Town Square

City makes a lot of money from the utility bills we pay

Original post made by Diana Diamond, Palo Alto Online blogger, on May 2, 2007

Palo Alto's utility rates will go up once again in July, after increases last year, in what will inevitably be a series of continuing increases.

What many residents don't realize is that the city -- not the Utilities Department -- is making a lot of money on what we pay monthly for our gas, electricity and water usage.

The reasons the rates will keep on increasing, independent of the actual cost of the utilities that the department purchases, are:

* The city rents land from Stanford for $1 a year and turns around and charges its own Utilities Department millions a year in rent. Last year the department paid $10.4 million for, among other things, lease of four parcels for electric substations and a reservoir. These exorbitant rental fees are reflected in our monthly utility rates.

* Salary and benefit increases negotiated by the union are passed on to utility users, causing our rates to increase.

* The city is planning on issuing a bond to build eight-hour storage wells for downtown emergencies, such as a fire following an earthquake. The guesstimated cost of the storage wells and repair of existing wells is $40 million, plus almost an equal amount in interest. The bond cost will be passed on directly to utility users. No referendum is required to ask ratepayers if they want to pay for these wells.

* The city charges the Utilities Department a "return on investment" fee -- an annual assessment to pay back for past utilities investments the city made years ago. Last year Utilities transferred $14.2 million to the city's general fund.

* According to John Melton, chair of the city's Utilities Advisory Commission, approximately 25 percent of the city's $129 million general fund is money transferred from the Utilities Department. The department gets its money from utility users.

* Users are paying more for gas this year because we used less last year. The commission was told recently that rates have to increase because the costs for staff, maintenance and operations continue to rise. If we use less gas next year, we may have to pay even more.

* Each month there is a "utility user tax" on our utilities bills. I paid $12.82 in March.

The council's Finance Subcommittee has recommended that come July 1, the average Palo Alto household will pay about $24 more per month for utilities -- $288 a year. Gas rates will go up 9.5 percent (last year they went up 20 percent); electricity will go up 5 percent, and water rates will increase by 10 percent. The council will vote on these increases in June.

Palo Altans are now paying more for gas than PG&E customers in other communities, according to a staff report. And Melton predicts that water rates will substantially increase in the future, perhaps even double. Much of this has been reported in the past. Palo Alto's utility rates have historically been substantially lower than what residents in other communities pay, and electricity rates continue to be lower. Palo Alto residents and businesses are paying substantially less for electricity than households served by PG&E. Indeed, our low rates have been touted as a big advantage of living here.

As for the rental charges, here are the figures on the city's lease from Stanford for three parcels for electric substations and a fourth parcel for a city reservoir (2005-06 figures).

Property Size City pays Rental cost to Utilities Dept.

950 Hansen .8 acre $1/year $173,000/year

3275 Hanover .7 acre $1/year $158,000/year

Mayfield reservoir 1.9 acre $10,000/year $600,000/year

213 Quarry Road 0.4 acre $1/year $155,000/year

What this says to me is the city is making a huge profit from land it is getting practically for free from Stanford.

According to Melton and other utility commissioners, the city argues that it is just applying good business practices to charge the Utilities Department "market rate" for these parcels, on the presumption that if this Stanford land was not available then Utilities would have find other land to rent and to pay fair-market rates.

"As a matter of general policy, (the Utilities Department has been told that) whatever the city pays Stanford is independent of the money the Utilities Department has to pay the city for renting this land," Melton said.

But we are not dealing with "what ifs" here. The fact is the land is available from Stanford and the city gets it for practically nothing. In fairness, the savings the city gets should be passed on directly to its own Utilities Department -- and to its own residents. The city should not be making money off all of us.

The City Council has defended this policy, saying that since the money goes into the general fund, it is being used for good purposes: to fund city parks, libraries and services. The Utilities Department has also been acknowledged as the city's "golden goose" for years.

Which brings me to the emergency water storage issue. One logical place the city is looking at is El Camino Park, across the street from the Stanford Shopping Center. Under a relatively recent agreement, the city leases the ballpark for $1/year under a contract that expires in 2033.

