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Total Utility

The pain and politics of raising electric rates as a means of controlling our destiny

By Mike Kanin, Fri., June 15, 2012

Total Utility
Cover illustration by Jason Stout, Photos by John Anderson

Just after 10am on Monday, May 14, Austin City Council Member Bill Spelman stepped behind the podium in the press conference room at Austin City Hall. To his left stood Council Member Chris Riley and Mayor Pro Tem Sheryl Cole. Spelman and Cole were fresh off re-election victories; Spelman managed to avoid a run-off in a very crowded field, and Cole defeated her sole opponent by roughly 40 points. The singular mix of celebration and relief that accompanies victory was palpable. But not just because of the election. After 18 years without council action, two years of preparation, several crowded weeks of tedious public work sessions, and – at that point still – no clear end in sight, Spelman, Cole, and Riley were putting forward their vision of what it would take to save Austin Energy.

They were flanked by supporters, including two former key skeptics. Joshua Hous­ton of Texas Impact represented houses of worship that had been convinced a rate hike of the sort suggested by the utility would bury them. Austin Independent School District Superintendent Meria Carstarphen and AISD General Coun­sel Mel­ Waxler had worried the rate increase would offer similar challenges to schools. Yet here they were to support the new proposal – and a rate increase that could return AE to relative solvency.

Still, absentees might better define that morning's event. City management and staff rarely take part in these occasions, as they are generally happy to leave the policy side of decision-making for elected officials. That practice sidesteps a certain truth here: Thanks to politics, the utility had been allowed to lapse into a precarious financial predicament. Worse, when council members were finally ready to tackle the issue, old-fashioned bureaucratic rigidity – some of which came thanks to a set of operational changes visited upon City Hall in the wake of the 2010 open meetings controversy – kept them from the sort of nimble discussion that might have resolved this problem sooner. To all of that, one could add the relatively recent hire of AE General Manager Larry Weis. Though no doubt an able hand, Weis found himself in the impossible position of inheriting the mantle of Roger Duncan, a trusted veteran of the Austin political apparatus whose advice was thusly received.

No member of the Texas Legislature attended the press conference either. With his appearance at a handful of Austin Energy rate hearings, state Rep. Paul Work­man, R-Austin, has made it clear he's ready to challenge any rate increase on the floor of the state House. State Sen. Craig Estes, R-Wichita Falls, has already tried to put AE in Texas' deregulated energy zone; word is that he's ready to do it again. Indeed, council members seem to worry about this as much as they worry about a nearly guaranteed challenge from ratepayers who live outside city limits, and thus have the right to ask the state's Public Utility Commission to alter the rate increase. The collection of disparate interest groups standing behind the council members – and by extension, the utility – represented formidable lines of defense against what could come next. Like it or not, without Austin Energy – and the programs it sustains – there would be considerably less of what people like to think of as Austin.

State Rep. Eddie Rodriguez, D-Austin, represents portions of East and South Austin, where affordability is particularly key. He notes that Austin is getting more expensive, and while he's concerned about the impact of a dramatic rate increase, he says the utility remains an important municipal cog. "The city is reliant on Austin Energy for things other than Austin Energy," he said.

Those who stood behind Spelman, Riley, and Cole agreed with the basic premise that rates need to rise citywide by roughly $71 million immediately; they'd even signed on to specific provisions that offered some measure of protection to their respective sectors as their rates looked to climb.

By the time City Council voted on June 7 to approve the Spelman-Cole-Riley rate proposal, other interest groups, representing poor residents and low-energy consumers, had also won concessions through last-minute amendments. The vote to approve the final proposal was unanimous.

Still, the electric utility business can't be fully understood in a crash course, no matter the intentions of policymakers. And whatever action council took was going to represent a relative stab in the dark. Council's carefully crafted rate solution may spread revenue increases perfectly across its ratepayer base in a way that makes everyone happy, saves the utility from challenges at the PUC and the Legis­lat­ure, and gives it enough cash to survive any economic hurdle for the foreseeable future. It could just as easily do none of that. Somewhere in between rests the fate of an entity economically critical to the city. How we all got here illustrates the unsightly mix of uncertainty and political maneuvering that gets poured into rate-making.

Historical Friction

Spelman had begun that day with a history lesson. "Two years ago, the director of Austin Energy announced that AE was running in the red," he said. "AE had not raised its rates since 1994, and the director proposed that a rate increase was needed to cure large and systemic deficits." Large the deficits certainly were, in terms of Austin Energy's fiscal situation, but it was the "systemic" that presented the real problem.

Two weeks later in his City Hall office, Spelman elaborated. For him, it came down to AE's cash reserve funds. The utility's reserves are intended to perform a series of roles that, collectively, soften the impact of the volatile world of energy production and sales. In simple terms, as commodities prices rise and fall, the fuel costs associated with them naturally mirror those actions. One of the reserve funds is designed to mitigate that issue. Another fund is supposed to serve as backup for emergency power purchases or infrastructure costs – the potential results of, say, an extreme summer or a strong hurricane – both of which can be inordinately expensive.

The utility's reserves also play directly into its bond rating – and thus its ability to borrow money on the cheap. If the reserve fund balances stay in a sweet spot as defined by the three major ratings agencies, that should theoretically contribute to a high bond rating. The higher the utility's bond rating, the less interest AE will have to pay to get people to buy their utility bonds.

Spelman says his phrasing referred directly to the depletion of the reserve funds. "The graph that I had in mind when I used those words was the graph of the reserve levels, which started off at basically zero, ballooned up [until] 2005, and then have been dropping to close to zero since then," he said. "It strikes me – given all the discussion we've had of their not hiring new [employees], of their trying to be tight with their money – I'm persuaded that somebody's watching this stuff. If our reserves are dropping that fast, then there is a reason for it, and we're not going to be able to cure that reason through internal trimming – it's just too big."

Yet despite the fact that the utility hadn't had a rate increase since 1994, as recently as 2005, its financial numbers seemed to point to no immediate danger. Austin Energy remained flush with cash, thanks largely to the ever-brimming popularity of Austin as a destination. Current AE General Manager Larry Weis noted that his observations might be a touch "judgmental" since he was nowhere near Austin at the time. "From 1990 to 2000, the utility had back-to-back years of great growth – 6 percent over the year before it, you know, those kinds of numbers," Weis said. It was right about then – before the 9/11 financial retreat or the much later onset of the housing-spurred recession – that Weis suggests AE should have picked up a signal.

Former Council Member Roger Duncan took the helm at Austin Energy in 2008. He'd already spent a significant amount of time as a city staff member in various key positions, both within and outside of AE. "You go through the budget each year, and department heads all come in. They say: 'I'm going to need this. I'm going to need that,'" he says. "The reality is that, not only me, but my [GM] predecessors have been saying for a while, 'We need a rate increase.' At the same time, the water and wastewater department is saying, 'We need a rate increase.' Trans­portation is saying, 'I've got to add $1 to the transportation fee' and so forth. So the response coming back to us [from council] would be, 'Have you absolutely, critically got to have a rate increase this year?' And the answer, ultimately as long as times were good and we were growing, was, 'No, we can put it off another year.'"

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