1 Utility Rate Projections and Changes Facility Managers Meeting February 11, 2015

2 Preliminary Rate Projections FY 2016FY 2017FY 2018FY 2019FY 2020 Electric Utility0%5% 3%2% Gas Utility*3%4% Wastewater9% 7% Water Utility7% 3% *Gas rate changes are shown with commodity rates held constant. Actual gas commodity rates will vary monthly with wholesale market fluctuations

3 Cap-and-Trade  Part of California’s Global Warming Solutions Act – Goal is state-wide greenhouse gas reduction – “cap” decreases each year – One allowance = authorization to emit one metric ton of carbon dioxide equivalent – Covered entities purchase “allowances” for emitting greenhouse gases – Allowances can be traded between entities

4 Electric Utility Subject to Cap and Trade since November 2012  Generators have to purchase allowances, will pass on costs to wholesale buyers (like Palo Alto)  Palo Alto gets free allowances and sells to counteract increased cost to rate payers – Purchases in renewable resources – keeping our electric resource mix 100% carbon neutral; – Programs and rebates to improve energy efficiency; and – Rebates to electric ratepayers.

5 Gas Utility Subject to Cap and Trade since January 2015  Palo Alto has to purchase allowances to cover greenhouse gas emissions from gas customers  Palo Alto also gets some free allowances and sells to counteract increased cost to rate payers – Programs and rebates to improve energy efficiency; – Purchases of or investment in bio-gas; – Investment in carbon reduction activities including projects to reduce emissions caused by leaks; and – Rebates to gas ratepayers.

6 Adopted Gas Rate Changes  New line item to reflect Cap-and-Trade costs – Pass-through of the cost of allowances – Updated quarterly – Range of $0.00 to 0.25 per therm  Combine Administration and Transportation rate components with Distribution – Administration ($ per them) and Transportation ($ per therm) added to each distribution rate tier – Change is revenue neutral – Simplifies bill presentation