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Debate centers on annual budget for Austin Energy operations

Thursday, October 6, 2011 by Bill McCann

How much money does Austin Energy need annually to run its electric system reliably?


That was the $1.136 billion question at a special meeting of the advisory Electric Utility Commission (EUC) on Monday, as more than a dozen representatives of religious groups, hospitals, schools, office buildings, and large businesses took their turn to discuss Austin Energy’s proposed increase in electric rates.


Much of the discussion centered on Austin Energy’s proposed $1.136 billion annual revenue requirement – the amount the utility says it needs to operate – and the basis for the proposed rate increase. Several speakers, and a persistent EUC member, suggested that the utility needs to take a hard look at cutting costs before finalizing its rate recommendations. Austin Energy officials – and their rate consultant – maintained, however, that the revenues are necessary, prudent, and consistent with how other publicly owned utilities operate.


One speaker, Marilyn Fox of Fox, Smolen & Associates, suggested that the utility could reduce its revenue requirement by almost $46 million, thereby cutting the proposed systemwide rate increase from 11 percent to 7 percent.  Fox, whose firm was hired by Data Foundry, a major power user in Austin, to review the rate package, said Austin Energy’s financial policies and its interpretation of those policies essentially eliminate its short-term financial risks and shift the financial burden to ratepayers.


“Austin Energy should share the financial burden with ratepayers,” she said.


Monday’s meeting was the third of four scheduled by the EUC, which is reviewing the rate package – the first change in base rates in 17 years – before making recommendations to the City Council later this month. Two weeks ago the EUC heard from various consumer advocacy groups concerned about the effect of proposed increases in rates on residential customers, particularly low-income customers.  At Monday’s meeting, the focus was on commercial and industrial rates, which generally would see lower percentage increases than residential rates under the Austin Energy proposal, with some exceptions.


What the EUC has continued to hear at its public meetings is that, while rates need restructuring, there are significant differences of opinion as to how much money the utility needs, how much rates need to be increased to meet those financial needs, and how that increase should be divided among the various rate classes. At times, the debate, particularly some of the discussion Monday, has delved into the intricacies of utility financial planning, providing a preview of what could be expected if the issue eventually ends up in a rate case at the Public Utility Commission of Texas.


Many of Monday’s speakers had positive things to say about Austin Energy’s efforts to restructure its rates, including the methodology used to determine the cost of serving the various customer classes, and the need for a community benefit charge in the rates to assist low-income families. But a big sticking point was the revenue requirement. Some of the most pointed comments came from Fox – a former staffer at the Public Utility Commission and former financial manager at the City of Austin – and from Barbara Day, recently appointed to the EUC by Council Member Kathie Tovo.


In recommending a $45.7 million reduction in the revenue requirement, Fox said the biggest savings would come if the utility set its debt service coverage to 2 times instead of its requested 2.24 times coverage. Debt service coverage is essentially what the utility needs to pay its debt yearly, plus a financial cushion that can be used to cover other costs, such as contingencies and operating expenses. Debt service coverage of 2 times, for example, is twice, or 200 percent, of what is needed to pay down debt.


Day jumped into the fray over debt service coverage, arguing that the utility may be double-counting several reserve funds, which also are in the revenue requirement to account for various contingencies.


But Austin Energy officials and the utility’s rate consultant, Joseph Mancinelli, a vice president at SAIC Energy, Environment & Infrastructure, LLC, defended the utility, saying there was no double-counting, but there was some misunderstanding. They pointed out that Austin Energy uses a well-accepted cash-flow methodology to calculate the revenue requirement. So the debt service coverage does not impact the revenue requirement unless the times coverage falls below 2. City financial policy states that the revenue requirement based on the cash-flow method must generate a minimum times coverage of 2. Therefore, 2 is the floor. Setting debt service coverage at 2, makes it the ceiling, rather than the floor, and does not give the utility the financial flexibility that it needs, they argued.


Fox told In Fact Daily later that she disagreed with the utility’s explanation. “They are saying that if the times coverage drops below 2, they will need another rate increase. But if it is over 2, it’s more revenues for them.”


The revenue requirement also was an issue two weeks ago when Gary Goble, a consultant hired by Austin Energy as part of a contract for a residential rate advisor, told the EUC that he had several questions and concerns. As a result, the EUC asked Goble to meet with utility financial staff and report back. 


In his follow-up report Monday, Goble the utility had answered some questions to his satisfaction, but some remained. For one thing, he said, the utility has not justified funds included in the revenue requirement for decommissioning non-nuclear facilities, he said. For another, the utility has not provided enough evidence to support requested funding levels for its reserve funds, he added.


Day also argued that by including money for a “rate-stabilization” reserve fund in the revenue requirement, Austin Energy was “loading up” more revenues than needed in order to get money now to meet a city affordability goal that limits future rate increases to 2 percent.“You are loading up now to meet a future cap,” Day said. “To me, there seems to be something wrong with this picture.”


Under questioning from EUC Chair Phillip Schmandt, Austin Energy General Manager Larry Weis said the utility would review the various issues that have been raised before coming up with its final recommendations.


“If you are hearing things that might make you consider changing the revenue requirement, we would like to know about it before making our recommendations to the Council,” Schmandt replied.


The revenue requirement was not the only issue raised at Monday’s meeting. Several representatives of religious groups voiced concerns that the rate structure proposed by Austin Energy for worship facilities would cause significant rate increases, which in turn could impede efforts by the organizations to provide needed social services in the community. Under the current system, worship facilities – which typically need most of their power on a few days of the week – can choose whether they want their facilities to fall into the residential or the commercial class. Under the proposed structure, they would fall under commercial, and their usage pattern would work against them. The new rates would have a three-year phase-in.


Stephen Reeves, representing the Texas Baptist Christian Life Commission, estimated that 619 churches would be required to switch, and 263 of those, or 42.5 percent, would see their rates increase by 49 percent or higher. He suggested that Austin Energy consider adopting something similar to El Paso, where churches have a “safety net” limiting increases to 20 percent.


Representatives of several school districts that have facilities in Austin Energy’s service area also voiced concerns about the impact of the proposed rates.


Wesley Perkins, representing the Round Rock Independent School District, said Austin Energy recently informed local school districts about the impacts of the proposed rates and those impacts would be substantial. For example, he said, Austin ISD would see a 25 percent increase; Pflugerville ISD, a 28 percent increase; and Round Rock ISD, a 38 percent increase.


The cost of power from Austin Energy, which supplies the Round Rock ISD about one-quarter of its power needs, would go from about 8.9 cents per kilowatt-hour to 12 cents under the proposed rates, Perkins said. Meanwhile, the combined price of other utilities supplying Round Rock schools outside Austin Energy’s service area will be about 9 cents a kilowatt-hour next year, he added.

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