The playing field is 10.2 acres. The underground storage reservoir would probably use up half of this space, according to a planning department official. The playfield would be restored after the reservoir is completed.

The estimated $40 million cost for the wells and reservoir does not include any land rental, I've been told. Based on what the city has done in the past, I wouldn't be surprised if it charged Utilities rent for this underground land. If two acres are being rented for $600,000 a year (see chart above), then the charge for five acres could be $1.5 million a year.

And who would be paying for this? All of us who buy city water.


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Posted by Fire the Auditor !!!
a resident of Charleston Gardens
on May 2, 2007 at 4:33 pm

All this seems completely illegal. Rate increase now looks like a tax and should require voter approval.

This is ILLEGAL. Why a few individuals get together and sue the city.

This sounds height of mismangement. The city auditor should lose his/her job. I am not kidding.....

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Posted by Kate
a resident of Duveneck/St. Francis
on May 2, 2007 at 5:45 pm

The "auditor" has nothing to do with this. This is city "policy" cooked up by previous councils and the Utilities Department. it's gone on for years, long before the Palo Alto even had an auditor. And, yes, Palo Altans should be outraged - and vote down any bond issue coming down the road until there is a total overhall of city finances - bottom to top and back down again NOW.

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Posted by Dumbfounded student
a resident of Palo Alto High School
on May 2, 2007 at 7:13 pm

Why would the city do this? This is just digging a hole for itself, more and more people are going to leave Palo Alto because of this. I am outraged as well.

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Posted by Hidden Tax
a resident of Professorville
on May 2, 2007 at 7:26 pm

I came across this about two years ago and thought how ingenious the city leaders have become. Set up a city-owned utility, raise rates consistently independent of your cost structure and fund your city government with the surpluses. It seemed to work well until the utility costs eventually exceeded neighboring PG&E customers. I hope that your column leads to the uproar it should. This is a real mess now because we will continue to justify our wonderful "city-owned utility" because of all the surplus funds it provides the city. So we will be burdened with two things in the future: a non-cost competitive city utility (not surprising given how many were moonlighting on the clock)and a nice hole in our operating budget. Someone needs to hold the city council to account for this! If we can get their attention away from how to save the planet and imparting their wisdom to all those other local governments asking "what is Palo Alto doing?" This will be the next budget hole to fill.

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Posted by Otto
a resident of Barron Park
on May 3, 2007 at 3:40 pm

How about selling off our Utility, to the tune of $800M-$1B? We could deposit a substantial portion of that into a General Fund Trust sufficient to match the current contibution to the General Fund made by this hidden tax to residents. The remaining funds would be used to fund needed infrastructure projects and begin an intensive "solarization" of Palo Alto residences.

One of the things that puzzles me is the natural gas increases, as spot futures have trended down or remained stable (this is a dynamic sector, however, so prices can change rapidly). What's going on here?

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Posted by Anonymous
a resident of Another Palo Alto neighborhood
on May 3, 2007 at 10:58 pm

Gas prices have gone up, wholesale,because it is being used in very large quantities to generate electricity. We should be using nuclear instead of coal or gas as there is no CO2 or radioactive and mercury,etc emitted into the atmosphere as with coal. The total cost to produce elect. w/nuclear is about 3 1/2 cents/KW Hr.

There should be price breaks on utilities based on quantity. i.e. electric: 7cents for first 600 KW, 8 cents for second 600KW (per KW hour) Now it's close to PG& E's rate for all or no matter how much. We don't know if the big corporations pay less than residential customers pay either.

Only action by the residents for the residents will change things.

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Posted by No, not again
a resident of Midtown
on May 4, 2007 at 9:34 am

Just say No to any Bonds, Taxes or Rate Increases! Thisc onstant increase of prices has got to stop.

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Posted by Arama Nash
a resident of Palo Alto Hills
on May 4, 2007 at 2:00 pm

[Post removed by Palo Alto Online staff.]

