With gas prices falling and reservoirs replenishing after recent storms, Palo Alto's leaders hope the type of skyrocketing rates that residents have experienced over the past two months will be an aberration, not a norm.
At the same time, utility customers in Palo Alto should expect to see gradual increases in most rates come July, thanks to high commodity costs and the Utility Department's ongoing efforts to refill its depleted financial reserves and upgrade aged infrastructure.
According to the city's new financial plans, the gas, water and wastewater utilities are all expected to see rate increases in July, when fiscal year 2024 begins. Collectively, all the rate changes are expected to add about $17 to the average monthly bill, which in 2023 amounted to $369, according to a presentation that the city's Utilities Advisory Commission saw on Wednesday night.
While high gas bills have been common lately thanks to colossal increases in commodity costs in January and February, the new financial plans suggest that changes to water rates will have the highest impact on utility bills in fiscal year 2024. Palo Alto's long-term plan shows a 7% increase in water rates in 2024, followed by three consecutive 3% increases in the following three years. This means the median monthly residential water bill is expected to increase by $6.90 in July.
The water rate hike is driven in part by infrastructural improvements undertaken by the city's supplier, the San Francisco Public Utilities Commission (SFPUC), and in part by local efforts to upgrade and maintain the distribution system. The SFPUC is now in the final stages of completing its massive, $4.8-billion project known as Water System Improvement Program, which entails 52 infrastructure projects around the region focused on boosting seismic safety for the Hetch Hetchy Regional Water System.
Palo Alto is one of more than two dozen cities that get its water through Hetch Hetchy and, as such, is responsible for its share of payments for the infrastructure improvements and the debt service costs.
"This has resulted and will continue to result in large increases in the annual debt service costs assigned to wholesale customers like Palo Alto," states a report from Lisa Bilir, senior resource planner at the Utilities Department.
Another major component of the water rate increase is the escalation in distribution costs, which includes the costs of paying for main replacements and performing seismic upgrades at two local reservoirs. While the city plans to tap into the water utility's reserves to avoid a higher rate escalation, the combination of growing costs and decreasing water sales (thanks to local conservation efforts) are prompting the city to seek higher rates.
Wastewater bills will also continue to rise, thanks to the colossal effort by Palo Alto and its partner cities to upgrade the Regional Water Quality Control Plant. On wastewater bills, customers can expect a series of cumulative 9% increase between 2024 and 2028, which will push the average residential bill from the current level of $44.62 to $48.64 in 2024 and, ultimately, to $65.53 by 2028.
The Utility Department's new plans also show an 8% increase in gas rates, which would add $5.20 to the median residential bill. That change, however, assumes that supply costs will remain steady between 2023 and 2024. Because utilities staff are forecasting that the city's cost of buying gas could in fact drop by about 36% from the sky-high levels of this past winter, local bills could decrease by 13% in the next year, according to staff projections.
Jonathan Abendschein, assistant director in the Utilities Department, said Wednesday that the recent quotes that the city has been getting from the gas markets show no indication that the market prices will reach a level similar to this past winter. He warned, however, that the projections can change.
"There are scenarios where people can see gas bills rise again next winter," Abendschein told the utilities commission.
Electricity bills, which also spiked during the last year, should remain relatively unchanged, according to Utilities Department staff. The city plans to slash in half the "electro rate hydro adjuster," a charge that it tacked on to bills last year to account for the drought's impact on the city's hydroelectric sources.
But while such a change would normally lead to lower bills, the department is also looking to raise the "base rate" by 14%, leaving bills more or less at the level where they are now.
The Utilities Advisory Commission endorsed the financial plans for all four utilities at its Wednesday meeting. The commission also supported a proposal to lower the amount of revenues that the city would transfer from its gas utility to its general fund in the coming year. While Measure L, which voters approved in November, authorizes the City Council to move 18% of gross revenues from the gas utility to the general fund, which pays for most basic services, the new proposal would limit the transfer to 15.5%.
That reduction, according to staff, obviates the need for a higher gas rate increase. If the city transfers 18% of the gas revenues, it would need to raise rates by 9% and 10% in fiscal years 2024 and 2025, respectively. With 15.5%, the increases in the two years would be 8% and 7%.
Abendschein also said that the city hopes to limit sharp fluctuations in gas prices by exploring hedging strategies, which may include entering into more long-term deals to avoid rapid changes in the "spot" market.
Commission Vice Chair A.C. Johnston was among the commissioners who supported lowering the transfer amount and exploring ways to stabilize rates going forward. He noted that the city's gas rates in January were well above PG&E rates, a departure from historic trends. While residential bills in PG&E territory were $217.25 in January 2023, in Palo Alto the amount was $393.57. (Last November, by contrast, the city's average gas bill was only $62.64, while PG&E's was $76.93.)
"Obviously, the concern that we all have, the community has, is 'Are we going to see a repeat of what happened?'" Johnston said. "Anything that we can do to provide some certainty on that I think would be very important."
Utilities staff didn't have a clear explanation for why PG&E gas prices were lower than the city's, a question that Abendschein said will require further investigation.
"They are one of the largest gas utilities in the country; they are one of the largest gas storage operations in the country," Abendschein said. "I do expect that as people start to look at what happened in western gas prices, we'll learn more about what PG&E's experience was during that time because they are such a large player in the market that there's going to be something that comes out of the investigation. But we're not in the position to know that right now."
Citing the high rates, both Johnston and Commissioner Greg Scharff spoke in favor of lowering the rate of the transfer from the voter-approved level of 18% to 15.5%.
"I don't think it was the intent of the voters to provide windfalls when commodity prices spike like they did," Scharff said.
Commissioner Phil Metz was the only member of the commission who voted against the gas financial plan because it proposed transferring money from the distribution fund (which supports the system's operation) to pay for high commodity costs. The financial plans for the water, wastewater and electricity plans all received the commission's unanimous endorsement and will now go to the council's Finance Committee for review before moving on to the full council.
Like others, Metz urged utilities staff to more fully explore the reasons behind the recent spike in gas prices and come up with ways to reduce the volatility in the future.
"This one is such a big problem and such a public one that the City Council and all the residents and ratepayers are concerned about that, (and it) requires visible and transparent analysis to address what happened and what are we doing to improve it," Metz said.