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.

Powersmack recognizes the intense controversy around the proposed Austin Energy rate increase and has asked a diverse set of local contributors to comment on it. We have also linked to other bloggers and media outlet coverage for comprehensive perspective.

Here are a few highlights of the opinions expressed.. click on the contributors name to read the full post.

“AE has failed to justify a rate increase..” EUC member Barbara Day, voting against it.

“We can have an economically healthy utility or reach our energy conservation goals, but not both.” EUC Chair Phillip Schmandt, voting for it.

“This proposal is upside down and backwards.” Bill Oakey, consumer advocate and former EUC member, opposed.

” 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 Bill Oakey, its “upside down and backwards.” John Sutton, Building Owners Management Association, supportive of the methodology.

“For the first time in decades ( this proposal) puts a lopsided rate burden on poor and middle class residential customers, small businesses, churches and schools while letting its largest industrial customers skate.” Robin Rather, Collective Strength, opposed.

What local media outlets say:

STATESMAN: Austin Energy unveils final rate-increase proposal
“Austin Energy now needs $126 million more in annual revenue to balance its books and replenish dwindling reserves…”

CHRONICLE: Beside the Point: ‘Mission of Affordability’
“…if ever there was a time for the council to listen to its constituents – from grassroots activists to clergy to poor people to small-business owners – it’s right now.”

AUSTIN ECONETWORK: Electric Rate Public Hearing – A Primer, by Paul Robbins. “I urge you to attend and speak out against this outrageous proposal, as well as support increased funding for Austin’s clean energy programs that promote energy efficiency and conservation.

The public hearing on Austin Energy’s Rate Proposal is Thursday, Jan. 12, at 6pm at City Hall.

Austin public hearings can be monitored by live video link.

What on earth possessed Austin Energy to believe it could magically talk the Council into a huge rate increase that for the first time in decades puts a lopsided rate burden on poor and middle class residential customers, small businesses, churches and schools while letting its largest industrial customers skate?

Do the AE executives, with their ridiculously convoluted powerpoint charts think they are “ the smartest guys in the room” a la ENRON and that nobody else understands what they are doing as they kiss off important consumer protection and affordable rates in order to subsidize their largest corporate accounts?

Surely this Council will have nothing to do with such treachery. Or will it? This Thursday, January 12th at 6pm, the Council will take up the matter and reveal whether it has the backbone to reject the proposal in total or will rubberstamp themselves into infamy.

Before the council votes on this or any other rate increase proposal, AE should be asked to answer the following fundamental questions:

1. What exactly is causing AE’s “sudden” revenue shortfall and why didn’t its management pro-actively seek ways to prevent it altogether or nip it in the bud? Natural gas prices are at their lowest point ever. Wind prices are at their lowest prices ever. Last year was the hottest year on record meaning AE should have cleaned up in revenues. So what is the core problem leading to ask for an enormous rate increase? Is it …

a) Overly generous special rate deals with its largest industrial customers who are locked into money-losing sweetheart contracts for several more years and are only paying a fraction of their actual cost?

b) “Hedging” on fuel costs and losing their shirt?

c) Huge cost overruns on scrubbers for the toxic, water hogging Fayette coal plant that it should get out of anyway?

d) Sky-high costs with no offsetting revenue for the mysterious “Chiller Districts”?

e) Operational malfunctions at Fayette and STP?

f) Poor Management Decisions in general and especially poor fiscal discipline?

g) A dysfunctional organizational culture that simply doesn’t know how to keep costs and rates low anymore?

or is it All of the Above?

Some will automatically blame Austin Energy’s renewable energy strategy but since that currently accounts for such a small portion of the AE fuel mix there is no way that is the core of this sizeable problem. The much larger issues of expensive investment in fossil fuel sources, a lack of financial discipline and runaway operational costs are the more likely culprits but no one knows for sure because Austin Energy is the least transparent agency in town.

2. Why hasn’t AE aligned its costs with revenues? Why hasn’t it substantially CUT BACK its costs instead of just “assuming” it can increase its prices willy-nilly? AE has given this question lip service in public meetings but not actually shown any substantial details.

3. Why can’t AE live within the 2% per year rate increase cap that the Council already approved last year? Has this kind of predictable and equitable rate strategy been fully explored?

4. Why isn’t there any serious, detailed public analysis into AE’s sudden Christmas “lump of coal” increase in its fuel charge — netting it an “instant” $60 million dollars for no clearly defined reason?

