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Council members begin to tackle Austin Energy cash questions

Thursday, March 8, 2012 by Michael Kanin

On Wednesday, Council members began to delve into the deeper policy issues related to Austin Energy’s proposed rate increase with a discussion of the utility’s reserve funds and its debt. Though no formal action resulted from the conversation, Council is clearly interested in further exploring ways that Austin Energy can chip away at both some of its near-term expenses and the amount of straight cash that it uses to make purchases.


Much of the exchange focused on the utility’s capital improvement budget, one of the areas of Austin Energy’s finances that offers it and Council members some level of revenue – and therefore policy – flexibility. After the meeting, General Manager Larry Weis told In Fact Daily that adjustments to the capital budget could also affect the utility’s hard-won generation plan. “I think, generally speaking, I would have to look at that,” he said, when asked if changes to the capital program would affect the generation plan.


“I think that it would probably affect whether we go into debt on anything new, or whether we can purchase purchase power” agreements, he continued. “If we’re going to be 35 percent renewable for a long, long time, than I have to start thinking about financing long, long investments in renewables, not just short-term purchase fixes.”


A purchase power agreement is a contract between a utility and a power generator. The city has long-term agreements to purchase power from companies that own wind turbines, for example.


The work session is the first in a series of meetings designed to help Council members make a series of policy decisions that will affect the way that the utility calculates its rates. There are 10 more such events scheduled over the next several weeks.


Wednesday’s discussion focused early on the question of whether Council members could make adjustments to the utility’s capital budget without causing too much negative impact. Council Member Laura Morrison keyed in on the utility’s debt-to-equity ratio, and whether it could be dropped to make room for more debt-based capital purchases. “Can’t we say we want to follow a pattern of, say, forty percent (cash purchases) instead of 60 percent ?”


The utility currently maintains a 50-50 debt to equity ratio. It could reduce that figure in its capital budget, but only on items that can be bonded out over 30 years. Morrison pointed to the expected continuing growth of the region. “That’s one of the issues we’ve heard from the public…’Hey, if we’re paying a lot of money for the growth, we want to build that in to make it so that the people who are here in the future can help pay for it as opposed to just us paying for it – those of us who are here,’” she said. “Which means, put it in to debt.”


Later, Morrison summed up what she saw as the additional effect that such a move might have on utility rates. She suggested that “if we…decided to put 40 percent of our cash” toward capital purchases rather than the 50 percent that the utility now uses, the overall cash expense would go down.


That action, she argued, would help close a gap in the utility’s expenses and revenues – the standard by which the utility bases a portion of its rate requirements. Morrison’s implication is that the overall effect could reduce the proposed rate increase.


Weis affirmed the majority of what Morrison suggested. However, he added that the utility would also have to figure in additional costs under her scenario that would be associated with the extra debt it would have to take on.


Council Members seemed to coalesce around a suggestion from Council Member Chris Riley. Riley would have Austin Energy reduce its cash-to-debt ratio in the short-term in order to minimize the impact of the coming rate. In the long-term, the utility would aim to get back to its 50-50 ratio.


Council Member Bill Spelman questioned utility officials over the possibility of simply delaying capital investments. Such action could, theoretically, be strategically taken to cut back on the rate hike.


After the hearing, Weis told In Fact Daily Morrison’s idea would have a small effect on the proposed rate change. “It doesn’t drop the revenue requirement a huge amount, but everything helps,” he said. “I think the idea is, let’s find places where we can chip this apart, little by little.”


Weis added that the utility could postpone some capital projects, as suggested by Spelman, but Austin Energy has already cut back significantly. “We’ve scrubbed our budget down to the point where our capital projects going forward are really, fundamentally, for growth and reliability.”


During the discussion, Weis also noted that, eventually, delaying projects could affect customer service. “Austin Energy has an extremely reliable electric system and our employees are extremely proud of it,” he said. “If you go too deep, it does have an overall reliability effect.”


Council members also engaged in a detailed look at Austin Energy’s reserve funds. They explored the general policy decisions behind the reserves, as well as the funding flexibility therein. After a while, Morrison summed the situation. She suggested that a switch from a three-year replenishment period to a five-year replenishment period could decrease the revenue gap by $14.7 million.


Though Weis told Council members that, “in real terms,” the reserve funds subject to three-year replenishment were actually on a five-year payback schedule, Mayor Pro Tem Sheryl Cole tried to formalize that and other Council members’ requests in a motion. “I think we want to be clear that we would like to follow up with clear direction on moving from a three year replenishment period to a five-year period,” she said. “And we want to look at maintaining the 50-50 ratio for the long-term, but (move to) a 40 to 50 (percent cash expenditure on capital projects) in a shorter period.”


Mayor Lee Leffingwell rejected the idea. “What I think we ought to do is just kind of keep track of these suggestions for further direction and not have that be formalized until we get to the end of the process,” he said. “We’ve got a long way to go.”

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