The pain and politics of raising electric rates as a means of controlling our destiny
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Then came the issue of Chernick's fees. At the close of their April 30 work session, members heard from utility attorney Andy Perny that Chernick had run up a bill in excess of $76,000 for work done on the rate case over a month's time. Council members had only authorized $52,000 to cover his efforts. Chernick asked members to provide a sum to cover the difference, plus another $17,000 to $30,000 more – depending on whether or not they would like him to appear at each of the remaining work sessions in person. "I am shocked by that figure, and staggered by it," Council Member Kathie Tovo, a strong supporter of the need for a residential advocate, told her colleagues at the time.
Flustered by Chernick's bill and smarting from his gruff and ineffective approach, members henceforth relegated their residential advocate to work session participation via speakerphone from his office in Massachusetts. Chernick chimed in a few more times – godlike from the rafters, still airing petulant objections – but was largely sidelined. His stint with the city cost taxpayers about $96,000* for just under two months of work.
Morrison, Tovo, and Martinez were also among those not at the Spelman-Cole-Riley presser. Some of this, no doubt, had to do with open meetings issues that would prevent the latter trio from interacting with any other member about the specifics of their proposal. But Morrison, Tovo, and Martinez were also architects of an earlier plan, one that aimed for an interim hike that would have generated considerably less revenue for the utility while council pursued a yearlong rate study. Indeed, the idea for the work sessions – which all members agreed were necessary – came out of the Morrison-Tovo-Martinez proposal, first pitched in February.*
The idea of a modest interim hike did not sit well with utility staff, nor with the rest of council, who voted 4-3 to ditch it. But it was in response to that proposal that the utility began its defense of a revenue number of $71 million. "An immediate $71 million rate increase is necessary for the utility to maintain 'reserve neutrality' at this time, with an additional $31 million increase required in October 2014 to resolve Austin Energy's financial challenges," Weis wrote in a report to council. For the record, $71 million would do nothing to replenish the utility's reserve funds – a key desire of both AE officials and, argues city bond counsel, bond ratings agencies. Rather, the first $71 million would be supplemented by another rate increase shortly thereafter that would aim to begin refilling utility reserve funds. At their press conference, Spelman, Cole, and Riley included a two-phased rate redesign as part of their announcement.
Weis likes to say that in at least some portion of energy rate-making, there is more art than science. Still, $71 million became the hard figure on which to base discussion, if not consensus. Just as Spelman, Cole, and Riley got behind it, Morrison, Tovo, and Martinez began chipping away. They questioned utility officials about one of the many arcane quarters of utility finances, what has been loosely termed "off-system" sales. In simple terms, AE both generates power and sells it. If the utility should generate "extra" electricity, it can sell that supply to other utility systems on the state electric power grid. In FY 2009, it did so to the tune of $35 million. But AE removed those figures from a study of FY 2009 that it based its rate study on.
Morrison, Tovo, and Martinez plugged away at the idea that those figures should be included, and, moreover, that they could offset AE costs and provide some savings to ratepayers. AE said that the $35 million it made in FY 2009 was an anomaly and couldn't be counted on in any rate projections. The utility further argued that, thanks to a 2010 change in how the Texas grid conducts its business, what had been known as off-system sales really don't exist any more.
Nevertheless, Morrison, Tovo, and Martinez kept at it – and on more than just off-system sales – as did the utility. Then, at the same April 30 work session where Chernick's bill became an issue, matters came to a head. Morrison and Tovo had pitched another tweak – this time in the debt-to-equity ratio that the utility uses to fund its capital projects. Their colleagues had gone for it. They read it as a reason to reduce the utility's revenue requirement. The utility disagreed.
"I don't know how it could still be $71 [million] after we've said, 'Let's look at a scenario where we've shifted the debt-to-equity ratio,'" Morrison said at the work session. She returned to the idea a bit later, only this time she also – inadvertently perhaps – summed up the frustration she and the rest of the utility's many doubters were feeling. "I guess I'm confused. We're looking at changing the revenue requirement based on policy changes, but I'm hearing you [AE] guys say that we can't change the revenue requirement."
