After seeing their bills spike earlier this year, Palo Alto's electric customers could finally see some relief in the months ahead.

The city is expecting to receive about $24 million from the federal government following litigation between a consortium of northern California utilities and the U.S. Bureau of Reclamation. According to a plan that the City Council will consider in the coming weeks, some of that funding could be used to lower electric rates by about 5% starting in July.

Palo Alto is a member of the Northern California Power Agency, which has been in dispute with the federal government over differing interpretations of the Central Valley Project Improvement Act, a 1992 law that governs the giant water storage and transport system known as the Central Valley Project. Members of the consortium have been arguing that the federal government failed to follow federal legislation when it overcharged City of Palo Alto Utilities and other municipal utilities over 28 years ??" between 1992 and 2020.

At the heart of the dispute with the Bureau of Reclamation, which oversees the Central Valley Project, are "mitigation and restoration" charges that the federal project has been imposing on customers since 1992 to address the environmental impacts of its water projects. Having created a Restoration Fund to restore the fish and wildlife habitats, the agency was authorized to raise about $50 million for it, of which about $30 million is allowed to come from water and power customers. The remainder is expected to come from other sources.

Normally, the Central Valley Project recovers about 75% of its costs from water customers, who get most of the benefits from its massive project. The remaining 25% come from electric customers in jurisdictions that purchase hydroelectric power from the project's dams and power stations.

When it comes to mitigation fees, however, the Bureau of Reclamation has imposed a much greater share of the cost on electric customers so that it could meet the $30 million target. Because the water fees are based on usage, which dropped during the recent drought, power customers have been footing a greater proportion of the mitigation costs ??" roughly half.

The court battle between the utilities consortium and the federal government dragged on for years, with a trial court initially ruling in favor of the bureau in 2018 and a federal circuit court later reversing that ruling and siding with the cities. Last September, the U.S. Court of Federal Claims concluded that the government owes the cities about $81.9 million.

Palo Alto, a major buyer of hydroelectric power, learned earlier this month that its share will be about $24 million.

Now, it is up to the city's Utilities Department and the council to determine how the money will be used. On Tuesday, March 21, the council's Finance Committee recommended a proposal to the full council to use $8 million to boost the electric utilities' depleted reserves and another $10 million to repay loans that the department spent on rate stabilization. The remaining $6 million will be used to reduce electric rates by about 5% starting July 1, according to the staff proposal.

According to a memo from the Utilities Department, the city's Hydroelectric Stabilization Reserve has dipped to $400,000, well below its target level of $19 million. The city also has a policy of activating a fee known as the "hydro electric adjuster" when the reserves go below $11 million, according to the memo from John Abendschein, assistant director of utilities.

Even before learning about the $24 million, city officials have been exploring ways to provide customers some relief after a winter marked by soaring bills. Earlier this year, council members agreed to provide rebates to gas customers, some of whom had seen their bills more than triple as commodity prices escalated in December and January.

Council members also agreed that they should also consider ways to lower electricity bills, which have also been on the rise. As the city's electric reserves dropped because of the drought, the city instituted a "hydroelectric rate adjuster" last December that raised the average residential electric bill by about 20%.

According to Abendschein's report, the city is considering spending about $720,433 on the electric rebate program and is evaluating two options for distributing the funds. One would be to give a rebate to each residential customer that would be equal to 20% of their electric consumption in January. The other would offer a flat rebate of $27.05 to every customer, an amount based on an average January residential bill of $135.26.

Council member Julie Lythcott-Haims argued in February that the city should look at reducing electric bills. She said that she had made the switch to an electric heat pump water heater and furnace and has seen her household electric bills increase. She also noted that the city had a surplus of about $40 million in fiscal year 2022.

"I think our residents are looking for relief from a city that has had such a massive surplus," Lythcott-Haims said at the Feb. 15 meeting. n