Palo Alto spends more than $60 million every year to fulfill its pledge of buying carbon-free electricity, but the city's oversight of these contracts has some room for improvement, a recent audit has found.

Baker Tilly, the firm that functions as Palo Alto's city auditor, conducted a deep dive last year into the city's power purchase agreements, multiyear contracts that Palo Alto Utilities relies on to fulfill its goal of providing carbon-free electricity to local businesses and residents. The city currently has 15 such contracts in place: six for solar power, five for biogas (natural gas that is produced from landfills), two for wind energy and two for hydroelectric power.

On Monday night, the City Council is scheduled to approve the Baker Tilly audit, which concluded that the Utilities Department falls short in several areas when it comes to ensuring that the companies that provide the city with power comply with all the provisions of the purchase agreements.

City Auditor Kyle O'Rourke, who serves as principal for public sector advisory at Baker Tilly, said the firm decided to conduct the review both because of the large dollar amount that the power purchase agreements represent and because of their central role in helping the city meet its sustainability goals. Carbon neutral electricity is a critical component of Palo Alto's movement to cut greenhouse gas emissions by 80% by 2030, with 1990 as the baseline.

The city has already cut its emissions by about 42% (or by 50.6%, if one factors in the decline in transportation-related emission during the pandemic) and the city's move toward carbon-neutral electricity represents about half of the reduction, according to Department of Public Works staff. The city is also banking on getting residents and businesses to switch from gas appliances to electric ones and to further accelerate adoption of electric vehicles — efforts that bank on a reliable source of clean electricity.

In introducing the audit to the council's Policy and Services Committee last November, O'Rourke said his firm wants to make sure that the city's management of its contracts is operating effectively in light of the sustainability goals.

"It's really critical that you're purchasing renewable energy to meet those goals and this is the mechanism through which you do that," O'Rourke said.

One area of concern was the city's process for keeping tabs on the power vendors, which has generally entailed informal meetings and status updates from the companies. The audit acknowledges that documenting companies' compliance with the agreements can be difficult given the nuances and complexities of power purchases. It argued, however, that formal reviews should be periodically conducted so that any issues are identified in a timely manner.

"Otherwise, vendor compliance or performance issues may not be documented appropriately, resulting in delayed or inadequate communication throughout the City, which poses a greater risk of maintaining a relationship with the vendor for a longer than ideal period of time," the audit states.

The audit also concluded that the front office operation in the Utilities Department – which is responsible for creating models for electricity use and for executing the energy contracts – does not have a formal process for reviewing and approving changes to its models. And it found that Palo Alto Utilities relies primarily on the Northern California Power Agency, a consortium of municipal utilities, to validate vendors' invoices, contract rates and payments. The audit recommends that the city establish a formalized process to validate invoices and rate calculations completed by the NCPA.

"Without proper rate review processes, payments for amounts charged at incorrect rates could be processed, and inaccurate financial reporting may occur," the report states.

Utilities Director Dean Batchelor told the committee that the city concurs with all the findings of the audit and has already taken steps to address them. As a result of the audit, the Utilities Department has created a checklist that contract managers now use as part of compliance reviews, according to the management's response to the audit. They will also report any issues with compliance to management on at least a quarterly basis.

The Utilities Department also noted in its response that the city now checks all the contract rates internally prior to approving its monthly payments and documents these checks. Utilities staff also plan to do an annual audit of power-purchase agreement invoices to make sure that the NCPA's figures are accurate. And any front-office changes to forecasting models are reviewed and approved by a senior resource planner.

The audit also lauded the city for its expertise, noting that utilities staff has been procuring renewable energy for about 20 years and that staff have displayed "a thorough understanding of processes and practices associated with their roles."

"In addition to developing and managing key processes, they exhibited expertise and knowledge of the power industry, current trends and best practices," the audit states.

The Policy and Services Committee voted 2-1 in November to approve the audit, with council member Greg Tanaka dissenting. Tanaka argued that the city should review its entire process for crafting forecasting models for energy use and that staff should optimize its modeling, a task that his two committee colleagues, Lydia Kou and Greer Stone, deemed to be well beyond the scope of the audit.

"This is a chance to actually look at everything as a whole. … Given the nature of what we're doing, I think it does make sense for us to review how we're doing on our forecast," Tanaka said.