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Should we 'give' our utility rate $$s to the city? Is it legal?

Original post made by Diana Diamond, Palo Alto Online blogger, on Mar 13, 2008

It's happening again. Our utility rates in Palo Alto will be going up nearly 10 percent. They went up last year, the year before and the year before that.

The rate increases may or may not be justified, but what really bothers me is the $20.5 million the Utilities Department sends to the city each year — as a required $15.1 million "transfer" plus $5.4 million in rent for the city lands it uses, according to the Utilities Advisory Commission's (UAC) chair, Dick Rosenbaum.

Yes, our very own Utilities Department has to pay $5.4 million rent this (and past and future) year(s) for substations, reservoirs and a pumping facility on city and Stanford lands. It sure seems to me the city is in the business of making money from its own Utilities Department.

The $15.1million transfer fund has been increasing yearly for years. According to Rosenberg, long ago the city council decided it should get a "return on investment" (ROI) for the money it spent to set up its own utilities department nine or 10 decades ago. The council reasoned that since corporations get ROIs for money they invest, then so should Palo Alto. The council established a base amount, and then agreed that each year that amount should automatically go up by 3 percent — conveniently compounded — and paid directly to the city's general fund.

I have two questions about this transfer arrangement: Is it fair? And is it legal?

I think it's unfair because the $15.1 million the city gets each year is paid for by utility users — you and me. It's a hidden cost buried in our utility bills each month. So not only do we pay for the electricity, gas and water we use, we also pay for this transfer payment and Utilities Department's rental fees. It's a Catch-22: The city gets its ROI by directly charging utility users (residents and businesses) every month so it can claim it's getting a great return (for residents) on what it invested years ago.

As to the legality of the transfer, I talked to a few UAC members who said the question had not been raised since the mid-1980s, when a "policy" was established allowing the transfer to continue. It has not been discussed since then, Commissioner George Bechtel said.

I remember when storm-drain-fee increases were being proposed in Palo Alto a few years ago — we were assured the money raised from the fees could not go into the general fund, it could only be used for storm drains. So what 's the difference between storm drains and utilities?

Second, I feel this is a "tax" that goes directly from the Utilities Department to city coffers — a tax we never approved. In fact, it feels like double taxation since we pay a 5 percent utility user tax on our utility bills.

Furthermore, once in the general fund the money can be used any way the city wants. The bulk of that fund goes to pay for city employee salaries and benefits. But the city can spend it on new sculptures, new consultants or even for funding the proposed new $80 million public-safety building.

Is it fair that the money residents pay for utilities go to pay for expenses like these? I think not.

Finally, there is that rent. Why the city's own Utilities Department has to pay rent for city lands is a quandary to me, other than it is an easy way for the city to get another $5.4 million into its general fund.

What's even more exasperating is that some of the lands that the Utilities Department pays rent on are the same lands that the city gets from Stanford for practically nothing. For example, Stanford charges the city $1 a year for the 950 Hansen Ave. site; the city charges Utilities $153,669/year for the same parcel.

The city rents a site at 3275 Hanover from Stanford at $0/year and charges Utilities $142,560/year. And it rents the Mayfield Reservoir from Stanford for $10,000 a year yet charges Utilities $756,000 a year. Wow!

The city argues that it is just applying good business practices by charging the Utilities Department "market rate" for the parcels on the presumption that if Stanford land were not available, then the Utilities Department would have to find other land to rent.

But why charge Utilities any rent? It's city land! Our very own utilities payments (our monthly bills) are paying for these "market rate" prices. By the city's logic, why not charge the fire department for the land the fire stations occupy?

So our rates keep escalating. Do costs to residents ever come into play in the city's income calculations?

Last week the UAC recommended raising electric rates by 14 percent, gas rates by 7.1 percent and water rates by 8 percent. Last July gas rates went up 9.5 percent (20 percent the previous year), electricity rose 5 percent (11.7 percent the year before) and water rates increased by 10 percent (7 percent the year before). The council will soon vote on these increases.

We have been told for years that one of the advantages of living in Palo Alto is that the city owns its own utilities and that our rates are much lower than neighboring communities. But that seems to be history.

Our water rates are now higher than those of any of our neighbors — Mountain View, Redwood City, Los Altos and Menlo Park. Our gas rates for the first four months of this fiscal year (2007-08) were 12.8 percent higher than PG&E's average customer's gas costs for the same period.

The good news is that our electric rates are still significantly lower than PG&E's. But when compared to Santa Clara, which also owns it own utilities. Palo Alto's rates are higher.

