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Duncan outlines challenges facing Austin Energy

Wednesday, November 4, 2009 by Bill McCann

Austin Energy’s top official has issued a red alert on the financial and operational future of the city-owned utility.


At a City Council work session on Wednesday, Austin Energy General Manager Roger Duncan pronounced the utility financially sound, but said the Council will need to make some hard decisions on several issues, including transmission costs, the utility’s general-fund transfer and a rate increase, for it to stay that way.


The utility has not increased the basic rates charged to customers since 1994, and a rate increase is way overdue, especially given the long list of innovative and successful programs that the utility has undertaken since then, Duncan said.


While the utility’s financial situation is not dire, Duncan said the sooner the Council provides direction, the more time utility staff will have to do the necessary preparatory work.


“We have a lot of work to do and need direction and time to do it,” Duncan told In Fact Daily.


On the positive side, Duncan said, Austin Energy has a number of things going for it, including a diverse customer base, good cash reserves, excellent bond ratings and moderate debt. “But there are financial storm clouds on the horizon,” he said.


First, he said, Austin Energy has an aging workforce, a problem facing the electric utility industry in general. But at Austin Energy it is particularly worrisome. For example, Duncan explained, 35 to 40 percent of Austin Energy’s workforce will be eligible to retire in 2010-2011, and almost half of the power-production workforce will be eligible to retire during that same period. About 40 percent of employees working in the energy conservation area are eligible to retire now.


Also, 61 percent of the utility’s management jobs are either vacant or eligible to retire within five years. (Duncan himself announced recently that he will retire in March and a search will soon be under way for his replacement.)


To deal with this workforce issue, Austin Energy is taking a number of actions including mentoring, streamlined training, stepped-up recruiting, internships, and job rotation to develop and discover talent within the organization, Duncan said. He recommended that the city implement a market study, meaning somewhat higher salaries for some management employees, in order to help keep them at Austin Energy. 


Duncan also identified three key problems on the financial side:


Cost of electric transmission. The state’s utilities are obligated to pay their share of transmission lines in the state grid. Austin Energy’s cost will be about $64 million in fiscal year 2010 for using the grid. About $49 million will be covered in current electric rates. By 2010 the cumulative amount under-recovered is expected to be almost $21 million, and that number could balloon to $309 million by 2015 unless an adjustment is made on customer bills. Meanwhile, the Council postponed until the next fiscal year (2011) the addition of a transmission-cost rider to the bills of Austin Energy customers to begin recovering transmission costs fully. Utility staff recommends adopting the transmission rider in the next budget.


General fund transfer. Austin Energy is a cash cow for the city. The utility will transfer more than $100 million into the city’s general fund this fiscal year, saving the city from either raising taxes or substantially reducing services. The amount transferred is calculated based on 9.1 percent of the utility’s gross revenues (a higher percentage than other comparable public utilities). This includes fuel charges, which are passed directly through to the customer at no profit to the utility. The cost of fuel has kept going up, causing the utility’s net income to decline. City staff recommends studying several options and coming back to the Council with a recommendation.


Rate Increase. Despite a variety of new programs, including conservation, solar rebates and “smart” meters, and increases in the general fun transfer and cost of electric transmission, Austin Energy has not raised its base electric rates in 15 years. The utility’s forecast for the past several years has demonstrated the need for a rate increase. As operating costs grow, there would be less funding available for capital projects without a rate increase, or alternatively, programs would have to be dropped. The utility staff recommends that new rates be developed and that an increase be effective in October 2012. Since the 14 largest industrial customers have a separate contracted rate until May 2015, they would not be affected by the 2012 increase. Instead, the increase would be borne by residential and commercial customers.


Meanwhile, there are other potential challenges facing Austin Energy, especially if it continues to be successful in reducing customer energy use through its energy efficiency and solar rebate programs, according to Duncan. If revenues drop due to the success of these green energy programs, the utility will have a growing problem recovering fixed costs, such as labor, poles, lines and other equipment.


As a result, Austin Energy will need to study a variety of options, including unbundling rates, developing new rate designs, and exploring new products and services, Duncan said. The utility will need to look at the possible benefit, in terms of rate of return, of owning future renewable energy facilities rather than buying power from privately owned ones like the solar power plant to be built east of Austin, he added.

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