by Robin Rather & Mike Sloan OCT 26, 2010.
$134 Million is a lot of Smackeroos. But it’s also more than just money. It’s a question that strikes to the heart of systemic issues strangling Austin Energy.
• It’s about transparency.
• It’s about affordability.
• It’s about talking that’s green but spending that’s not.
• It’s about who really owns and controls Austin Energy.
$134 Million is the mother of all questions about AE right now.
$134 Million is worthy of an answer to the owners and ratepayers of the municipal utility.
This question has been asked and re-asked until Austin Energy’s lawyers formally responded, saying that the request of AE to answer this question “did not provide a rationale for how release of such information would be useful to the public.”
(SEE FULL TRANSCRIPT following initial 3/22/2010 email to Robert Goode & Marc Ott.)
What $134 Million ?
Austin Energy doesn’t seem to have a clear answer for what it spends on fossil fuel each year.
Depending on the source, Austin Energy’s Fuel Cost during 2009 was:
$309 million (according to 2009 annual report, March 2010)
$443 million (according to FY2011 budget, August 2010)
That’s a difference of $134 million, all seemingly explained by the utility with 5 words: “excludes hedging and ERCOT fees”.
Pretty scant explanation for a $134 million mega-chunk of customer money that is:
• 1X bigger than AE’s annual General Fund Transfer
• 2X bigger than AE’s total spending on Renewable Energy Contracts (10% of AE’s energy)
• 10X bigger than AE’s total expenditures on Energy Efficiency Incentives
• 30X bigger than AE’s total expenditures on Solar Rebates.
$134 Million works out to an average of $335 for each of Austin Energy’s 400,000 customers
When City Government takes $335 out of everybody’s wallet (and many Austinite’s don’t have that kind of extra jack in their back pocket now) shouldn’t the City at least explain why they took the money?
Sure they should, but they haven’t.
And the problem persists. Even with natural gas prices dropping in half during the last two years, Austin Energy’s total fuel costs have continued to rise — topping an amazing half billion dollars in FY2010. Before 2008, natural gas regularly accounted for more than 70% of all utility fuel costs. Chopping the price of gas in half and raising Austin’s overall fuel tab by $80 million is not an expected result, but it seems to be what has happened. SEE GRAPH DETAILS.
What is Hedging And Why Does AE Do It?
Hedging is not a word that gives most Americans warm fuzzies… For many, “hedging” has come to represent a voracious financial vacuum that sucks their hard-earned money out of wallets, bank accounts and home equity and sends it over to some mega-rich Wall Street guy. “Hedging” often involves colossal sums of money that seemingly evaporate.
In the electric biz, the Energy Information Administration defines “Hedging Contracts” as “ Contracts which establish future prices and quantities of electricity independent of the short-term market.”
What may have happened at Austin Energy during 2008 when energy prices were spiking is that the utility “locked in” multi-year fuel contracts that require Austinites to pay predictable but high prices far into the future. (This may explain why Austin’s electric rates have not declined when others in Texas have.)
By analogy, it’s as if a homeowner in 2008 bought 5 years worth of gasoline at $4 a gallon — a brilliant move if gas prices would have kept zooming up, but not so much with the way things actually worked out with current $2-something a gallon gas. Such a homeowner would likely now regret placing such a “hedge’ …. even before factoring in the spicy comments likely to flow from their significant other.
For similar reasons, Austin Energy may rather not talk about it either. But they should.
Hedging is a common practice in today’s business world, but there are many ways to lessen the risk of higher fuel prices. Austin Energy has almost exclusively used a “financial” hedging policy — basically an expensive insurance policy that pre-buys fossil fuel. Sometimes the hedging effort results in nothing the City can show for it, except the increased likelihood of burning carbon fuels in the future.
Given Austin’s Climate Protection Plan, PowerSmack hopes that Austin Energy’s new leadership will invest more attention and money in carbon-free “physical” hedges that permanently reduce fossil fuel risk. Such investments — such as energy efficiency — will always leave behind something tangible for Austin while having added benefits like being cheaper, local, and reducing emissions and water use.
Compounding the Problem: “Over-Collection”
In addition to the extra $134 million collected for mysterious uses in 2009, Austin Energy has also over-collected “Fuel Charges” from customers in each of the last 3 years. The over-collection in 2009 was more than $22 million — about $50 per customer.
AE Fuel Over-Collection, end of fiscal year:
2007 $19,380,165
2008 $1,730,474
2009 $22,696,920
Austin Energy may find security in hanging on to that extra cash, but with the financial pain that so many individuals and businesses have endured in recent years, it may frustrate some to know a portion of their money has been sitting idle in Austin Energy’s bank account.
If Austin aspires to be the best managed City in the Country, surplus fuel money should not be in Austin Energy’s bank account, but rather in the hands of customers to spend on their own priorities, thereby stimulating the local economy.
Waiting for an Answer
Some in Austin have suggested that AE’s financial woes are tied to the pursuit of being “green”. PowerSmack’s review of Austin Energy finds the opposite is true — efficiency and renewables have historically helped hold down customer’s electric bills. In fact, heavy investments in fossil fuels and additional carbon-burning technology seem the more likely culprit.
We are hopeful that under Larry Weis, these problems will be fully explained and remedied. After all, part of the reason Mr. Weis was hired to lead Austin Energy was his “track record of… ensuring full transparency”.
But the City Manager is ultimately in charge of how Austin spends money and what the City tells its citizens.
Until Marc Ott is willing to provide a full accounting for the $134 Million, we simply do not know what is fueling AE”s sudden financial shortfall.
NOTE: PowerSmack analyzes publicly available information that’s often incomplete or inconsistent in offering educated estimates. To the extent more accurate information is made available by Austin Energy or others, numbers contained herein will be revised.