Without those transfers, our utility rates would be much lower. Think about that.



Comments (30)

 +   Like this comment
Posted by John
a resident of Fairmeadow
on Mar 13, 2008 at 11:40 am

"They went up last year, the year before and the year before that." True, but they go up twice a year once in January then again in July. We are about to experience an increase beginning in July if approved by the City Council. Watch out they'll do it again next January.


 +   Like this comment
Posted by Anna
a resident of Southgate
on Mar 13, 2008 at 12:03 pm

Ms. Diamond's column makes excellent points. The legal issue in particular deserves more discussion. I recall that when Prop 13 was passed, there was a lot of concern about whether transfers from the Utility Department to the General Fund required a vote under the law.

As she points out, this concern was largely forgotten or ignored over the years as our rates were lower than PG&E's and nobody ever challenged the questionable transfers.

It would be interesting to see what would happen if some interested and enterprising citizen or group contacted the Howard Jarvis Foundation, or one of the other taxpayer watchdog groups which monitors compliance with taxpayer rights initiatives, and sometimes sues to enforce them.

----

By the way, Diana leaves out one other very significant method by which what are usually thought of as general fund obligations are paid for with utility payments. Over the years, the city has transferred many functions (street lights, e.g.) that used to be "general fund" services to the Utility Department. The expenses for these - including employee expenses and "rent" - are then folded into the Utilities rate-base --- and paid for with our utility payments.

I don't have the exact figures at hand, but if you look at the employee numbers, you'll see that the "General Fund" paid employee numbers have been flat over the past decade or two, while the Utility Department has increased its numbers markedly.

This cost-shifting has cost us plenty as it's raised our utility rates and freed up the resulting general fund moneys to spend on other things (like employee benefits).

-----

The availability of the Utility Department to serve as a kind of "slush fund" - avoiding public discussion of tax and spending issues that other cities have to regularly confront - has been corrosive to our city's government integrity.

Thanks to Diana for publicizing this very important issue.


 +   Like this comment
Posted by Prop 218
a resident of Another Palo Alto neighborhood
on Mar 13, 2008 at 2:07 pm

Here is an interesting staff report:

Web Link


 +   Like this comment
Posted by Go For It
a resident of Professorville
on Mar 13, 2008 at 10:12 pm

The reason that property values are at top of the market in Palo Alto are because of the school and City Services. Go ahead and have the Jarvis group challenge the transfers, the Santa Clara County Grand Jury has and it got no where! I would love to see your property values go down once you cut all the precious services. You think that all the money goes to unnecessary salaries, well go for it! One way or another you must pay for services recieved! Check out the budget for community services - the $22 million would be in jeopardy, but hey you will be lower than other cities. Check out the property values of other cities and figure out why PA is on top???? Let the Jarvis Group help you get your money back because you will need it!!!!


 +   Like this comment
Posted by Good Point
a resident of Meadow Park
on Mar 14, 2008 at 8:07 am

Go For It makes a good point. Any prospective buyer looking at our infrastructure - libraries, storm drains, road repair, public safety building - would quickly see that we are tops and know how to spend our money. Heck - King Plaza, the Homer Bike Tunnel - who wouldn't want to live here?

It is never the wrong time to do what should have been done long ago.


 +   Like this comment
Posted by Resident
a resident of Crescent Park
on Mar 14, 2008 at 8:25 am

I want to thank Diana Diamond for attempting to rationally discuss this disturbing issue. As a resident of Palo Alto for many years, I have witnesses the politically correct crowd take over City Council and push their agenda down the throats of all Palo Altans. It is not in the interest of most residents to follow this path. Our utilities cost too much right now and it has to stop. Our City Council has wasted a vast amount of money on pet projects that also needs to stop right now. City Council has to put a stop to the rising costs of utilities NOW.


 +   Like this comment
Posted by diana diamond
Palo Alto Online blogger
on Mar 14, 2008 at 9:24 am

diana diamond is a registered user.

Anna =

You are absolutely right! A lot of the city's infrastructure has been transferred to the Utilities Department, e.g., traffic lights and street lights, and our monthly utility bills include paying for the costs of upkeep and maintenance for these items -- items that, to me, should be paid for by the city's general fund revenues, not by those of us who pay for gas, electricity and water each month.

Thanks for bringing this up!