5. Why didn’t AE release the full results of a Navigant report, allegedly “copyrighted”, ordered by City Manager Marc Ott in 2010? What conclusions about AE structural issues, management-level decision-making and fiscal operations did the report call into question?

6. What progress has been made on AE’s need to re-invent its business model to ensure its viability during the anticipated innovation and decentralization of energy, which has been compared to the innovation that happened after mainframe computers gave way to personal computers? What is AE’s long-term 21st century vision and how does this rate increase help strengthen the utility AND the community in the coming years?

We urge the Council-members to focus on these “big picture” questions while insisting that AE dramatically streamline its own costs before it will even consider any rate increase. The Council should quickly and completely nix this approach and force AE to come back with a plan that respects its own ratepayers and that actually makes economic, moral and political sense.

BELT TIGHTENING? This charts shows how Austin Energy’s operational costs skyrocketed just as the economy was tanking. Instead of cutting back and aligning costs to revenues, they spent their reserves down to unprecedented levels (dashed orange line below). Was that necessary? Was that smart? And what alternatives were considered so that this rate hike could be minimized?

SOURCE: Austin Energy, Final Recommendation on Electric Rates, Dec. 14, 2011, page 9.

Bill Oakey
Bill Oakey is a consumer advocate, former member of the City Electric Utility Commission, and writer for the blog, “Affordable Energy for Austin.”

Robin Rather
Rather is a longtime Austin environmentalist and CEO of Collective Strength, a research and planning firm.

No, AE has failed to justify a rate increase. Also, the timing of this rate case is poor because beginning December 2010 AE no longer dispatches its own resources or sets its own prices. That is now done by ERCOT. In the rate case AE filed it theoretically used a 2009 test year but in fact it forecast expenses out into the future but failed to match revenues for the corresponding period. Instead AE adjusted 2009 revenues downward. This mis-match overstates the need for a rate increase by inflating expenses while understating revenues. When questioned about this AE stated it didn’t know what future revenues would be. However, we know revenues from sales to other utilities will not be zero because AE has made and will continue to make sales to other utilities from electricity generated by AE’s power plants in excess of what its own customers will use.

If AE feels it needs a rate increase it should re-file using 2011 as a test year. That would be one complete year under ERCOT; there would be no reason to mix projected expenses with understated revenues.

I also disagree with AE’s request to collect a fixed delivery charge from residential customers. AE has always collected the distribution costs on a per kwh basis. Shifting these costs to a fixed charge overcharges small use residential customers and undercharges large use residential customers. That is the opposite of giving correct pricing signals to encourage conservation.

AE is framing the rate case as “residential customers are not paying their fair share.” Do you agree with this as a broad statement of fact?

I do not think that the framing of the residential customers not playing their freight is accurate. AE has selected a production cost allocator that allocates more costs to residential customers. AE has used an allocation method that is not used at the PUC. The residential rate advisor, who was hired by AE in this case, has calculated that the method requested by AE shifts 20% more costs to residentials than the BIP method he recommends. AE chose a method which is slanted towards giving large commercial users the best deal. There are other, better ways that are more equitable. I recommend the BIP method recommended by the residential rate advisor. In the alternative, the 12CP model would also be a fairer approach.

The AE proposal shifts costs away from large commercial customers to residential, small commercial and non-profit customers such as churches and schools. AE’s Dec 19th filing shows that 89% of this rate increase falls on residential customers.

I am also concerned about the 16% increase in the fuel charge that AE recently announced it was implementing effective January 2012. AE did not seek approval. Apparently there is no process and no oversight of AE’s increasing its fuel factor. This needs to be changed. There is no transparency in their fuel factor change. AE provided no calculations, reasons, need, etc.

Bear in mind that natural gas prices are the lowest they have been in years. The price of gas is commonly used as a proxy for fuel costs. So why is the fuel factor going up? The broad brush reasons given in the memo were:

– The outage at Fayette (one of the cheapest resources) in August;

– An extended outage at STP right now which is still out;

– The Biomass facility; and

– The Webberville solar project.

These four reasons were mentioned but no dollar-amounts given. Why are there outages? Are there any management issues? I have questioned the process to the Council. AE needs to answer to City Council or their representatives and needs to actually prove their need for an increase in the fuel factor. Simply announcing an increase is unacceptable.

Do you have any other concerns?