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Posted by Fed Up
a resident of Another Palo Alto neighborhood
on May 4, 2007 at 4:37 pm

I am fed up with a utility tax that goes on, and on, and on. It is time to sunset this tax. Palo Altans should be wary of any tax they encumber since it seems they become a "cash cow" for some agency. Does anyone know how to sunset the Utility tax.

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Posted by Cheap Skate
a resident of South of Midtown
on May 6, 2007 at 3:39 am

The average Palo Alto utility customer is still saving money versus what those in surrounding communities would pay for a like bundle of utilities, is that right? Now, don't get me wrong. I'd like my water rates to be lower so I can wash my dog when he smells bad. Can't afford that now. They want me to pay for preventive maintenance on the Hetch Hechy water system. Ridiculous. Repairing the leaks when they show up has been good enough for over 100 years. And we don't need any extra water reservoir in some expensive underground tank at double the rent just to fight a theorectical fire following a hypothetical earthquake. The chances are less than 50-50 we'll need that while I'm in town. Diana's right, emergency preparedness is just another excuse to soak the poor.

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Posted by Miss Florida
a resident of Green Acres
on May 6, 2007 at 3:56 am

Diana makes a lot of money publishing half truths. Did you ever notice that Diana only tells the part of the story which favors her warped view point? Not very credible. Where I grew up in central Florida, there was this old bitty on the other side of the tracks who was always singing the blues. She wrote a letter to the editor at least twice a month. Nothing was ever good enough for her. Then she won the lottery. Did she stick around to help those of us in need? No. She packed up in the middle of the night and moved to Key West. Never heard from her again.

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Posted by pat
a resident of Midtown
on May 8, 2007 at 4:22 pm

Miss Florida: Do you know how much money Diana makes? Which half of her story is true? Which part is warped? And what’s the relevance of someone winning the lottery, on either side of the tracks? BTW, it’s “old biddy,” not bitty.

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Posted by Maria
a resident of Midtown
on May 8, 2007 at 4:36 pm

I'm not sure what Diana's point is. If we still pay less overall for our gas, electricity, water, rubbish collection, etc. than neighboring cities then what is the problem? Sure, we'd all love to see lower utility rates, but do we also want a cut in services? Choices and decisions have to be made, but just because there has been some creative financing doesn't necessarily mean it's wrong. Since the utility dept. is part of the city government, it needs to be looked at as a part of the whole income and expenses of the city.

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Posted by Chris
a resident of Old Palo Alto
on May 8, 2007 at 6:44 pm

Maria is incorrect when she says that, "just because there has been some creative financing doesn't necessarily mean it's wrong."

Only morally challenged persons, like bureaucrats and politicians, would try to argue that hiding what people pay for services through creative accounting and then redirecting the excess funds to other purposes is somehow OK.

But it's not only wrong, it's apparently also illegal. Proposition 13 and follow-on measures generally require that taxes and fees not related to the actual cost of providing government services must be voted on by the affected taxpayers. Here we have a lot of fees that look a lot like taxes being imposed not only with no popular vote, but also without even any direct vote of the elected City Council.

It's common knowledge that the city is vulnerable to a proposition 13 lawsuit on these grounds, and we're lucky one hasn't been filed by some anti-tax group.

But even if the law doesn't catch up with the city, responsible citizens should object to surreptitious and essentially dishonest revenue generation like that described by Diamond and others.

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Posted by Walter_E_Wallis
a resident of Midtown
on May 8, 2007 at 6:59 pm

People tend to be profligate with "found" money. Our people sure are.

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Posted by Mary
a resident of Community Center
on May 8, 2007 at 9:10 pm

Each Palo Alto utilities customer should have received a letter from the city detailing the utility rate increases planned for July 1, 2007. If you have not read it, please do so. Not only will rates rise, but there is planned a stand alone surcharge on two of the utilities of approximately $5.00 per month in addition to the utility charge itself plus an increase in refuse rates.

From the letter:

These rates will be considered by the City Council at a public hearing to be held on June 11, 2007 at 7:00 p.m. in the Council Chambers at 250 Hamilton Avenue, Palo Alto, California 94301. All residents and other interested persons are encouraged to submit written and oral testimony at the hearing.

