City Council
Staff Report
From: City Manager
Report Type: ACTION ITEMS
Lead Department: Utilities
Meeting Date: June 15, 2026
Report #:2602-5894
TITLE
PUBLIC HEARING & PROPOSITION 218 HEARING: Finance Committee Recommends Adoption of Seven Resolutions: 1) Approving the Fiscal Year 2027 Water Utility Financial Forecast, Reserve Management Practices and Reserve Transfer, and Amending Water Rate Schedules W-1, W-2, W-3, W-4, and W-7; 2) Approving the Fiscal Year 2027 Wastewater Collection Utility Financial Forecast and Reserve Management Practices, and Amending Wastewater Collection Rate Schedules S-1, S-2, S-6 and S-7; 3) Amending Refuse Utility Rate Schedules R- 1 and R-C; 4) Approving the Fiscal Year 2027 Electric Utility Financial Forecast and Reserve Transfer, Amending the Electric Reserve Management Practices and Electric Rate Schedules E-1, E-1 TOU, E-2, E-2-G, E-4, E-4-G, E-4 TOU, E-7, E-7-G, E-7 TOU, E-14, E-16, E-EEC-1, and E- NSE-1, and Directing the Use of Up To $225,000 in Renewable Energy Certificate Exchange Net Revenues in Fiscal Year 2027 to Reduce Electric Customers’ Photovoltaic Generation and Energy Storage System Installation Costs; 5) Approving the Fiscal Year 2027 Gas Utility Financial Forecast, Reserve Transfer, and General Fund Transfer, and Amending the Reserve Management Practices and Gas Rate Schedules G-1, G-2, and G-3; 6) Amending Utility Rate Schedules EDF-1, and EDF-2; 7) Amending Storm Water Utility Rate Schedule D-1; CEQA Status: Not a project under CEQA Guidelines Sections 15378(b)(4) and (5) and Exempt Under Section 15273(a)
RECOMMENDATION
Note: Resolutions are included in the packet as Attachments A – G, Attachment H reflects the Table of URLs for the Exhibits to Attachments A – G.
The Finance Committee recommends that the City Council adopt the following:
1. For the Water Utility, a Resolution (Attachment A):
a. Approving the FY 2027 Water Utility Financial Forecast and Reserves Management Practices; and
b. Approving the transfer of up to $5.5 million from the Operations Reserve to the CIP Reserve in FY 2026; and
c. Amending the Water Utility Rate Schedules effective July 1, 2026 (FY 2027):
i. W-1 (General Residential Water service),
ii. W-2 (Water Service from Fire Hydrants),
iii. W-3 (Fire Service Connections),
iv. W-4 (Residential Master-Metered and General Non-Residential Water Service), and
v. W-7 (Non-Residential Irrigation Water Service); and
2. For the Wastewater Collection Utility, a Resolution (Attachment B):
a. Approving the Fiscal Year (FY) 2027 Wastewater Collection Utility Financial Forecast and Reserves Management Practices; and
b. Amending the Wastewater Collection Utility Rate Schedules effective July 1, 2026 (FY 2027):
i. S-1 (Residential Wastewater Collection and Disposal), ii. S-2 (Commercial Wastewater Collection and Disposal), iii. S-6 (Restaurant Wastewater Collection and Disposal), and iv.S-7 (Commercial Wastewater Collection and Disposal – Industrial Discharger); and
3. For Refuse, a Resolution (Attachment C):
a. Amending the Refuse Rate Schedules effective July 1, 2026 (FY 2027):
i. R-1 (Domestic Refuse Collection), and
ii. R-C (Commercial Refuse Collection); and
4. For the Electric Utility, a Resolution (Attachment D):
a. Approving the FY 2027 Electric Utility Financial Forecast, and Amending the Electric Utility Reserves Management Practices; and
b. Approving the transfer of up to $5 million from the Electric Utility Distribution Operations Reserve to the Electric Utility Capital Reserve in FY 2026; and c. Amending the Electric Utility Rate Schedules effective July 1, 2026 (FY 2027):
i. E-1 (Residential Electric Service),
ii. E-1 TOU (Residential Time of Use Electric Service)
iii. E-2 (Small Non-Residential Electric Service),
iv. E-2-G (Residential Master-Metered and Small Non-Residential Green Power Electric Service,
v. E-4 (Medium Non-Residential Electric Service),
vi. E-4-G (Medium Non-Residential Green Power Electric Service), vii. E-4 TOU (Medium Non-Residential Time of Use Electric Service), viii. E-7 (Large Non-Residential Electric Service),
ix. E-7-G (Large Non-Residential Green Power Electric Service), x. E-7 TOU (Large Non-Residential Time of Use Electric Service), xi. E-14 (Street Lights),
xii. E-16 (Unmetered Electric Service),
xiii. E-EEC-1 (Export Electricity Compensation),
xiv. E-NSE-1 (Net Surplus Electricity Compensation); and d. Directing the Use of Up To $225,000 in Renewable Energy Certificate Exchange Net Revenues in Fiscal Year 2027 to Reduce Electric Customers’ Photovoltaic Generation and Energy Storage System Installation Costs, as local decarbonization efforts, via:
i. Changing the funding mechanism for the Cap-and-Invest Reserve to allocate up to $225,000 less in Cap-and-Invest auction revenues in FY 2027 to the City’s Cap-and-Invest Reserve and instead allocate these funds for other local decarbonization efforts; and, as a related matter:
1. Directing staff to review existing HVAC incentive levels including consideration of financial offsets to lower the cost of related work including panel upgrades, electric utility service upgrades, or the cost of building permit fees; and
2. Directing staff to return to City Council within FY 2027 to review the Electric Supply Portfolio Carbon Neutral Plan and use of revenues derived from the REC Exchange program.
5. For the Gas Utility, a Resolution (Attachment E):
a. Approving the FY 2027 Gas Utility Financial Forecast, and Amending the Gas Utility Reserves Management Practices; and
b. Approving the transfer of up to $1.5 million from the Gas Utility Operations Reserve to the Distribution Rate Stabilization Reserve in FY 2026; and c. Transferring up to 18% of gas utility gross revenues received during FY 2025 to the General Fund in FY 2027; and
d. Amending the Gas Utility Rate Schedules effective July 1, 2026 (FY 2027):
i. G-1 Residential Gas Service,
ii. G-2 Residential Master-Metered and Commercial Gas Service, and iii.G-3 Large Commercial Gas Service; and
6. For the Fiber Optics Utility, a Resolution (Attachment F):
a. Amending the Dark Fiber Optic Utility Rate Schedules, consistent with the applicable Consumer Price Index, effective July 1, 2026 (FY 2027):
i. EDF-1 (Dark Fiber Licensing Services), and
ii. EDF-2 (Dark Fiber Service Connection Fees); and
7. For Storm Water Management, a Resolution (Attachment G):
a. Amending the Storm Water Management Fee Rate Schedule, consistent with the applicable Consumer Price Index, D-1 effective July 1, 2026 (FY 2027):
i. D-1 (General Storm and Surface Water Drainage)
EXECUTIVE SUMMARY
The City of Palo Alto Utilities (CPAU) provides electricity, water, wastewater, natural gas, and fiber optic services to the Palo Alto community. The Public Works Department also provides refuse collection and processing for recycling, compost, and garbage, wastewater treatment and storm water management. The recommended resolutions propose rate schedules for these services in FY 2027, beginning July 1, 2026, and present the financial forecasts, reserve management practices, and additional financial adjustments to support the recommended rates, for Council approval as recommended by a majority of the Finance Committee.
