by Phillip Schmandt, Jan. 11, 2012.
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.
