feasibility for conversion.

Check readiness reports.

Run simplification pre-checks.

Review target architecture.

Sandbox System Build Create the Sandbox Environment and perform initial unit testing and validation capabilities.

Table 14: Prepare Task Description
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3.1.1.2 Design
Best business practices are used to determine system configuration and technical development.

Strategy plans are developed, and final project schedule is communicated.

Task Description
Project Plan Project document listings tasks, owners, durations, start/end dates, dependencies, and responsibilities.

Strategy Documents Communication, testing, training, data conversion and support.

Issue Log Oversight, tracking and closure of project issue log.

Design Document
Document detailing business processes, configuration
requirements; including integration touchpoints, standard reports, roles, authorizations, etc.

Initial System Build Create Development and Testing environment for configuration and validation capabilities.

Table 15: Design Task Description

3.1.1.3 Realize
Configuration and technical development of the solution based on the system design.

Task Description
Configuration &
development of the system
Application configuration and technical development.

Data load templates Data is cleansed, prepared and ready to load into the system.

User Acceptance,
Integration Plans
Document that defines specific data and processes required for testing to successfully process business transactions and transfer data into or out of SAP.

First & Second Solution
Reviews Overview of system configuration and in-scope processes.

Test Scenarios and Scripts Documentation that defines CoPA’s business scenarios to be executed during the Validate stage.

Table 163: Realize Task Description

3.1.1.4 Validate
Validation and testing of configuration and business processes. Includes Administrator and EndUser Training.

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Task Description
Integration, Payroll
Comparison, & User
Acceptance Test execution
Execution of all applicable test scripts.

Final Solution Review Review detailed configuration and processes.

End-User Training Finalize training material and conduct end-user training.

Cut-over Plan
A plan that documents the system cut-over, which includes cutover activities, roles and responsibilities, activation of integration, and job scheduling.

Administrator Training Training for identified administrators for in-scope processes.

Table 174: Validate Task Description

3.1.1.5 Launch
Establish the productive environment, perform hyper-care and post-production support.

Task Description
Go/No-Go Meeting Final decision on project status.

Final Issue Log Validate post go-live issues list.

System Go Live Production system available for users.

Hypercare Support Post go-live support provided for resolution of critical issues.

Transition to AMS team
Communication of issues and postproduction enhancements to be performed by Support team.

Project Sign Off Close project and confirm deliverables.

Table 18: Launch Task Description
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3.2 Estimated Timeline and Staffing Levels
Based on our discussions to date, the proposed start date for this Project is January 5, 2026, and the planned go live date is February 1, 2027, followed by a 1-month HyperCare support period through February 28, 2027.

The following is a high-level timeline for how we propose to work with CoPA on this project.

Figure 3: Timeline
Based on the date provided in the RFP with a targeted start of January 5, 2026, the chart below assumes a go-live of February 1, 2027. These dates will be confirmed as part of contract negotiations and project onboarding.

Implementation Phase
Estimated
Duration
(Months)
Estimated Begin
Date
Estimated End
Date
Prepare 1 1/5/2026 1/31/2026
Design - Process Review 3 2/1/2026 4/30/2026
Realize - Remediate/Build 5 5/1/2026 9/30/2026
Validate - Test/Validate 3 10/1/2026 12/31/2026
Launch 1 1/1/2027 1/31/2027
Post Go-Live Support
(Hypercare) 1 2/1/2027 2/28/2027
Table 19: Begin and End date per Phase
` M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M11 M12 M13 M14
Prepare Planning &
Staffing
Design
Realize
Validate
Launch Training and
Cutover
Support Post Go-Live
Support
Project Plan, Workshops, Process Review,
Communication
Configuration, Integrations, Test Planning & Preparation System Integration, User Acceptance
Testing, Train-the-Trainer
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Additionally, we have provided a detailed estimated staffing plan below based on the information we have gathered to date and through our experience with like clients.

