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Other CA Cities With Muni-Owned Gas Utility Charge Significantly Lower Rates Than LB

Palo Alto City Hall Uses Public Funds To Help Its Residents, Businesses Offset Soaring Costs

Palo Alto's City Council has directed that cash reserves. be used to offset rising commodity rates. In effect, Palo Alto uses public money to help ensure its publicly owned utility provides the public with lower bills.

Randy Baldschun, Assistant Director of Palo Alto's Gas Utility Rate Dept., told LBReport.com:

"We've been drawing down our cash reverses to mitigate the rate impact to our customers. When gas prices shot up in May last year [2000], instead of just passing through those high gas costs directly to our customers and impacting their financial situation. We have a policy in Palo Alto to use reserves to act as a buffer for sudden jumps in wholesale price increases. So over the years, we'd built up this reserve for exactly the purpose that we're using it for right now. So we're drawing this cash reserve and in the meantime, we're stagering a series of rate increases, approximately four increases, to get to a point where we're recovering all of our cost plus contributing back into the reserve.

..."When the cost of gas goes up, you got two options to pay for it. You can raise your rates or you can draw down your cash, and we're drawing down our cash and we're raising rates, a combination of it.

..."It gets to the local contract that municipal utilities have. We decided years ago we wanted to build up cash reserves to give some rate stability to our customers, so when times were good, we built up our cash reserves, and now we're drawing down those cash reserves because the rate increases to our customers are so outrageous. We want to buffer that somehow and that's what we're doing."

Palo Alto also uses longer-term contracts with their gas suppliers, but this alone wouldn't produce such low rates since such contracts are frequently indexed to reflect market rates.

In effect, Palo Alto City Hall uses a combination of measures: longer term contracts, drawing down cash and raising rates to replenish its reserve. This policy, directed by their City Council, provides residents with lower gas bills while generating a reserve to avoid future sudden increases.

A Palo Alto Gas Utility fact sheet explains in greater detail:

"[T]here is currently an imbalance between supply and demand in the United States that has dramatically escalated wholesale gas prices. Palo Alto Gas Utility has been paying higher than expected wholesale costs since May 2000 by drawing down upon its cash reserves and by enacting a series of retail rate increases. In August 2000 and January 2001, gas ates increased 15 percent and 25 percent, respectively. Current estimates indicate that a 25 percent rate increase in April 2001 and 25-35 percent in July 2001 will be presented to the City Council for consideration. With these rate adjustments, the Palo Alto Gas Utility will have the ability to offset the wholesale cost of gas it procures on behalf of the citizens and businesses of Palo Alto..."

Even if the Palo Alto City Council enacts the projected rate increases in coming months, Palo Alto's residential rates would range from roughly 1.03 per therm to 1.45 per therm, well below what LB City Hall is charging now.

In the curent budget year (FY 00-01), Palo Alto City Hall is spending roughly $7.615 millon on increased wholesale gas costs. Of that amount, $2.242 million or roughly 30% will come from a City Hall withdrawl from cash reserves. The remaining amount will come from the rate increases, effectively using their public utility to keep residents' and businesses' bills lower than they would otherwise be.

LB's City Charter specifies that Gas Dept. revenue (after paying debts, funding improvements and setting aside reserves) is sent to City Hall's General Fund. The General Fund supports City Hall spending on items ranging from police and fire to consultants and Council district "discretionary" funds.

In the current FY 00-01 budget, LB's General Fund is supported by a $15 million transfer from the Gas Dept. The City Manager's budget message doesn't indicate what proportion of that sum represents Gas Dept. net revenue and how much, if any, represents reserves. However, it did say it's unlikely the Gas Fund will be able to maintain a transfer at the current level beyond FY 01.

The Council could presumably direct that LB General Fund money be used to offset and lower LB consumer bills. However, this would almost certainly require budget adjustments and a Council vote. To date, the Council has not taken these steps.

Instead, in early January, Councilmembers approved a staff proposal to provide a temporary 25% discount but only to qualifying low income seniors and low income disabled. It offered no rebates and the discount is not available to general consumers.

Councilmember Frank Colonna subsequently suggested considering (but didn't make a motion for) a 5% rate reduction, a fraction of the roughly 200-300% increases some LB consumers now face over last year's levels.

Many LB homeowners are receiving bills of between $200-$500; some LB businesses report monthly bills well into the thousands.

Colloquy at the January 30 Council meeting indicates some Councilmembers may now be leaning toward taking more aggressive action. LBReport.com will be posting full coverage (include transcript excerpts) shortly. When posted, a link will appear here.

As of the date of this posting, LB City Hall has not yet mentioned Section 1502 of the City Charter (previously reported on LBReport.com) that governs LB Gas Dept. rates. In pertinent part, it states:

"The rates to be charged users for any services or commodities supplied by any public utility owned and operated by the City shall be based upon the prevailing rates for similar services and commodities supplied or sold by other like utilities whether public or private, operating in the Southern California area."

As previously reported on LBReport.com, Lakewood and most other So. Cal cities served by investor-owned gas utilities are currently paying less than half of what LB consumers are being charged by their own City Hall run Gas Dept.