I am very concerned that Austin Energy is over-reaching so much on this rate case that they will bring further scrutiny from the Legislature in terms of de-regulating AE. A 16% fuel increase plus the rate increase AE is requesting will cause rate shock. Although AE talks about this rate increase as 12% average increase, that is deceptive. Some customers will receive rate increases of over 30% while other classes will receive rate decreases. The types of customers hurt the most will be those who conserve and are low use customers. This outcome is attributable to the fixed charges and increased customer charge. Also customers like churches with varying usage will be hurt by this proposal. Those benefiting are the highest use customers. This is the opposite of the goal of conservation that the city has adopted.

AE has14 special contract rates – below cost rates – for the largest commercial customers. AE is losing $20 to $30 million annually on these customers. The contracts end in 2015. And at that time AE has said they will bring them up to cost.

I would not like to see AE deregulated. This is a valuable asset to the city. The city makes significant money from AE. An increase really isn’t justified. I believe AE’s request is over reaching. Drawing this kind of legislative scrutiny is a risk that should be taken seriously.

If you were on the council what would you do with this proposal?

What I’d like to see the Council members do is to tell Austin Energy to re-file using an actual 2011 test year. I believe the Council should direct AE to use the BIP method to allocate production costs. In the alternative, Council could direct AE to use the 12 CP method. Also, I think Council should tell AE it will not adopt a fixed delivery charge or increase the customer charge. I would like to see the Council tell AE to tighten its belt and refile a simpler and better proposal using the 2011 actual expenses and revenue.

Barbara Day
Barbara Day is Councilmember Kathy Tovo’s new appointee to the EUC. She practiced regulated utility law for more than 25 years and has experience with hundreds of rate cases. She is currently retired and serves as a private citizen advocate.

Why support the EUC Majority’s recommendations regarding the Austin Energy rate case?

1. We Need to be Good Stewards of our City-Owned Utility. The citizens of Austin own their electric utility, which is the tenth largest publicly owned utility in America. For the benefit of our citizen owners and all the customers of Austin Energy, we need to manage the utility so its long term economic health is assured.

Austin Energy has not increased its base rates for 17 years. That is not sustainable. Two years ago, the City Manager wisely asked an outside auditing firm to perform a comprehensive review of the economic health of the utility. That report pointed out deep and structural flaws in Austin Energy’s business model where revenues had not been increased to match rising costs. What other business has not increased prices in 17 years?

Many of Austin Energy’s normally healthy reserves have been reduced to zero, leaving Austin Energy in a precarious situation in the event of unforeseen costs or economic downturn. Austin Energy has lost money in the last three consecutive years, surviving by eating up its reserves. That will not go unnoticed by bond houses who grade Austin Energy’s financial standings, and therefore the interest Austin Energy must pay on its debt. The proposed increases in rates are coming in time to avoid a re-assessment of Austin Energy’s debt rating, but if we let this opportunity slip by, we will surely pay the cost later in the form of higher interest charges that Austin Energy must pay.

The concerns being expressed by those who wish to limit how much new revenues may be earned by Austin Energy pale in comparison to the dire consequences that are just around the corner if we do not return our utility to a health financial footing with adequate reserves.

Caveat: The majority of the EUC did not approve Staff’s recommendations to include in the revenue requirement programs that are controlled by the City of Austin but paid for by Austin Energy, such as economic development or the climate protection program. But with those two exceptions, the revenue requirements being proposed by staff were reviewed and generally approved by an independent financial advisor and a separate utility analyst hired to represent residential rate payers of Austin Energy. With those stamps of approval, we feel policy makers should tread warily when considering whether to substitute the analysis of a minority fraction of a volunteer board that meets once a month. The EUC and City Council should be setting broad policy goals, not trying to micro manage accounting rules for revenue projections that have been thoroughly vetted and approved by not one, but two, trained and qualified independent utility analysts.

2. The “Unbundling” of Rates Sets the “Ship” of Austin Energy on a Course of Greater Energy Savings and Reduced Costs. What is unbundling and why is it important? Utilities have two types of expenses. The first type is fixed expenses which stay constant no matter how much energy is sold, like the costs of maintaining the wires and poles, or the cost of customer service personnel. The second type is variable expenses, which increase or decrease in correlation to how much energy is sold, like the cost of fuel used to generate electricity. Traditionally, utility companies recoup their fixed costs through variable charges to the consumer for energy. That means the utility depends on consumers buying lots of energy in order for the utility to recoup its fixed costs. In fact, the utility’s economic survival – its ability to pay its bills for its fixed costs – is dependent on selling electricity to customers.