Diana


 +   Like this comment
Posted by pat
a resident of Midtown
on Mar 14, 2008 at 10:39 am

I've been told that the money transferred from the utilities fund to the general fund is kept in a separate bucket. So what? It's like saying I have $10 in my right pocket and $10 in my left pocket. It's all in the same pair of jeans.

What I want to know is how the money from each pocket is spent. Will any of the utilities money go to pay off the COPS for the police building that we didn't get to vote on? (I'm not saying we should or should not have that new building, just wondering how it will get paid for.)

Also, why should the money make a profit on the utilities department but not on the auditor's department or the IT department or …. ? Maybe the city could make money by charging us to use its glorious website.

PS: Thanks for your post on how we spend our money, Good Point. I needed a laugh this morning!


 +   Like this comment
Posted by Eric
a resident of Midtown
on Mar 15, 2008 at 6:24 am

At one time our Utility bills went up once a year, but for the last 2 or 3 years the City has increased them twice a year in both January and July. Not only are they taking much of this money and transferring it to the City's General Fund. But, the City also needs to recoup the $21 Million they had in the Utility Department's reserve fund that was paid out to Enron's creditors.


 +   Like this comment
Posted by Suckers R US
a resident of Palo Alto Hills
on Mar 15, 2008 at 10:15 am

Palo Altan are dumb PC suckers !


 +   Like this comment
Posted by Mike
a resident of College Terrace
on Mar 16, 2008 at 12:48 am

I've brought this up before. Why not at least look into selling PAU? Maybe it's a bad idea; maybe not.

I've heard numbers in the $800M-$B range. I don't know how accurate that is, because it seems like a pretty big multiple to pay for a small utility...but what do I know?

Let's assume that we got $800M, just for the sake of conversation. We could take $200M right off the top and pay for some needed infrastructure (libraries, police building, storm drains, roads, etc.)

We could take $400M and put it into an investment trust that would pretty much guarantee a return equal to what PAU pays into the general fund.

We could take the remaining $200M and put it into a "solar conversion fund" that would enable local residents to go solar at a steep, steep discount. Maybe we could build the cost into an equity debt that would transfer with the property. There are probably lots of cool ways to finance something like this.

Voila! We pay for infrastructure; we get a bump every year in the general fund; and, we get to pump electricity back into PG&E's infrastructure.

Now, if the going price for PAU is smaller than $800M, we'd have to think hard, and maybe pass on the idea. Maybe not. Maybe we could sell it at a lower price in return for a cap on utility charges for some number of years, until Palo Altans could have a chance to use a smaller amount of money to go solar, or other energy saving technology.

There may be other variables that I'm not considering, that would make it more expensive than its worth, so sell off PAU.

If so, I would like to hear what those constraints are.

Why not look into having a potential buyer do a valuation of PAU, or have PAU do this itself.

We should at least know what PAU would be worth on the auction block - even if we don't want to sell it. Knowing what PAU is worth today could be used as a performance baseline for PAU management, one of whose jobs it would be to increase the value of PAU.

PAU is very unlike the rest of Palo Alto's public infrastructure; it's essentially a private business, run for the public good. Let's treat it that way, and leverage what it is, or could become, to the optimal advantage of its owners (us).


 +   Like this comment
Posted by Spectator
a resident of Adobe-Meadows
on Mar 16, 2008 at 8:35 am

Isn't it simply good business practice to allocate the cost of things you use?

Suppose it were the other way round-- Suppose Utilities were getting all those facilities rent free (instead of paying a charge for their use).

I can just imagine Diana Diamond righteously complaining that the Utilities were being unfairly subsidized by a city give-away of the use of valuable property.



 +   Like this comment
Posted by pat
a resident of Midtown
on Mar 16, 2008 at 11:29 am

Spectator: Does the city charge the IT department or the planning department or .... for facilities and admin costs?

How much does the Children's Theater, the Junior Museum and Zoo and the Art Center pay for facilities?


 +   Like this comment
Posted by Mike
a resident of College Terrace
on Mar 16, 2008 at 12:52 pm

The Children's Theatre, Art center, etc. are not chartered as quasi-private businesses. This is the fatal flaw in Diana's argument.

For a more enlightening discussion of these matters, go to
Web Link


 +   Like this comment
Posted by Resident
a resident of Another Palo Alto neighborhood
on Mar 16, 2008 at 1:44 pm

PALO ALTO FINANCE COMMITTEE ... The committee plans to discuss infrastructure and utilities rate increases. The meeting will begin at 7 p.m. Tuesday, March 18, in the Council Conference Room at City Hall (250 Hamilton Ave.).