You may also submit a written protest against any or all of the proposed changes. You must file a separate written protest for each type of utility rate increase (water and/or refuse) that you are protesting, and the City must received your written protest prior to the close of the public hearing on June 11, 2007. Mail or deliver written protests to: City Clerk, 250 Hamilton Avenue, Palo Alto, California 94301.

If written protests are filed by a majority of the affected customers, the applicable proposed rate increases will not be imposed. For assistance in determining the cost of the proposed rate adjustments to you, please call the City of Palo Alto Customer Contact Center at 650-329-2161.

Over fifty percent of the housing stock in Palo Alto is reported to be rentals, so the City is probably safe in presuming that there is no way that it will hear from a 'majority' of the customers, residential and business. But nevertheless, I urge you. Don't just sit there, do something. I went to that Utility Commission meeting when the rate increases were approved to go the Council. Only one resident showed up. Now it's up to you.

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Posted by Mary Carlstead
a resident of Duveneck/St. Francis
on May 8, 2007 at 11:07 pm

The above post by'Mary of Community Center' was word-for-word a letter I sent about an hour ago to the Duveneck/St. Francis listserv and my own e-mail list. I did not post the previous comments to this website.

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Posted by Maria
a resident of Midtown
on May 9, 2007 at 4:23 pm

Well, if Diana Diamond could figure out the financing, I'm sure other citizens could also. It's iobviously not that secret! Please remember, Proposition 13 did not pass in Palo Alto. In essence, the citizens said they wanted services rather than lower taxes (of course we'd all like both great services and low taxes, but as of now, great services cost money.) If citizens want things changed, find out the truth and ask the council to lchange them. But, remember, you do get what you pay for. Lower utility rates will mean less money for the city as a whole, therefore, less services.

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Posted by common sense
a resident of Midtown
on May 9, 2007 at 4:26 pm

Interesting article from the Weekly:

Web Link

Brings up alot of questions:

Its okay to charge $1 for the museum, but the city likes to charge "market" rate to the utilities.

The museum costs keep growing - but couldn't those millions of dollars have been better used for infrastructure, storm drains, library upgrades or the public safety building!

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Posted by Chris
a resident of Old Palo Alto
on May 9, 2007 at 6:19 pm

Once again Maria misses the point entirely.

We have laws in this state that govern the way local governments, including Palo Alto, must follow when raising revenue. That Palo Alto did not vote for Proposition 13 is entirely beside the point. The city is not permitted to follow only those laws with which it is in agreement.

Maria is right that if the city weren't using creative accounting to extract more in utility "fees" than it costs to provide them, we'd be forced to cut services, or provide other ways of raising the foregone revenues. However, this doesn't make the city's surreptitious revenue schemes proper. I can't afford a European cruise every year unless I steal the money or find a way to earn more than I do. But that doesn't mean it's OK for me to violate the law to come up with the funds I want.

It's a lot easier for the city to raise money if the Council doesn't have to vote on it directly, and especially if it can done without the debate a city-wide election would entail. It also makes citizens mistrust the government. That's exactly why we should do things in the open, not under the table.

Maria may well be correct that a majority of residents would prefer we tax utility fees to cover Palo Alto's services. But if so, shouldn't we vote on that to show the community actually feels that way, rather than just assuming it's OK because Palo Alto didn't vote for Proposition 13?

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Posted by Maria
a resident of Midtown
on May 9, 2007 at 6:26 pm

Okay Chris, what substantial cuts would you make? What are you willing to do without? Also, I'd be interested to know if you have lived in your house long enough, or bought it from parents or used another Prop. 13 fiddle so you don't pay the very high taxes many of us do while neighbors in larger houses pay much much less in property taxes.

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Posted by Don
a resident of Downtown North
on May 9, 2007 at 6:28 pm

Chris is right. Contra Maria, the citizens never said "in essence [they] wanted services rather than lower taxes". They never got to vote on the matter because the city leaders never put it up for a vote.

