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Palo Alto Online

Publication Date: Wednesday, April 11, 2001

$27 million bond sought by utility department $27 million bond sought by utility department (April 11, 2001)

Power rates may still have to climb to cover costs

by Marv Snow

A $27.7 million bond is being sought by the Palo Alto Utilities Department to cover the costs of capital improvement projects using a source other than reserve funds.

Because of the energy crisis, now compounded by PG&E's declaration of bankruptcy and the skyrocketing costs of purchasing gas and electricity, Utilities Director John Ulrich and Assistant Director Randy Baldschun do not want to dip into the city's enterprise reserve funds, which are being used to supplement price fluctuations and pay for needed system improvements.

The revenue bonds, which only need City Council approval, amount to $9 million for electrical improvements; $12.7 million for gas upgrades; and $6 million for water-line replacement. The bond money would be used over three years, but paid back over 30 years through each utility's rate structure.

Before taking the bond to the City Council, Ulrich and Baldschun must first receive the approval of the Utilities Advisory Commission and the City Council's Finance Committee.

"It's still up in the air," Baldschun told the Weekly. "We still have the water fund that needs to be looked at closer, as well as the gas. This is all still preliminary stuff. We haven't gone to them with our budget proposal, so we're providing (the Utilities Advisory Commission) with the stuff earlier than we normally would."

In recent years the cost of capital improvement projects came from the rate structure, not outside sources. However, selling bonds is not new to Palo Alto, Baldschun said.

"We've done a number of things with debt financing in Palo Alto's history," Baldschun said. "In the 1950s we were very heavy into debt financing because of the growth of the system. And then in the 1960s the council adopted a policy of 'pay as you go,' which means you pay for your (capital improvement projects) off the current rates. That's what we've been doing.

"What we're proposing here is to continue that policy, but deviate for the next three years," Baldschun said. "After three years, (we'll) continue to use the rates to cover (capital improvement projects). The reason we want to do it this year is the rate increases we are proposing to the City Council are going to have a very adverse impact on our customers' bills.

Baldschun said long-term financing is one way to somewhat minimize the impact of increased rates. Unfortunately, whether or not a bond is passed, rates will go up some degree.

"The downside is, over the long term basis, you are going to have slightly higher rates than you would normally," Baldschun said. "We think, in light of the rate increases we're having this year, that this is a small price to pay. If you ask customers today, 'Would you rather have a 67 percent rate increase today or a 77 percent rate increase in your gas, you are going to find that they are going to take the 67 percent."

Although gas rates have increased 65 percent in the past nine months and there's an additional 67 percent rate increase on the table -- which will mean a rate increase of 132 percent over the course of year -- there still might not be enough funds to cover the costs of providing the service.

Baldschun said rates might have to go even higher.

"The wholesale gas market right now, the forecasted price for natural gas for the next year or two years, is still high and we may have to come back with another gas rate increase," he said. "Until the price for natural gas comes down -- and it will, not in the short term but in the long term -- the supply is going to catch up with demand. When that happens, gas prices start to go down. The cycle goes on in the industry but it has never gone like we're seeing right now. It's discouraging."

And then there is the matter of PG&E's bankruptcy leaving the Western Area Power Association with billions in contracts that won't be honored, which could cost Palo Alto $125 million.

"That's the $64,000 question," Baldschun said "The question is, does he (the judge presiding over the bankruptcy hearing) have jurisdiction or does he not have jurisdiction? Is he going to negate the contracts or is he going to negotiate a settlement? There's any number of possibilities. There are two actions that could, potentially, raise our wholesale rates from 2.5 or 3 cents to 7 or 8 cents.

"So, if you do the math, you're talking huge rate increases. It will get passed on to all consumers," Baldschun said. "We're a middleman when it comes to providing power. We don't generate that power. We buy it on the market and the market dictates what you are going to pay for it."

In the meantime, the gas reserves are being used to cover the increased cost of buying the product on the open market, Baldschun said.

"Part of our strategy was not having this 130 percent rate increase in August," he said. "The primary reason for having reserves is to stabilize rates and, without using these reserves, the rates would be even higher." <@$p>

E-mail Marv Snow at


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