MEMORANDUM
TO:UTILITIESADVISORYCOMMISSION
FROM:UTIITIES DEPARTMENT
DATE:MAY 4, 2005
SUBJECT:PROPOSED GASRATE INCREASE
RECOMMENDATION
This report requests that the Utilities Advisory Commission (UAC) recommends the City Council approve a $4.3 million distribution retail gas revenue increase effective July 1, 2005. The proposed increase represents approximately 15 percent of the total system sales revenues.
BACKGROUND
In June 2004, the City Council approved a 9.9 percent rate increase for Ffiscal yYear 2004-05 and in December, another 20 percent rate increase was approved by the Council for January 2005. Both rate increases were to cover the increased purchased costs of gas. However, gas usage in Palo Alto has been declining mainly due to the soft economy, and more energy efficiency investments on the part of customers to mitigate the impact of high commodity costs on their Utilities bills, occurring since the energy crisis of 2001. For FY 05-06, Gas usage is projected to be flat.
DISCUSSION
Supply
During the budget process for Fiscal Year 2003-04, staff informed the Council that natural gas prices had stabilized, and that the "laddering" strategy used to purchase gas had resulted in stable and lower wholesale gas costs for the Gas Utility, which had a favorable impact on the Supply Rrate Stabilization Reserve. A recent bill comparison with PG&E showed that during the majority of FY 2004-05, Palo Alto’s average residential customer delivered gas cost is approximately 24 percent below PGE’s average customer’s delivered gas costs. No increase for supply costs is recommended at this time.
Distribution
While wholesale gas costs are projected to be adequately managed through the current and projected balances for the Gas Supply Rate Stabilization Reserve, the Distribution Rate Stabilization Reserve is projected to be $1.8 million below Minimum Guideline without a rate increase. During FY 2004-05, $3 million isare expected to be withdrawn from reserves to pay for operating expenses. An evaluation of the Gas Utility financial reserves, indicates that further drawing down of the Gas Distribution Rate Stabilization Reserve (DRSR) will leave the Utility cash flow capability vulnerable to an emergency breakdown on the distribution system.
The proposed rate increase for FY 2005-06 would bring the Distribution Rate Stabilization Reserve above the Minimum Guideline and to the Target Guideline as approved by Council.
. However, Therefore sStaff recommends that distribution retail gas rates be increased 15 percent on a system- wide base, to provide enough funds for the Gas Utility to meet its financial obligations and commitments, and maintain prudent cash reserve levels.
Cost of Service Allocations
To achieve equity between customer classes, a Cost of Service Study (COSS) has been updated and rate adjustments will be applied to customer classes over the next 3 to 5 years to comply with standard municipal utility industry practices. The reason for the difference between current allocations and the findings of the COSS is that distribution allocations have been kept at the same level for the past 4 years. During these past years, customer loads and usage patterns changed. Therefore, Sstaff will apply proposed and future gas system average rate changes (over 3 to 5 years) to to comply with industry norms of equity between classes. The following table shows the impact of this rate proposal on a typical monthly bill for the various customer classes.
TABLE 1
Impact of Proposed 15% Average System Rate Increase on Customer Bills
Customer / UsageTherms / Monthly
Bill / Amount of Increase / Percent
Increase / Percent PA
(Below) or Above PG&E as of 4/05
(Not Annualized)
Residential/Winter / 100 / $ 103.54 / $ 15.50 / 17.6 / (5.5%)
Residential/Summer / 2630 / 29.6935.98 / 4.535.53 / 18.018.2 / 4.9%8.1%
Commercial G-2 / 500 / 583.50 / 69.50 / 13.5 / 15.0%
Industrial G-2 / 10,000 / 11,670.00 / 1390.00 / 13.5 / 32.2%
Contract Customers – Distribution only / 60,000 / 18,000.00 / 3,780.00 / 26.6 / N/A
ALTERNATIVES
Staff evaluated other rate increase options. However, any rate increases lower than thosee proposed will not be insufficient to shield the utility from market volatility. On the other hand, higher than the proposed may have too large of a rate shock on customer's bills, especially when combined with corresponding increases in electric, water, wastewater and refuse. . Therefore, sStaff recommends that gas revenue be increased by 15 percent.
RESOURCE IMPACT
Approval of this proposed rate increase will raise the Gas Fund sales revenues by approximately $4.3 million for FY 2005-06.
POLICY IMPLICATIONS
These recommendations do not represent a change in current City policies. The proposed rate decrease is consistent with the Utilities Strategic Plan approved by the Council “to provide superior financial performance to the City and competitive rates to customers”.
TIMELINE
The effective date of the proposed rates is effective July 1, 2005.
ENVIRONMENTAL REVIEW
The adoption of the resolution does not constitute a project under the California Environmental Quality Act, therefore, no environmental assessment is required.
ATTACHMENTS
A:A.Gas Rate Schedules G-1, G-2, G-3, G-4, G-6, G-10, G11 and G-121 .
PREPARED BY: ______
LucieHirmina, Rates Manager
REVIEWED BY:GirishBalachandran _____
Assistant Director, Resource Management
TomAuzenne _____
Assistant Director, Customer Services
DEPARTMENT HEAD:______
JOHNULRICH
Director of Utilities
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