Finance committee forwards 2026 gas cost-of-service study and amended rates to council

The Palo Alto Finance Committee voted unanimously to forward to the City Council staff's recommendation approving the 2026 natural gas cost-of-service analysis (COSA) and accompanying revised gas rate schedules.

Staff from the Utilities Department, led by Director Alan Curatori and Senior Resource Planner Lisa Belair, presented the study and described four primary methodological refinements that drive the proposed rebalancing of rates. The changes include: (1) recalculating monthly service charges using each customer's meter cost via a weighted average; (2) splitting the G2 commercial/multifamily class into three service-charge tiers based on meter capacity; (3) applying an "average-and-excess" allocation to separate energy-related costs from demand-related (peak) costs; and (4) moving to a base-and-excess approach for residential tiers, which staff said results in a roughly 15-cent increase in tier 1 and a 23-cent increase in tier 2 as shown in staff charts.

Staff said the combined effect of the study produces an estimated median residential bill increase of about 8% at median usage levels, with smaller and varying impacts across commercial subgroups. The presentation noted the gas utility holds roughly $15 million in a cap-and-trade reserve and showed approximately $400,000 in FY25 interest income available for targeted uses; staff emphasized that allowable uses of cap-and-trade auction revenue are constrained by council policy.

Public and committee comment focused on accounting choices and equity. John Melnichuk of Quiet Zones Palo Alto used the public-comment period to press for funding to implement quiet zones following a recent council vote. Hamilton H., speaking on Item 1, commended the clearer reporting but criticized what he described as a discretionary change in meter accounting that added installation labor to meter cost calculations, stating that caused meter costs to rise (he cited a change from about $73 to $414 per residential meter in comparison to the 2020 COSA) and shifted costs from small businesses to residential customers. Hamilton said the reduction in fixed fees for a subset of small G2 customers (described in staff materials as dropping from $170 to $29 per month for one subgroup) could discourage electrification. Staff did not accept the characterization as an error but acknowledged methodology choices and pointed to the UAC subcommittee review and consultant inputs.

Committee members asked technical questions about which pass-through charges would keep caps and which would be uncapped. Staff clarified the commodity pass-through cap remains in place because of the council-approved hedging program; staff recommended removing caps for the cap-and-trade and transportation pass-throughs while retaining council-approved limits on carbon-neutral gas offset programs.

UAC Commissioner Utsoff Gupta and several committee members praised the study's transparency and the UAC subcommittee's involvement; Gupta said the updated mechanics make residential costs more affordable than a straight update of the 2020 methodology would have produced. After questions, a committee member moved to adopt the staff recommendation; another seconded and the committee voted aye unanimously.

Next steps: The committee forwarded the recommendation to City Council for formal action on the COSA and amended rate schedules. The council will consider the resolution to adopt the 2026 COSA and associated rate schedule changes at a subsequent meeting.