Palo Alto utilities staff recommend FY2026 gas rate increases; commission backs one‑time climate credit amid dispute over cost‑allocation study

Palo Alto — Utilities staff on Wednesday recommended the City Council adopt the FY2026 gas utility financial forecast, approve a new cost‑of‑service rate schedule and implement rate schedule changes that collectively raise system revenues by about 5% beginning July 2025. The Utilities Advisory Commission voted 5–2 to recommend council adoption after agreeing to a separate recommendation to use cap‑and‑trade reserve funds for a one‑time residential credit.

The staff presentation, led by Lisa Blair, senior resource planner, showed the updated cost‑of‑service study pushes a larger share of delivered costs onto residential (G1) customers at the median usage level. Blair said the study “is the result of a detailed analysis balancing what our costs are against the safety of the system, the long‑term maintenance risks” and other drivers, and that residential median bills could rise substantially under the new allocations.

Why it matters: The study’s allocation choices matter because state law (cited in staff presentation as Proposition 26) requires rates to reflect cost of service; changes in allocation can shift large sums between customer classes even when overall revenue needs are unchanged. Commissioners flagged that the consultant’s updated allocators and a change in how the general‑fund transfer is allocated increased the residential share of costs relative to the prior study.

What staff proposed and what the commission recommended: Staff proposed a 5% system average rate increase for the gas utility in FY2026 and presented an optional, one‑time climate credit of $73.20 per residential customer funded from the gas cap‑and‑trade auction revenues reserve. Blair said that credit would cost about $1,600,000 and would reduce the median residential bill impact by roughly 2 percentage points (for example reducing a 22% median residential increase down toward 20% in some presentations, or from 22% to 13% when combined with other adjustments noted in the packet).

At the UAC finance discussion, members of the finance subcommittee (Commissioners Phillips, Gupta and Croft) described three alternatives they considered: accept staff’s proposal as presented; recommend drawing the climate‑action (cap‑and‑trade) reserve for a one‑time credit; or recommend a smaller general‑fund transfer than the council’s planning target. Commissioner Phillips said the subcommittee’s “biggest concern … is the 22% increase in the median residential rate,” calling it “excessive and very difficult to swallow.”

After public comment yielded no speakers on the item, the commission voted in two separate actions: first to recommend the council use cap‑and‑trade funds for a one‑time residential climate credit (commission roll call recorded six votes in favor and one vote against) and then to recommend council adopt the FY2026 gas utility forecast and rate changes (motion passed 5–2). The commission asked staff to return with the supporting analysis that shaped the allocation decisions and to continue outreach about ways to mitigate customer impacts.

Key numbers and constraints raised in the meeting: - System average gas rate increase proposed: 5% (FY2026, effective July 2025). - Median residential bill impacts discussed in the presentation: staff cited a large median residential increase (presented as about 22% under the cost‑of‑service outcome before mitigation options); staff offered a one‑time $73.20 climate credit as an option to reduce customer impact. - Suggested climate credit cost to be drawn from cap‑and‑trade reserve: approximately $1,600,000. - Cap‑and‑trade reserve balances discussed in the packet and at the meeting: staff cited an ending balance for FY2024 of roughly $13.5 million and projected balances in the range of multi‑millions over near years (staff noted a projected decline after planned qualifying expenditures). - Federal pipeline grant referenced: $16,500,000 (Pipeline and Hazardous Materials Safety Administration grant) was noted as an expected award that staff are reviewing for terms and conditions.

Discussion highlights and staff responses: Commissioners repeatedly pressed staff and the consultant’s cost‑of‑service allocations. Commissioner Gupta asked whether the prior COSA was compliant with Proposition 26; staff answered that the prior study had been compliant. Staff described the key methodological drivers: a revised allocator that accounts for seasonal “peakier” residential usage, a changed allocation method for distribution assets using an average‑and‑excess approach, and a revenue‑based allocation for the general‑fund transfer (the latter reflecting council direction tying the transfer to a percent of gross revenue). Staff said reversing those methodological changes would likely require redoing the integrated study rather than a simple amendment, which would delay rates beyond the July 2025 effective date.

Public outreach and mitigation: Communications staff outlined planned outreach about the rate changes and customer programs to lower bills, saying the strategy will emphasize transparency about system investments, safety and reliability goals, and available assistance and efficiency programs. Staff also noted the cap‑and‑trade fund is eligible to be returned as a non‑volumetric customer credit and that PG&E uses that approach in its territory; the city’s legal review confirmed the credit approach is permissible and can be targeted to a customer class if council directs it.

What the commission asked next: Commissioners asked staff to provide (a) additional detail showing the cost allocators and how changes moved costs between classes, (b) a near‑term schedule for recruitment and staffing items that affect operating budgets, and (c) follow‑up on the federal grant terms. Staff said they will bring additional modeling and reserves detail to future meetings.

Discussion vs. decision: Commissioners distinguished that accepting the COSA (the technical study) is different from policy choices about transfers and credits. Several commissioners said the technical study appears defensible, but some said the commission should advise council to examine whether methodological choices produced a disproportionate residential impact.

Ending: The commission recommended the one‑time climate credit and recommended council adopt the staff‑proposed FY2026 gas forecast and rates. Staff will return with requested breakout and further outreach materials before council consideration.

Provenance: Meeting transcript excerpts from staff presentation, finance subcommittee report and final roll calls were the primary evidentiary basis for this article.