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Council continues to move forward on Austin Energy rate design

Friday, May 18, 2012 by Michael Kanin

City Council members took more incremental steps toward a final Austin Energy rate design yesterday. However, bogged down in the details of that project – most of which carry the weight of much larger implications as the utility defends the Council’s rate decisions at the Public Utility Commission and perhaps the Texas Legislature – they were unable to give direction to staff on a handful of key issues.


As part of action taken at their work session on Thursday, Council members did approve the prospective inclusion of a $10 monthly fixed fee, a $1.50 monthly charge to pay for the cost of low-income rate-payer assistance, and a two-phase rate increase. The first phase would start in September and the second phase on Oct. 1, 2014.


As with all decisions made during the Austin Energy rate structure work session process, none of those moves represent final action.


However, taken together with earlier action, a clearer picture of where debate may focus on June 7 when Austin Energy’s new rate design comes up for formal Council action is emerging. This includes certain voting patterns that appeared as Council members tallied their approvals and objections at Thursday’s meeting.


It all came against the backdrop of a frank discussion of the rate design on the utility’s bond ratings. Here, longtime city bond counsel Bill Newman played the role of doomsayer. Newman urged Council members to consider the fact that a drop in Austin Energy’s bond rating by as little as one level could cost the agency as much as $27 million in interest for every $100 million it borrows.


Typical Austin Energy capital improvement bond packages are in the neighborhood of $200 million annually. Newman added that it could take as many as five years for the utility to regain its current status.


However, Newman’s reluctance to address any specific scenarios – which seemed reasonable to Council members – made it more difficult for them to get an idea of what a set of actions could cost in terms of real dollars. It also seemed as though it would be hard to predict the exact moves of any rating firm.


“I’m being very straight forward with you,” Newman said. “You could raise your rates today to the highest rate that was proposed to you in this process…I think it may be very helpful to you to do so and show a good sign that you’re trying to put those revenues where an ‘A’ rated category would be. But I wouldn’t tell you today that you’re going to maintain that ‘A’ rating.” 


The most contentious item on Thursday proved to be whether or not to include a figure for the potential earnings that Austin Energy collects on off-system sales in calculations about the utility’s revenue requirement. Utility staff maintain that including that figure in a revenue requirement calculation could also inject volatility into base rates thanks to the fact that there is no clear picture of how much Austin Energy will collect from such sales in the future.


Council Members Laura Morrison, Kathie Tovo, and Mike Martinez suggested that the utility should include a “conservative” figure for off-system sales in its bottom line, and that it should reduce Austin Energy’s revenue requirement. Utility Vice President of Finance Ann Little suggested that the PUC could be friendly to a 10 percent-of-off-system-revenue calculation. Morrison took that and pitched a $3.5 million calculation that would have reduced the utility’s stated revenue requirement of $71 million to roughly $67.5 million based on the $35 million in off-system sales Austin Energy recorded in 2009.


“Trying something (like this) for a couple years may be worth it in my opinion,” Martinez said. “It’s not going to crush the utility, it’s just going to need an adjustment in 2014 when we come in with phase two (of the revenue increase) if we don’t get off-system sales.”


Utility staff insisted that the $35 million from 2009 is not a typical figure. They further argue that there is no good way to calculate the number for use in rate design.


The motion failed on a 4-3 vote with Mayor Lee Leffingwell, Mayor Pro Tem Sheryl Cole, and Council Members Bill Spelman and Chris Riley voting against the idea. Spelman, Cole, and Riley have proposed a rate design that roughly leaves the utility’s requested revenue requirement at $71 million.


Leffingwell proved the tie-breaker. With the vote deadlocked at 3-3, he took a breath and announced his ‘no.’


That discussion was part of debate on fixed charges. Council members decided to explore a figure of $10 suggested in the Spelman, Cole, Riley plan. That number, said Spelman, was the current $6 fixed charge adjusted for inflation from 1994. Though the rest of her colleagues supported that move, Tovo voted against the idea.


With time winding down before the expected June 7 vote, Council members agreed to hold one final Austin Energy work session. There, they hope to tackle what will likely be a difficult set of issues, including what to do about the utility’s reserve funds and a continuance of the discussion about a proposed five-tier residential rate structure that is designed to incentivize energy conservation.


Leffingwell continued to single out the tiers, which would aim to charge customers less per kilowatt hour the less electricity they use, as key. “To me this is one of the more important parts of the entire case,” he said. “You know the old story about the average rate increase? You’ve got one hand in the refrigerator and one hand in the oven and on the average they’re comfortable. I want to try to get full information on this tiered rate structure to make sure we don’t have any big surprises.”

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