 +   Like this comment
Posted by a long time resident
a resident of Another Palo Alto neighborhood
on Mar 17, 2008 at 1:08 am

I suspect that one reason the rates will go up is that they need money to relocate the Power Substation on Alma across the alley from 800 High St condos. This relocation may cost the city util dept about 10 million $$ according to a report many months ago. I suspect the city leaders made a deal with the condo developers that this substation would be moved .??. The transformer makes a humming noise like a deisel locomotive. Large walls have been built to try to cut the noise. This power station and the big lines to it were a concern from the first time development of the creamery property was proposed. It wasn't mentioned before the public vote on 800 High was made.
This downtown power substation is going to be located way over by the Stanford shopping center where another substation is located I believe.. How the power is going to get to downtown area has never been disclosed (overhead or buried).

The prop 13 issue is that all property that dosen't sell keeps low tax rate. This is sort of ok for residential property, but it applies to giant commercial property also like HP and other long time commercial/industrial property also. In the past these propertys paid a lot of taxes that went into the general fund. Now their payments are very low and probably doen't cover the basic city services provided to them like special fire fighting/inspection services, police service, road maintance for the 60,000 commuters that come to work at these places every day and the giant trucks that tear up the roads.

The util. should be broken into two teirs so that homeowners or/and small users :ie. Power: of up to, maybe 1200Kw/hr /month have a lower rate and the large users have a higher rate. This would be for Elect.,Gas, and water.

Also the reason home prices are high is because of the schools now and as other services are cut and the util rates go up and maybe higher than PG&E home prices won't go up unless things change for the better.


 +   Like this comment
Posted by Karen White
a resident of Duveneck/St. Francis
on Mar 17, 2008 at 11:39 am

I think Mike's idea of exploring the pros and cons risks and benefits of selling CPAU deserves attention. With the skyrocketing cost of infrastructure improvement, no potential funding solution should be left off the table.


 +   Like this comment
Posted by EHM
a resident of Another Palo Alto neighborhood
on Mar 18, 2008 at 8:51 am

2 different comments:
1) Last year we had a $300 bill [for our small, about 1500 square foot, home]. This year we have had three bills between 245 and 285. We keep the thermostat off at times when we're cold and rarely run it above 70. For near-fixed income, this is not wonderful. City tax should be charged clearly and separately. Thanks to DD for the full-faceted discussion.
2) When I added my name to our utility account, my social security number was demanded of me. When I demurred, I was told that I couldn't otherwise sign on to the account and that the practice of collecting the SS numbers was backed by the city attorney. Why does the city of Palo Alto need our social security numbers?


 +   Like this comment
Posted by Tom
a resident of Professorville
on Mar 19, 2008 at 3:14 pm

The 800 High Street condos cut a deal with the city to speed up the move of the substation. They, or their developer, paid the city $1 million to get it out of their backyard within 1 year. However, the city had intended to move the substation for some time, and plans to combine its site with the to-be-former Ole's garage to build very low income housing. The finances of that undertaking might bear watching.


 +   Like this comment
Posted by numerate
a resident of Greater Miranda
on Mar 19, 2008 at 10:27 pm

If you live in Palo Alto you are better off under this arrangement, since many nonresident businesses are subsidizing your city government. I don't know why Diana is giving away our secret.


 +   Like this comment
Posted by bikes2work
a resident of Santa Rita (Los Altos)
on Mar 19, 2008 at 10:44 pm

The last time I walked by the substation on Alma Street the electrical equipment was already gone. That is a done deal. I wonder how soon Ole will fix his last car?




 +   Like this comment
Posted by Kathy Phillips
a resident of Midtown
on Mar 20, 2008 at 1:59 pm

As a long-time Palo Alto who just got the largest utility bill I have ever seen in my life...I would like to help put a stop to this tax and switch utility rip off. How can we change this?


 +   Like this comment
Posted by A working Palo Altan
a resident of Midtown
on Mar 21, 2008 at 10:54 am

Many thanks to Diana Diamond for highlighting this issue. I think the underlying problem here can be traced to the type of people who have served on our city council, really, for the last few decades. Most of them don't work or don't need to work to make a living, unlike the rest of us. The few who do work often seem to have employers (HP or Stanford, usually) that are willing to pay them in exchange for serving on the council, as a sort of community service, which is nice. The result, though, is that our Councilmembers, as individuals, are largely insulated from the economic pressures the rest of us face. Clearly, if you have trouble paying your utility bills you're not the type of person who runs for or gets elected to the Council. So we've got a bunch of folks who don't see these problems, don't experience them -- and probably won't see them until it all erupts in the inevitable voter rebellion that tosses them all out of office.

