Palo Alto advisory commission backs 10% water rate increase, urges use of savings to shore reserves

The Utilities Advisory Commission on Tuesday recommended that the City Council adopt a 10% increase in water rates for fiscal year 2026 and urged that any cost savings identified by staff or the commission be applied toward reducing the planned draw from rate stabilization reserves.

Commissioners said the increase seeks to balance operating cost pressures and depleted reserves against the long-term cost of deferring capital projects. Lisa Belair, senior resource planner, told the commission the proposal relies on using $3 million from the rate stabilization reserve in FY25 and $1 million in FY26 and deferring about $7.1 million of capital improvement projects across the five‑year plan to keep the near‑term rate increase at 10%.

The commission’s recommendation follows staff analysis showing wholesale supply costs from the San Francisco Public Utilities Commission (SFPUC) are uncertain. Belair said staff used a 2% SFPUC wholesale rate assumption and a 17% distribution increase to reach the 10% combined proposal for 2026. She also described an alternative that would finance two major tank projects with debt to reduce outer‑year rate pressure to about 7% and defer less capital.

Commissioners pressed staff on options to reduce operations costs, coordination across underground projects and opportunities to realize economies of scale by aligning street work with other utilities. Matt Zuka, assistant director for water, gas and wastewater engineering and operations, said the utilities are overlaying below‑ground asset maps to identify locations where larger consolidated projects could reduce design and administrative costs and neighborhood impacts. He also said CCTV inspection already used for sewer pipelines is being accelerated to allow more targeted repairs and extend asset life.

Several commissioners and the budget subcommittee recommended two near‑term savings ideas staff could pursue: (1) pass through credit card processing fees rather than absorbing them (estimated annual savings roughly $1.2 million across utilities), and (2) seek waivers or policy changes for electric vehicle replacements where all‑electric heavy utility vehicles are not available or cost multiple times the fossil‑fuel alternative (identified budget line roughly $1 million in water for vehicle replacement). The commission asked that any realized savings be applied to reduce the reserve draw planned for FY26.

Belair said staff will adjust the proposed CIP if SFPUC’s final wholesale rate differs from current assumptions and that the goal is to hold the overall 10% number while adjusting which levers (CIP deferral, reserves, debt) are used. The commission voted 7–0 to recommend the council adopt the 10% water rate proposal and to forward the subcommittee’s cost‑savings suggestions to council for consideration.

The commission’s motion asked staff and council to prioritize applying cost savings toward reserve restoration rather than reinstating deferred capital, and to return with updates if SFPUC final rates differ from the current assumptions.

The recommendation now proceeds to the city’s finance committee and then to the City Council for final adoption and the Prop 218 notice schedule.

Votes at a glance: The commission voted 7–0 to recommend the 10% FY26 water rate proposal and to encourage council to apply cost savings toward reserve reduction rather than additional capital spending.