Ask yourself: doesn’t that structure make it really hard (even dangerous!) for a utility to embark on an aggressive program of reducing how much energy it sells through energy conservation? But that is just what the City Council has asked Austin Energy to do: The City Council adopted a goal for Austin Energy to reduce its total sales of energy by 800 Megawatts by 2020. The Sierra Club and several in the EUC majority want Austin Energy to increase that goal by 200 Megawatts. Austin Energy’s total capacity is about 2400 Megawatts, so we are asking Austin Energy to reduce sales by about 30% – 40% to achieve those goals. How can we ask the utility to cut sales by that much if its economic survival depends on selling energy?

By “unbundling” we assess fixed costs on all customers that pay for the utility’s own fixed costs, so the utility can remain healthy even when it dramatically reduces its sale of electricity. Unbundling means the fixed costs of the utility are no longer “bundled” inside the variable charges collected by the utility. If we want both a health utility and to meet the aggressive energy conservation goals set by the council, we need to unbundle rates. Otherwise we can have an economically healthy utility or reach the energy conservation goals, but not both.

Austin is a vibrant and growing city. Austin Energy’s demands will soon exceed the current 2700 megawatts of capacity that Austin Energy needs, which will mean expensive investments in new generation capacity. But those investments can be delayed or avoided if we reach the goal of reducing current demand by 800 – or 1000 – megawatts. And the cost of achieving the energy conservation goals is far less than the cost of building and selling new energy capacity. And that is why the EUC majority believes that by unbundling rates now, we are guaranteeing lower costs – and lower rates – in the future.

3. A Hidden Benefit of Unbundling Rate – Protecting Consumers from High Electric Bills During Extreme Weather Events. If rates are not unbundled, then all charges assessed to customers will be charged through variable rates, which increase as more energy is consumed. Under that structure Austin Energy will receive a windfall – and customers will pay extraordinary amounts – during extreme weather events. Do long hot summers and extreme cold winters ring a bell? In the past few years, it has become routine that Austin breaks one new heat wave record after another. And it seems likely this trend will continue or worsen. By having a portion of the overall bill paid through fixed costs, the impact of these extreme events are tempered and customers keep more dollars during weather events they cannot control.

4. The Proposed Rate Plan is Affordable: Under the Proposed Rate Plan, the average customer will not see more than a $20 per month increase in Rates. We need to focus on the total electric bill consumers will pay, not just the fixed cost component. The EUC minority correctly points out that the percentage increase of fixed charges for residential customers is very high. But while the fixed charges were increased, the rates for the two lowest tiers of electricity usage were decreased. The result, when the entire bill for an average electricity user is considered, is not more than a $20 per month increase. For the average customer who uses 1,000 kWh per month, that monthly increase will be even less, about $10 – $15 per month. On the other hand, the proposed increase also proposes the most progressive rates in the state of Texas, so that those who use the most electricity will pay the highest rates. And that is as it should be. The average Austin Energy customer uses a bit less than 1,000 kWh, but if you are using higher amounts, such as 2500 kWh, then you should be paying more. Under the current rate structure, the price for the first 500 kWh is 3.55 cents and the price for electricity over 500 KWh is 7.82 cents in the summer and 6.02 cents per kWh in the winter.

Under the rate proposal, the energy charge for the first 500 kWh is 2.8 cents in the summer and 1.7 cents in the winter. From 500 kWh to 1,000 kWh, the energy charge is 6 cents in the summer and 4.4 cents in the winter. At the fifth tier, above 2,500 kWh per month, the proposed energy charge is 10.6 cents in the summer and 8.2 cents in the winter. And that’s the way it should be. Those who use more, and require more generation resources from Austin Energy, should pay more. These rates will encourage more energy conservation by charging more to the top users. Those rates are also fair, because for the lowest users, they are even lower than today’s rates to compensate those users for the higher fixed charges.

The rate proposal calls for innovative “unbundling” that will allow our utility company to keep its standing as a national leader in energy conservation. With the most progressive rates in the State of Texas, the proposed rates are also fair and encourage more energy conservation.

Phillip Schmandt
Schmandt is an Austin lawyer specializing in technology, e-commerce and the upstream oil and gas industry for McGinnis, Lochridge, & Kilgore. He has served as chairman of Austin’s Electric Utility Commission since 2008.

