Austin Energy Wins Round One

Until Tuesday of last week, it looked like we were all set for some Capitol theatre. The persistent reason that Austin Energy ratepayers hadn't seen an increase in their electric rates for 18 years (until City Council action last summer) would be on graphic display this week before a panel of state administrative law judges. Five parties and representatives of the utility were ready to debate dry notions about cost, operations, and accounting, in order to devise answers to these questions: Just how much money does the utility really need, and how should those costs be distributed?

Three days before the public hearing was scheduled to begin (with a preliminary session Friday morning), whispers began about a potential settlement. By Thursday's Coun­cil meeting, everyone was ready to hear the details of what the averted crisis was going to cost AE; the term sheet only became available late Friday morning, just before Council members approved the settlement in that form. In short, the agreement that would put an end to what could have been a very costly appearance in front of the Public Utility Commission for the utility appears to be much better than anticipated – at least for AE and for city of Austin ratepayers. In order to placate a slice of complaining suburbanites – those lucky few who live in huge houses outside the city and burn electricity like there's no tomorrow – AE will grant them a break from the rates originally scheduled under the new system. As structured, it appears as though the only folks who will take a comparative hit are out-of-city ratepayers who don't consume a lot of energy during the summer months. As a result, AE's prospective annual revenue is reduced by approximately $5.75 million – a relatively nominal reduction, at least compared to what might have been, but still, it apparently does mean that out-of-town customers will be getting a break that Austin residents will not enjoy.

The utility will maintain its much-debated but long-standing 9% transfer to the city's General Fund, its low-income customer assistance program, and its virtually 100% support of the city's Economic Growth and Redevelopment Services Office. AE conceded only a change in its recently designed five-tier rate system; outside city limits, that will be compressed to what amounts to three tiers – which will enable lower rates for large consumers.

Assuming the agreement holds and all parties, including, eventually, the PUC sign off, AE and the city step out of the shadow of the PUC, whose jurisdiction holds only outside the city. In principle, city staff and Council can enter their 2014 budget cycle next month with considerably more certitude about utility transfer funding – which overall amounts to roughly 20% of the city's General Fund revenue. How­ever, this penultimate climax doesn't necessarily end the vigilance on Second Street – not as long as the Legislature remains in session. The city's ability to maintain control of the utility – perpetually under threat of legislative action – in turn represents Austinites' ability to determine their energy future in an environment somewhat independent of pure market forces.

That all goes away should the Legislature decide to deregulate the Austin market. Throughout their 2012 deliberations on the potential rate increase, Council members – especially Mayor Lee Leffingwell – alluded to that potential disaster. By all appearances, Council members have done their level best to avoid another Capitol assault on AE, and the settlement should help in that regard. Though no legislation is currently pending, rarely a session passes during which someone doesn't at least make rhetorical threats to deregulate AE. This settlement brings some resolution and comfort, but it's only one battle in a longer war.

Austin Girds for Battle

In August, suburban ratepayers filed a petition at the PUC to challenge the rate increase, exercising the appeal rights afforded them because they are not directly represented at City Hall, as are Austin voters. Curiously, in some ways that strengthens their relative position; not being subject to Austin jurisdiction or its sometimes baroque public politics, they can apply for redress directly to the state. PUC politics are not necessarily as foreboding as those at the Lege, but a Capitol rate case was not a comfortable venue for either the utility or the city.

Energy ratemaking is a dense process, burdened with economic theory and master-level accounting, but the underlying goal remains similar to the central principle of any business: The utility must collect more revenue than it spends. For a privately owned utility, the determination of how it accomplishes that is largely confined within the corporate walls. A municipally owned utility like AE must not only publicly account for its methods to its owners – in this case the citizens and elected officials of Austin – but must also periodically justify its rate structures and expenditures to outside regulators. Needless to say, experts can sharply disagree on even the basic nature of income and expenditures at a given utility – and that certainly happened to AE at the PUC.

