Rocked by a dry weather spell and dwindling reserves, the city's utility department is poised to raise electricity rates this summer.

But while Mother Nature may shoulder some of the blame for forthcoming rate increases, a city practice of transferring money from its utilities department funds to its general fund could also spike residents' utility bills.

A new staff report indicates the city plans to take a much larger chunk of cash from utilities in fiscal year 2010 than in years past.

The transfer is, in many ways, like a dividend paid by the utilities department to the entity that created and owns it, the City of Palo Alto.

Over the past century, the amounts transferred from the water, electric and gas funds to the city's general fund have been steadily rising, largely reflecting the city's overall growth and need to fund its services. (View annual transfers from the utility fund to the general fund since 1909 (PDF))

This year, however, the dividend is slated to swell by an unprecedented amount. On Feb. 4, city staff presented a five-year projection to the Utilities Advisory Commission, showing a sharp spike next year in the amount transferred from utilities to the general fund.

Under the tentative plan, which is subject to change in the coming weeks, the city would draw $13.3 million from the electric fund in 2010 and $6.3 million from the gas fund, for a total transfer of $19.6 million. The city plans to take no money from the water fund this year.

The numbers represent a $4.5 million surge from the amount transferred in 2009 – and would represent the largest increase in the city's history, if adopted.

Over the past decade, the year-to-year increases generally ranged from roughly $300,000 to about $500,000 (between 2008 and 2009, the total transfer spiked from $14.6 to $15.1 million).

Prior to that, the transfer amount held steady from year to year (from 1997 to 2000, the city shifted $11.8 million annually from utilities to the general fund) or even went down (by $1.3 million between 1990 and 1991). But the overall trend has been toward gradually larger numbers.

City Manager James Keene said the transfer amount is one of many factors he and staff are considering in putting the city's budget together, which is facing a projected $8 million shortfall in 2010.

Keene said his main goal is to make sure the cumulative impact of the various cost increases and budget cuts doesn't hit the residents too hard.

"It's important that we take a holistic perspective on impacts of all of the various revenues and costs and rate impacts on our customers and citizens," Keene told the Weekly.

"As we are putting together recommendations, our recommendations will be ultimately informed by cumulative impacts."

Keene noted that staff showed the Utilities Advisory Commission numbers that represented the maximum transfer that could be made and that the actual transfer will likely be less than the tentative figures indicate.

Director of Utilities Valerie Fong said the city is in the process of updating the methodology used in coming up with the transfer amount. She said staff will present fresh numbers to the commission in March, reflecting various budget options. She also said staff is seriously considering the commission's opposition to sharp rate increases. Fong called the transfer figures shown to the commission "extremely preliminary."

But Commissioner Dick Rosenbaum said he wished staff was more candid about how they arrived at their transfer numbers. The commission had no involvement in any discussions on changing the transfer amount, he noted. And City Council member Yiaway Yeh, the council's liaison to the Utilities Advisory Commission, said the council had not dealt with the subject either.

"Under those circumstances, for Utility to propose a $7 million increase in transfer to the general fund is, in my opinion, just beyond belief," Rosenbaum said, referring to staff proposals to increase transfer from the electric fund by $4.2 million and to increase transfer from the gas fund by $3.1 million. "To do so without discussion and to tell us next month that you'll provide the numbers, it's just totally unacceptable."

Rosenbaum was one of several commissioners who expressed concern about staff projections for rate increases in 2010. With electricity rates currently expected to surge by 12 percent to 21 percent starting in July, commissioners John Melton and Asher Waldfogel urged staff to look for other ways to keep the rate increases as low and gradual as possible. Rosenbaum pointed to the tough economic climate and questioned whether the proposed transfers were justified.

"Given that the transfer is to some degree arbitrary, one has to wonder what has to go on here," Rosenbaum said at a Feb. 4 meeting.

"In this difficult year, is the city really going to tell the ratepayers that we need $7 million more because of some arcane methodology?" he added.

Keene said staff will present the Utilities Advisory Commission and the council's Finance Committee a range of options next month, and discuss the methodology used to arrive at each of the options.