Finance committee directs staff to use Proposition 26 as design principle for 2026 gas cost‑of‑service study

The Palo Alto City Council Finance Committee voted unanimously Sept. 2 to recommend that the City Council direct staff to use Proposition 26’s reasonable‑cost requirement as the principal design principle for the 2026 gas cost‑of‑service analysis (COSA) and to proceed on a schedule that could support rates effective Jan. 1, 2026.

Staff told the committee the Utilities Advisory Commission (UAC) had debated several possible design principles and recommended relying on Proposition 26 while forming a UAC subcommittee to work with staff and the rate‑making consultant to develop the gas COSA. Staff provided a tentative timeline: staff and the consultant will work with a UAC subcommittee in September–October; staff expects the UAC to review and make a recommendation in November; finance committee review would occur in mid‑November; and final consideration by the City Council would happen in December, with implementation targeted for Jan. 1, 2026, if timing permits.

The matter drew public comment. Two residents urged the committee to adopt the city’s prior (2016) gas rate design guidelines with minor edits, arguing those guidelines better address climate goals, low‑income impacts and electrification economics. Hamilton Hitchens and Peter Taskovich told the committee they preferred preserving and updating the 2016 principles rather than relying only on Proposition 26.

Assistant City Attorney Amy Bartel advised caution. Bartel summarized recent California appellate decisions tightening judicial scrutiny of rate‑setting under Proposition 26 and cautioned that courts have scrutinized record language that appears to prioritize policy goals over cost causation. She said Proposition 26’s standard—rates must reflect the “reasonable cost” to provide service—is sparse but legally controlling, and including language that emphasizes policy objectives could expose the city to legal challenge if the record looks like it favors non‑cost goals.

Committee members and staff discussed whether portions of the 2016 guidelines could be retained in a way that aligns with Proposition 26. Staff and legal counsel indicated that some elements of the 2016 guidance (for example, evaluating impacts on low‑income customers and reviewing existing rate schedules) are compatible with a cost‑based approach, while language that would direct rate outcomes to favor electrification or maximize volumetric charges risked legal challenge if it appeared to supplant cost causation.

The committee approved a motion to recommend that Council direct staff to use Proposition 26 as the guiding principle for the gas COSA, to accept the tentative schedule presented by staff, and to work with the UAC (and a UAC subcommittee) to develop the study and return recommendations in time for potential January 2026 implementation. Committee roll call recorded Councilmember Rekdal, Councilmember Lythcott Hanes and Chair Burt voting yes; the motion passed.