In our opinion, when LB consumers pay more than twice as much for the same commodity as consumers across the street in Lakewood and other area cities, City Hall is violating this Charter section. We believe it has done so for the duration of the period in which City Hall allowed LB's bills to reach extreme levels.

(Some may argue the Charter lets City Hall "pass along" increased rates by energy suppliers. We simply note that the Charter specifies that LB Gas Dept. rates must be based on prevailing rates charged "by other like utilities," not by energy suppliers.)

Even if one contends the Charter doesn't mandate lower rates, the City Council could provide LB consumers with rebates as a discretionary matter. (It would take a tortured interpretation to contend otherwise.)

Meanwhile, as first reported weeks ago on LBReport.com, LB's rising natural gas and electricity rates have produced new utility tax revenue for LB City Hall, which imposes a 9% tax on the bill amount.

In November, nearly 70% of LB voters enacted Norm Ryan's petition initiated Prop J, which sought to reduce the amount of utility tax flowing to City Hall. Instead, City Hall let its gas bills rise, which has increased the amount of utility tax collected on LB City Hall's gas bills.

On January 30, City Hall Financial Management chief Bob Torrez publicly admitted during a City Council colloquy that LB's natural gas bill increases were expected to bring City Hall roughly $1.5 million more in utility tax revenue than previously expected.

At the same time, Mr. Torrez strongly denied City Hall was reaping a net windfall, trying to factor in City Hall "losses" from Edison's failure to make certain payments on LB's SERFF energy producing plant (arguably a collection matter, not an energy matter). Mr. Torrez promised a full report would be forthcoming.

On January 30, the Council requested a report from the City Manager on what additional measures, if any, could be taken. We would expect the report to quantify month by month by how much the LB Gas Dept's rates have exceeded rates in neighboring areas like Lakewood since roughly October.

Once the differential amount is known, a formula can be devised to rebate it to LB consumers. The rebates should be retroactive to the time when the extreme disparity began (we believe roughly December 1) and continue until the extreme disparity ends.

Staff comments at the January 30 Council meeting suggested the Manager's report will claim LB City Hall has not received a net windfall and may recommend against meaningful rebates.

Regardless of what the staff report says, the City Council, not the City Manager, has the last word.

Section 1501 of the City Charter provides that Gas Dept. revenue must be disbursed in a certain order: to pay interest and principal on bonded debt, then pay annual operating and maintenance expenses, acquisitions, improvements and extensions, then set aside a reserve for contingencies in operating the utility; the remaining amounts determined by the City Manager to be unnecessary to meet these obligations may be transferred into City Hall's General Fund.

In September, 2000, the City Council budgeted (i.e. expected to receive) roughly $7 million from the Gas Dept. for the General Fund.

Since the City (by law) has a balanced budget, we presume Gas Dept. revenues are already budgeted to offset budgeted expenses.

Accordingly, some Council-approved budget adjustments will be required.

Councilmembers will have to decide whether to perpetuate the oppressive status quo or adjust their spending to provide costituents full rebates (i.e. for the extreme differential retroactive to at least December and the utility tax collected on the extreme bills.)

Providing only partial rebates could backfire, since challengers would likely pledge to vote for full rebates when elected.

The LB City Council is ultimately responsible because it oversees the publicly owned, City Hall run gas utility.

City staff (the City Manager and his subordinates) run the Gas Dept. on a day to day basis subject to direction from the City Council. The Council is the Gas Co.'s de facto "Board of Directors" and can pass ordinances raising or lowering rates, subject to the City Charter. The Council answers to the public, not corporate shareholders. In theory, LB City Hall is supposed to run the publicly owned LB Gas Dept. to serve the public, not City Hall.

This seems to have been the case in Palo Alto and to a lesser extent in Coalinga. LB City Hall has the dubious distinction of charging the highest natural gas rates of any CA city with its own natural gas utility.

City Councilmembers understandably prefer to talk about what they may do in the future instead of what they can do right now. Future energy production, new policies, investigating "market distortions" may be worthy but the Council has the power to lower bills from its City Hall run Gas Dept.

By reading this, you already know more than many of your neighbors. Pass it on. Tell your friends and neighbors about LBReport.com's detailed coverage. Knowledge is power. Urge your friends to sign up for LBReport.com's free LB e-mail alerts with detailed updates (just go to our front page and use the glaring yellow box on the left side.)

Use the internet. Click on our left side link to "LB City Hall" and send an instant e-mail to your Councilmember. Tell him/her (politely but firmly) that you insist on a full rebate. Stress that this means equalizing the LB Gas Dept's rates to Lakewood's levels, rebating the difference retroactive to at least December, and rebating the windfall utility tax revenue City Hall has been collecting. Remind them that you vote and you watch what poiliticians do, not what they say.

If you're asked to endorse or send money to a Council incumbent seeking higher office (such as Mayor), don't. Tell them you'll consider changing your position after you see their record on voting to provide full rebates (i.e., the full amount of the differential commodity charge retroactive to at least December as well as the windfall utility tax collected on these extreme bills.