Palo Alto prepares for another utility rate hike

Utility rates in Palo Alto are slated to go up by another 9% next summer, adding $36.40 to the median residential utility bill, according to new projections from the Palo Alto Utilities Department.

For local ratepayers, this round of increases is the latest in a pattern of annual rate hikes. Utility rates similarly went up by 9% last summer and Utilities Department staff projects further hikes between 7% and 9% in each of the four years after 2025. According to staff, the monthly residential bill is about $402 this year.

The reasons for the increases vary from year to year for each of the city’s six municipal utilities. In the current year, ratepayers saw gas and electric rates go up by 13% and 9%, respectively, while water rates went up by 9% and wastewater rates rose by 15%. Next year, the hike to the electric and gas rates would be comparatively modest — 5% and 6%, respectively — while water and wastewater rates will see hikes of 18% and 14% each. Combined, the water and wastewater rate hikes are projected to add $26.30 to the median bill.

Refuse and stormwater rates are set to remain relatively flat, with staff projecting no increases to the former and a 3% increase the latter, which would add $0.40 cents to the median residential bill.

The increase in water rates is required to make needed repairs to the distribution system, according to the Utilities Department. The city’s supplier, the San Francisco Public Utilities Commission, had indicated that it does not plan to raise rates for water sales in fiscal year 2026, which begins on July 1. However, the cost of maintenance is higher than the city had previously projected, according to a new report from Lisa Bilir, senior resource planner at the Utilities Department.

This preliminary rate increase is necessary to pay for inflationary cost increases and continued lower water sales, while performing the necessary maintenance and replacement activities that contribute to the safe and reliable provision of high-quality water to Palo Alto residents and businesses,” the report states.

Water usage in Palo Alto has been gradually declining, according to utilities staff, driven by conservation measures that customers had adopted during the drought in fiscal years 2022 and 2023. To offset the decline in revenues and avoid rate spikes, the city tapped into its operating reserves in each of the last two years to cover the costs of operating the system.

Now, the city is looking to replenish the reserves so that it can undertake various capital projects, including main replacements and rehabilitations of reservoirs, according to Bilir.

“The Water Utility has used or planned for the use of all possible reserve funds to offset costs and set rates at a level that is below the utility’s actual costs throughout the pandemic and drought,” Bilir wrote. “However, the reserves have now reached a point where rate increases are needed to pay for distribution system costs.”

Staff expects the water rate increases to continue over the next five years, with another 14% hike slated for fiscal year 2027, followed by increases of 10%, 9% and 9% in the following three years. Each increase will add between $15 and $18 to each residential bill, according to projections.

Wastewater rates will also see a surge, with next year’s 18% increase followed by two years of 15% hikes, adding about $10 to a median bill in each of the next three years. This is due to a combination of rising costs and higher flow share than were previously projected, according to staff.

The Wastewater Collection Utility experienced increased wastewater treatment costs due to a higher flow share compared to the prior year forecast and operating cost increases. Total operating costs are expected to go up by $6.2 million, or 14%, over the next five years.

The city report notes that the rate will remain about 6% below neighboring cities, assuming their rates remain flat.

The City Council’s Finance Committee and the Utilities Advisory Commission are set to discuss the new projections on Dec. 3 and Dec. 4, respectively. The rates will undergo further reviews next spring before the council adopts them in June.