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Audit generally affirms Austin Energy’s revenue requirement

Wednesday, May 2, 2012 by Michael Kanin

The City Auditor’s office says that an internal audit of Austin Energy’s stated revenue requirement concluded that the utility is largely correct about its need for an additional $71 million in revenue.


Though Assistant City Auditor Walt Persons told members of the Austin City Council’s Audit and Finance Committee Tuesday that some corrections could be made to the figure, he saw relatively little room for Council members to cut Austin Energy revenues.


The results of the auditor’s report could play a key role as Council members move forward with their deliberations over the details of a proposed Austin Energy rate increase. Indeed, both skeptical Council members and rate-payers have questioned whether or not the utility really needs the amount of additional revenue it has requested.


Persons told Council members that Austin Energy officials agreed with the auditors’ conclusions.


Council requested the audit as it began what has proven to be a lengthy investigative process into a rate-increase proposal from Austin Energy. Among other headline-catching details, the utility’s initial proposal called for a new, $22 monthly fixed charge for residential customers. Council questions over the that figure, as well as what some from the community consider an unfair rate burden placed on schools and religious institutions, eventually focused attention on whether the utility’s revenue requirement is accurate.


Persons’ report concluded that, for the most part, it is. “The figures that form the basis for calculating (Austin Energy’s) revenue requirement…are materially accurate with one exception, which has no impact on the revenue requirement,” according to the report.


The report further concludes that “most of the adjustments” that Austin Energy made to project its FY2009-derived figures in to future needs were accurate. Here, however, Persons’ team found seven items that it was unable to verify. Two of these – labor and costs associated with the utility’s Sand Hill plant – were incorrectly stated. Five of the items were impossible for the Auditor’s office to verify.


The auditor found that the Sand Hill and labor errors more or less cancelled each other out. Still, according to the audit, the incorrectly stated items could amount to an adjustment of anywhere from $900,000 subtracted from Austin Energy’s revenue requirement to just under $2 million added to it.


The five unverifiable items would amount to roughly $8.68 million in a net drop in the utility’s revenue needs.


After Persons concluded his presentation, Council Member Kathie Tovo offered her take on the situation. “There are some reductions possible, it sounds like, to the revenue requirement,” she said.


Council Member Bill Spelman then delivered his. “(You’re) saying it’s within a couple million dollars one way or another,” he offered. “Maybe it’s a million too much, maybe it’s a million too little but we’re in the right ballpark.” While a million dollars is a lot of money, it is not much compared with Austin Energy’s billion dollar budget.


In his remarks, Spelman referenced the general uncertainty involved with the revenue estimate. He quoted Electric Utility Commissioner Michael Webber on an earlier revenue estimate. “You’re adjustments for the next year are $100 million, plus or minus $100 million.” Spelman went on to say that the auditor’s report had, if anything, reduced some of that uncertainty.


Spelman further suggested that, though the parties involved are “still in an extremely uncertain universe” they could “largely strike” the uncertainty surrounding the revenue requirement. Persons agreed with his summation.


It could be difficult for Council members to justify reducing Austin Energy’s revenue requirement based on the unverifiable items. “We can’t say that (these figures) are or they’re not (correct),” City Auditor Ken Mory told Council members. “We don’t have any reason to believe that they are not.”


Both utility officials and city bond counsel have cautioned against making deeper fiscal cuts. If Council members slash below a certain threshold, they argue, instability will result.


During the hearing, Mory pointed out – as he has in the past – that his office wasn’t equipped to perform a more detailed internal analysis of the proposed Austin Energy rate package. “Within my office, I don’t have that rate expertise,” he said.


Mayor Pro Tem Sheryl Cole made it clear that this could soon change. “I do agree with you that we are probably going to need more of that type of expertise,” she said. “That should be a part of the budget discussion.”

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