Palo Alto's gas customers will be protected from sharp bill spikes this winter thanks to a new strategy that the City Council approved on Sept. 18.
The assurance will, however, come at a price: namely, a 4% to 6% surcharge on the average monthly bill.
The new policy was driven by a colossal increase in gas rates last winter, which more than doubled local residential bills. The main reason was the increase in commodity prices, with natural gas rates going up from about $1 per therm to just below $5 per therm. Under the new strategy, the city will pay a premium to create a cap of $2 per therm. The cost of creating the cap, however, lies between $0.175 and $0.275 per therm between December and February, the period during which the policy will be in effect.
The council voted 6-1, with Council member Greg Tanaka dissenting, to approve the new policy, which was unanimously endorsed by the council Finance Committee last month. Council member Pat Burt, who chairs the committee, likened the new strategy to an insurance policy.
Burt called last winter's bill surge a "big deal," noting that it caused a real disruption to residents and led many to lose their trust in the city's management of its utilities.
"That's just the way it is," Burt said. "It wasn't our fault or our cause that this market had these wild disruptions, but our ratepayers look to us and this is a way for us to really significantly reduce the potential disruption for the future."
Some, however, wondered if the rate increases inherent in the new policy justify the risk reduction. The policy caps the maximum commodity rate impact at 15 cents per therm, which in the most extreme scenario would add about 8% to the average bill, according to staff.
Council member Ed Lauing noted that the price cap will cost the city between $2 million and $3 million. According to Utilities Department staff, this means an additional $5.95 on the average residential winter bill and $1.98 on the average residential summer bill.
The benefits, meanwhile, may never materialize, Lauing said.
"We're barely settled down from last year and the new rates and now we're basically announcing that we're going to raise rates around 4% or 6%," Lauing said.
Tanaka urged his colleague to explore other alternatives, including purchasing gas over a longer period of time to lock in price stability, paying lower premiums (but having a higher cap on spikes) and adopting a "collar" strategy in which the city would purchase put options that would allow it to sell gas at a fixed price. Tanaka voted against the strategy shift after his colleagues did not support these proposals.
The rest of the council generally agreed that it's worth paying a little extra to insure the city from another tough winter. Council member Julie Lythcott-Haims said the new policy is "equitable" because it protects both the ratepayers and the city's reserves. Last year, the city withdrew about $1.8 million from its electricity reserves to limit the rate hikes.
"If it goes to $5/therm again, we're going to feel like idiots if we don't do it," Lythcott-Haims said. "So we are taking a more conservative approach to protect our residents and the city."