Finance committee delays gas rate decision after debate over new cost‑of‑service study and distribution of impacts

The Palo Alto City Council Finance Committee on April 15 extensively debated a proposed FY26 gas financial forecast and a newly completed cost‑of‑service analysis (COSA) that staff said reallocates costs among customer classes and, as modeled, would raise the median residential gas bill by about 22% (roughly $15.20 per month).

Carla Daley, assistant director of utilities, introduced the gas item and reminded the committee that cost‑of‑service studies are performed roughly every five years and must align with legal limits such as Proposition 26. Lisa Belier summarized the staff recommendation and the Utilities Advisory Commission’s (UAC) suggestion to use cap‑and‑trade‑derived funds to provide a one‑time $73.20 climate credit to reduce the immediate impact on residential customers to about 13% for FY26; staff estimated that credit would cost about $1.6 million.

Why it matters: staff told the committee the new COSA uses a more granular ‘‘average‑and‑excess’’ allocation method and subdivides the large G2 commercial/multiunit customer class by meter capacity. That refinement shifts charges between classes: some small commercial and master‑meter multifamily accounts would see lower rates while many smaller residential accounts would see larger percent increases because of how fixed monthly service charges and volumetric tiers were reallocated.

Key details - Median residential impact: staff presented a 22% increase for the median residential gas customer (about $15.20 per month); the UAC recommended a one‑time $73.20 credit paid from cap‑and‑trade funds to reduce the year‑one impact to about 13% (staff estimated the credit at ~$1.6 million). - Drivers: staff cited reserve replenishment after recent drawdowns, increased labor and allocated administrative costs, and project spending in the CIP supported in part by an expected federal grant of $16.5 million; staff also modeled a general fund transfer at the 18% level (about $9,735,000) as previously directed by council. - Methodology change: the consultant applied a more detailed average‑and‑excess method and subdivided the G2 class by meter capacity; staff said that produced more granular allocations that better reflect meter sizes and usage patterns but produce large shifts in near‑term bills for some customers.

Committee concerns and public comment Committee members repeatedly asked whether the changes were caused primarily by real changes in costs or by a different consultant methodology; several members and public commenters said the allocation produced unexpectedly large increases for low‑volume residential customers and urged delaying adoption. A letter read at the meeting on behalf of Palo Alto Neighborhoods (PAN) urged the committee to retain the currently adopted COSA for another year and to apply the FY26 5% gas increase uniformly across customer classes while the new study is reviewed.

Legal and procedural context City legal counsel Kyle Arellano told the committee that both the prior (2020) study and the newly proposed COSA are defensible under Proposition 26’s requirement that utility rates reasonably reflect cost of service; he said the law gives little room for policy‑driven rate design unrelated to cost allocation. Committee members noted that choices about whether to apply the new COSA this year or to defer to the prior study would shift costs between customer groups and carry political and financial risk.

Next steps requested by the committee Committee members asked staff to return with follow‑up materials before final budget and rate decisions: (1) options or examples showing the effect of using the 2020 COSA for one more year versus adopting the new COSA; (2) illustrations of applying a larger or differently apportioned climate credit (including whether the credit could be split between gas and electric or spread across monthly bills rather than provided as an annual lump sum); and (3) clearer, line‑item examples that show which assets and allocators drive the biggest changes in the G1 and G2 charges. Staff and counsel said those follow‑ups will be scheduled during the May utilities budget and council study sessions (May 7 utilities budget, May 12 council study session, May 20 follow‑up committee meeting).

Sources and attribution This article uses statements made by Carla Daley (Assistant Director, Utilities), Lisa Belier (Senior Resource Planner), Kyle Arellano (Chief City Attorney) and public commenters as recorded in the April 15, 2025 Finance Committee transcript.