How sad it is that the people who most need government to work for them, at the local, state and national level, are so often the least represented.


 +   Like this comment
Posted by Another resident
a resident of South of Midtown
on Mar 22, 2008 at 2:03 pm

Long time resident says
>the rates will go up is that they need money to relocate the Power Substation on Alma across the alley from 800 High St condos. This relocation may cost the city util dept about 10 million $$ according to a report many months ago. I suspect the city leaders made a deal with the condo developers that this substation would be moved<

Yes that's right. And the deal with developer Ross was secret.


 +   Like this comment
Posted by Lazlo Toth
a resident of Old Palo Alto
on Mar 22, 2008 at 4:19 pm

Blah, Blah, Blah!!! Someone please shut this old lady up!!!! Palo alto Weekly SUKS!!!!


 +   Like this comment
Posted by You're no Lazlo
a resident of another community
on Mar 24, 2008 at 12:03 pm

The real Lazlo Toth was humorous, creative, and knew how to type.


 +   Like this comment
Posted by Rod
a resident of Community Center
on Apr 9, 2008 at 4:28 pm

The legal status for use of revenue is clear - because it is fee-based, the money may be used for any purpose within that Enterprise except that it is governed by the Charter of the City of palo Alto, Atricle VII, Section 2:
The revenue of each public utility shall be kept in a separate fund from all other receipts and shall be used for the purposes and in the order as follows:
(a) For the payment of the operating and maintenance expenses of such utility, including the necessary contribution to retirement of its employees.
(b) For the payment of interest on the bonded debt incurred for the construction or acquisition of such utility.
(c) For the payment of the principal of said debt, as it may become due.
(d) For capital expenditures of such utility.
(e) For the annual payment into a reserve fund for contingencies, of an amount not to exceed ten percent of the expenditure for capital outlay for the year, exclusive of bond fund expenditures. The total accumulated in this reserve for contingencies shall at no time exceed five percent of the book value of the utility's capital in service. This reserve fund shall be available for use by the utility, only for replacements or emergency repairs and after special appropriation by the council.
(f) The remainder shall be paid into the general fund by quarterly allotments.


 +   Like this comment
Posted by Anna
a resident of Southgate
on Apr 9, 2008 at 6:42 pm

Rod's post restates the City Charter provision dealing with Utility Department Revenue.

However, Palo Alto is not free to have provisions in its Charter that violate State (or Federal) Law, or to interpret provisions of its Charter in a way inconsistent with State Law or the State Constitution.

The Charter subsection (f) quoted by Rod above would appear to violate the State Constitution as Amended by Proposition 13 if it allows the City to increase its general fund expenditures by raising Utility Fees -without a popular vote - above the amounts specified as Utility related by subsections (a) through (e.

Moreover, Proposition 13 would also appear to prohibit the City from making expenditures using Utility Revenues for what would otherwise seem to be general fund expenditures (like Street Lights) as this allows the city to raise Utility Rates to cover these items without a popular vote.

Bottom Line: The city can't rely on an unconstitutional interpretation of its Charter to skirt the requirements of the Law or the State Constitution. The city is on very thin ice as it continually raises utility rates to fund general expenditures as it's done for the past 30 years.

It would be very interesting to see what were to happen if this is challenged, as many in City government are said to fear.


 +   Like this comment
Posted by Utility Transfers are Bad Business
a resident of Old Palo Alto
on May 27, 2008 at 11:01 pm

Utility transfers are a lazy way to do business. We pay extra on our Utility bills -- the "extra" gets transferred to the City General Fund, and then pet projects and facilities hang on without paying for themselves. Exhibit A: Leasing Cubberley to Foothill College for far less than what the City pays the PAUSD for the facility. Palo Altans pay for Cubberley Community Center but then don't get to use it.


 +   Like this comment
Posted by Timothy Gray
a resident of Charleston Meadows
on Aug 25, 2009 at 12:56 pm

Just because we can get the funds from the Utility, doesn't mean we have to spend it. Finding the "right size" of City Government that is sustainable deserves some intensive financial focus. With the new City Manager, the door seems open to this objective evaluation. What about the benchmarking that everyone talked about last election? This is a complex issue, that deserves a little more transparency. Let's get to work.

Respectfully,

Tim Gray, 2009 Palo Alto City Council Candidate www.Vote4Gray.Com


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