Responding to a dramatic spike in gas utility bills, the Palo Alto City Council is preparing to offer rebates to residential customers.

The council has yet to determine exactly how large the rebates would be, but members signaled by a unanimous vote that they would like them to amount to about 20% of the January or February gas bill, whichever is larger. They also indicated that they will explore future rebates for electricity bills, which also have been on the rise.

The decision followed two months of horror stories from residents about their gas bills doubling or tripling in January and February, a hike that the city attributed largely to increasing commodity prices. Utilities Director Dean Batchelor attributed the spike to a sharp increase in gas commodity prices, which he said were five times this past January than in January 2022. Batchelor noted in an opinion piece last week that he expects the March bills to be significantly lower with the commodity rate dropping from about $4 per therm in January to $1.26 per therm in February.

The recent increases have prompted a litany of complaints from residents who have seen their bills spiral out of control.

"What you are doing now is simply price gouging your residents," resident Keith Ferrell wrote to the council this week, noting that his gas bill had gone up by 210%. "This is not simply a matter of the city paying more for their gas and passing it on to the consumers. Someone needs to explain why these prices have jumped dramatically and what is being done about it."

Resident Parul Sharma's bill in January totaled $1,500, three times the norm, even though the household's consumption patterns haven't changed, Sharma wrote to the council.

"The city cannot pass on its inefficiency to its residents. No other neighboring cities are experiencing this spike. We pay exorbitant sums to buy homes here and pay high California taxes," Sharma wrote.

At the same time, the city has seen its budget outlook brighten midway through the current fiscal year. According to staff from the Administrative Services Department, the city had a surplus of about $40 million in fiscal year 2022 thanks to lower-than-expected expenditures and recovery of key revenue sources at a faster pace than had been anticipated. But with expenses slated to increase by about $50 million in the current fiscal year, which began on July 1, the forecast predicts no surplus in the coming year.

Council member Greg Tanaka questioned staff about the 2022 surplus, which he said came as a "surprise" to him and others.

"It just seems like we're pouring salt into the wounds for people," Tanaka said. "The rates keep going up even though some of the underlying commodities are not. Yet we're showing a $40 million surplus, which I don't think is right."

City Manager Ed Shikada and Chief Financial Officer Kiely Nose both pushed back against Tanaka's characterization of the surplus as a "surprise," noting that the revelation was consistent with the city's regular calendar, which includes audits in the fall and the creation of the long-range forecast at the end of the year.

"We have perhaps been too responsive in setting an expectation that the information is available sooner than the traditional calendar," Shikada said, in response to Tanaka.

The council approved the long-range financial forecast for the years 2024 to 2033 by a 6-1 vote, with Tanaka dissenting. The council then voted unanimously to approve a series of mid-year budget adjustments, including approval of 5.75 new full-time positions, including a court liaison officer in the Police Department, two city planners, a division manager in the Community Services Department and about 2.73 positions in the Library Department.

As part of the vote on the mid-year adjustments, the council directed staff to return with a specific recommendation about a rebate that would equate to about 20% of the gas bill for either January or February, whichever month is higher. Council member Julie Lythcott-Haims advocated for the rebate, noting the "unique circumstances" of having sharp rate hikes coincide with a large budget deficit.

Staff estimated that a rebate of 10% for all December and January residential bills would equate to about $1.3 million. A 20% rebate for January would be about $1.7 million, Shikada said.

"I think our residents are looking for relief form a city that's had such a massive surplus," Lythcott-Haims said.

She also noted that because some households, including her own, have electrified most of their gas appliances, the city should also offer rebates for electricity bills. The council had recently raised the rates by about 20% to account for the drought and its impact on the city's hydroelectric supplies.

Lythcott-Haims ultimately agreed to a compromise proposed by council member Pat Burt: move forward with the gas rebates first and then consider rebates for electricity at a later date.

"They didn't go up equitably," Burt said. "Gas went way up, and electricity went up significantly."