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Austin Energy electric rates continue to demand Council’s attention

Friday, January 27, 2012 by Michael Kanin

Tuesday is shaping up to be a big day in the ongoing debate over a proposed Austin Energy rate hike. That’s when Austin City Council members are slated to again discuss the matter as part of their regular work session. After a meeting between City Manager Marc Ott and Austin Energy General Manager Larry Weis set for today, Weis indicated he will have a revised rate plan in time for that meeting.


Weis clarified at least one lingering question on Thursday. When pushed by Council Member Chris Riley about a deadline for the new rates to be in place, Weis responded that “you want to have them in place for the summer.” Weis had already explained that it would take about 90 days to change the city’s billing system and Riley concluded that a final Council vote on the matter would have to come in March to allow the new rates to take effect by the beginning of the all-important summer season.


Although Weis was officially before Council Thursday to give his regularly scheduled quarterly briefing, Council remained focused on the more contentious rate issue.


“Larry, you have done a phenomenal job of coming before us a number of times and trying to lay out the case for the rate proposal and understanding what’s going on with Austin Energy in general,” said Mayor Pro Tem Sheryl Cole. “But I still want to ask you some questions that may seem kind of simple…I think we have to get it in simple terms because we have to explain what we’re considering doing to the public.”


During the ensuing conversation, Cole referenced a rate proposal report released but not discussed at Wednesday’s meeting of the Audit and Finance Committee. While the report found that Austin Energy’s proposed level of reserve funding did comply with city financial policies, it also said the utility’s proposed reserves are higher than reserves of other utilities surveyed.


Weis told Council he thought the City Auditor’s Office, which wrote the report, may not have gotten a complete picture of reserve funds at other comparable utilities, and that a complete picture might show a higher level of reserves than the report indicated. A number of critics have argued that Austin Energy is insisting on too large a reserve fund.


The current Austin Energy rate proposal has met with no small amount of skepticism from city residents and non-Austin rate payers. However, since Council members got their first public taste of the opposition during a lengthy hearing on January 12, several—including Mayor Lee Leffingwell—have expressed concern about some facets of the plan (See In Fact Daily, Jan. 12, 2012; Jan. 17, 2012; Jan. 18, 2012).


Those concerns may have forced Weis and his team to reconsider the rate proposal. Meanwhile, a letter from the city’s financial advisors that warns of consequences for Austin Energy’s bond ratings should a rate hike not come in timely fashion became public. In it, Public Financial Management‘s (PMA) Dennis Waley and Bill Newman warn Austin Energy that a significant decline in two key financial indicators could threaten the utility’s pristine bond rating.


“Our concern is that this decline in financial margins may well lend itself to a reduction in AE’s bond ratings unless positive, near-term action (in the form of a rate increase) is taken to remedy the problem,” reads the letter (See In Fact Daily, Jan. 19, 2012).


PMA’s letter pointed to debt service coverage and system equity. This week, the Austin American-Statesman raised the question of whether the utility wasn’t relying enough on debt. The article pointed out that utilizing more debt could theoretically put off a dramatic rate hike.


Weis used the occasion of the quarterly report to keep pushing for a large-scale rate change. He turned to illustrate a dramatic decline in the utility’s operating fund and unrestricted reserves. “As you see there, (the operating fund) has been brought down over time,” he said. “That’s where we have the revenue problem—the rate problem.”


Cole questioned Weis about the reserves and their importance to the utility.


“Our operating fund reserve is the critical piece that funds our capital and all of our operations. That’s where we’re really having the problem,” Weis responded. “Debt service plays into this…the next time we would have a large capital project — let’s just say for example that we did a big wind project or a solar project –  we would have to cross that decision point about whether we would want to issue debt for that…or whether it would be some other business arrangement.”


Cole asked Weis why the utility would want that choice.


Weis told her that it was important for the utility to have a careful balance between those options. “If you don’t have enough cash and you’re borrowing for everything, that’s a complete…”


Weis trailed off. His implication was that a poor debt-to-cash ratio could sink the utility’s bond rating. That situation would make it hard for Austin Energy to borrow money at competitive interest rates, which, in turn, would cost the utility millions of dollars in interest.

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