Figure 4: Staffing Plan

3.3 System Migration and Conversion Strategy
EPI-USE supports a Brownfield Migration approach to minimize disruption to business users while preserving prior investments in CoPA’s current SAP environment during the transition to S/4HANA on RISE. Our expertise in SAP implementations – combined with a strong focus on clean core principles, cloud migration, and business process transformation – positions us to deliver a seamless and future-ready transition to CoPA’s SAP RISE landscape.

The next subsections delve into specifics of the S/4 Migration, including System Migration and Conversion, and Data Migration.

EPI-USE S/4HANA Migration Staffing Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Phases Prepare Design Design Design Realize Realize Realize Realize Realize Validate Validate Validate Launch Support Activities Prep / Design Process Review Process Review Process Review Data Validation Data Validation Data Validation and Test Prep
Data Validation
and Test Prep
Data Validation
and Test Prep SIT Prep SIT SIT/UAT Cutover/ GoLive Hypercare EPI-USE S/4HANA Migration Staffing Hours
PMO & Architecture 3,808 192 312 272 312 264 264 184 184 264 352 352 192 352 312 Client Partner/QA 408 32 32 32 32 24 24 24 24 24 32 32 32 32 32 Project Manager 1,760 80 160 120 160 120 120 80 80 120 160 160 80 160 160 S/4HANA Technical Solution Architect 1,640 80 120 120 120 120 120 80 80 120 160 160 80 160 120 S/4HANA - Technical & Data Migration 7,190 190 340 380 460 540 620 620 660 660 700 580 480 480 480 S/4HANA ABAP Developer Lead 1,240 40 80 80 120 120 120 120 120 120 80 80 80 80 S/4HANA ABAP Developer 800 80 160 160 160 160 80
Fiori Architect 600 40 40 40 80 80 40 40 40 40 40 40 40 40 Reporting Remediation & Development (BW 7.5) 1,320 80 80 120 120 120 80 120 120 120 120 80 80 80 S/4 BASIS 2,530 190 180 180 180 180 180 180 180 180 180 180 180 180 180 S/4 Security Remediation 700 40 40 40 40 40 40 80 80 100 100 100 S/4HANA - Functional - Utilities & Work Mgmt 7,120 40 440 600 600 600 600 400 600 600 600 600 400 600 440 S/4HANA - ISU - Architect Functional 1,440 40 120 120 120 120 120 80 120 120 120 120 80 120 40 S/4HANA - ISU - FI-CA Functional (Configuration/Testing) 1,360 40 120 120 120 120 80 120 120 120 120 80 120 80 S/4HANA - ISU - Billing 1,400 80 120 120 120 120 80 120 120 120 120 80 120 80 S/4HANA - ISU - Device Mangement, AMI and Integration 1,400 80 120 120 120 120 80 120 120 120 120 80 120 80 S/4HANA - CRM 1,520 120 120 120 120 120 80 120 120 120 120 80 120 160 S/4HANA - Functional - HCM/Payroll 1,000 0 40 40 40 40 40 80 80 80 120 120 120 120 80 HCM Architect and Spot Consulting 1,000 40 40 40 40 40 80 80 80 120 120 120 120 80 S/4HANA - Functional - Finance/Procurement 4,720 104 264 384 384 384 384 340 300 340 384 384 264 404 400 New GL Migration Architect 320 24 24 24 24 24 24 20 20 20 24 24 24 24 20 FI Architect and Spot Consulting 1,520 40 80 120 120 120 120 120 80 120 120 120 80 140 140 S/4HANA Funds and Grants Management 1,360 80 120 120 120 120 80 80 80 120 120 80 120 120 S/4HANA Supply Chain/Procurement/EAM 1,520 40 80 120 120 120 120 120 120 120 120 120 80 120 120 Training Services 576 0 0 0 0 0 0 0 0 56 160 160 160 40 0 Train-the-Trainer Development & Delivery 576 56 160 160 160 40 Total Estimated Implementation Labor Cost 24,414 526 1,396 1,676 1,796 1,828 1,908 1,624 1,824 2,000 2,316 2,196 1,616 1,996 1,712 Item 6
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3.3.1 System Migration and Conversion
EPI-USE will manage the complete migration of CoPA's SAP ECC 6.0 system, along with all associated custom objects, add-ons, and interfaces, to the SAP S/4HANA environment. This migration will adhere to the Brownfield approach, preserving existing configurations, data, and customizations while ensuring compatibility with the new system. New functionality will be a focus of Phase 2 and determined in coordination with CoPA.

