New Austin Energy proposal may include phased-in rate hikes

Responding to strong concerns from the public and the City Council, Austin Energy plans to deliver to the Council on Thursday an alternative electric rate proposal that may include phased-in rate increases.

 

City Manager Marc Ott suggested that possibility yesterday during a work session at which the Council continued to dig into the nitty-gritty details of Austin Energy’s finances. Austin Energy officials initially had considered presenting their alternative rate proposal at yesterday’s work session. But Ott told the Council it was not ready yet.

 

“We do anticipate on Thursday providing an alternative proposal and, generally speaking, it might offer that kind of solution,” Ott said. He was responding to a comment from Council Member Laura Morrison, who said some kind of temporary increase might be an option if the Council is unable to reach a conclusion about rates by a March 1 target date. 

 

Several council members, including Mayor Lee Leffingwell and Council Member Bill Spelman, have suggested phasing in new rates rather than hitting customers with a big increase all at once. The current plan, proposed by Austin Energy officials on Dec. 14, calls for an increase of about $126 million in revenues needed to operate the utility annually. This translates to a systemwide rate increase of about 12 percent. But increases would vary substantially by rate class due to the way rates would be structured. For example, residential customers would see an average increase of about 20 percent.

 

One way a rate increase could be stretched out, according to some Council members, would be to take longer to replenish some of the utility’s dwindling reserve funds. “Are there any opportunities to stretch out the period of replenishment?” Council Member Chris Riley asked utility officials.

 

Austin Energy General Manager Larry Weis replied that general operating requirements, not replenishment of reserves, were the big driver of the proposed rate increase.

 

Morrison and Council Member Kathie Tovo then discussed the issue of the 18 industrial customers, whose electric rates are currently frozen under special contracts until May 2015. By replenishing some reserves over a number of years instead of three, those industrial customers – who won’t be affected by the rate increase for three years – would then participate in rebuilding the reserves, they suggested.  

 

Austin Energy started the rate process more than a year ago with carefully conceived plans and lofty goals that have run into a familiar roadblock at City Hall – political reality. While critics nodded at the utility’s ratemaking goals, they did not like what they saw when they got to the bottom line.  Now, with a wide range of customer groups – from churches, to schools to low-income to suburban ratepayers – up in arms, the Council is trying to figure out how to respond to critics without jeopardizing the financial integrity of the utility.

 

Leffingwell started off the work session yesterday saying that the scheduled 6pm public hearing on rates at Thursday’s Council meeting would be canceled and re-set for a later date. Instead, the Council will hear from Austin Energy on its new rate alternative, he said.  

 

The work session featured briefings from Austin Energy staff on several financial issues, including a year-old consultant report on Austin Energy’s finances; a utility overview of its reserve funds; and an overview of the utility’s decision to pay for new construction projects half with cash and half with debt.  

 

First up for discussion was a Navigant Consulting, Inc. report, dated December 2010, that looked at Austin’ Energy’s financial picture. Ott said he commissioned the report because he was aware that the utility faced financial challenges and wanted to understand them clearly. The report recently caused a stir among some critics when they found it during the rate review and picked out pieces of the report to voice concerns about the utility.

 

In summarizing the report’s conclusions, Weis pointed out that the report was largely favorable to Austin Energy.  Weis, who was new to the utility when the report was in the works, said: “My takeaway was that I was pretty impressed that Austin Energy is a great utility.”

 

One thing that the report did show clearly, Weis said, was that the national economic downturn has had a big impact on the utility. Until 2009, power sales growth and increasing revenues were more than adequate to offset Austin Energy’s rising system expenses, according to the report.

 

Then the economic slowdown and lower natural gas prices resulted in a decrease in off-system sales revenues, decreased interest earnings on fund balances, and overall reduced growth rate for power sales. In 2009 and 2010, the utility dipped into its operating fund balance to make up for the deficiency in revenues, something the consultant said was not sustainable in the long term – and thus the need for a rate increase. 

 

Council members also questioned why conclusions in a recent report from the City Auditor’s office differed from those reached by Austin Energy on a couple of issues, including how the utility compares to other utilities in the amount of reserve funds it is proposing as part of the rate increase.  

 

The Auditor’s report showed, for example, that while Austin Energy reserves comply with financial policies, proposed reserves would be higher than reserves of other utilities surveyed. Austin Energy, on the other hand, had figures showing that under the proposed rate increase reserves would be in the middle of comparable utilities, and right now are the lowest of comparable utilities.  

 

It turns out they were using different data, including the utilities used for comparison, prompting Leffingwell to suggest that it would be beneficial to the Council if the Auditor and Austin Energy decided on common criteria. “Otherwise, some of it’s apples and some of it’s oranges.”