The City’s primary goals are to manage these services in a way that ensures continued safe, reliable, environmentally sustainable, and cost-effective operations. The City is proposing rate increases this year for electric, natural gas, refuse, wastewater and water services. Storm water management fees and two Dark Fiber rates will increase per the Consumer Price Index (CPI).
These rate adjustments are necessary to:
Cover operating costs: As a municipal utility, CPAU's rates are designed to recover the costs of providing services.
Invest in infrastructure: Funds are needed for critical projects like modernizing the electric grid, rebuilding the wastewater treatment plant (Regional Water Quality Control Plant), and maintaining the water distribution system.
Replenish reserves: Utility reserves are currently low due to minimal rate increases during the pandemic, rising commodity prices and past droughts, and need to be restored for financial stability and to prepare for unexpected events.
The city aims to provide safe, reliable, environmentally sustainable, and cost-effective services, and is committed to transparency in communicating these rate changes to customers. Estimates for retail revenue impacts are included in the FY 2027 budget assumptions.
From November 2025 through June 2026, the Utilities Advisory Commission (UAC) and Finance Committee reviewed preliminary and proposed rate changes recommended by staff for Fiscal Year 2027. This report summarizes the meetings and incorporates UAC and Finance Committee recommendations into the recommendations for Council adoption.
The expected residential median utility bill changes are listed below, with the expected overall median utility bill for residential services to increase 8% or approximately $35.20/month in FY 2027:
• 8% increase for Water,
• 16% increase for Wastewater Collection,
• 3% increase for Refuse,
• 4.5% increase for Electric,
• 9% increase for Gas,
• 3% increase for Dark Fiber for pre-2006 commercial customers only, and • 3% increase for Storm Water Management Fee
ANALYSIS
The rate schedules and recommended changes are summarized below, further details for each can be found in the referenced Utilities Advisory Commission and Finance Committee reports.
Water Utility Proposal
The FY 2027 Water Utility rate proposal reflects an 8% distribution rate increase and a 7% commodity rate increase, which is equivalent to an 8% overall system average increase. The Water Utility’s five-year financial forecast projects annual rate increases ranging from 6% to 9% for fiscal years 2028 through 2031 (see Table 1). Both the FY 2027 proposed rate increase and the projected increases in the five-year forecast are lower than those included in the FY 2026 Financial Forecast presented to Council on June 16, 2025 1 (see Table 1). The 5-year projected distribution rate increases are primarily driven by capital spending. The capital plan’s largest projects include water main replacement projects and seismic improvements 1 Staff Report 2411-3776: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=83992 to two reservoirs. Additionally, rate increases continue to reflect inflationary increases to operating costs, revenue impacts from the most recent drought, long-term decline in demand, and low rate increases in earlier years.
On April 28, 2026, the San Francisco Public Utilities Commission adopted a wholesale rate (commodity rate) of $6.23/CCF for FY 2027, representing an increase of $0.43/CCF or 7.4%.
SFPUC also projects a rate increase of 7.5% in FY 2028, 3.4% in FY 2029, 2.3% in FY 2030, and
4.5% in FY 2031, although the projection is highly uncertain and subject to change.
Since the March 17, 2026 Finance Committee meeting 3, Staff updated the Water Utility Financial Forecast based on updated SFPUC wholesale rate information and the Committee’s feedback and adopted rate recommendation, as described below and in the tables in Exhibit 2 to Attachment A, which amend the Financial Forecast presented to the Finance Committee on March 17, 2026:
1. Updated FY 2027 water purchase costs from $6.24/CCF to $6.23/CCF, as approved by the SFPUC on April 28, 2026. This decreased FY 2027 Water Purchase costs by $46,000.
2. Updated water purchase costs in FY 2028 through FY 2031 in accordance with the April 28, 2026 SFPUC forecast, as shown in Table 1.
3. Reduced the proposed distribution rate increase from staff’s original 12% to 8%, lowering the overall rate increase from 10% to 8%, consistent with the rate recommendations approved by the UAC on March 4, 2026 4, and the Finance Committee on March 17, 2026. This update lowered the operations reserve by $1.2 million for FY 2027 and resulted in lower contributions to the Operations Reserve and CIP reserves in subsequent years (see Exhibit 2 to Attachment A for details).
4. Lowered the overall rate increases for fiscal years 2028 and 2029 to 10% from 9% by lowering the distribution rate increases to 11% from 12% for fiscal year 2028 and to 13% from 14% for fiscal year 2029, based on affordability concerns from the UAC and the Finance Committee.
This update lowers the Operations Reserve and CIP reserves for the 5-year forecast period (see Exhibit 2 to Attachment A for details).
5. Adjusted the water sales projections for fiscal years 2028 through 2031 to include assumptions for housing development expected during the forecast period to better align with RHNA-related growth assumptions and future housing development, based on feedback from the Finance Committee.
Compared to the FY26 Water Utility Financial forecast, significant forecast updates include changes to the Water Fund’s CIP, higher than projected reserve balances as of June 30, 2025, and the revised SFPUC commodity rate trajectory (see Table 1). The 5-year CIP budget for fiscal years 2027 through 2031 totals $71.7 million, $5.0 million lower than the prior year’s 5- year budget, and some projects have been deferred to later years within the 5-year period. 3 Staff Report 2512-5604: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86855 4 Staff Report 2512-5639:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86697&dbid=0&repo=PaloAlto Moreover, as of June 30, 2025, the Operations Reserve balance was $16.5 million, approximately $10.2 million higher than projected levels, and the Rate Stabilization Reserve had a balance of $4.0 million. The positive variance is primarily attributed to salary and benefits expenses and capital expenses in FY 2025 that were lower than forecasted by $3.8 million and $5.4 million, respectively. This positive fiscal year-end result contributes to higher reserve balances over the five-year planning period compared to the FY 2026 Financial Forecast. These updates also contribute to the City’s updated rate projections that are lower compared to the FY 2026 Financial Forecast’s rate projections (see Table 1).
