Palo Alto's elected leaders often tout the many achievements of the city's municipal utilities, from its "carbon neutral" electricity and profitable fiber network to its practice of buying "offsets" to mitigate the environmental impact of natural gas.
Last month, however, Palo Alto Utilities hit a milestone few are anxious to brag about: residential bills that, for the first time, top $300 per month on average. And according to city utilities staff, the number will continue to go up in the years ahead.
The City Council approved in June an array of rate increases that collectively add 5% — or $15.65 — to the residential monthly bill, bringing the average to $312.15 per month, according to staff. The new rates kicked in on July 1, the first day of fiscal year 2020.
The biggest factor is gas rates, which went up by 8.4% in July, adding $4.91 to the average monthly residential bill. Wastewater rates went up by 7%, adding another $3.83, while electric rates jumped by 5.5%, or about $2.98. Water rates increased by 4.4%, tacking on another $2.71 bill.
Smaller increases to the storm-drain fee and the rising utility user tax, combined, bump up the average monthly bill by another $1.22, according to Utilities Department staff.
The latest round of hikes marks the fifth year in a row in which the city has raised utility rates. Since 2014, the last year in which there were no rate increases, the average residential utility bill has gone up by more than $70. The biggest increase occurred in 2016, when the council approved various rate hikes that raised the average bill by more than 8%, or about $22. Utility bills then went up by another 2.5% in 2017 and by 3.9% in 2018, reaching $293.50, according to Utilities Department reports.
Utilities officials note that even with the recent rate increases, Palo Alto Utilities still compares favorably with neighboring jurisdictions, most of which are served by PG&E. Local residents still pay about 30% less for electricity than PG&E customers, said Catherine Elvert, communications manager for Palo Alto Utilities. And when it comes to gas costs, the city's rate is about 10% lower than PG&E's, Eric Keniston, rates manager for Palo Alto Utilities, told the City Council in June.
A comparison of rates from fiscal year 2019 shows Palo Alto's total utility bills below those in Mountain View, Redwood City, Los Altos and Menlo Park (which has the highest combined bill for water, wastewater, gas and electric). It is, however, higher than the city of Santa Clara, which also runs a municipal utility.
Elvert attributed the bulk of the increases to factors that aren't entirely in the city's control, including the higher costs of both acquiring and delivering commodities to customers. In some cases, she said, the near-term increases are necessary to avert higher hikes further down the road.
She pointed to the San Francisco Public Utilities Commission's recent effort to upgrade the Hetch Hetchy water system, a $5 billion project that required contributions from all SFPUC customers, including Palo Alto. The project, she said, is an example of a "very proactive investment" in the aged system that is used by San Francisco and more than two dozen other municipalities.
Many other water systems throughout California will have to make similar investments, Elvert said. And given the sizzling construction market, costs for such projects are only expected to increase.
"The benefit of completing the project when SFPUC did is that we continue to see labor costs increase, and you likely can't expect that to go down," Elvert said. "Hopefully, we were able to achieve cost savings."
On gas rates, higher transmission costs are a major driver in rate increases, she said. Even though the city owns its own electric utility, it relies on PG&E's transmission lines to bring natural gas to customers. With PG&E rebuilding and upgrading its gas lines and increasing inspections, particularly in the aftermath of the San Bruno pipeline explosion in 2010, the city has to deal with the rising costs of transmission.
PG&E's projects to update both its gas and electric systems are also impacting the area's construction market, further driving up the costs of capital repairs. The costs of replacing gas pipelines have increased dramatically in recent years, she said.
"Since PG&E is doing so much work on their system, it's hard for us to find contractors to complete the work on our system," Elvert said.
Elvert said the utility has taken some actions to curb future increases. This includes scheduling its upgrades so that major projects can be undertaken in alternate years, increasing the economy of scale and potentially lowering construction costs. It has been negotiating with PG&E to keep the rate increases more modest than the company had initially proposed. And it recently negotiated a pre-pay arrangement for the city's gas supply that she expects will save about $1 million annually.
The utility is also now reforming its billing system to make it more efficient, an upgrade that Elvert said will save money once it's in place.
The utility is also continuing to review its staffing levels and adjusting positions to make operations more efficient, she said.
Even with these changes, however, bills are expected to continue to rise in the coming years. The city's preliminary projections show electric rates rising by about 4% annually over the next three years and by 3% the year after that. Gas rates are expected to go up by 9% and 7% over the next two years, respectively, followed by more modest increases (between 2% and 3%) in each of the two following years. When coupled with increases in water, wastewater, refuse and storm drain rates, the average residential bill is expected to go up by a total of 5% in fiscal years 2021 and 2022 and by 4% in fiscal years 2023 and 2024.
The projections indicate that residential customers should expect to see their monthly bills go up by between $13 and $15 every year between now and 2024.
During the June 17 discussion of the most recent rate hikes, Councilman Greg Tanaka objected to rising rates. He and Councilwoman Lydia Kou both voted against most of the rate increases, with the exception of wastewater rates. Tanaka suggested that because the city owns its utilities, it should be realizing more savings.
"I know one resident who just moved out of Palo Alto after 40 years because it just got too expensive here, with utilities going up and taxes and what not," Tanaka said.