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Austin Energy backs retiring city’s share of Fayette plant in 2025

Wednesday, February 5, 2014 by Bill McCann

Shifting position on the Fayette Power Project, Austin Energy has recommended retiring, rather than selling, its share of the controversial coal-burning plant.


The recommendation calls for the city to establish a shut-down date of 2025, nearly a decade later than environmentalists are seeking. The additional time would help avoid potentially difficult legal, regulatory and financial problems, including rates increases, Austin Energy officials told a meeting of the City Council Committee on Austin Energy on Tuesday.


In presenting their latest Fayette plan, utility officials provided a sobering reminder to the City Council of the many legal and financial difficulties facing the city as it tries to figure out what to do about the plant.


Rate increases could range conservatively from about 5 percent to 25 percent starting in 2017, depending on various options for the City of Austin to get itself out of the power plant in the next few years, Khalil Shalabi,  Austin Energy’s vice president for market operations and resource planning,  told the committee. These increases would be in addition to relatively small increases planned by the utility in the next few years. By holding off until 2025 to retire Austin’s portion of the plant, the utility would mitigate financial risks, and could set a clear planning objective to guide plant investments and resource planning, according to Shalabi.


The utility also would maintain its current plan to begin ramping down its share of Fayette’s power output beginning in 2020 to meet an already-established climate protection goal, he said.


Previously, the utility recommended that the city sell its share of the power plant and replace it by building a large natural gas-fired facility.


Environmental groups have urged Austin to shut down its share of the Fayette facility by 2016 to reduce carbon emissions associated with climate change. At the same time, environmentalists generally have expressed strong opposition to Austin selling its share because the plant would still operate, resulting in increases in carbon emissions if Austin built another power plant to offset the lost power from selling Fayette.


Pushed by environmentalists and some Council members, Austin Energy has been wrestling with the best way to extricate the city from the Fayette plant. But the utility has found the road difficult because of complicated financial and legal issues, including the fact that Austin jointly owns two of the plant’s three generating units with the Lower Colorado River Authority. The city and LCRA are bound up in a complex operating agreement for the plant, which is located near La Grange. Austin’s share of the two units is 590 megawatts.


At Tuesday’s Council committee meeting, Shalabi outlined Austin Energy’s latest plan to eliminate coal from the city’s power portfolio. The utility looked at three scenarios: Shutting down Austin Energy’s share of the Fayette plant, selling its share to another party, and reducing the plant’s output to a minimum operating level, or 160 megawatts, Shalabi said. In addition, the utility looked at two options, buying power on the market and building an 800-megawatt gas-fired plant, for replacing the power generation lost from eliminating Fayette from the utility’s portfolio, he said.


Among other things, the plan concludes that the sale, retirement or minimum-output strategies would result in an immediate large cash outlay for the city to pay off revenue bonds of up to $260 million as well as a large book loss of value of the plant on the utility’s income statement, Shalabi said. The utility would have to pay off the bonds out of its cash reserves, which would significantly deplete those reserves, or raise electric rates to boost the reserves. The increases would mean the utility would fail to meet its affordability goals for its rates, he said.


The option carrying the biggest rate increase, about 25 percent, would be to retire the plant and replace its power generation by purchasing power on the market, according to the plan. Retiring Fayette and replacing the power with a gas plant would result in roughly an 18 percent rate increase, while ramping down the output of the plant would result in roughly 10 percent to 14 percent in rate increases, depending on whether the replacement power was bought on the market or produced from building a new gas plant.


Selling Fayette would produce rate increases between roughly 5 percent and 12 percent, again depending on the source of power being replaced, according to the plan. Carbon emissions would increase under this option, compared to significant reductions in carbon emissions under the ramp-down and retirement options.


Shalabi cautioned, however, that the costs, and resulting estimated rate increases, are conservative and could be significantly higher if there are changes in market conditions or gas prices.


Besides the financial impacts from paying off bond debt, Shalabi outlined a number of other potential issues that the city could face over Fayette. These include the potential costs of negotiating with the LCRA over retiring the plant; the potential forfeiture of $30 million in federal funds; and a City Charter prohibition against the sale of “all or any substantial part” of Austin Energy.

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