Table 1: 2026 Actual Rate Increases and Projected Water Rate Trajectory from FY 2027 to FY 2031
Figure 1: Water Utility Operations Reserve Adequacy Fiscal Year Ending Balances Proposed Rates
The current rates became effective on July 1, 2025. CPAU has five water rate schedules:
separately metered residential customers (W-1), commercial and master-metered multi-family residential customers (W-4), irrigation-only services (W-7), services to fire sprinkler systems in buildings and private hydrants (W-3), and service to fire hydrant rental meters used for Fiscal Year 2026 2027 2028 2029 2030 2031
FY 2027 Proposal 10% 8% 9% 9% 7% 6%
FY 2026 Forecast 10% 10% 10% 10% 10%
FY 2027 Proposal 17% 8% 11% 13% 9% 7%
FY 2026 Forecast 17% 16% 15% 12% 11%
FY 2027 Proposal 2% 7% 8% 3% 2% 4%
FY 2026 Forecast 2% 1% 1% 5% 8%
Overall System Average Rate Trajectory
Distribution Rate Trajectory
Commodity Rate Trajectory
construction (W-2). All customers pay a monthly service charge based on the size of their inlet meter. This charge represents metering, billing, and other customer service costs, and also the cost of maintaining the capability to deliver a peak flow for that customer based on their meter size.
Water rates are composed of two general types of costs: distribution and commodity. Proposed distribution rates for the water utility are shown in Tables 2 – 5. The commodity rate is a pass- through of the 7% wholesale water rate increase approved by SFPUC, effective July 1, 2026.
Council approved the pass-through provision for a five year period, effective July 1, 2024.7 Table 2 shows the current and proposed consumption charges, which are distribution rates.
Table 2: Current and Proposed Water Distribution Charges Current Rates
(as of 7/1/2025)
Proposed Rates
(effective 7/1/2026)
Change
($/CCF)
Change
(%)
W-1 (Residential) Volumetric Rates ($/CCF)
Tier 1 Rate 3.49 3.77 0.28 8%
Tier 2 Rate 8.14 8.81 0.67 8%
W-2 (Construction) Volumetric Rates ($/CCF)
Uniform Rate 4.92 5.32 0.40 8%
W-4 (Commercial) Volumetric Rates ($/CCF)
Uniform Rate 4.92 5.32 0.40 8%
W-7 (Irrigation) Volumetric Rates ($/CCF)
Uniform Rate 7.49 8.11 0.62 8%
Table 3 and Table 4 show the current monthly service charges for rate schedules W-1, W-4 and W-7. These monthly service charges are also considered distribution rates.
Table 3: Current and Proposed Water Monthly Service Charges for W-1 Monthly Service Charge
($/month based on meter size)
Change
Meter
Size Current
(as of 7/1/2025)
Proposed
(effective 7/1/2026)
$ %
5/8” 27.63 29.92 2.29 8%
3/4” 27.63 29.92 2.29 8%
1” 27.63 29.92 2.29 8%
1 ½” 89.28 96.69 7.41 8%
2” 138.11 149.57 11.46 8%
3” 292.75 317.04 24.29 8%
4” 520.66 563.87 43.21 8%
7 See Resolution 10176 “Resolution of the Council of the City of Palo Alto Approving the FY 2025 Water Utility Financial Plan and Reserve Transfers, and Increasing Water Rates by Amending Rate Schedules W-1 (General Residential Water Service), W-2 (Water Service from Fire Hydrants), W-3 (Fire Service Connections), W-4 (Residential Master-Metered and General Non-Residential Water Service), and W-7 (Non-Residential Irrigation Water Service),” June 17, 2024.
6” 1,065.97 1,154.44 88.47 8%
8” 1,961.28 2,124.06 162.78 8%
10” 3,100.74 3,358.10 257.36 8%
12” 4,077.45 4,415.87 338.42 8%
Table 4: Current and Proposed Water Monthly Service Charges for W-4 and W-7 Monthly Service Charge
($/month based on meter size)
Change
Meter
Size Current
(as of 7/1/2024)
Proposed
(effective 7/1/2025)
$ %
5/8” 24.16 26.16 2.00 8%
3/4” 32.31 34.99 2.68 8%
1” 48.59 52.62 4.03 8%
1 ½” 89.28 96.69 7.41 8%
2” 138.11 149.57 11.46 8%
3” 292.75 317.04 24.29 8%
4” 520.66 563.87 43.21 8%
6” 1,065.97 1,154.44 88.47 8%
8” 1,961.28 2,124.06 162.78 8%
10” 3,100.74 3,358.10 257.36 8%
12” 4,077.45 4,415.87 338.42 8%
Table 5 shows the current and proposed monthly service charges for fire services rate schedule W-3.
Table 5: Current and Proposed Water Monthly Service Charges for W-3 Monthly Service Charge
($/month based on meter size)
Change
Meter
Size Current
(as of 7/1/2025)
Proposed
(effective 7/1/2026)
$ %
2” 5.68 6.15 0.47 8%
4” 35.22 38.14 2.92 8%
6” 102.32 110.81 8.49 8%
8” 218.07 236.16 18.09 8%
10” 392.19 424.74 32.55 8%
12” 633.50 686.08 52.58 8%
Wastewater Collection Utility Proposal
The Wastewater Collection Utility financial forecast proposes a 16% rate increase for FY 2027, which is equivalent to approximately $10.70 per residential customer per month. This forecast also projects annual rate increases of 14% in FY 2028, and 6% annually from FY 2029 and FY 2031.
The proposed Wastewater Collection rate trajectory is shown in Table 6 below. The additional funding generated by this rate increase is required to pay for ongoing wastewater treatment and collection operations costs, and collection capital improvement projects (CIP).
Staff updated cost projections for the FY 2027 to FY 2031 five-year financial planning period using the most recent cost data and updated escalation assumptions. Total expenses are expected to increase by an average of about 7% annually over the five-year financial planning period, driven primarily by increased wastewater treatment operating and capital costs as well as collection system CIP costs, partially offset by higher projected capacity fee revenues and lower collection operations costs. Consistent with the FY 2026 financial forecast 9, this forecast assumes deferral of the next sewer main replacement project to FY 2028. This approach limits CIP spending to the highest priority projects, allowing the Wastewater Collection Operations Reserve to recover to within guideline levels and avoid the need for a higher rate increase.
Table 6: Projected Wastewater Collection Rate Trajectory from FY 2027 to FY 2031 With the proposed rate trajectory, the Wastewater Collection Operations Reserve is projected to be between the minimum and target guideline levels at the end of FY 2027 through FY 2030, and gradually return to the target level by FY 2031.
Figure 1 shows the Operations Reserve ending balances alongside the minimum, maximum, and target guidelines and risk assessment levels.
