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EUC recommends shaving $20 million from Austin Energy revenues

Wednesday, October 19, 2011 by Bill McCann

The advisory Electric Utility Commission (EUC) on Monday recommended that more than $20 million be cut from Austin Energy’s proposed $1.136 billion revenue requirement that the utility says it needs to operate its system annually.


The recommended cuts include eliminating the roughly $10 million annual costs that the utility pays to operate the city’s economic development department, known as EGRSO. It also includes reductions in certain reserve funds that the utility maintains for contingencies and other purposes. Since the utility’s proposed rate increase is based on the revenue requirement, a reduction would mean a drop in the proposed rate hike.


In recent years the seven-member EUC has repeatedly advised the Austin City Council, to no avail, that electric rates should not fund economic development. This time around, EUC members hope the council will pay more attention in the context of a rate increase that could especially hit schools, churches and low and fixed-income residential customers, who are likely to put on heavy pressure when the rate issue goes to the council for a final decision.


Austin Energy says it needs $1.136 billion annually to operate its growing electric system. To meet those revenue needs, the utility has proposed an average 11 percent increase in rates systemwide. It would be the first increase in base rates in 17 years.


However, the proposed increases would vary widely, depending on the type of customer and the amount of power used. For example, some residential customers using less than 500 kilowatt-hours a month could see a 70 percent increase in bills, while the average customer using about 1,000 kilowatt-hours a month would see an 11 percent increase. A major reason why smaller users would see such a jump is because Austin Energy is proposing a big increase in the fixed customer charge (from $6 to $15) and to add an electric delivery charge on bills to be more in line with the utility says is the actual cost of service.


The EUC, which is under Council orders to make its recommendations on the proposed rate increase by the end of October, began the arduous task on Monday of wading through the technicalities – and the often-divergent arguments of various interest groups – to develop a list of proposals to the council. The EUC is scheduled to continue its deliberations at a fifth specially called meeting at 5pm on Thursday at the utility’s conference room, 721 Barton Springs Road.


After hearing from more than a dozen citizens – mostly urging the city to hold the line on rates and to encourage clean energy technologies – the EUC waded into the murky waters of Austin Energy’s revenue needs, and designing fair rates for the various customer classes to meet those needs.


The first issue the EUC addressed – and one of the most controversial – was the revenue requirement. EUC Chair Phillip Schmandt proposed roughly $14 million in cuts, mainly in utility reserve funds, as well as the roughly $10 million in cuts by dropping the economic development department. Commissioners approved that proposal 6-1. The lone dissenter was Commissioner Barbara Day, who felt the cuts did not go deep enough. 


In recommending the cuts to the utility reserves, Schmandt was relying heavily on a recommendation from Gary Goble, one of a team of expert consultants hired by the city to provide advice on residential rates. Goble came up with about $25 million in reductions to the revenue requirement, primarily cuts in reserve funds (but not including economic development). Those adjustments would drop the systemwide rate increase from 11 percent to 8.6 percent, Goble said.


However, Goble said he decided that his initial recommended cuts to reserve funds were “probably too harsh” because the utility needed flexibility in dealing with emergencies that might arise. So he came up with two other revenue-reduction scenarios that ranged between about $14 million and $20 million. Schmandt went with the lower number.


Day, who has proven to be the maverick on the EUC in the rate discussions, then pushed for $100 million in adjustments to the revenue requirement, including deep cuts in reserve funds and an increase in the percentage of capital improvement projects funded by debt instead of cash. Her proposal would have wiped out nearly all of the proposed $111 million rate increase.


That clearly upset Austin Energy officials. Elaine Hart, Austin Energy’s senior vice president of finance, said such changes would lead to huge budget reductions for the utility and subsequent layoffs next summer.


Austin Energy General Manager Larry Weis said he was surprised to hear that kind of proposal after all of the work that the utility had done on the rate package. “We would have to reinvent the utility on top of reinventing rates.”


Schmandt added his concern as well, saying that Austinites expect the utility to be a national leader, but with the kinds of cuts proposed by Day the utility could not succeed. “We are in a danger zone here.”


Day then broke her proposal into three separate motions, all of which failed.


The revenue-requirement issue is not likely to go away with the EUC votes, however. Both citizens groups and industry representatives – some of whom believe that the revenue requirement could be cut by roughly $50 million with no harm to the utility – are expected to take their arguments directly to the council when the issue moves over to that venue later in the year.

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