Utilities Advisory Commission - December 4, 2024

Preliminary forecast would raise combined utility bills 9%

Palo Alto’s preliminary fiscal 2026 utility forecast would raise the modeled combined bill 9%, from $402 to $438.60 including the utility user tax. The package calls for a 5% electric increase, a 6% gas increase, a 14% water increase and an 18% wastewater increase.

The Utilities Advisory Commission did not vote on the preliminary forecast. Staff plans to return to the commission in March with more complete financial projections and analysis before taking the rates to the Finance Committee in April and the City Council in June.

Water drew the sharpest scrutiny. Its 14% overall increase would be driven by a projected 26% increase in distribution rates, compared with an earlier fiscal 2026 forecast of 9% overall and 17% for distribution. Staff said the plan would use $5.4 million in reserves and raise $7.5 million through rates. The Finance Committee had favored an increase closer to 10%, while staff said the Council had asked for a figure below 10%.

Staff attributed the water pressure to higher operating costs, including salaries and benefits, administrative charges and vehicle replacement, as well as uncertainty surrounding San Francisco Public Utilities Commission water rates. Commissioners requested clearer analysis of cost drivers and demand forecasts and cautioned that holding rates down by deferring capital work could increase long-term risks. They also urged the city to coordinate neighborhood water, gas and wastewater replacements, repaving and possible fiber-conduit installation to reduce repeated trenching costs.

The preliminary wastewater increase would add about $10 per month for a residential customer. Staff tied it to aging infrastructure, reserve rebuilding, permit obligations and the $193 million Secondary Treatment Project, which is nearing the second year of a five-year construction period. Staff said a collection-main replacement had been deferred from 2026 to 2028; proceeding in 2026 could have required a 60% rate increase followed by a 10% reduction the next year. Commissioners questioned whether deferrals would create greater future costs and requested clearer information about how expenses are divided between residential and commercial customers.

The electric fund entered the forecast from a stronger position after favorable hydroelectric conditions and restoration of its rate-stabilization reserve to a $17.5 million target. Staff retained 5% annual electric increases to support Grid Modernization, although planned bond issuance was delayed by one year. Commissioners also questioned the gas utility’s competitiveness, electrification assumptions and an estimated $9.7 million transfer to the general fund, calculated as 18% of fiscal 2024 gross gas revenue.

Time-of-use electric rate design is set for March review

Utilities staff plans to bring a draft time-of-use electric rate schedule and supporting analysis to the commission in March. An early-adopter residential option is planned for July 1, 2025, followed by a standard residential time-of-use rate in fiscal 2027, subject to City Council approval. The commission made no formal recommendation in December.

Time-of-use rates charge different prices depending on when electricity is consumed, with the aim of shifting use away from periods when power and grid capacity are more expensive. Staff said the proposed design is intended to be revenue neutral overall, although individual bills would rise or fall according to customers’ usage patterns.

Commissioners pressed staff to show whether the rates could reduce carbon emissions and defer infrastructure spending while remaining based on the cost of providing service, as required under Proposition 26. They requested hourly and seasonal energy-cost information, residential bill projections, quantified load-shifting goals and analysis of avoided Grid Modernization costs.

The rollout also depends on advanced meters, billing automation and customer-portal upgrades. Staff expected residential advanced-meter installation to reach 90% completion in December, while commercial installation was expected by May 2025, pending meter deliveries. Customers with advanced meters can already view detailed usage through MyCPAL, and staff plans to make residential peak-demand information visible in the portal in 2025.

Commissioners questioned how much behavior the more complex rates would change. A 2013-to-2017 pilot involving about 150 residential customers produced relatively small shifts from peak to off-peak hours, while voluntary time-of-use rates available to large customer classes for more than 20 years have attracted essentially no participation. Staff agreed to focus further analysis on avoided infrastructure costs and to expand customer outreach after billing automation is tested.

Fiber planning uses a $1,500-per-home benchmark

During its review of the fiscal 2024 Utilities Annual Report, staff said the fiber program is using a construction-cost target of $1,500 per home passed, meaning the cost to extend the network past or serve a residence. The commission took no action, and additional fiber discussion was scheduled for January.

Hanover Substation upgrade was commissioned in October

Staff reported that the Hanover Substation upgrade was commissioned in October after being completed with Tesla cost-sharing. Final invoices from Tesla remained pending.

Primary sources

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