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Council tentatively extends large energy contracts

Monday, May 11, 2015 by Tyler Whitson

Austin Energy is stuck between a rock and a hard place, with the rock being the Texas Legislature and the hard place being the utility’s exhausted reserve funds. City Council is now working to wriggle the municipal energy provider out of its predicament without serious damage.

Acting essentially as Austin Energy’s board of directors, Council took a major step toward that goal Thursday when it tentatively approved an ordinance that includes six-month extensions of long-term contracts between the utility and several of its large industrial customers.

The extensions would apply to contracts — some of which go back as far as 1997 — that keep rates lower than standard rates for the companies that hold them. If Council allows those contracts to expire May 31, rates for these companies will increase to current standards.

Other measures in the ordinance include the permanent establishment of a new transmission tariff for customers with own their own electrical substations, which would essentially create a special rate for a category that currently includes only one customer — Cypress Semiconductor.

Council voted 10-0 to approve the ordinance on first reading, with Council Member Delia Garza absent. If Council passes the current ordinance on third and final reading, it would apply to as many as 15 customers, though it could amend the ordinance before reaching that point.

A conversation between Mayor Steve Adler and Council Member Greg Casar suggested that Garza’s absence might have played a pivotal role in the decision to adopt the ordinance on first reading only, as she could have cast the deciding vote on an amendment that Casar proposed.

That amendment, which failed when it evenly split the 10 Council members present, would have effectively limited the ordinance to Austin Energy’s three largest customers by retaining only the measures that extend contracts for the top tier of users and create the new transmission tariff.

Council would not have been able to pass the ordinance as written through all three readings without the support of seven Council members, which it did not appear to have.

Austin Energy’s three largest customers are Samsung, Freescale Semiconductor and Cypress Semiconductor.

“My understanding is that if we want to balance the books appropriately, we will not be able to extend special contracts to the second category of users,” Casar said, referring to customers covered in the current draft of the ordinance but not in the top tier.

At the same time, several employees of Freescale Semiconductor — Austin Energy’s second-largest customer — requested that Council extend the contracts for two years rather than six months during a public hearing before the vote .

Lance Lemanski, director of global procurement for Freescale Semiconductor, asserted that his company’s annual bill is about 30 percent more than what similar customers would pay in a competitive — or deregulated — market. This, difference, he said, would rise to more than 50 percent if contracts expire.

Adler was among those who voted against Casar’s amendment, noting that the extensions would give Council an opportunity to reconsider Austin Energy’s rate policies and how much the utility contributes annually to the city budget through its general fund transfer and other processes.

Adler added that there’s currently a “disagreement” about what some customers say is the relative difference between what they pay to Austin Energy and what they would pay in a different area.

According to Austin Energy’s calculations, the utility will contribute nearly $155 million to the city’s general fund this fiscal year.

“We’ve been asked to consider those issues more broadly, and I would do that for this limited period of time as part of our overall look at how we do Austin Energy,” Adler said.

Austin Energy projects that all of the proposed contract extensions and the creation of the new tariff would result in a roughly $8 million reduction in revenue, or a little over half of a percent of the utility’s annual $1.2 billion revenue.

A fact sheet that Austin Energy released Thursday assures customers that “no one’s rates will change as a result of this extension.” Rather, it continues, “Austin Energy will reduce its expected end-of-year balance and book the expense as revenue that will come in the future.”

Austin Energy would hold off on depositing that revenue into its reserve funds, which it says are short by about $400 million, because the utility did not increase its rates for several years before the 2012 increase.

Reserve funds help Austin Energy maintain financial stability and work through unforeseen circumstances without raising rates.

On the other side of the quandary is pressure from the Texas Legislature, which has come primarily in the form of Senate Bill 1945. Filed by Sen. Troy Fraser (R-Horseshoe Bay), the bill could give large Austin Energy customers or groups of customers a path to break from the utility and buy power on the deregulated market, essentially opening the door for deregulation.

The Senate Committee on Natural Resources and Economic Development passed SB 1945 on April 14.

According to Austin Energy, the bill is, “in part, a result of concerns expressed by large customers whose contracts are expiring.”

Whether Fraser will push the bill forward is unclear at this point. However, it appears that Council is attempting to find a path that both satisfies the representative and protects the utility from potential future deregulation measures.

 

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