Last year, after months of planning, an Elec­tric Utility Commission review, and seemingly endless Council hearings and re-hearings, there had emerged a new set of rates underscored by a fresh system of rate designs. Though everyone at City Hall anticipated the filing of a PUC rate case, hopes were high that what had finally passed Council on a unanimous vote would survive PUC review and replenish the utility's coffers, badly depleted in recent years.

Council Member Bill Spelman, who had been instrumental in forging a resolution on the rate package, expressed his satisfaction to online newsletter In Fact Daily. "Austin came together tonight to make the best of a difficult situation," he said via email. "Years of hard work have led to a significantly reduced rate increase; nation-leading programs for low-income customers, renewable energy, and energy conservation; and most importantly, a financially stable electric utility that can continue to affordably serve its community and customers far into the future."

The new structure sought to increase utility revenues by roughly $91 million in two stages: 1) an immediate residential hike, and 2) an increase for industrial ratepayers that would kick in after existing contracts expire in 2015. It featured a five-tier residential block rate system that more closely associates utility rates with usage (the more kilowatts you use, the more you pay), thus incentivizing conservation. The new system also left intact the utility's direct transfer to the city's General Fund – about 9% of income, amounting to about $105 million in 2012 – along with the nearly $10 million that AE provides to the city's Economic Growth and Redevelopment Services Office.

Across the board rate increases amounted to a roughly 14% average for residential customers, plus a $4 bump in the customer service charge – effectively a $10-$24 increase in summer bills for small to average users. (Council members reserved the right to bump up the rate increase, should it appear necessary, by another $15 million.) In key compromises responding to public input, the new rate package features discounts for local school districts and houses of worship; for the latter, the new structure ignores characteristic peak weekend demand – meaning a steep discount over what they would otherwise be charged.

Along the way, multiple critics – including representatives of Public Citizen, the Texas Legal Services Center, Texas ROSE, and a handful of local environmental organizations – had offered criticism about nearly every aspect of the rate structure. But by the time it came to a vote, Public Citizen's Tom "Smitty" Smith seemed to reflect a common satisfaction. "We got a lot done tonight," Smith told In Fact Daily. "We have annual reviews of many of the critical programs and retroactive review of the fuel charge where a lot of the bad stuff has been buried over the years. The Council reaffirmed that they want to become a world-class leader in terms of efficiency and renewables."

The Critics Attack

Certainly, a few sharp words from Public Utility Commission staff were as inevitable as the challenge petition itself. By the middle of February, AE was facing a complex web of criticism: from the petitioners (aka Homeowners United for Rate Fairness), from the state's Office of Public Utility Counsel, and from PUC staff. But in a somewhat ironic coalition, Austin groups that had been among the loudest critics of the new rate structure as it was developed by Council now moved to the utility's defense. It's not yet clear exactly when negotiations for a settlement of the case began; public posturing, however, was immediate.

Utility rate expert Marilyn Fox provided the bulk of HURF's argument to bust AE's rate structure. In written testimony filed for administrative review, Fox criticized AE's overall accounting methods, suggesting specifically, for example, that it had inappropriately accounted for street lighting expenses. But her overall math was far more dramatic: She argued that AE's increase should be slashed by $82 million – of the $92 million approved by Council. In other words, Fox proposed that the PUC reject nearly the entire rate increase. Fox also argued that AE's five-tier residential rate system – intended both to spread costs equitably and encourage conservation – "is not supported by common practice or economic studies."

Direct written testimony from the Office of Public Utility Counsel, a state-run consumer advocacy agency, was also harsh. The office raised the same accounting questions, but added strong criticisms of the utility's reserve policies and its debt service coverage – two key factors that AE and Coun­cil members understood help reinforce the utility's currently strong bond rating. OPUC representatives argued that the utility could afford to allow these backup funds to shrink.