Austin Energy to Reduce Fuel Charge

Austin Energy is reducing the fuel charge on electric bills by 15 percent effective January 1, 2011. This change will reduce electric bills by about 6% for residential customers and about 9% for large industrial customers. The bottom line impact: about $75 million should stay in the hands of Austin homeowners, businesses and other electric customers relative to what they paid the utility for fuel last year, when total fuel expenditures exceeded $500 million.

This is a welcome move that PowerSmack has advocated. To Larry Weis and Austin Energy we say: Thank You.

Thanks, but More Explanation Please.

In its press release announcing the fuel charge reduction, Austin Energy says:

This is the third time over the last five years the fuel charge has been decreased. The fuel charge was decreased twice in 2007.

While this is true, it comes off as “spin” as a more complete look at the last 5 years tells a more complex story:

On Jan 1, 2006, AE’s fuel charge increased 30%.

On Jan. 1, 2008, AE’s fuel charge increased 20%.

This illustrates a key issue at the very heart of the Transparency Question that will be before City Council in January:

Should Austin Energy package its communications as marketing information tailored to a public treated as “payers”, or should Austin Energy offer a more complete picture – with both good and bad – to a public treated as its “owners”?

Next month, City Council may shed some light on its perspective on this question.

PowerSmack’s perspective? Austin Energy should treat the public as owners: explain what’s in the fuel charge, why its changing now, and how it is expected to change in the years ahead.

The $134 Million Question

In October, PowerSmack highlighted AE’s history of fuel cost overcharges and the enormous discrepancy in AE’s reported fuel costs for FY2009. Austin Energy has responded to PowerSmack, but it only confirms the $134 million amount that was questioned, virtually nothing more. AE continues to offer no breakout or explanation of the fuel cost discrepancy aside from it being a “total of $133,631,095 for purchase power agreements (non-renewable), hedging costs and ERCOT fees”.

That substantive explanation by Austin Energy works out to about $10 million of spending for each word of explanation.

While many other utilities in Texas provide significant explanation on each of these items, Austin Energy has been able to hide most anything about fuel charges at their discretion, since City Council in 2001 delegated such authority to AE staff.

Austin Energy’s efforts to hedge fuel purchases appear to have cost more than $100 million in 2009 and even more in 2010. In 2 years, perhaps $250 million in extra discretional spending. But despite “affordability” and “transparency” being at the forefront of utility discussion, AE is not explaining one of its largest cost drivers.  That seems wrong.

City Council will have the opportunity in January to decide the appropriate standard for utility transparency going forward.

San Antonio: Besting Austin in Green and Truthiness

In contemplating whether their city is “Even Greener than Austin?”, the San Antonio Express-News verified PowerSmack’s “GreenPower Smackdown” claims and concluded:

“When it comes to the amount of renewable energy powering customers’ homes and businesses, CPS has inched past its more progressive neighbor to the north.”

And while Austin:

• failed to meet its 2007 Solar Goal of 15 MW (achieving only 1 MW);
• will fail to meet its 2010 Solar Goal of 30 MW (achieving about 5 MW); and
• has a hold on proceeding with renewable energy components of its Climate Protection Plan adopted in 2007;

San Antonio continues to make impressive strides toward its Green Power goals:

• October 7 announcing a new 30 MW solar contract with SunEdison expected to bring new jobs to San Antonio;
• November 9 dedicating the 14.4 MW Blue Wing Solar project;
• December 23 starting operation of the latest addition to its renewable energy portfolio, the 150 MW Cedro Hill Wind Project near Laredo; and
• This month announcing the possibility of delaying or eliminating a $565 million investment in old coal plants with the prospect of increasing investment in clean energy sources – a move embraced by environmentalists.

CPS Energy started 2010 with a public largely of the opinion “We don’t trust you”, but now seems to be a utility in rapid transition for the better.

The credit is largely directed to the new CPS leader, Doyle Beneby.

San Antonio columnist Jan Jarboe Russell had this to say of Beneby:

Since his arrival in July, the direction at CPS has changed dramatically. …

Instead of shielding information from the media, he adopted an open, transparent stance that proved effective.

“He’s treating ratepayers like shareholders,” Councilman Reed Williams said. “It’s a major shift.”

There is much Austin can learn from San Antonio and its popular new leader at CPS, Doyle Beneby.

Lesson 1: If Austin Energy wants to be Affordable AND Clean, it is best to start with more Transparency.

City Council received its first presentation from Austin Energy’s new leader Larry Weis last Thursday on the utility’s “Affordability Goal” and an update on its Generation and Climate Protection Plan. DOWNLOAD PRESENTATION. VIDEO LINK.