Figure 2: Operations Reserve Adequacy Fiscal Year Ending Balances Note: Operations Reserve shown with a minimum balance of $0.
The CIP Reserve has a zero balance due to insufficient wastewater collection revenues to maintain the annual Capital Program Contribution to the CIP Reserve. However, starting in FY 9 Staff Report 2412-3871: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=64772
2027, staff anticipates the wastewater utility can resume contributions to the CIP reserve.
Proposed Rates
The current rates were effective July 1, 2025, when the City increased sewer rates by 20%. The average monthly sewer bill for a Palo Alto single family residential customer is $67 at current rates, which is about 12% lower than the neighboring community average.
CPAU has three sewer rate schedules applicable to current customers: one for residential customers (S-1), one for non-residential customers (other than restaurants) (S-2), and one for restaurants (S-6).
Table 7 below summarizes the current and proposed rates for all customer classes.
Table 7: Current and Proposed Sewer Rates
ChangeCurrent
(as of 7/1/2025)
Proposed
(effective 7/1/2026) $ %
Monthly Service Charges ($/Month)
S-1 (Residential) Service Charge $ 67.11 $ 77.84 $ 10.73 16% Water Quantity Rates ($/CCF)
S-2 (Commercial) Quantity Rates $ 12.52 $ 14.52 $ 2.00 16% S-6 (Restaurant) Quantity Rates 18.69 21.68 2.99 16%
The proposed rates for the S-7 (Industrial Discharger) rate schedule are also increasing 16% to the rates shown below:
1. Collection System Operation, Maintenance, and Infiltration Inflow: $7.20 per 100 cubic feet of metered water use.
2. Advanced Waste Treatment Operations and Maintenance Charge: $2.87 per 100 cubic feet of metered water use
3. $352.84 per 1000 pounds (lbs) of COD (Chemical Oxygen Demand)
4. $850.74 per 1000 lbs of SS (Suspended Solids)
5. $5,878.53 per 1000 lbs of NH3 (Ammonia)
6. $25,791.37 per 1000 lbs of toxics (chromium, copper, cyanide, lead, nickel, silver, and zinc)
Refuse Rate Proposal
Refuse rates are designed to recover the City’s costs of collecting, transporting, processing, recycling, composting, and disposing of materials collected curbside, as well as providing extensive waste diversion services, and compliance with State and local regulatory requirements.
The rates are based on the customer level of container size subscription, which provide a bundled comprehensive suite of essential services. The current commercial rates were effective July 1, 201611, and the current residential rates were effective July 1, 201712. The proposed rate increase is necessary to meet increasing operating expenses, increased expenses related to the cost-of- living adjustments based on multiple indices required in the City’s solid waste contracts, including GreenWaste of Palo Alto and GreenWaste Recovery contracts which account for 76% of fund expenses, increased cost for street sweeping and the post-closure monitoring of the City’s closed landfill, and to reduce reliance on the Refuse Fund’s Rate Stabilization Reserve. Staff reviewed the City’s costs of providing refuse collection services and determined that the 3% increase for Fiscal Year 2027 would not exceed those costs. Staff is conducting a more detailed cost of service analysis and comprehensive review of future financial needs and reserve requirements and will use the results to confirm cost allocation to inform next year’s rate-setting actions.
Proposed Rates
The 3% Refuse rate proposal recommendation to increase residential and commercial refuse service rates for Fiscal Year 2027 as presented to the Finance Committee 13 was approved unanimously (3-0). The current and proposed residential rates are reflected in Table 8 and the current and proposed rates for the most common commercial service levels are reflected in Table 9 below.
Table 8: Current and Proposed Residential Refuse Monthly Rates ChangeContainer Size Current Rates Proposed Rates
(effective 7/1/2026) $ %
20-gallon $27.81 $28.64 $0.83 3%
32-gallon $50.07 $51.57 $1.50 3%
64-gallon $100.15 $103.15 $3.00 3%
96-gallon $150.22 $154.72 $4.50 3%
Table 9: Current and Proposed Most Common Commercial Refuse Monthly Rates Change Container Size and
Service Frequency
Current Rates Proposed Rates
(effective 7/1/2026) $ %
96-gallon garbage, 1x/week $109.87 $113.16 $3.29 3%
2-cubic yard garbage, 1x/week $309.02 $318.29 $9.27 3%
96-gallon compost, 1x/week $87.90 $90.53 $2.63 3%
2-cubic yard compost, 1x/week $247.21 $254.62 $7.41 3% 11 City Council, June 13, 2016; Agenda Item #9; SR #6932 https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=878 12 City Council, June 19, 2017; Agenda Item 14; SR #8171 https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=36130 13 Finance Committee, March 17, 2026; Agenda Item #3; SR #2601-5866 https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86858 Electric Utility Proposal
The Electric Utility rate forecast proposes a 4.5% overall rate increase for FY 2027. Beyond 2027, the forecast shows additional increases that are slightly lower than the forecasts prepared last year.17 Table 10 shows the proposed rate increases for FY 2027 through FY 2031.
Table 10: Projected Overall Electric Rate Trajectory from FY 2027 to FY 2031 Fiscal Year 2027 2028 2029 2030 2031
FY 2027 Proposal 4.5% 7% 7% 7% 6%
FY 2026 Forecast 6% 8% 8% 6% -
The drivers for lower rate increases relative to last year’s forecast include a new approach to grid modernization described to the Utilities Advisory Commission on January 7, 2026.18 The new “when and where” approach to grid modernization provides the opportunity to delay costly system upgrades until electric customers are ready to replace gas appliances or install EV chargers. This approach lowers the expected rate increases compared with pre-scheduled upgrades by neighborhood. The rate increases in the outer years of the forecast could change as the Council finalizes plans for debt financing grid modernization costs.
In the current year, FY 2026, power supply costs are expected to be slightly lower than forecasted a year ago, mainly due to unexpected extremely high market prices for resource adequacy capacity and renewable energy credits, which have yielded higher wholesale revenues for the City. The City’s load (consumption) for the current year is forecasted to be about 14% higher than previously forecasted but is then expected to be relatively flat over the next several years.
Meanwhile, output from the City’s hydroelectric resources is forecasted to be roughly equal to long-term average levels over the next few years. Hydroelectric revenue continues to be a large source of uncertainty in the City’s supply cost forecasts. In the next five years, staff expect steadily increasing electric supply costs due to increasing transmission access charges, rising renewable portfolio standard requirements, and increasing resource adequacy purchase obligations. Capital spending and distribution system maintenance spending is rising due to grid modernization, a dedicated fiber backbone supporting critical City services, and an upgrade to the Hanover Substation which will benefit all electric ratepayers. Staff expect grid modernization and related capital costs to be offset after a series of debt financing with the first bond issuance in FY 2027.
