by John Sutton, Jan. 12, 2012.
The proposed electrical rate hike is bringing out a lot of Austin Energy’s (AE) dirty little secrets.
The utility has been bleeding red ink for five years, but the only solution offered was to raise rates. Why was cutting the budget to size not an option?
With energy costs falling throughout the state, why has AE’s revenue requirement skyrocketed?
What goes into the excessive mandatory annual general fund transfer?
What answers to these questions are hidden in the hugely redacted management audit report copyrighted by Navigant Consulting to avoid public review and analysis? (Austin Energy paid a consulting firm $281,000 for an in-depth review of its finances and operations.)
Why did AE declare a mid-year “dividend” in mid-summer due to higher than anticipated revenues attributable to the brutal summer heat and transfer $4 million to the city general fund, only to turn around and raise fuel charges in January?
The upcoming council review and subsequent vote on an impending electric utility rate increase gives the City Council a unique opportunity to right some decades-old fiscal transgressions and implement a whole new business model for AE.
For decades the City Council has looked upon AE as a cash cow, used to avoid property tax increases and fund extravagant programs and personnel. Austin has a Champagne appetite, but a beer budget.
The rate case is an opportunity for the city council to clean up the utilities non-utility related expenditures by biting the bullet and placing those expenditures where they belong — in the general fund budget — instead of ducking a tax increase. The council has a choice—sock it to the public via higher utility rates, or sock it to them in the form of higher tax rates. Truth be told, a tax rate increase would probably have less effect on the small home owners and no effect on the school districts or churches or outside-the-city-limits customers.
The council has an opportunity to drastically lower the GFT and additional budget transfers from the ‘cash cow.” (some $156m); revisit the council indebtedness reserve mandate from 2X to 1.25X; enter more wisely into some of the alternate fuel choices (a $2.3 billion Biomass? 16.5 cent/kWh solar? C’mon guys, really?). AE is not immune from guilt, but how guilty we may never know if we can’t see the $281,000 publicly-funded audit report. Poor hedging decisions? Chilled water district boondoggle? Questionable timing on capital improvements?
AE currently sets aside 9.1% of revenues to fund an annual general fund transfer fee (GFT) to the city general fund. The 9.1% ‘dividend’ is put into the budget calculation on the top line, as the first expenditure. Most businesses figure their profit margin from the bottom line.
Sometimes you win, sometimes you lose, sometimes it rains. Think about that for a while. … (Bull Durham).
Almost no one, except maybe the federal government, sets the budget first and then tries to scare up the revenues. That’s one area where I agree with consumer advocate Bill Oakey, this is “upside down and backwards.”
AE’s GFT fee has increased from $70M in 2002 to $105M proposed 2012 – 5%/year. In addition to this year’s $105-plus million, the utility also transfers some $50 million in “city support services” and economic development. AE‘s non GFT transfers to city increased 89% over the last ten years ten years ($27M in 2002 to $51M proposed 2012) – 8.9%/year.
The City Council’s use of $156 million of AE’s revenues for non-utility purposes is unreasonable. The Austin Electric Utility Commission (EUC) has repeatedly cautioned the City Council that continued reliance on the utility as a “cash cow” could cause problems at the Texas Public Commission, should AE’s new rates be appealed. The EUC also says that excessive spending of AE’s money on non-utility items is a bad practice that could affect the long-term financial health of the utility.
It is often said that transferring AE’s revenues to the City’s operating budget, and assigning non-utility costs to AE, are analogous to the dividends paid by investor-owned utilities. In actuality, there is no resemblance between the two.
Most investor-owned utilities pay dividends according to profitability, which is why some pay no dividends at all. However, although AE has accumulated operating deficits totaling $245 million since 2008, hundreds of millions of the utility’s dollars have been spent for non-utility purposes.
AE’s transfers and assigned costs represent 15 percent of its gross revenues. However, the dividends of investor-owned utilities average less than 5 percent (e.g., El Paso Electric – 2.5%, Center Point Energy – 3.9 %).
Plainly, the excessive use of AE funds for non-utility purposes is a major factor behind the proposed rate increase. The need for the current increase, and future increases, will be significantly alleviated when the City Council adopts a narrower transfer policy that is more consistent with dividend policies in the private sector, and absorbs the lion’s share of the GFT into the general fund budget.
The viability of AE’s proposed rate plan hinges on the accuracy of the utility’s calculations and projections. However, history indicates that management’s ability to make credible forecasts is problematical.
In 2008, for example, management projected a FY 2009 operating deficit of $27 million, but the ultimate shortfall was $77 million–almost 200 percent more than estimated. In 2009, a deficit of $11 million was forecast for FY 2010, but the actual number was $68 million. More recently, a shortfall of $52 million was estimated for FY 2011, but the final number was only $6.5 million.
AE’s estimated revenue requirement has been closely studied by numerous parties, including utility attorneys, rate consultants hired by the City and members of the City’s own Electric Utility Commission. Without exception, all of the parties concluded that the revenue requirement is excessive and should be reduced by amounts ranging from $14 million to $100 million.
During the past five years, statewide average residential electric rates fell by 14 percent. During the same period, the bills of AE’s residential customers increased by 15 percent. If the proposed rate increase is adopted, residential customers’ bills will have increased by 25 to 45 percent at a time when rates elsewhere in the state are declining.
Some immediate recommendations:
• Limiting rate increases and meeting affordability goals go hand-in-hand. The Council adopted a 2%/year budget increase and goal for AE rates to remain in the bottom 50% statewide.
• Limit/reduce funds transfers (GFT and non GFT) to COA – ($97M in 2002 to $156M proposed 2012) – 61% increase or 6.1%/year
• Eliminate non Electric Utility functions from AE budget
o Economic Development – $9.9M (identify non electrical portion)
o CMO environmental sustainability office – $1.1M
o Street Lighting – $6.1M
o Admin Support – $17M (identify non electrical portion)
o IT – $5.1M (identify non electrical portion)
• Reduce debt service coverage (current/proposed 2.27X) to minimum required by AE bond requirements
o AE bond requirements are 1.25
o City Council Policy is 2.0
• Reduce % of CIP funded by cash (current/proposed 50%) to a lower level
o Council policy allows levels as low as 35%.
o Tighten capital justification/approval process – only approve construction that is absolutely necessary
o Take advantage of low interest rates to fund more CIP with debt – but only if necessary
• Use longer horizon (current/proposed 3 year) to establish strategic reserves
o Five year is reasonable
John Sutton
Sutton is Assistant Vice President of the Texas Guaranteed Student Loan Corporation and is the energy representative for the Building Owners and Managers Association. He served as a member of Austin’s Generation Resource Planning Task Force in 2009 and is a board member of CCARE.
