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Austin Energy says proposed interim hike won’t cover revenue needs

Thursday, February 23, 2012 by Michael Kanin

A flat 3.5 percent electric rate increase, like one proposed by Council Members Kathie Tovo and Laura Morrison to serve as an interim measure while the Austin City Council looks into a long-term solution, would not cover the utility’s needs. According to Austin Energy General Manager Larry Weis, the organization needs at least an 8.9 percent rate increase – roughly $80 million under the proposed new rate structure – to keep it from digging further into reserves over the next year.


Weis spoke at a special called session of the Austin City Council on Wednesday. There, council members approved a scheduling outline that could result in a months-long series of council work sessions designed to tease out a range of policy decisions that will factor into a final rate determination. Though the original draft of the document put the city on track for a rate decision in September, Tovo, from the dais, removed all dates from it in order to garner the support of other Council members.


Though the work session plan eventually passed unanimously, Tovo’s action illustrates the hesitance of some Council members to vote on any sort of rate increase in the near future. Morrison, Tovo, and Mike Martinez will offer a resolution at next week’s meeting that would, among other measures, order an interim rate increase. Still, it remains unclear what Council will be voting on next week.


Austin Energy developed its rate increase proposal over a two-year period of input from stakeholders and the public, as well as several studies that took a long-term look at the utility’s rates and revenue structure. After the Electric Utility Commission approved it, the utility formally presented its rate plan to Council on Dec. 14.


Council members also heard from a handful of citizens on Wednesday who urged them to delay any rate decision until a more thorough discussion could take place. Tom ‘Smitty’ Smith of Public Citizen suggested that Council consider employing an independent hearing officer to conduct a preliminary vetting of Austin Energy’s new rates.


If passed as it currently reads, the resolution from Martinez, Morrison, and Tovo would establish a 3.5 percent across-the-board interim Austin Energy rate increase. That action would attempt to provide extra revenue to the utility while the Council delves into the many policy questions laid out in the work session schedule.


However, Weis noted that, because the utility has customers on contracts that lock in some rates – mostly large commercial enterprises – not every ratepayer would be subject to the 3.5 percent increase. So, in order to increase utility revenue by 3.5 percent, residential and commercial ratepayers not on long-term contracts would see their bills go up by roughly 5.9 percent.


On top of that, Weis argued that the utility would probably need something more like an 8.9 percent increase to stay revenue neutral. Council Member Bill Spelman asked Weis to come back with numbers for an interim rate that would not just cover the revenue question, but return the utility to solid ground in terms of bond metrics. “I don’t want us to dip further into our reserves, but I really, really don’t want us to dip below our cash-in-hand and debt service requirements,” he said.


Should the utility find itself on the wrong side of those figures, its bond ratings could take a hit. That would raise the cost of any bond-linked project.


Council also grappled with the legal ramifications of employing an interim surcharge. Anytime Austin Energy raises its rates, it is subject to a challenge from ratepayers who live outside of the city limits. Under state law, those parties can appeal the case to the Public Utility Commission, or PUC.


Spelman asked outside legal counsel Thomas Brocato of Lloyd Gosselink if the PUC might be inclined to stay any action on an appeal of the interim charges, pending final resolution of the permanent Austin Energy rate increase. Brocato responded that would be a possibility.


In addition to the interim charge, the resolution instructs staff to develop a rate proposal based on 2011 utility statistics. That departs from current efforts, which rely on a 2009 year. Smith criticized the approach that uses the 2009 figures. “The electric utility world changed substantially in December of 2010 when we went to nodal,” he said. “That has led to a…situation in 2010 and 2011 where we actually made $27 million more than we expected, largely due to significant off-system sales.”


The resolution also called for City Manager Marc Ott to find an “independent consumer advocate” who would represent residential, low income, and small business ratepayers as the policy process moves forward. This has been a point of contention for consumer advocates who insist that their interests were not minded as the utility prepared its new rate structure.


Smith’s suggestion would add an independent hearing officer to the process. That effort would mimic a potential hearing before the PUC in an effort to preempt issues that the state board might consider with the new Austin Energy rates. At a break in the hearing, Smith acknowledged that such a process could still be subject to political pressures with council members left to approve or disapprove of the hearing officer’s recommendations.


Still, he told In Fact Daily that it would be worth the investment. “To the extent that you narrow down the number of contentious issues, and to the extent that you (can) pre-load the discussion by having made policy issues early on in the process, you minimize the likelihood that that is going to happen,” he said.


Council also asked City Auditor Kenneth Mory to study Austin Energy’s revenue requirements. Mory said he should be able to come back with a report on the matter sometime in April. That makes it even more likely that Council will not take up a rate increase until after the May 12 election. Mayor Lee Leffingwell and Council Members Mike Martinez, Bill Spelman and Sheryl Cole are all running for re-election. However, the utility has stressed the need for a rate hike in March in order to give programmers time to reconfigure electric bills before June, the beginning of Austin Energy’s most profitable season.

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