Thursday’s briefing provided a chilling perspective on Austin’s future as a leader in clean, affordable energy.

The problem is there was no affordability goal. No goal at all. Instead, Weis implied the utility may be challenged to deliver energy by 2020 that is both affordable and clean. He asked the Council to choose which factor is most important.

Sheryl Cole’s closing comments best illustrate the key concern. In thanking Larry Weis for his presentation, she pointed out the “tension” between the goals of renewable energy and affordability.

But that tension is optional, it doesn’t need to exist. Not now, not in the future, not even in the recent past.

Austin Can’t but Others Can?

During the last 2 years, San Antonio’s municipal utility CPS Energy has added 3 different South Texas wind projects totaling 357 MW. Meanwhile, Austin Energy’s new wind totals zero.

Yesterday, Austin-based RRE Austin Solar began construction on a $230 million solar plant in Pflugerville. Austin Energy has delayed its 2010 solar farm.

Yesterday, bottom line-oriented Colorado regulators decided to shut down 7 coal plants by 2017 and replace them with cleaner sources. Austin Energy’s regulators — City Council — have approved more than $200 million dollars to extend the life of the Fayette coal plant, largely with borrowed money Austinites will repay until 2040.

How can others do bold things but Austin can’t? Austin used to be admired for its leadership, now we struggle to follow. Why?

At this pivotal time, Austin needs Larry Weis to be its answer man.

It is essential that Larry lead the effort to confront the fiction that Austin needs to wait for renewable energy to become more cost effective. He needs to put the facts on the table, set the record straight, and move us forward.

And based on Austin’s steller cost history with renewables, this should be tension-free.

“Current” Costs: The latest “all in” comparison of Austin Energy’s actual electric generating costs (for 2008) showed efficiency and renewables are among the lowest cost options — cheaper than gas; cheaper than nuclear, and — with all coal expenditures for 2008 included — renewables were also cheaper than coal. SEE DETAILS.

Future Costs: AE’s latest data shows wind power to be the lowest cost of all new generation sources in Texas. Of resources primarily used to meet peak energy needs, solar has become cost competitive with natural gas turbines. SEE DETAILS.

Past Costs: For the first time on Thursday, Austin Energy disclosed its historical renewables costs (kudos to Larry for providing that). It says AE’s wind and landfill gas contracts have been extremely cost-effective, between 2 and 4 cents/kWh – cheaper than AE’s average cost of generation from all sources (5.6 cents/kWh in 2008), and generally less than AE’s fuel charge (3.65 cents/kWh in 2008 & 2009). SEE DETAILS.

2008 All Source Average Production Cost: 5.6 cents/kWh

SOURCE: PowerSmack, based on Slide 26, Larry Weis, Austin Energy presentation to City Council, Dec. 9, 2010.

These wind and landfill gas contracts are great examples of renewable energy done right.

How to do it wrong? In 2008 AE pressed ahead – despite broad opposition from its customers – into a different type of biomass resource with high emissions, high water use and high cost (about 14 cents/kWh).

This one mistake seemingly has given Austin’s leaders renewable energy amnesia.

What are They Waiting For???

Austin – once the emerald city that received international acclaim for its innovative green programs – seemingly no longer remembers how to do renewable energy affordably.

It is puzzling that in Austin – of all places – “clean energy” could even be accused of being “expensive energy” and not draw an immediate and forceful challenge from Austin Energy staff, City Council members, their EUC advisors, and local media.

Perhaps each of these groups, and the community as a whole, need a refresher course to again become familiar with:

• Austin Energy’s actual costs to produce electricity, which historically show that efficiency and renewables have cost less than fossil and nuclear sources;

• The fact that the Public Utility Commission of Texas told the Texas Legislature in 2009: “Wind generation has had the impact of reducing wholesale and retail prices of electricity.”; and

• Its own GreenChoice program, through which Austin became the first community in the U.S. to sell green power for less than the cost of electricity from “dirty” sources.

Factoring in the City’s current policy calling for national leadership on climate protection and interest in nurturing a local cleantech economy leads to obvious questions: Why should Austin wait to do more renewables and efficiency? And what is the cost of waiting?

Urgency = Destiny

Mayor Leffingwell led the Council’s effort last Thursday directing that staff develop a “hard and specific affordability goal”. For this, he should be commended. Yet the Mayor also suggested it would be OK to delay the implementation year of AE’s renewable energy goal and that there seemed to be no urgency to proceed on the renewable components of the Generation Plan.

