I. RECOMMENDATION:
Financial Services Director recommends City Council adopt Resolution No. 4113 increasing natural gas rates by 50 percent effective September 1, 2022 for one year. This increase will be for one year only, allowing gas rates to return to their present level September 1, 2023, unless staff and City Council takes further action prior to that date. The Resolution further requires staff to present a long-term gas purchase plan to City Council by April 1, 2023.
II. BACKGROUND:
For ten years into 2021 wholesale gas costs remained low; however, gas costs have continued to escalate dramatically. System operating costs have continued moderate and little capital work has been performed. The result has been a long period of very low gas rates. On December 1, 2021, rates were increased 45 percent to cover increasing costs, mainly for wholesale gas purchases. The increase last year was also to protect an adequate fund balance for the natural gas enterprise.
III. DISCUSSION:
After the rate increase December 1, 2021, wholesale gas costs increased more than projected and PG&E imposed a pass-through surcharge on the City for the greenhouse gas cap-and-trade program, administered by the California Air Resources Board. Further, wholesale gas costs for this coming winter are projected to be higher than last winter because of uncertainty caused by war in Ukraine, hot summer temperatures in the US, lack of hydro-electric power, and environmental pressure on fossil fuels. Consequently, another increase is needed, especially for this winter. Fortunately, the gas futures market shows prices decreasing after this winter. The strategy for this proposed increase is to make it for 12 months only, then allow rates to come back to the present level. This will require action by staff and City Council in September 2023 to reset rates based on actual conditions at that time. The Resolution further requires a long-term gas purchase plan to avoid extreme gas cost swings in the future. A natural gas study, dated July 26, 2022, has been prepared by Dan Bergmann of IGService and is attached to this staff report.
IV. ALTERNATIVES:
Not approve Resolution No. 4113 Increasing Natural Gas by 50%.
V. FISCAL IMPACT:
The recommended 50 percent increase will maintain the gas fund enterprise cash balance at roughly $1.0 million through this winter, based on current projected wholesale gas prices. The amount of increased revenue through August 2023 will be approximately $1.4 million. The increase in cost to a typical residential customer will be an average of $19 per month compared to the past 12 months. | | |