The Hydroelectric Rate Stabilization Reserve has a balance of $18.8 million, or approximately equal to the reserve’s target level of $19 million. This reserve is used to manage the supply cost impacts associated with variations in generation from hydroelectric resources. Having sufficient 17 The current year (FY 2026) Financial Forecast for the Electric Utility (approved June 16, 2025) is described in the Finance Committee Staff Report 2412-3870 from April 15, 2025:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=64778 Changes made after the Finance Committee Staff Report are described in the City Council Report 2411-3776:
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=83992 18 Staff Report 2512-5638 Fiscal Year 2026 Mid-Year Electric Grid Modernization Update https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=85181 funds in the reserve allows the City to avoid activating the hydroelectric rate adjuster if an upcoming winter is drier than average. This FY 2027 forecast includes a transfer of an additional $3 million into the Hydroelectric Rate Stabilization Reserve from the Operations Reserve in FY 2027 consistent with guidance from the Finance Committee during its April 21, 2026 meeting.
Staff expect that debt will be issued in FY 2027 to cover the grid modernization costs already spent and planned over the period FY 2025-FY 2029. The Electric Distribution Operations Reserve is forecasted to be low at the end of FY 2026 because it reflects grid modernization costs, commitments, and reappropriations planned to be reimbursed through the debt issuance. On a combined basis, the Electric Distribution and Supply Operations Reserves are within the guideline range and are forecasted to remain within the guideline range throughout the five-year forecast period, FY 2027 to FY 2031.
As directed by the Finance Committee on April 7, 2026, staff reviewed the building permit fees related to PV, ESS, HVAC installations, and new or replacement electric panels less than 400A.
From that review, staff recommends the use of non-rate revenues from the Renewable Energy Certificates (REC) Exchange Program21 to partially offset the cost of PV and ESS permit fees, and the use of proceeds gained through the sale of freely allocated Cap-and-Invest (C&I) allowances or Public Benefits funds to support HVAC incentives, including costs of related work such as panel replacements, utility service upgrades, or building permit fees. For electric panel replacements less than 400A where there is no direct tie to an action supporting building or transportation electrification, staff is recommending that these building permit fees not be subsidized, to encourage customers to participate in an EV charger or HVAC installation at the time of electric panel replacement, versus some uncertain future date.
Staff recommends, as shown in the attached Electric Resolution, that Council direct the use of up to $225,000 in REC Exchange net revenues in FY 2027 to reduce electric customer costs related to photovoltaic generation and energy storage system installations, as local decarbonization efforts, and direct staff to take the following actions:
a. instead of allocating an amount equivalent to the REC Exchange Revenue from the City’s Cap-and-Invest Reserve, allocate up to $225,000 less to the City’s Cap-and- Invest Reserve in FY 2027 for other local decarbonization efforts; and b. review existing HVAC incentive levels including consideration of financial offsets to lower the cost of related work including panel upgrades, electric utility service upgrades, or the cost of building permit fees; and c. return to Council within Fiscal Year 2027 to review the Electric Supply Portfolio Carbon Neutral Plan and use of revenues derived from the REC Exchange Program.
21 Reaffirmation of the Carbon Neutral Plan and the Renewable Energy Credit Exchange Program as Recommended by the Utilities Advisory Commission; CEQA Status: Not a project, December 15, 2025 https://cityofpaloalto.primegov.com/api/compilemeetingattachmenthistory/historyattachment/?historyId=af8b2a 70-d917-4868-baa8-8157048a5cc3
Proposed Rates
The City adopted its current electric rates effective July 1, 2025. All FY 2026 rates are increased by 4.5% to develop the proposed FY2027 rates. The current and proposed rates are reflected in Table 11 below.
Table 11: Current and Proposed Electric Rates
Rate Schedule Current Rates
(as of 7/1/25)
Proposed Rates
(effective of 7/1/26)
Change Change
(%)
E-1 (Residential)
Tier 1 Energy ($/kWh) 0.20570 0.21494 0.00924 4.5%
Tier 2 Energy ($/kWh) 0.22944 0.23975 0.01031 4.5%
Customer Charge ($/month) 5.15 5.38 0.23 4.5%
E-2 & E-2-G (Small Non-Residential)
Summer Energy ($/kWh) 0.26485 0.27676 0.01191 4.5%
Winter Energy ($/kWh) 0.17290 0.18067 0.00777 4.5%
Customer Charge ($/month) 6.22 6.49 0.27 4.3%
E-4 & E-4-G (Medium Non-Residential)
Summer Energy ($/kWh) 0.15842 0.16553 0.00711 4.5%
Winter Energy ($/kWh) 0.11429 0.11942 0.00513 4.5%
Summer Demand ($/kW) 49.17 51.37 2.20 4.5%
Winter Demand ($/kW) 26.09 27.25 1.16 4.4%
Customer Charge ($/month) 126.24 131.92 5.68 4.5%
E-7 & E-7-G (Large Non-Residential)
Summer Energy ($/kWh) 0.13792 0.14412 0.00620 4.5%
Winter Energy ($/kWh) 0.08970 0.09372 0.00402 4.5%
Summer Demand ($/kW) 43.61 45.56 1.95 4.5%
Winter Demand ($/kW) 30.57 31.93 1.36 4.4%
Customer Charge ($/month) 578.08 604.09 26.01 4.5%
Under the proposed FY2027 rates, and the median consumption level, the CPAU residential electric monthly bill is about $92.97. This is about 45% lower than the monthly bill for a PG&E customer and about 29% higher than the bill for a City of Santa Clara (Silicon Valley Power) customer with the same consumption level, based on comparable rates effective on January 1, 2026.
Table 12 shows the current rates effective July 1, 2025 and proposed NEM Buyback rates effective July 1, 2026. The details of these rates adjustments were described in the April 21, 2026 Finance Committee meeting staff report23.
23 Staff Report #2512-5603: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87766 Table 12: Current and Proposed Electric NEM Buyback Rates Rate Schedule Current Rates
$/kWh
Proposed Rates
$/kWh
Net Surplus Electricity (E-NSE-1) $0.1012 $0.1064
Export Electricity (E-EEC-1) $0.1206 $0.0990
The City offers an E-16 rate for unmetered electric service for wireless communication facilities and related equipment on wood utility poles and streetlight poles. The E-16 unmetered service rate aligns closely with the E-2 rate for small commercial electric service, excludes costs related to meter reading and is determined based on the energy requirement of equipment specifications. The E-16 rate also includes miscellaneous electric utility charges such as licensing fees for City-owned spare conduit, usable space for utility pole attachments, and mounting communication equipment on utility poles and streetlight poles. In FY 2026, CPAU engaged the services of EES Consulting (EES) to perform a cost of service analysis of the E-16 rate and update the rate schedule to ensure the City is recovering the actual costs of delivering these services. As part of the final cost of service study, EES recommends increasing the miscellaneous unmetered electric service rates by the Consumer Price Index for All Urban Consumers (CPI-U) in the San Francisco area, to recover capital and maintenance expenses associated with utility pole attachments and telecom conduit. This year’s change in CPI-U was 3%, as reported by the Bureau of Labor Statistics.