3.3.2 Data Migration
Our data migration strategy will ensure that all historical transactional and master data from the current SAP ECC 6.0 system is successfully transferred to the new S/4HANA system. We will execute a phased data migration process that will include development, quality assurance, and production environments to ensure data accuracy and system reliability. While performing this data migration, EPI-USE will ensure that all necessary data is available for system builds and user acceptance testing with a focus on preserving data integrity throughout the migration.

3.3.3 S/4 System Migration
The system migration from ECC to S/4 is a major event for any organization. Many see this as ‘just an upgrade,’ but we understand S/4HANA conversions are really three projects in one, occurring on parallel paths. First, there is a business process impact that must be handled.

There are new terms, new data objects, some different screens, and in most cases a much faster system. Next, there is a database upgrade, in this case Suite on HANA to S/4HANA in the cloud, but this step is a sizeable technical endeavor. Finally, there is the data center move to consider.

3.3.4 Functional Preparation
Once the Design – Process Review phase is complete, functional preparation for the upgrade begins. This includes executing SAP consistency checks, analyzing simplification items, and identifying process adjustments needed before the upgrade. A critical activity during this phase is data cleansing, as SAP tools will highlight data that must be added, corrected, or removed.

A key requirement is the Customer/Vendor Integration (‘CVI’) setup to align the legacy system with the Business Partner model in S/4HANA—essential for passing consistency checks. This also includes properly configuring Employee-to-Business Partner relationships and reviewing master data number ranges to prevent conflicts. We have noticed that there are many overlapping number ranges which adds to CVI complexity
Throughout this phase, SAP migration tools will support analysis and system build activities.

Based on findings, configuration changes may be recommended and applied to the legacy system in advance, helping reduce both downtime and upgrade risk.

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3.3.5 Realization
At the start of the Realize phase, Software Update Manager (SUM) becomes the primary tool for executing the technical S/4HANA upgrade. It uses both a source and target system to guide the upgrade step-by-step, with rollback options at key checkpoints. Once complete, the new S/4 system is ready for post-processing, while the ECC system remains intact but functionally offline.

EPI-USE will document each step of the SUM process to capture decisions, actions, and lessons learned – helping reduce downtime and issues in future upgrades. This documentation is continuously refined and reused for subsequent iterations. The diagram below illustrates where SUM fits into the overall upgrade process.

Figure 5: SUM Process Diagram (from SAP documentation)
The SUM process includes key milestones such as locking the system for development and restricting end-user access. A critical component during this phase is the Database Migration Option (DMO), which handles the conversion from the legacy database to HANA. Since the source and target databases often reside in separate data centers, maintaining stable connectivity between them is essential throughout both uptime and downtime phases.

Figure 6: SUM Process (from SAP documentation)
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One thing the SAP guides do not convey is the four-dimensional experience of living through the upgrade from the user's point of view. While the actual upgrade SUM process may take multiple weeks, the downtime should be minimized for the users.

3.3.6 Cutover
We maintain a comprehensive runbook detailing the sequenced steps, including the specific timing and document resolution of any errors encountered during the migration process. Below is a summary of our proven approach.

Figure 7: Summary of Approach
All early phases (ECC Side, Pre-Upgrade, and Uptime) can be performed on a copy of the live production system well ahead of the actual cutover—potentially starting months in advance.

The final phase (Post-Upgrade Steps) represents the converted system before it is released for general use. Only during the fourth phase (Upgrade Steps) is the system unavailable to endusers until the migration is complete.