PowerSmack asks, WHY is there no sense of urgency?

Austin Energy should be moving forward aggressively with its most affordable energy options, which also happen to be clean. But it isn’t and no one will say why.

Meanwhile, Austin Energy continues investing enormous sums of ratepayer money on expensive fossil fuel sources while giving lip service to renewables – a complete contradiction of Council policy directives.

Actions speak louder than words. Investment of our community’s money speaks loudest of all. Of the 16 resource additions specified in the Generation Plan conditionally approved by Council on April 22, 2010 (SEE DETAILS HERE), the only projects moving forward and on schedule are three expensive power plants that burn carbon. All 12 zero emission wind and solar resources are delayed or indefinitely on-hold, even though wind power is the lowest cost generation resource in the plan.

If striving for “clean”, AE & Council are prioritizing the wrong resources.

If striving for “local”, AE & Council are prioritizing the wrong resources.

If striving for “affordable”, AE & Council are prioritizing the wrong resources.

The lack of urgency in acquiring 2011 wind is particularly mystifying, as:

• Many customers’ GreenChoice contracts will expire in less than 3 months;
• If the 77 MW King Mountain wind contract is not replaced before it expires in 2011, Austin will fall below average for wind power use in Texas;
• Wind power prices are currently depressed in ERCOT – deals are available for less than $50/MWh (5 cents/kWh) – but likely to go higher in the near future.

In contrast to Austin’s inexplicable inaction on lower cost wind power, City Council recently approved $167 million in CIP funding to add yet another natural gas-fueled power plant 5 years from now, adding local emissions, using local water, and burning perhaps $2 billion in non-local fuel over its lifetime.

Follow The Money: Burn Baby Burn

The truth is, despite being incredibly well positioned to capitalize on the highly competitive, global movement toward “green”, Austin Energy has stalled and delayed adding the cleanest and cheapest energy sources. So much so, that many other Texas energy companies have surged beyond Austin in clean energy, including CPS Energy, Denton Municipal Electric, E.on and NextEra Energy.

Austin Energy has instead devoted its focus and dollars on old, tired and problematic resources: mammoth spending on natural gas fuel and power plants, opting to fix up its old coal plant, and almost uniquely in Texas, turning to expensive biomass as its preferred renewable investment.

For those looking for a culprit in Austin Energy’s affordability woes, you’re going to have to cast a wider search than wind, landfill gas and solar power. To date, AE’s declining affordability stems from the utility’s inability to discipline fossil fuel spending. That spigot has been stuck in the ‘full on’ position despite years of green words.

Austin Energy’s Spending has Skyrocketed. Utility spending has surged over the past 10 years in 3 areas: fuel, operations, and capital spending. Since AE owns virtually no renewable resources (less than 0.1% of its capacity), virtually none of the increased operations and capital spending are due to renewables. DOWNLOAD SPREADSHEET WITH DATA. GFT = General Fund Transfer

SOURCE: PowerSmack, estimate from data in AE presentations and budget documents, 1999-2010.

The trend begs the question: With AE’s pedal-to-the-metal spending on “old” resources, are “new” renewables being “starved out” from an investment standpoint?

Austin’s recent actions are not consistent with a city aspiring to be a national utility leader. On its current course, Austin seems to be striving to be mediocre in affordability, transparency, and renewables.

Last Thursday’s briefing provided a status report on the formal processes that have been lumbering along most of the year to establish new policies on electric utility “Affordability” and “Transparency”.

In practice, these wonky words mean: “How much will my electric bill go up?” and “Will the utility tell me why?” Along with the key question of “How clean is my electricity?” there is no doubt that this is a pivotal time in Austin Energy’s evolution.

Weis will be back before the Council in January. Will he continue to emphasize the challenges of moving forward? Or will he step up to making clean and affordable electricity a powerful reality?

PowerSmack remains hopeful. Seriously worried, but hopeful.

If you‘d like to make your comments known, email the council here. http://www.ci.austin.tx.us/council/groupemail.htm

In response to our post of Oct. 8, some have questioned whether San Antonio is doing more “green” than Austin if adjustment were made for the relative size of the utilities. The short answer is “yes” in categories of solar, wind and total renewables but “no” for energy efficiency.

Austin –vs- San Antonio

With completion of the Blue Wing solar plant in November, San Antonio now has about 3-times as much installed solar capacity as in Austin Austin. San Antonio has about 2-times as much wind power capacity as Austin.

