Drought drives up electric costs in Palo Alto

After seven years of stability, Palo Alto’s electric ratepayers could soon be in for a series of jolts, as the state’s prolonged drought continues to take its toll on both the city’s hydroelectric supplies and its cash reserves.

According to projections presented to the City Council’s Finance Committee on Tuesday night, electric rates are set to go up by 11 percent on July 1, a slight increase from the 10 percent increase that Utilities Department staff projected last month. Rates are also expected to go up by another 8 percent next July before stabilizing, according to the projections.

Much like with water rates, which are also projected to rise in July, the drought is the main driver. Half of the city’s electric supply comes from hydroelectric sources and with the dry spell stretching into its fifth year, Palo Alto has been forced to buy wholesale electricity at market prices, which tend to be higher.

Water rates, meanwhile, are set to go up by 6 percent – down from the 9 percent estimate in staff’s prior assessment. This is because the San Francisco Public Utilities Commission, the city’s water supplier, has revised its own projections for future rate hikes. Utilities staff also project 9 percent increases in each of the following years.

The drought is even affecting the city’s wastewater operation. According to Utilities Department staff, with less water flowing through the system, there is a greater concentration of chemicals at the end source, which increases the treatment costs. Wastewater rates are projected to go up by 9 percent in July, said Eric Keniston, rates manager for City of Palo Alto Utilities, which would add about $2.88 per month to a residential bill. They are also projected to go up by 10 percent in each of the next two years.

Even gas utility isn’t insulated from the drought’s impacts. A warm winter means less heating, and as people use less water, they heat less water, which means gas consumption dips and the city’s revenues fall below expenditures. That’s part of the reason why gas rates are projected to go up by 7 percent in July and by 5 percent in each of the following three years.

“The drought is a huge driver for all the funds,” Assistant Utilities Director Jane Ratchye told the committee Tuesday. “We know this is unusual for us to have a rate increase in every single fund.”

Altogether, the bundle of rate bumps (which also includes a 9 percent increase in the refuse rate and a 2 to 3 percent increase in storm drain rates) are expected to add about $23.25 to a resident’s monthly bill, which as of last July totaled $245.23.

Councilman Greg Schmid observed that the city is coming out of a period of time when things were stable and where market conditions were going in the city’s favor. Now, he said, “we seem to have a number of special circumstances on the other side.”

“We have the drought which affects both the electricity and water in a unique way and given that we’ve had no rain during February, it’s hard to write that off quickly,” Schmid said.

Schmid and his three committee colleagues – Chair Eric Filseth, Councilwoman Karen Holman and Councilman Cory Wolbach – generally accepted staff’s recommendations, though the council won’t be asked to formally approve any rate changes until June.

In some ways, everyone recognized, the increases are inevitable. The electric utility’s stabilization reserves, which had been used to cushion ratepayers from sharp increases in recent years, has been largely used up. In the years ahead, the city will be trying to rebuild these reserves, which will also contribute to rising rates.

Judith Schwartz, a member of the city’s Utilities Advisory Commission, said the utilities reserves have been used in the past to “insulate the populace from what was happening.” To keep rates from rising, the city brought its reserves down to a point where they now have to be built back up, Schwartz said.

Schmid, however, pointed to the significant rate increases local residents will experience in July and wondered whether the city should really be focusing on rebuilding its reserves.

“We have all these things going on and we have a series of rate increases for three years that are quite striking, after what we’ve been through,” Schmid said.

Council members took solace, however, in the fact that the city’s rates would remain well below PG&E’s, even with the proposed rate hikes.

Keniston said the city’s rates are now about 46 percent below those of PG&E, which had recently raised its rates.

Wolbach said that it’s been a significant point of pride for Palo Alto that its electric portfolio is not only carbon neutral, but also comes at a lower rate than PG&E. The July rate change will do nothing to change that, Keniston said.

Other projections, however, are far less certain. The cost of natural gas, for instance, is nearly impossible to predict because the commodity price changes month to month, Keniston said.

There’s also the biggest wildcard of all.

“The big uncertainty is: How long will the drought last?” Keniston said.