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4. PROJECT ORGANIZATION

4.1 Project Governance
The following resources will form part of the Governance and Project Management Office:

Party Role Named resource Assignment
CoPA Project Sponsors Darren Numoto Part-time
CoPA Project Manager TBD Full-time
EPI-USE Client Partner Mark Schexnaildre Part-time
EPI-USE Project Manager TBD Full-time
Table 20: Governance and Project Management Office resources EPI-USE employs a methodical approach for organizing and executing projects. Representatives from each organization will serve as key stakeholders, representing various business areas and project workstreams. These representatives will furnish metrics, enhancing project visibility crucial for timely decision-making and recommendations, ultimately ensuring the project's overall success. In terms of project governance, our perspective on the decision-making process is outlined below:

Figure 8: Overview of Decision-Making Practice
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Furthermore, the management of communications will be a collaborative effort, offering valuable insights to inform project stakeholders. This includes updates on the project's overall progress, key decisions, issues, risks, and tracking key deliverables. The project plan updates will be supported by proposed meetings described below to facilitate effective communication among project stakeholders.

Steering Committee Meetings – EPI-USE recommends the Steering Committee meet once every month. The Project Managers of EPI-USE and the client shall jointly prepare and present the status reports to the Steering Committee. These may include reports on the summary of tasks completed, milestones achieved, unresolved issues, changes affecting the project, status on deliverables, etc.

Review Meetings – Design and document review meetings will be scheduled as required, with EPI-USE overseeing these sessions. The active involvement of end users and process owners is pivotal for the meetings' effectiveness. The EPI-USE leads or coordinators will be responsible for publishing meeting minutes and action items, ensuring that they are disseminated to all stakeholders.

Weekly Status Meeting – EPI-USE proposes to conduct a project status meeting every week.

This meeting will primarily concentrate on the progress achieved in the previous week, the plan for the current/next week, any issues that need resolution and other open items.

4.2 Project Sites
Work will take place at the following locations:
• Palo Alto, CA;
• Remotely.

In the event that travel is required, it must be pre-approved via Change Order prior to the time of travel. If on-site presence is required, then the parties will mutually agree on the schedule.

Physical access to CoPA’s offices will be required if EPI-USE resources work on-site. CoPA will provide access to the work sites, including VPN access, as reasonable and necessary, based upon CoPA’s sole discretion. Travel expenses will be reimbursed based on actuals/CoPA travel policy.

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4.3 Roles and Responsibilities
This section identifies the applicable activities, tasks, roles and responsibilities of CoPA and EPIUSE (and any third party under CoPA’s or EPI-USE’s respective supervision) for the Project.

Figure 2 indicates the definition for
each code used in the table below,
where R stands for responsible, A
for accountable, C for consulted,
and I for informed.

Figure 9: RACI Definition
The key activities, tasks, and responsibilities associated with the Project are outlined in the table below.

Stage Item Deliverable Definition EPI-USE CoPA
Prepare
Statement of
Work Review
Statement of
Work
Develop the Statement of Work
to validate alignment for project
activities.

R A
Project Kick-off
Presentation
Kick off
presentation
PowerPoint presentation to
communicate the goals of the
project, team structure,
implementation methodology
timeline, and next steps.

R A
Project Charter Project Charter
Document detailing project
requirements; including
schedule, roles and
responsibilities, project
objectives, etc.

R A
Phase Sign off Phase Sign off
Confirm Phase deliverables are
complete, and project is ready
to move to next phase
R A
Design Project Kick-off N/A Meeting to signify the start of the project and align all
R, A C
• The individual(s) who performs the task and are responsible for the action. R • R’s can be shared. • The individual who is ultimately accountable and responsible for acceptance. • Has Yes/No power, as well as power of veto. A • Only one A can be assigned to an activity/ deliverable. • The individual(s) to be consulted. C • C’s can be shared. • Optional participation, and/or I • Provided a copy of the final deliverable for informational purposes.

RESPONSIBLE ACCOUNTABLE CONSULTED INFORMED
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Stage Item Deliverable Definition EPI-USE CoPA
stakeholders on the project
details.

Implementation
Project Plan
Project Plan
Project document listing tasks,
owners, durations, start/end
dates, and dependencies.

R A
Communication
Strategy & Plan
Communication
Strategy
Document
Document outlining the plan for
communicating the project
details to the project team and
stakeholders.

C R, A
Design
Organizational
Change
Management
(OCM) Strategy
& Plan*
OCM Plan,
Framework and
Organizational
Impact
Assessment
This document lays out the
overall purpose, goals and
approach the team will follow
as they execute the
Organizational Change
Management (OCM) work
associated with the
transformation.