Morrison was pointing out the odd position she and her colleagues were in. They'd wanted to make a change – a change based on the policy stuff that the management side of the city was supposed to leave to the electeds – and yet there they were, listening to AE officials say they couldn't quite do that. So the $71 million stuck. Two weeks later it showed up at Spelman, Cole, and Riley's presser.
How It All Rates
The June 7 council meeting became Rate Decision Day as the work sessions pushed into late May. When Spelman, Cole, and Riley held their presser, their efforts became the focus of discussion in the media and on the dais. With roughly a week to go before the vote, it seemed as if Morrison, Tovo, and Martinez were ready to accept $71 million. In return, Spelman, Cole, and Riley were ready to let their colleagues take their best shots at a handful of adjustments to other portions of the rate proposal. So on June 7, rates went up, and everyone – remarkably – even seemed satisfied (see " The End Result," June 15, 2012).
A week before the decision came down, Ott was ready to take the credit. "This city manager chose to address the issue that had not been addressed for 17 years," he said. Ott has about a third of a point. Someone needed to have the intestinal fortitude to muster a change in AE's rate structure. Things were bad, getting worse, and – as everyone agreed – the utility's survival as a municipally owned organization is critical to the city. But in November 2009, it was Duncan who delivered a surprise kick in the pants that set the rate case in motion – a PowerPoint presentation that illustrated AE's dire financial picture. It was something only he – as a well-respected former council member, and then on his way out the door after a long city career – could pull off.
Ott notes that even he was surprised by Duncan's announcement. "It wasn't until near his departure that [Duncan] announced to everyone, including me for that matter, that we were on the brink of this financial crisis," he says. Weis, a newcomer to Austin, was handed the unenviable task of crafting a new rate structure and selling it to a City Council he barely knew. "I think Roger certainly had a lot of credibility with a lot of people," says Riley. "Larry didn't have that history with people in the community, so it might have been a little more challenging for him and his staff."
There was a further side effect of Duncan's departure: With a replacement, Ott could bring the utility closer to the City Manager's Office. He'd often send Assistant City Manager Robert Goode along with Weis for formal meetings with council members. For the utility, this provided some insulation. "From the very beginning, Marc Ott said one thing to us over and over and over again," says Mark Dreyfus, AE director of regulatory and government affairs. "He said, 'You bring your best business case to the council, and let me handle the political environment.' So he directed Larry to develop that best business case, that's what we did." Still, it removed some of the unfiltered frankness and total access that Duncan brought with him.
Nevertheless, the council and the utility put forth a ton of effort just to arrive at a place where everyone was sort of happy. Whether or not the issue comes up the next time anyone's up for re-election remains to be seen.
Of course, none of it may matter. Council members remain hopeful that they'll be able to fend off the near-certain attempt by the Legislature to deregulate the region. They've taken pains to conduct a process that could make for a successful defense of the utility's rates before the PUC. But the reason no politician wants to raise any sort of fee – as Martinez put it – illustrates the extreme post-Goldwater/Reagan setting where public sentiment remains challenged to see the benefit of paying for any large civic endeavor. Though a utility isn't exactly your typical battleground for social empowerment, if the "shrink it!" idea visits Austin Energy, we could all be in for something of a tragedy.
This reporter spoke on the record to every council member, the city manager, an Austin state representative, two current AE executives, and one former GM in preparing for this story. Each one said it is critical that the utility remain in municipal hands. Without the income provided to the city by the utility, a host of city programs – potentially from parks to public safety – would face cuts. Control over the utility also allows city officials to set conservation and green generation priorities that might otherwise be ignored by a private, profit-driven firm.
"We need control over our destiny," said Spelman. "If we are being served by the usual mélange of wirage companies and retail companies, we don't."*Two changes have been made to reflect the correct month a proposal was made by Council Members Morrison, Tovo, and Martinez, and the total amount the city paid to a consumer advocate.