Gas Utility Proposal
The Gas Utility financial forecast proposes a 9% overall rate increase for FY 2027, which includes a 14.5% increase to distribution rates, assuming no change in supply costs, effective July 1, 2026.
Additionally, this forecast projects overall rate increases of 7% in FY 2028, and 6% annually from FY 2029 through FY 2031. The proposed Gas rate trajectory is shown in Table 13 below.
Table 13: Projected Overall Gas Rate Trajectory from FY 2027 to FY 2031 Staff updated cost projections for the FY 2027 to FY 2031 five-year financial planning period using the most recent load forecast, cost data, and escalation assumptions. Lower-than-projected gas usage is driving the need for a 9% overall rate increase in FY 2027. In FY 2025 gas usage was 8% below the forecast. Staff expects usage to continue to drop by approximately 1.1% annually from FY 2027 through 2031. Relative to the FY 2026 financial forecast25, the updated forecast projects total gas usage to be about on average 4% lower in the FY 2027 to FY 2031 period, resulting in 25 FY 2026 Financial Forecast for the Gas utility (approved June 16, 2025) is described in the Finance Committee Staff Report 2412-3868: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=64777
decreased retail sales revenue.
Operations and Capital Improvement Project (CIP) expenses for critical gas main replacements are also expected to rise over the next five years. These higher expenses are forecasted to reduce the Operations Reserve balance below the risk-assessment threshold at the end of FY 2027. With the proposed set of rate increases, the reserve is projected to recover above the minimum guideline level by FY 2028 and return to target levels by FY 2031. Figure 2 shows the actual and projected year-end balance.
Figure 3: Operations Reserve Projection
General Fund Transfer
The Gas Utility's transfer to the City’s General Fund is a component of the City’s gas rates. This transfer was first authorized by voters in 1950 and reaffirmed in November 2022 with the passage of Measure L, which authorizes a transfer amount up to 18% of the gross revenues of the Gas Utility. This financial forecast proposes a transfer of $10.7 million in FY 2027, 18% of FY 2025 gross revenues. This transfer of 18% is in alignment with the assumptions in the FY 2027 Proposed Budget.
Proposed Rates
Table 14 shows the current and proposed monthly service charges, while Table 15 shows the volumetric charges related to distribution for all rate schedules. Supply-related charges are pass- through charges that update periodically. The latest charges are published online 27 in the City’s Rates website. The calculated monthly gas bill based on current rates for the median Palo Alto residential customer is about 11% lower than that of a PG&E customer with equivalent consumption. The proposed rates reflect the proposed rate increases compared to the current rates, which are based on the Natural Gas Cost of Service and Rate Study and were adopted by 27 City’s Gas Monthly Supply Rates: https://www.cityofpaloalto.org/files/assets/public/v/25/utilities/rates-schedules- for-utilities/residential-utility-rates/monthly-gas-volumetric-and-service-charges-residential-3.pdf
City Council at the December 1, 2025 meeting29.
Table 14: Current and Proposed Gas Monthly Service Charges ($/Month) Rate Schedule Current Rates
(as of 2/1/2026)
Proposed Rates
(effective 7/1/2026)
Change
($)
Change
(%)
G-1 (Residential) $ 19.58 $ 22.41 $ 2.83 14.5%
G-2 (Small Commercial)
G-2 (≤ 220 scfh) $ 29.24 $ 33.47 $ 4.23 14.5%
G-2 (> 220 and < 4,000 scfh) 94.56 108.27 13.71 14.5% G-2 (≥ 4,000 scfh) 419.08 479.84 60.76 14.5%
G-3 (Large Commercial) $ 1,712.36 $ 1,960.65 $ 248.29 14.5% Table 15: Current and Proposed Gas Distribution Charges ($/Therm) Rate Schedule Current Rates
(as of 2/1/2026)
Proposed Rates
(effective 7/1/2026)
Change
($)
Change
(%)
G-1 (Residential)
Tier 1 Rates $ 1.0456 $ 1.1972 $ 0.1516 14.5%
Tier 2 Rates 2.5203 2.8857 0.3654 14.5%
G-2 (Residential Master-Metered and Small Commercial)
Uniform Rate $ 1.2204 $ 1.3973 $ 0.1769 14.5%
G-3 (Large Commercial)
Uniform Rate $ 1.1874 $ 1.3595 $ 0.1721 14.5%
Fiber Utility Proposal
Since 2007, the EDF-1 and EDF-2 rates for Dark Fiber customers have increased annually by the annual December change in the Consumer Price Index for All Urban Consumers (CPI-U) in the San Francisco area, as stated in their dark fiber license agreements. Based on prior Utilities Advisory Commission and City Council direction, these rate changes are routinely included as part of the Budget adoption process rather than in a separate staff report. This year’s change in CPI-U was 3%, as reported by the Bureau of Labor Statistics. The City has four customers remaining on the pre-2006 EDF-1 rate schedule. All other dark fiber customers are on the EDF-3 rate schedule, for which no increase is proposed.
Storm Water and Surface Water Drainage Proposal
On April 11, 2017, a majority of Palo Alto property owners approved a ballot measure approving a monthly Storm Water Management Fee. This fee funds thirteen storm drainage capital 29 Staff Report 2506-4908: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=84117 improvement projects listed in the ballot measure, enhanced maintenance of the storm drainage system, and a variety of storm water quality protection programs. The approved ballot measure allows for an annual adjustment based on the Consumer Price Index (CPI) for the San Francisco-Oakland-San Jose CSMA or 6%, whichever is less. The Storm Water and Surface Drainage Rate will increase 3%, increasing the monthly charge per Equivalent Residential Unit by $0.53, from $17.61 to $18.14 for Fiscal Year 2027, effective July 1, 2026, to reflect the annual CPI change. See Staff Report 2602-598131 for more information.
TIMELINE
Water, Wastewater Collection, and Refuse Rates
After the June 15th Public Hearing is opened and testimony from members of the public accepted, City Council may choose to:
1. Close the hearing and take action; or
2. Close the hearing and defer action until the close of the Budget Adoption Hearing on June 15th; or
3. Continue the hearing until the end of the Budget Adoption Hearing (should the Budget Adoption Hearing be continued to another Council meeting), and then reconvene the hearing, take any additional water, wastewater collection, and refuse rate testimony, close the hearing, and take action.