C R, A
Design
Document
Design Document
Functionality
Workbooks
Functional Design
Specifications
Document detailing business
processes, configuration
requirements; including
integration touchpoints,
standard reports, roles and
authorizations, etc. (including
solution configuration
workbooks).

R, A C, I
Issue Log
Management
and Resolution
Issue Log
Oversight, tracking and closure
of project Issue log.

R A
Inventory
Reports
Report
Requirement
Document
Document outlining existing
reports

C, I R, A
Reporting
Strategy
Reporting
Strategy
Document
Document mapping existing
reports to CDS Views
Identified gaps documented

R, A C, I
Testing Strategy
Testing Strategy
Document
Document outlining the
approach for the various levels
R A
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Stage Item Deliverable Definition EPI-USE CoPA
of testing the configuration,
integration, and interfaces.

Training Needs
Assessment
Training Needs
Assessment
Document of the assessment of
the training requirements which
arise from the project.

C R, A
Design
Training Strategy
& Plan
Training Plan and
Coordination
Document
Document outlining the steps
and tasks for training Client
resources beyond what training
SAP provides.

C R, A
Data Conversion
Strategy
Data Conversion
Strategy
Document
Document identifying the data
specification for conversion -
including source, data
requirements, extraction,
cleansing, etc.

C, I R, A
Post
Implementation
Support Plan
Support Strategy
Document
Document detailing Client plans
for supporting their internal
resources for support.

C, I R, A
Phase Sign off Phase Sign off
Confirm Phase deliverables are
complete, and project is ready
to move to next phase
R A
Realize
Configuration
and
development of
the system
Functionality
Workbooks
Technical Design
Specifications
Application configuration and
technical development

R, A C, I
Data Load
templates
Data Load
Templates
Templates for data loads. Data
will be provided by customer
per project requirements.

R A
Data cleansing
and preparation
Completed Data
Load Templates
Perform data cleansing and
prepare for data migrations.

C, I R, A
Training Material
development
Training Material
Create identified training
material from the Training
Analysis Framework
C R, A
Realize
Test Plans (to
include
acceptance
criteria)
Relevant Test
Plans
Document that defines specific
data and/or processes required
for testing to successfully
process business transactions
and transfer data into or out of
the target system.

C, I R, A
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Stage Item Deliverable Definition EPI-USE CoPA
Reporting
Development
Reports Development of identified
reports in BW4HANA

R, A C, I
First Solution
Review
(Iteration 1)
Business Process
Procedures
Configuration
Change Log
Overview of system
configuration and in scope
processes
R A
Test Scenarios
and Test Scripts
Test Scripts with
relevant data
scenarios
Documentation that defines
Client business scenarios to be
executed during the Testing
Phase.

C, I R, A
Second Solution
Review (Iteration
2)
Updated Business
Process
Procedures
Configuration
Change Log
Overview of system
configuration and in scope
processes
R A
Phase Sign off Phase Sign off
Confirm Phase deliverables are
complete, and project is ready
to move to next phase
R A
Validate
System
Integration
Testing (SIT) Test
Scenarios &
Scripts
Test Scripts with
relevant data
scenarios
Documentation that defines
client’s business scenarios to be
executed during the Testing
Phase.

C, I R, A
System
Integration
Testing Execution
Completed
Integration Test
Scripts
Execution and visibility of
business processes and
integration processes that bring
data into or out of S/4.

C, I R, A
Validate
Reporting Testing
Execution
Completed
Reporting Test
Scripts
Execution of report validation C, I R, A
User Acceptance
Testing Execution
Completed UAT
Test Scripts
Execution of User Acceptance
Testing.

C, I R, A
Payroll
Comparison Test
Execution
Completed
Payroll
Comparison Test
Scripts
Execution and visibility of
business processes and
integration processes for payroll
to ensure valid and accurate
payroll calculations.

C, I R, A
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Palo Alto City CouncilDecember 1, 2025

Palo Alto City Council
December 1, 2025