The biggest hike will be in water rates, which are slated to rise by 8.9%. Palo Alto is one of 26 jurisdictions that buy water from the San Francisco Public Utilities Commission, which last month approved a 15.9% increase to its wholesale rates.
The city also is seeing a 4% increase in distribution costs, according to senior resource planner Lisa Bilir.
The council on Monday voted 5-1, with council member Greg Tanaka dissenting and council member Greer Stone absent, to approve the water rate increase. Tanaka noted that the city's residential water rates are about 14% higher than those in surrounding jurisdictions and said he cannot support the rate hike.
In addition, the council voted 6-0, with Tanaka dissenting, to support a 5% increase to electricity rates and a 3% increase in wastewater rates. Council members also voted 5-1, with Tanaka dissenting, to support a 4% increase to gas rates. For both electricity and gas, usage has dipped as a result of the pandemic, according to utilities staff.
When it comes to water rates, the increase is driven in large part by infrastructure improvements that San Francisco Public Utilities Commission (SFPUC) is undertaking, Catherine Elvert, communications manager for Palo Alto Utilities, said in an interview. Palo Alto gets all of its water from the SFPUC while some other nearby cities get water from other sources with different costs than SFPUC, which is one reason why there are differences in water rates between water retailers.
The investment, Elvert said, is necessary to maintain the Hetch Hetchy system, which the SFPUC uses to draw water from the Tuolumne River.
"Any system that ages will eventually deteriorate, and we know that labor and construction material costs are not going down," Elvert said. "By being proactive in investment in the earlier years, you'll likely be saving money in the long-term by taking advantage of lower labor and construction and material costs versus inflation in the future. Also, you're avoiding the potential costs you have to pay to repair any ruptures or breaks in the system."
The drought also has contributed to the higher rate. With customers cutting back on water, the water utility loses some of its revenue it gets from ratepayers. But because much of the system's costs are fixed, it needs to recoup the money by raising rates.
"If we cut our water consumption, we on average would experience a slightly smaller water bill but a higher cost per gallon. But our total bill would probably be slightly less — not a lot less — from the savings we're doing on water," Mayor Pat Burt said during the Monday discussion. "That's just part of the unfortunate circumstance of how costs are structured and passed on to us and in a drought period that's what happens."
A similar factor is in play with electricity and gas. Eric Keniston, rates manager at Palo Alto Utilities, said the city has seen declining sales over the course of the pandemic, though usage has started to pick up in recent months. Through fiscal year 2022, sales are projected to decline by 10%, he said.
At the same time, the costs of maintaining utilities are rising.
"We're seeing increased operations, maintenance and (Capital Improvement Project)-related costs for all of our utilities," Keniston told the council.
He also noted that the cost of gas supply had reached its highest level in about 15 years.
Staff emphasized that the gas bill for Palo Alto customers remains well below PG&E's rates. In the winter, the median monthly bill amounted to $91.40, while PG&E's was $116.08, a difference of 21.4%. In the summer, when usage is much lower, Palo Alto's median bill is $36.48, while PG&E's is $37.13.
While Burt called the increase to the gas rates "cautiously prudent," Tanaka voted against the hike and argued that Palo Alto's rates should be even lower because the city owns its own utilities and other jurisdictions rely on PG&E.
"I would expect the rates to be lower than PG&E across the board, in some cases significantly lower," Tanaka said. "But I can't see it here."
On the electricity side, the city's finances have been hampered by both lower usage and the drought. The utility plans to draw nearly $15 million from its hydroelectric stabilization reserve, virtually exhausting the reserve, Keniston said. The city, which typically generates about 35% of its electricity from hydroelectric sources, has seen very low hydroelectric output over the course of the drought.
"We have a variety of reserve funds, and it feels like we have to tap into every single one of them this year," council member Alison Cormack said during the discussion of the electric rates, alluding to the drought's impact on hydroelectric projects.
Cormack and Burt also noted that the city will have to invest more in the electric utility to meet the city's climate change goal of cutting greenhouse-gas emissions by 80% by 2030, with 1990 as the baseline. The city's projections show 6% increases in each of the next four years, which includes money for upgrading the electrical grid so it can handle increased demand when people switch from gas appliances and vehicles to electric ones.
Electricity rates remain well below PG&E's, according to staff. While Palo Alto's median residential bill was $69.22 in the winter and $52.18 in the summer, PG&E's was $127.93 and $110.17 for the two periods, respectively. Burt lauded the city's effort to keep its costs comparatively low, particularly given its reliance on 100% carbon-neutral electricity.
"For us to have done that at half of PG&E costs is amazing, particularly when you're looking at the fact that we're sharing the same transmission costs," Burt said. "We're amazingly strong in those ways, and it looks like we'll be able to continue our electrification program and increase our electricity supply and, if anything, we may widen the gap there."
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