The latter option has been used in prior years when the Budget Adoption process has spanned multiple City Council meetings. It is customary in such circumstances to continue to accept written protests up until the hearing is closed. Unless written protests are filed by a majority of affected water, wastewater, or refuse customers, Council may vote on the proposed rate actions.
If approved, the water, wastewater, and refuse rates will become effective July 1, 2026. The City Council will also consider changes to the Financial Forecasts for the water, wastewater collection and refuse utilities, and should they take action to approve these forecasts, they will also become effective July 1, 2026.
Electric, Gas, and Fiber Rates and Utility Financial Forecasts and Storm Water Management Rates The electric, gas, and fiber rates and financial forecasts, and the storm water management rates will be considered at the June 15, 2026 public hearing. Should the City Council take action to approve any or all of these rates, they will become effective July 1, 2026.
FISCAL/RESOURCE IMPACT
The resource impact of the recommendations and rate increases summarized in this report is the continued financial solvency of the various utilities through the revenue increases described below. Table 17 shows the estimated FY 2027 revenue impacts of the recommendations in this report, relative to projected revenue for FY 2027 without changing utility rates. Streetlight 31 Staff Report 2602-5981: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87150 expenses (which are paid from the General Fund) are projected to increase by 4.5% or $0.1 million.
Table 17: Median Residential Bill Increase and Revenue Impact Utility Median Residential
Bill Increase
FY 2027 Estimated
Overall
Revenue Impact
Water 8% $6.2 million
Wastewater Collection 16% $4.9 million
Refuse 3% $1.0 million
Electric 4.5% $10.8 million
Gas 9% $5.5 million33
Storm Water Management 3% $0.2 million
Below are the impacts to the general fund from the adopted 2026 budget to the proposed 2027 budget, related to General Fund Transfers and revenues from utility users tax:
• Water: General Fund utility users tax revenue would increase by $0.2 million from estimated $2.6 million in FY 2026 to $2.8 million in FY 2027. • Electric: General Fund revenues from the Electric Utility General Fund Transfer and utility users tax would increase $0.4 million (from an estimate of $17.6 million in FY 2026 to an estimated $18.0 million in FY 2027) and $0.5 million (from $9.0 million in FY 2026 to $9.5 million in FY 2027), respectively.
• Gas: General Fund revenues from the Gas Utility Equity Transfer would increase from about $9.7 million in FY 2026 to $10.7 million in FY 2027, an increase of $1.0 million.
General Fund utility users tax revenue, in addition to General Fund Revenues, would increase by $0.2 million from estimated $2.8 million in FY 2026 to $3.0 in FY 2027.
Staff proposes the use of Electric Utility’s net revenues from the REC Exchange Program to offset building permit fees. This REC Exchange Program net revenue is non-rate revenue. The use of this revenue will maintain current funding for local decarbonization efforts, including electric customer costs related to photovoltaic generation and energy storage system installations. Up to $225,000 of Net REC Exchange revenue will be used for local decarbonization in FY 2027 while up to $225,000 of equal and offsetting Cap-and-Invest Auction revenues that would have been used for local decarbonization will instead be used for renewable energy purchases.
Resource impacts to City departments and funds of the recommended rate adjustments are programmed in the FY 2027 Proposed Operating Budget. If the final rates adopted by Council in June differ from those proposed in this report, further adjustments may be brought forward as part of the annual budget process.
33 Not including fluctuations in commodity revenue/cost.
POLICY IMPLICATIONS
Policy implications related to the proposed electric, gas, water, wastewater collection, fiber, storm water management fee, and refuse rate actions are detailed fully in the attached Resolutions and associated exhibits.
STAKEHOLDER ENGAGEMENT
On November 5, 202535, staff presented the preliminary rate proposals at the UAC meeting. The UAC subsequently formed a Subcommittee on December 3, 2025 with a defined scope of reviewing the FY 27 Financial Plan and 5-Year Forecast regarding affordability for the electric and water utilities regarding affordability.
On November 18, 2025 36, staff presented the same preliminary rate proposals to the Finance Committee. Council members emphasized that the absence of rate increases during the pandemic created a catch-up scenario that should be avoided in the future.
Water
On March 4, 2026 37, staff presented the Water Utility rate proposal to the UAC, recommending a 12% increase to distribution rates and an 8% increase to commodity rates, for an overall system average increase of 10%. The primary drivers of the proposed distribution rate increase were restoring reserves and funding capital expenses. Commissioners expressed concern that the SFPUC’s FY 2027 wholesale rate increase had risen from the previously projected 1% to 7.4% and noted that wholesale rate projections in subsequent years could increase further. Commissioners also recommended a cost-of-service study, evaluation of rates for different pressure zones, and legal guidance on tiered rates. Commissioners also asked about the proposed $5.5 million transfer from the Operations Reserve to the CIP Reserve and questioned whether reserve guidelines remain appropriate. Some commissioners expressed lack of confidence in the 5-year forecast during the outer years because an updated water master plan was unavailable to inform the capital project forecasts. The UAC then voted 7-0 not to approve the FY 2027 Water Utility Financial Forecast and voted 5-2 to approve both the reserve transfer and an 8% FY 2027 rate increase by decreasing the contribution to the Operations Reserve by $1.2 million from the proposed level.
At the March 17, 2026 38 Finance Committee, Staff presented its recommendation of an overall 10% rate increase. Council members unanimously supported the UAC’s recommendation of an 8% overall rate increase, while emphasizing the need for clearer public communication and additional analysis. They noted the importance of explaining to residents that although unit rates may increase, conservation can help limit bill impacts because customers use fewer units of water. They also encouraged staff to better communicate that investments in technology, such as AMI, are helping reduce labor costs. They emphasized the importance of communicating that 35 Staff Report 2503-4364: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=84164 36 Staff Report 2508-5119: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=83887 37 Staff Report 2512-5639: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86697 38 Staff Report 2512-5604: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86855 rates fund needed investments in infrastructure. A council member noted ongoing coordination with regional partners and other elected officials to obtain additional information from SFPUC.
One council member expressed support for taking a more conservative approach to reserves, while also noting hesitation pending completion of the reserve study by Baker Tilly and requesting additional information on debt capacity. Council members also asked staff to revisit the water sales forecast to better align with RHNA-related growth assumptions and future housing development, and to coordinate with planning staff to confirm which housing unit projections are reflected in the forecast.
Wastewater Collection
On March 4, 202643, staff presented the Wastewater Collection Utility rate proposal to the UAC.
The UAC voted 6-1 to recommend that the City Council adopt a resolution approving the 16% rate increase. Commissioners asked about wastewater treatment costs including underlying drivers, impact on Wastewater Collection utility rates, and potential cost-saving opportunities at the treatment plant. One Commissioner asked about the assumptions underlying projected capacity fee revenues and the risks associated with those projections. Commissioners also inquired about rainwater infiltration and its potential impact on Collection system costs. In addition, one Commissioner asked about the findings of the sewer master plan and recommended improving the staff report narrative, particularly the discussion of FY 2025 actuals and neighborhood bill comparisons.