PUC staff filed the last set of critical documents; with them came more questions about the utility's accounting practices and true revenue needs. PUC staff argued for a $31 million reduction (roughly one-third) to the General Fund transfer, and a nearly $46 million reduction (more than half) to its revenue requirement and rate increase. Moreover, PUC staff recommended a halt to discounts offered by the utility to houses of worship and school districts – one result of tough public horse-trading by Council members and intended to soften the rate increase for nonprofit customers. Staff also called for an end to the utility's consumer assistance program – the discounts it offers to low-income ratepayers. At a minimum, that was a curious position for an agency whose charge is to advocate for utility consumers – although arguably, a break for low-income customers "discriminates" against the better-off.

AE Fights Back

The utility's response to the barrage was not coy or even particularly deferential. At many hundreds of pages, AE's rejoinder was detailed, dense, but surprisingly brusque for such a technical subject. Mark Dreyfus, the director of AE's regulatory and government affairs division, and CFO Ann Little hammered away in detail at swaths of critical testimony. They also provided more general opinions about the perspective of the utility's critics and, specifically, about what they saw as the analysts' collective failure to acknowledge the distinctions between private and public utilities and the role played by AE as a city asset. "[They] ignored the premise," wrote Dreyfus, "that AE is a municipally owned utility (or MOU) that operates according to distinct accounting and taxing policies and practices, and that as an MOU, AE reflects community priorities." He also described the recommendation that the utility abandon its customer assistance program as "bizarre" and "entirely without merit."

Little, responding to Fox's testimony as well as that of OPUC forensic accountant June Dively, was equally blunt: "They appear to fundamentally misunderstand the nature of ratemaking for municipally owned utilities that own generation," she wrote. There were also specific defenses of the utility's conservative debt and reserve practices (the sort of stuff, argued city bond advisor Bill Newman in written testimony, that keeps the cost of borrowing money low), AE's transfer policies, and the customer assistance program. The utility representatives stoutly defended these city programs, saying the arguments against them reflected poor understanding from critics. "When properly understood, it is clear that AE required the rate increase at issue in this case simply to maintain its credit ratings and to position it for future upgrades to its ratings," Newman wrote about the bonds. "The rating agencies' evaluation of the new rates in November of 2012 supports this conclusion."

In its responses, AE was joined by perhaps unlikely allies – its former critics before City Council. The Texas Legal Ser­vices Center and Texas ROSE – two groups that had pushed hard against the potential costs of the hike to low-income ratepayers – joined the utility's defense of its rate structure and, specifically, the customer assistance program. Consumer affairs consultant Barbara Alexander wrote for the two groups: "The method of cost recovery is reasonable. ... I recommend that the PUC approve Austin Energy's expanded CAP programs and the method of cost recovery included in the June 2012 Ordinance."

Round Two ... and Following

Until last week and the settlement talks, the dispute was shaping up to be a direct battle before the judges. The sides would make their arguments, the judges would make their recommendation, and eventually the PUC members would rule. And until that ruling came down later this summer, AE's financial structure – as well as the future budgetary prospects of the city of Aus­tin – would hang in the balance. Sud­denly, it was all over but the accounting.

Still, even with a settlement in place, to be approved by all parties – and presumably the judges and the PUC – AE finds itself in a position not unlike the one it was in before it made the recommendations to Council to raise and revise its rates. It remains one of the few municipally owned electric utilities in Texas, and one of the largest in the country. It is, in other words, a ripe target for fans of deregulation, kibitzing from their seats on the floor of the Legislature. One source says that something along those lines is very likely. But at least one possible carrier of a deregulation bill – Rep. Paul Workman, R-Austin – appears content with the agreement, so long as HURF signs off.

In a somewhat separate issue, on March 21, Austin City Council members will vote on a still-developing proposal to give ongoing operational oversight of AE (i.e., month-to-month management) to an independent board. Policy decisions – including final say over rates – are expected to remain with Council. There is also the possibility that an independent board might offer member representation to out-of-city ratepayers. Such representation, the argument goes, might just keep them reasonably happy – just as it might keep the Legislature from more intrusive meddling.

The settlement is a bonus for city leadership in two respects. If the deal goes through as framed, the city appears to give up very little – a possible indication of the strength of its position. It also relieves a significant amount of potential state agency pressure. Until Texas turns blue, that's about the best anyone at City Hall can hope for.