For those who believe size matters, there are a  number of different metrics that can be compared.  In the table below, we have adjusted the comparison of updated installed capacity numbers  based on the two utilities’  relative (1) number of customers (2) total MWh sales, and (3) total electric sector revenues.

This “size-adjusted” comparison shows that CPS Energy leads Austin Energy in the Green Power Smackdown for solar (by 64% up to 89%, depending on metric used), wind (by 14% to 31%) and total renewable MW (by 14% to 31%).

Denton Tops for Green Power Use

If broadening the “Smackdown” on renewable energy use to all city-owned utilities in Texas, Denton has surged ahead of its bigger brethren on the I-35 corridor.

Denton Municipal Utility reports it has “approximately 60 megawatts of renewable energy that comprises about 40% of its energy portfolio on an average yearly basis”

While substantiation of that level of renewable energy use (40%) has not yet been provided by the City of Denton, PowerSmack’s analysis indicates Denton is already recieving 15% or more of its energy from a single wind project (Wolf Ridge), which would place Denton Municipal Utility ahead of both CPS Energy and Austin Energy, which are both using approximately 10% to 12% renewable energy at present.

DISCLAIMER: PowerSmack seeks to present a range of community voices, including those with which we do not fully agree. This guest post underscores a common concern on the lack of transparency at Austin Energy, yet:

• While Austin has suffered in recent years from inefficient and at times ineffective utility decision-making, PowerSmack believes City Council can be a competent Board of Directors for Austin Energy IF council members become more engaged – breaking their habit of “rubber stamping” utility requests — and establish a legitimate oversight capability aided by full-time professional staff.

• While the utility’s math to date remains fuzzy, we differ on what the culprit for rising costs has been: PowerSmack believes Fossil Fuel spending, Austinites for Action believes Green Power. Complete and timely information disclosure by the utility will provide the true answer.
  

Mike, I know that transparency at Austin Energy has been an important issue to you, and I wanted to share that I think that it is at least one issue upon which I, and Austinites for Action, must wholeheartedly agree. The last thing we need is a decision making process that results, or could possibly result, in another biomass plant purchasing disaster without adequate public input.

On November 15, the Electric Utility Commission finally approved the long-awaited affordability matrix ( or plan, or goal). Unfortunately it fails to achieve the predictability desired and needed by a large number of stakeholders who actively participated in the process, and worked and hoped for more useful outcome. While the benchmarking which has been done is useful in comparing current Austin Energy rates to those of similarly situated places, it does not do anything to provide guidance as to how the city will make future generation purchasing decisions.

If affordability is truly the goal, as stated by Mayor Leffingwell when he amended the generation plan last spring, we have only taken a micro-step in that direction, if even that. A truly useful product would have given guidance to both the utility and the rate paying community as to how generation purchasing decisions will be made. As it stands we have nothing but a promise of a 35% revenue requirement increase over 10 years, at least as reported by the Statesman, which is likely a gross underestimate. We all want and need to see how and when our rates will be affected. Unanticipated and explosive rate increases will be truly detrimental to our local economy and our citizens.

Transparency is an essential and sorely needed addition to this process.

SOURCE: from presentation by Larry Weis to Electric Utility Commission, Nov. 15, 2010.

Along those same lines, it was encouraging that Austin City Manager Mark Ott announced last spring that he would seek an independent audit of the utility, however, we have yet to see any results. The $134 million fuel cost discrepancy you have written about is another example of why we need improved oversight at Austin Energy right now.

In order to restore public trust and insert a healthy dose of accountability, and transparency, it is critical that a truly independent assessment be conducted of the utility. Austinites need to know about how both the Climate Protection Plan, and the upcoming rate case, will ultimately impact the utility, the city’s budget, and utility rates.

Austinites For Action has offered a number of specific reform measures to increase transparency and accountability while protecting ratepayers. Some of these reform recommendations are:

• Establish an independently appointed, qualified, and geographically representative Board of Trustees to manage utility operations separate and apart from the Austin City Council.
• Require an annual independent audit of Austin Energy by an outside auditor.
• Direct an independent review of Austin Energy’s operations and finances similar to the sunset legislation directed at Capital Metro.

We have offered these common-sense recommendations aimed at protecting the long-term viability of our utility company and shielding ratepayers from dramatic and unforeseen increases in their bills. Our local leaders ignored the warning signs of Capital Metro’s fiscal meltdown—we are in a position to learn from those mistakes and prevent a very similar problem at our publicly owned utility.

$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.