The Finance Committee reviewed staff’s proposals for the Wastewater Collection Utilities at its March 17, 2026 meeting44 and unanimously approved the proposal.
Refuse
The Finance Committee reviewed staff’s proposals for Refuse rates at its March 17, 2026 meeting45 and the Finance Committee unanimously approved the proposal.
Electric
At the UAC meeting on March 31, 2026 46, the UAC reviewed the Electric rate proposals and financial forecast and voted 6-1 to approve the staff recommendation.
During the discussion, the UAC Subcommittee reported out on their meeting to discuss Electric rate affordability and reported that they discussed rates in general, data centers, and rebates to low-income customers. The discussion noted that the City’s consultant ran a model and found that the addition of data centers would result in reductions to marginal cost. Additionally, UAC Subcommittee was in agreement with staff’s approach to increase the eligibility thresholds as well as electric discount levels to low-income customers through a separate report to the City Council. One Commissioner requested information in the future showing a histogram of the number of customers at each level of electricity usage and their bill impacts. Commissioners 43 Staff Report 2512-5640: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86546 44 Staff Report 2512-5608: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86854 45 Staff Report 2601-5866: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=86856 46 Staff Report 2603-6163: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87029 asked questions about time-of-use rates, indexing rate increases to inflation indices, and reserves.
The April 7, 2026 Finance Committee Meeting included a review of proposed building permit fees related to installation of photovoltaic (PV) systems, energy storage systems (ESS), and electrification51. As a result of this discussion, the Committee directed Utilities Department Staff to develop a rebate program for building permit fees related to PV and ESS. Further, the Committee directed Utilities Department Staff to develop rebate programs related to HVAC systems and new or replacement service panels less than 400A52.
At the Finance Committee meeting on April 21, 2026 53, a UAC Commissioner summarized the perspectives of the UAC including that the Commission was generally aligned with the current strategy, expressing support for continued investment in grid modernization while stretching project timelines to mitigate near-term rate pressure.
Finance Committee members asked about the load forecast assumptions, second transmission line status, and clarifying resource adequacy for public communication purposes. A Committee member highlighted the importance of communicating that Palo Alto has historically benefited from early procurement of low-cost green energy, generating additional revenue and delivering value to the community.
A Committee member asked about the reason for the $6 million transfer to the hydro stabilization reserve. Staff explained the transfer was to hedge against volatility in hydropower costs driven by drought conditions. While hydropower remains a low-cost resource, it is highly sensitive to water availability, creating exposure to sudden cost increases.
The Finance Committee modified staff’s proposal to transfer the $6 million to the hydro stabilization reserve over a two-year period ($3 million per year), instead of all in FY 2027, with a corresponding reduction in the rate increase. The Finance Committee unanimously approved the staff proposal with this revision.
Gas
On March 31, 202654, staff presented the rate proposal to the UAC. Commissioners voted 4-3 to recommend to maintain an overall rate increase of no more than 7% for FY 2027 through a combination of reducing the General Fund Transfer and potentially using other levers such as reserve levels. Commissioners raised concerns about the gas utility's long-term financial sustainability, highlighting the challenge of planning for end-of-life of the gas system while 51 The April 7, 2026, staff report can be viewed through this link. https://cityofpaloalto.primegov.com/viewer/preview?id=0&type=8&uid=3f9162f0-a2c5-4baf-942e-cf17727675e1 52 The April 7, 2026 Finance Committee meeting resulted in actions directing staff to develop a rebate program funded through Utilities non-rate revenues that provides subsidies for all fee categories at an amount that approximates the difference between City costs and state caps, and to develop a rebate program funded through Utilities non-rate revenues that provides subsidies for all fee categories at an amount that approximates the proposed cost in Table 2, excluding “Electric Service – New or Replacement 400 amp and Greater.” 53 Staff Report 2512-5603: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87766 54 Staff Report 2512-5641: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87025 managing rising operating and capital costs. Lastly, Commissioners debated the General Fund Transfer assumption, with some recommending a reduction from 18%.
At the Finance Committee meeting on April 21, 202659, a Committee member recommended that future reports more explicitly acknowledge that reserve balances were drawn down during COVID to support lower rate increases, and that current upward rate pressure is partially a consequence of those prior decisions. A Finance Committee member noted recent news from the U.S. Energy Information Administration (EIA) of a potential price spike in FY 2027. Staff responded that they actively monitor market conditions and, based on current trends showing declining prices and high levels of storage staff does not anticipate any spike.
The Committee then discussed the UAC recommendation and Committee members expressed reluctance to reduce the general fund transfer, citing ongoing general fund budget deficits. In response, staff outlined alternative options for lowering the rate increases and there was a discussion of the option to extend the collection of the gas price spike mitigation adder.
Ultimately, the Finance Committee approved the staff’s proposal, which passed on a 2-1 vote.
Stormwater Management
The Finance Committee reviewed staff’s proposals for the Stormwater Management rate increase on April 7, 2026 60 and unanimously approved the proposal 61. The rate increase was subsequently discussed with the Stormwater Management Oversight Committee on April 13, 2026.
This rate increase is in accordance with the Stormwater Management Fee ballot measure passed by a majority of Palo Alto property owners on April 11, 2017.
ENVIRONMENTAL REVIEW
Adoption of the attached Financial Forecasts and budgeted transfers does not meet the California Environmental Quality Act’s definition of a project, pursuant to Public Resources Code Section 21065 and CEQA Guidelines Section 15378(b)(4) and (5), because it is a governmental fiscal and administrative activity which will not cause a direct or indirect physical change in the environment. Adoption of the proposed water, wastewater collection, refuse, electric, gas, and fiber rates, and the storm water management fee 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. 59 Staff Report 2512-5607: https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87765 60 Finance Committee, April 7, 2026; Agenda Item #1; SR #2602-5981, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87150 61 Finance Committee, April 7, 2026; Agenda Item #1, Action Minutes, https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=87140
ATTACHMENTS
Attachment A: Resolution for the FY 2027 Water Utility
Attachment B: Resolution for the FY 2027 Wastewater Collection Utility Attachment C: Resolution for the FY 2027 Refuse Rates
Attachment D: Resolution for the FY 2027 Electric Utility Attachment E: Resolution for the FY 2027 Gas Utility
Attachment F: Resolution for the FY 2027 Fiber Optic Utility Attachment G: Resolution for the FY 2027 Storm Water Management Fee Rates Attachment H: Table of URLs for Exhibits to Attachments A - G APPROVED BY:
Alan Kurotori, Director of Utilities