UAC urges city council to limit FY27 gas-rate hike to 7% after debate over decline, grants and reserves

Chair Sharf convened the Utilities Advisory Commission to hear staff recommendations on Palo Alto’s FY27 gas utility forecast, a package that initially proposed a 9% overall rate increase (a 14.5% increase in distribution rates) that staff said would translate to about $7.30 per month for a typical residential customer. Utility staff highlighted large, near-term capital needs — including gas main replacement projects (GMR 25 and 26) — and a $16.5 million federal grant that must be spent in the coming two years and that constrains the city’s ability to reduce CIP spending.

Utility Director Alan explained the proposal and why it assumes both lower gas sales and elevated capital spending: “We are federally regulated to ... actively manage and invest and maintain the gas system,” he said, adding the grant-supported main work contributes to a lumpy near-term CIP profile. Resource planner Eric Wong summarized the financials: “Roughly a third of our rate is supply related. ... The remaining two‑thirds are distribution rates ... and these are the rates under consideration tonight,” he said.

Why it matters: commissioners repeatedly pressed staff over whether the forecast understates or omits decommissioning costs and whether the utility should keep investing heavily in a business with declining therm sales. Several commissioners also pressed staff to explain key assumptions that reduce the forecasted commodity burden — notably a projected decline in gas commodity costs and a sales decline tied to electrification and mild weather.

Commission debate and motion: Commissioners split over the tradeoffs between assuring system safety/reliability and limiting near-term customer impacts. Some members said underinvesting in mains would risk safety and future costs; others said the city should avoid add-on investments while it studies possible transition paths away from gas. After extended discussion the commission moved a recommendation to council: maintain an overall FY27 gas-rate increase of no more than 7% using a combination of reducing the general-fund transfer and other levers such as reserves. The motion asked the finance committee to analyze options and returned authority to staff to implement changes needed to meet that 7% ceiling. On a roll call the motion passed 4–3.

What the commission directed: The UAC’s recommendation asks staff and the finance committee to identify which combinations of actions (for example, lowering the level of the planned general-fund payout under the voter-approved measure, drawing on restricted or stabilization reserves, and other limited adjustments) could achieve a 7% net increase while preserving the city’s eligibility for grant funds and meeting safety obligations for gas mains.

What is next: The recommendation goes to the City Council for final action. Staff reiterated that the $16.5 million grant requires continuing CIP at specified levels for grant eligibility, meaning choices about lowering CIP or pausing projects could jeopardize those funds. Commissioners asked staff to provide clearer sensitivity tables showing how changing the general-fund transfer, reserve withdrawals or CIP timing would change the required rate increase.

Ending: The UAC concluded it would send the 7% policy direction and asked the finance subcommittee to return with concrete dollar scenarios for council consideration.