Council punts decision on AE reserves

The Austin City Council decided with a 4-3 vote Thursday to postpone a decision to transfer $30 million from Austin Energy’s Operating Fund to its Strategic Reserve Contingency Fund as requested by staff in order to bring the utility closer to complying with its own financial reserve policies.

Council Member Laura Morrison made the motion. Joining her were Mayor Pro Tem Sheryl Cole and Council Members Kathie Tovo and Mike Martinez in the majority vote. Mayor Lee Leffingwell and Council Members Bill Spelman and Chris Riley cast the dissenting votes.

The motion to postpone and reconsider after the budget is completed was a substitute to an earlier Spelman motion to approve the transfer of funds.

“We have a policy, and you’re asking us to follow the policy. It seems to me we ought to follow the policy until we change the policy,” Spelman told Austin Energy General Manager Larry Weis and Chief Financial Officer Ann Little when explaining his motion.

Austin Energy officials told Council members that the purpose of maintaining a contingency fund is for the utility to be prepared for unplanned events, including major generation disruptions and fuel price volatility.

Currently, Austin Energy has $27 million in its contingency fund. Adding $30 million would bring it up to $57 million, which would still be short of the prescribed $80 million minimum.

Weis stressed that the major rating agencies – including S & P, Moody’s and Fitch Group – pay close attention to how much is in these funds when grading utilities. Having high ratings could help lower interest rates for the utility when borrowing money in the future, and also lower customers’ rates. (See Austin Monitor, Aug. 6.)

Prior to the final vote, Martinez sought to ease concerns that postponing the decision could affect the utility’s bond rating. “I find it hard to believe that they’re going to downgrade us because of the conversation that we’re having about how we want to have a better policy for our reserves,” he said.

Weis agreed. “In my professional judgment, there’s not going to be a downgrade,” he said. “But the reality of it is that we need to get our house in order, have a good policy and follow the policy.”

By postponing the decision, Council members are giving themselves the opportunity to consider other possible allocation options as alternatives to moving the entire $30 million into the contingency fund.

Cole suggested they consider allocating a portion of the money to Austin Energy’s Strategic Reserve Rate Stabilization Fund, which is currently empty. That fund would help the utility stabilize its rates so customers do not see sharp increases when it projects decreased revenues and increased costs.

The rate stabilization fund could be used, for example, as a way to stabilize a projected rate increase for Fiscal Year 2015 that is driven primarily by an increased regulatory charge coupled with cool weather patterns.

After making her motion, Morrison clarified its intent. “There’s no doubt that we need more reserves,” she said, adding that the motion calls for Council to “address the move within the context of our broader discussion that we’re going to have – hopefully this fall, after the budget – about reserves.”

Austin Energy spokesman Robert Cullick told the Monitor in a written statement, “I guess the majority of the Council wanted to take another look at all of the reserve fund strategies and policies, and felt like putting money into one of those reserve funds right now would be premature.” He noted the utility “will certainly come back with some ideas about how dollars should be put aside.”

The vote, Cullick added, will prompt a conversation about whether there is a need for a rate stabilization fund, given current circumstances. “The bigger question is how does that fit in with the priorities of making sure that you can withstand an outage, or making sure that you can withstand having to rebuild things that you didn’t know that you’re going to have to rebuild, or being cut off from your revenue supply for a period of time,” he said. “Those are big questions that the Council will have to wrestle with.”