In fact, it's worse than that. Long time residents will recall that the current Utility User's Tax passed by a very narrow margin only after the Council promised that it would be put up for reauthorization in 10 years. It's been almost 20 years now, and we still haven't had another vote. And it's highly doubtful if this out-in-the-open tax - let alone the currently hidden upcharges in Diana's piece - would pass if we got to vote on them again. (Look at the commentary in this thread.)

If the city's resident's really want all these fees and taxes added to their utility bills to fund services, why don't we legitimize them by voting up or down on the matter.

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Posted by Chris
a resident of Old Palo Alto
on May 9, 2007 at 6:32 pm

Maria, once more you miss the point completely. In fact, I like higher services. I'd be willing to vote for higher taxes on utilities or in other ways to fund higher service levels.

My objection is to the fundamentally dishonest (and illegal) process the city uses to raise these extra revenues. I believe the residents, if properly educated would vote to pay more taxes to get more services. If you're similarly sure, what's your problem with voting on the matter as honesty and perhaps the law requires?

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Posted by Maria
a resident of Midtown
on May 9, 2007 at 7:22 pm

Yes, I'd be glad to vote. I always vote. Of course, many citizens already voted against Prop 13 and voted for other taxes here in Palo Alto. Also, elections cost money. I don't see this as an issue worth voting on, but obviously you do. So, lobby your elected officials, petition your neighbors, etc. If enough people feel as you do, we'll have an election. Just be honestly aware of the costs of any election.

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Posted by Petey
a resident of Midtown
on May 10, 2007 at 4:59 am

Why vote on anything if elections cost money? We can just let the council appoint its successors and never have to bother with all those expensive and pesky accouterments of democracy.

And if a lot of citizens voted against Proposition 13 and voted for other taxes, of course it's okay to assume that they'd be in favor of subterfuge taxes in the form of excessive utility rates. No need to vote or even discuss that.

In fact, why don't we just appoint Frank Benest as emperor of the city and avoid the costs of democracy altogether?

It's pretty incredible what principles some people in this town are willing to ignore sometimes.

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Posted by George
a resident of Palo Alto Hills
on May 28, 2007 at 4:46 pm

Most people think utility bill only covers gas, electricity and
water. But for Palo Altans,in addition to paying a 5% city utility user fee on our cellular phone bills, we will soon be charged a new
monthly fee on just water meter alone. Annual cost would be from
$60 to $4,600 depending on the size of one's meter.

Please note that:

1. On May 23, 2006, Santa Clara County Superior Court Judge John
Herlihy made his decision that City of Palo Alto must respond to a CLASS ACTION lawsuit for illegally and erroneously collected money from residents (about $10-$27 million)via a tax on nationwide services offered by cellular companies.

The Class Action lawsuit was brought forward by attorney Christopher
Shenfield who represented a Palo Alto resident, Allen Atwood.
According to the suit, the City improperly levies a 5% utility users
tax on residents' nationwide service bills. Based on the City's own statue, such services are exempt from the tax, approved by voters in

With trial date sets for this Summer; our City contiues to add a 5% city utility user fee on our cellular phone bills which comes to about $1.5 million a year.

2. Water Meter Tax: Read the April 23 letter from the City detailing
a proposal to levy tax on water meter. To protest, you must first call to find out the cost, then write to the City Council to protest.
Unless written protests are filed by a majority, we will get charged for a dormant water meter even with no drop of water has ever flowed.

It is getting too rediculous. Would someone bring up these issues
on the pulic hearing? (we'll be out of town in June).

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Posted by bruce
a resident of University South
on Jun 1, 2007 at 3:23 pm

It is painfully apparent that the Utility Dept. is subsidizing the General Fund. Instead of imposing a tax (a word all politicians shudder at) our utility service charges are increased. This enables the Dept. to transfer 10.4M to the Fund.

Our vaunted services are paid for by increasing service charges instead of imposing taxes - but the result is that residents pay in the end. Let's end this nonsense and call a tax a tax.

Incidently I expect any and all bond issues to fail because of the utility charge increases. Voters are angry.