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.