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Despite questions, Council members consider ‘decoupling’ for AE rates

Wednesday, April 4, 2012 by Michael Kanin

Austin City Council members will consider employing an alternate approach to ratemaking as part of their deliberations about a potential Austin Energy rate hike. The tactic, known as “decoupling,” might allow the utility the flexibility to correct for revenue shortfalls or windfalls without having to ask Council permission or defend a rate case at the Texas Public Utility Commission.


However, significant questions remain about whether or not the practice would actually present Council members with a way to make those adjustments without a visit to the state regulatory body, the PUC. Not the least of these questions involves how such adjustments would be viewed under Texas utility laws.


There are also questions about whether decoupling, an approach originally developed for investor-owned utilities, would be appropriate for a municipal utility such as Austin Energy. Though veteran economist Jim Lazar – a booster for the practice from Olympia, Oregon – thinks that the process could be adopted for Austin Energy, the utility’s general manager was less optimistic.


“We already have a mechanism that’s kind of like this and what’s difficult here for me is that we are not a private utility, we are a public utility,” Larry Weis said Tuesday. “If you notice from today, all the examples from across the country, this all has to do with private utility regulatory world where there is a constant battle every day in the regulatory commissions of states on the private utilities and how much money they make.”


Some Council members invited Lazar to address the fourth of 11 work sessions designed to help them make policy issues about Austin Energy rates. There, he described the key points about the concept of decoupling. “The regulator sets an allowed revenue level – number of dollars – and if the utility actually recovers an amount greater or lesser than that, those deviations are trued up.”


In Austin, “trued up” could mean that Council members would make relatively minor adjustments in the bills it sends to customers based on the utility’s prior performance. That adjustment could be applied to monthly bills, although such a procedure would be more difficult because the city complex billing system is not set up to handle such changes.


Though he continually referred to the Austin City Council as the “regulatory” body over Austin Energy, Lazar seemed to mean that Council members would set the utility’s revenue requirements. That lapse seemed to indicate an uncomfortable fit for Austin Energy and decoupling. More than a handful of states employ decoupling but no Texas utility has yet attempted the practice.


In a paper called “Pricing Dos and Don’ts: Designing Retail Rates as if Efficiency Counts,” Lazar and two co-authors suggest that, among other benefits, decoupling would allow an energy utility to take in enough revenue “to cover investment and labor costs (as well as) supporting service and reliability.” They further argue that, because revenues are no longer dependent on kilowatt hours – a central component of the idea would use revenue needs to set customer bills – a utility would be freed to “focus on reducing costs to increase profits, and stabilizing consumer bills despite weather conditions.”


Both concepts represent something of a holy grail for Council members looking to balance Austin Energy’s income needs with a desire to encourage conservation. Lazar tells In Fact Daily that decoupling could also be employed by a water utility – though he adds that he doesn’t have direct experience with that process.


Council Member Kathie Tovo broached the subject of whether or not a move to decouple would be legal with a nod to a letter from outside counsel. “I know that we have a memo from our outside legal counsel,” she said. “But I guess it’s all protected and something we should discuss in executive session.”


That attorney, Lloyd/Gosselink’s Thomas Brocato, said he could not speak with In Fact Daily about his advice. Council members will discuss Brocato’s letter at their April 10 work session.


After the meeting, Tovo repeated that she couldn’t share much about Brocato’s memo. “There were items of exploration, I guess I would say, in the memo,” she said. “I haven’t reviewed it carefully enough to really make a comment on it.”


Despite it all, Weis suggested that there might be a way to work some of Lazar’s ideas into a new set of rates. “There is a way to incorporate some of what he is talking about into a revised form of what would be a power supply adjustment charge,” (on your electric bill, this is called a fuel charge) “that’s very similar to what we currently do,” he said. “It would just have some of this up and down in it that we don’t currently have.” The fuel charge is currently adjusted only once a year.

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