City makes a lot of money from the utility bills we pay
Original post made by Diana Diamond, Palo Alto Online blogger, on May 2, 2007
What many residents don't realize is that the city -- not the Utilities Department -- is making a lot of money on what we pay monthly for our gas, electricity and water usage.
The reasons the rates will keep on increasing, independent of the actual cost of the utilities that the department purchases, are:
* The city rents land from Stanford for $1 a year and turns around and charges its own Utilities Department millions a year in rent. Last year the department paid $10.4 million for, among other things, lease of four parcels for electric substations and a reservoir. These exorbitant rental fees are reflected in our monthly utility rates.
* Salary and benefit increases negotiated by the union are passed on to utility users, causing our rates to increase.
* The city is planning on issuing a bond to build eight-hour storage wells for downtown emergencies, such as a fire following an earthquake. The guesstimated cost of the storage wells and repair of existing wells is $40 million, plus almost an equal amount in interest. The bond cost will be passed on directly to utility users. No referendum is required to ask ratepayers if they want to pay for these wells.
* The city charges the Utilities Department a "return on investment" fee -- an annual assessment to pay back for past utilities investments the city made years ago. Last year Utilities transferred $14.2 million to the city's general fund.
* According to John Melton, chair of the city's Utilities Advisory Commission, approximately 25 percent of the city's $129 million general fund is money transferred from the Utilities Department. The department gets its money from utility users.
* Users are paying more for gas this year because we used less last year. The commission was told recently that rates have to increase because the costs for staff, maintenance and operations continue to rise. If we use less gas next year, we may have to pay even more.
* Each month there is a "utility user tax" on our utilities bills. I paid $12.82 in March.
The council's Finance Subcommittee has recommended that come July 1, the average Palo Alto household will pay about $24 more per month for utilities -- $288 a year. Gas rates will go up 9.5 percent (last year they went up 20 percent); electricity will go up 5 percent, and water rates will increase by 10 percent. The council will vote on these increases in June.
Palo Altans are now paying more for gas than PG&E customers in other communities, according to a staff report. And Melton predicts that water rates will substantially increase in the future, perhaps even double. Much of this has been reported in the past. Palo Alto's utility rates have historically been substantially lower than what residents in other communities pay, and electricity rates continue to be lower. Palo Alto residents and businesses are paying substantially less for electricity than households served by PG&E. Indeed, our low rates have been touted as a big advantage of living here.
As for the rental charges, here are the figures on the city's lease from Stanford for three parcels for electric substations and a fourth parcel for a city reservoir (2005-06 figures).
Property Size City pays Rental cost to Utilities Dept.
950 Hansen .8 acre $1/year $173,000/year
3275 Hanover .7 acre $1/year $158,000/year
Mayfield reservoir 1.9 acre $10,000/year $600,000/year
213 Quarry Road 0.4 acre $1/year $155,000/year
What this says to me is the city is making a huge profit from land it is getting practically for free from Stanford.
According to Melton and other utility commissioners, the city argues that it is just applying good business practices to charge the Utilities Department "market rate" for these parcels, on the presumption that if this Stanford land was not available then Utilities would have find other land to rent and to pay fair-market rates.
"As a matter of general policy, (the Utilities Department has been told that) whatever the city pays Stanford is independent of the money the Utilities Department has to pay the city for renting this land," Melton said.
But we are not dealing with "what ifs" here. The fact is the land is available from Stanford and the city gets it for practically nothing. In fairness, the savings the city gets should be passed on directly to its own Utilities Department -- and to its own residents. The city should not be making money off all of us.
The City Council has defended this policy, saying that since the money goes into the general fund, it is being used for good purposes: to fund city parks, libraries and services. The Utilities Department has also been acknowledged as the city's "golden goose" for years.
Which brings me to the emergency water storage issue. One logical place the city is looking at is El Camino Park, across the street from the Stanford Shopping Center. Under a relatively recent agreement, the city leases the ballpark for $1/year under a contract that expires in 2033.
The playing field is 10.2 acres. The underground storage reservoir would probably use up half of this space, according to a planning department official. The playfield would be restored after the reservoir is completed.
The estimated $40 million cost for the wells and reservoir does not include any land rental, I've been told. Based on what the city has done in the past, I wouldn't be surprised if it charged Utilities rent for this underground land. If two acres are being rented for $600,000 a year (see chart above), then the charge for five acres could be $1.5 million a year.
And who would be paying for this? All of us who buy city water.