AE Rate Increase

The following is based on PowerSmack’s best understanding of costs and business practices for Austin Energy.  If more accurate information is made available to us from any source, we will update the discussion below.

Paying for Deficit Spending

Assuming Austin Energy would seek to raise an extra $177 million from its current operations (with projected revenue = $1.23 Billion in FY2011), it would need to have an across the board increase from all revenue sources of:

$177 million /  1.23 Billion = 14.4%

This would be appropriate if AE tried to get out of the hole in 1 year.  More realistically, this will be done over a longer period of time.  The resulting rate increase will depend on whether AE continues to dig a deeper hole (continued heavy spending) and how long it plans to take to come out of the hole.

Former Austin Energy GM Roger Duncan sounded the alarm that coordinated action was needed to address this growing problem in a major presentation to City Council on Nov. 4, 2010. His presentation indicated annual deficits in the $36 million to $102 million/year range reaching a cumulative deficit of $177 million by the end of 2013 (FY2014)

Some of  AE’s current revenue sources are not eligible for discretional increases at the hands of Austin City Council (for instance, transmission revenue is set by state rules and certain large industrial consumers electric rates were fixed by earlier City Councils until 2015 – SEE BELOW).  Since certain revenue sources can be off limits, the percentage rate increase of different customer groups is likely to vary, being higher for some than others.

There are many complicating factors that new GM Larry Weis and his staff will have to deal with to reform electric rates.  Honest communication by the City with the public is the best way for customers to have a realistic expectation of what their future electric bills will be.

The following discussion provides material on three issues that will impact near-term electric bills.

Paying for Expensive Biomass — Starting 2012

The 100 MW Biomass contract AE finalized in 2008 that is expected to be delivering power in 2012 has been estimated to cost an average of $115 million per year for 20 years ($2.3 Billion total).  This contract will displace some costs that AE would otherwise incur, such as for fuel burned in other power plants.  If it is assumed that the biomass plant is approximately 2X more expensive than other sources that would otherwise meet the need, the biomass contract would result in an across the board increase from all revenue sources of:

about $60 million extra /  1.23 Billion = about 5% extra

It is noted that this biomass contract (approximately 14 cents/kWh, although actual price has never been disclosed by AE) is vastly more expensive than what AE has historically paid for  renewable energy.  For instance, the average price paid for all renewable energy contracts  in FY2008 was 3.27 cents/kWh – about 1/4 the cost of the future biomass contract.

The graph below compares the approximate pricing and duration of the new biomass contract (shown as the “brown block”) to that of an early wind power contract (“green block”) and the historical average “market price” for wholesale electricity in the ERCOT South zone that includes Austin ( “blue line”).  The wind contract pricing shown is 2.85 cents/kWh, and is from the King Mountain wind contract that serves as the basis of AE’s GreenChoice Batch 2 program, 2001- 2011).

The wind contract started out as being higher than conventional energy costs in 2002, but the fixed “green” contract quickly became cheaper than rising fossil fuel costs and prevailing electric power costs.  As GreenChoice Batch 2 customers know, their early action resulted in lower overall electric costs than if they had stayed with AE’s conventional energy charge.

It cannot be said with certainty whether Austin Energy’s Biomass contract — originally opposed by customers for cost, environmental and process reasons — will ultimately be “cost effective” for AE customers, as it will depend on what happens with future wholesale electric costs.  What can be said with certainty is:

  • future wholesale electricity costs will need to be dramatically higher than today (approx. 3X to 4X higher) for the biomass project to be cost effective.
  • Contracting for 100 MW of Biomass would have been much cheaper than $2.3 billion if AE would have waited a year or two — likely about $1 billion cheaper.
  • Many alternatives to biomass that are cheaper and cleaner are available to AE, including wind power.  Local solar power is now approaching the price of the biomass contract.

For perspective, new wind power contracts in ERCOT are currently estimated to cost between 4 and 6 cents/kWh and new biomass contacts approximately 8 cents/kWh.

Renewable as well as conventional purchase power contracts are now typically added into the “variable” component of AE customer’s electric bills, through the “fuel charge”.

Paying for Transmission Lines — New “Rider” Now in Place

A “Rider” is a special charge that is added to bills rather than being rcovered through traditional “base rates” or “fuel charges”.

The state of Texas has approved many investments in transmission infrastructure that are generally intended to (1) ensure the Texas electric system is reliable or (2) make the overall electric system cheaper by providing access to lower-cost energy sources.

These transmission infrastructure investments add some cost to all electric customers bills, but should offset or lessen other costs currently in customers’ electric bills (like fuel costs or purchased energy supplies).  For example, while Competitive Renewable Energy Zone transmission lines being built to West Texas to support wind power development (at an overall cost of about $5 billion) will result in an annual transmission cost of about $800 million but a projected annual benefit of reducing generation costs across ERCOT of $3.3 Billion per year.

Austin Energy must raise revenue to pay for a small portion (about 4% = its share of the ERCOT system) of all new and old transmission lines in ERCOT.  Whether this charge results in a net overall increase or decrease in customers electric bills depends on the extent to which AE takes advantage of new opportunities for lower cost energy created by the transmission lines.

Roger Duncan’s Nov. 4, 2010 presentation disclosed AE’s projection of future transmission costs as follows:

Austin City Council approved a new transmission rider as part of the FY2011 Budget on Sept. 13, 2010 (see below).  The new charge becomes effective on October 2010 electric bills and amounts to 82 cents/MWh for FY2011 and is projected to be $5.45/MWh for FY2015.  For the typical residential electric customer in Austin, this new charge will have an impact on monthly electric bills of 79 cents starting this month and $5.23 by 2015. 

If AE does not offset this charge elsewhere on customer bills, the transmission rider will result in about a 1% overalll rate increase now (October 2010) and approximately 6% in 2015.  (It is not known if Austin Energy has discussed to date whether this new transmission charge will enable opportunities that will reduce costs on other parts of the electric bill.)

Large Industrial Electric Rates – Fixed until 2015

The graph below, developed by Austin Energy at the request of EUC commissioner Shudde Fath, shows the history of Austin Energy’s “base rates” between 1981 and 2008.  In the early 1980′s Austin Energy’s rates favored residential customers.  Since 1994 rates have been modified such that larger industrial consumers tend to get the lowest rates — consistent with the practice of most major utilities in Texas.

While fuel charges have changed dramatically over the past 15 years, base rates have remained unchanged for residential and most commercial customers.  Austin’s largest industrial customers have had 2 rate reductions since the significant base rate reduction in 1994  (this was done in part to offset large increases in industrial customers’ fuel charges, which some believe is appropriate, since fuel is a higher portion of the electric bill of industrial than other customers.)

Base rates for the largest industrial customers are reportedly frozen until 2015, and are exempt from the transmission rider described above.