by Alex de Marban
Above the din created by
the mayor et al.‘s ceaseless clamor to sell the city’s electric utility is the sound of money being counted. Not necessarily by the lobbyists of the
private electric companies hungry for a deal, but by the budget officers of the
Electric Utility Department (EUD), who are witnessing phenomenal commercial and
healthy residential growth, and predict that between now and next year the
utility will have one of its sharpest revenue increases ever.
Nonetheless, with utility experts predicting that the 1997 state Legislature
will essentially free up monopolized electric service such as we have in Austin
to any and all electric producers, wary department officials stop short of
applauding their stead. “There’s obvious uncertainty about the whole industry,
and that rolls down to us,” says EUD Director John Moore. “It creates some
degree of anxiety but it’s not so severe that we can’t function in an adequate
mode. The whole situation presents new challenges that our employees are
already addressing with energy and effectiveness. But just because we’re doing
good now, doesn’t mean we’ll be doing good enough if the environment takes on a
more severe competitive tone.”
So who knows whether these
profitable days are the utility’s swan song or its coming of age, but at least
for now, the factors leading up to next year’s proposed budget certainly look
promising. The customer base is expected to grow by 2.5%, surpassing 300,000
users for the first time next year. More importantly, two of the utility’s
biggest customers, Motorola and Advanced Micro Devices, are expanding their
chip production capabilities, meaning millions of dollars in new sales. In
fact, revenue, primarily due to customer sales, is expected to swell by 7%,
increasing from $524 million this fiscal year to an estimated $561 million next
year.
To ratepayers, the increased revenue is a boon. The utility has discarded
plans for a 3% rate increase in 1997 and a 9% rate increase in 1998, and now
forecasts no increase in rates for the next three years. The EUD is even
talking about doing the same through the year 2000.
“The biggest effect that competition is having on us internally is we are
doing everything humanly possible to avoid a rate increase,” says Joe Malaski,
the EUD’s chief financial officer. “That’s the most significant thing we’re
trying to do to keep ourselves competive.”
The utility may go even farther than that, perhaps slashing rates to prevent
being undercut by the competition.
“That’s something we’ve never talked about before,” says David Kasper, the
EUD’s director of budget and financial planning. “It may not be substantial,
and it may not be to every customer, but we have to look at everything we can
do to retain our customers, especially our biggest customers.”
To do that, says Kasper, the utility is “approaching our budget a lot
different than we have in the past.”
To begin with, the EUD is proposing to keep more of its money for itself. For
the first time, department officials recommend transferring less than 12% of
the EUD’s revenue to the general fund, and instead want to transfer only 11.7%
next year, or about $59.9 million. By going with the smaller percentage, the
utility would be able to retain an extra $1.5 million. “That $1.5 million can
be used to help offset increases in rates by helping to eliminate some debt,”
says Malaski. Moreover, the EUD hopes the additional money continues to grow:
They’re recommending that the council cap the transfer at $59.9 million
beginning in 1997.
Also, the EUD is reducing operations and maintenance costs by 10%, the first
decrease since at least 1987. Part of that is because operating expenses at the
South Texas (Nuclear) Project (STP), partially owned by the city, are projected
to come in $10 million under budget, an 18% decrease from the current fiscal
year. The reason? “We went into this year’s budget expecting an outage for
[nuclear] reactor #1,” says Kasper. “To our surprise, the reactor was
[repaired] well ahead of schedule and under budget.”
Despite the lower operating costs, STP is still expected to hobble
the utility in the impending footrace to competitive rates. The Nuke currently
represents 40% of the average utility bill, and that likely won’t get lower
anytime soon. The STP’s debt service payments are phenomenal, and at
$100 million this year, represent about 55% of the EUD’s total debt service
payment in the next fiscal year. The STP’s total $998 million debt won’t be
paid off until the year 2020. Moreover, millions of dollars in
legal costs alone are riding on Austin’s lawsuit against STP manager Houston
Lighting & Power, which is expected to come to trial next spring. The city,
which is suing HL&P for mismanagement, has already spent $11 million in
legal fees, and the department is proposing to spend at least another $5.4
million next fiscal year.
The other part of the reduction in operating costs is attributable
to a shell game of sorts: The department wants to simply move funding for its
energy conservation programs, totalling an estimated $15 million, out of the
utility’s proposed $553 million operating budget, and into the EUD’s proposed
$118 million capital budget, for projects that are primarily supported by debt
and last longer than a year. Undoubtedly, some operating expenses will be saved
in the short term, but the move means the department will issue $15 million in
new debt per year. That, of course, means making interest payments, and in the
end, the budget shuffle will be costlier.
“[The move] is definitely an attempt to lower ratepayer bills right now,” says
Kasper. He adds that to minimize interest-rate expenses, the EUD recommends
returning the rebate programs to the operating budget in 1998, a high-stakes
aspiration that may not pan out. “There’s so many variables when you’re doing
long-term planning, you’ve just got to make some assumptions on some things. We
assume after three years that we go and put it back in the operations budget.
Now that’s just our assumption, the council could say, `No we want to keep it
this way.'”
The utility is also pushing
off costs into the future by relying on debt. In 1994, 73% of the EUD’s capital
costs were covered with borrowed money. This year, as well as in future years,
that percentage will jump to 80% – the maximum percentage allowed under the
city council’s financial policy. All of the debt proposed for issuance next
year, $115 million, will be commercial paper, a short-term, low-interest debt
instrument that does not require voter approval.
“Before, we had this surplus of cash where we weren’t having to issue a lot of
debt,” says Kasper. “Now, we have less dollars to invest and as a result, we’re
having to issue more debt. It is a problem, but it’s also the reality of
running a business that’s large.”
By this time next year, the EUD’s total debt will be $1.7 billion, and will
remain a primary issue in any debate regarding a sale of the utility, since a
private company could assume much or all of the debt in a purchase.
Another issue is whether a utility governed by politicians can respond
effectively to a rapidly changing market. Councilmembers Ronney Reynolds, Max
Nofziger, Jackie Goodman, Brigid Shea, and Gus Garcia recently announced that
they are against holding an election for a utility sale until a management
audit is completed, which wouldn’t happen until at least February. Meanwhile,
the future of the utility industry remains in flux at the state and federal
levels, and the department will continue to carry out its work under a shadow
of apprehension.
“What if STP has a problem again?” Kasper wonders. “And what if the sales
we’re projecting don’t materialize? Or what if the expected growth doesn’t
occur? We don’t know what’s going to happen.” n
This article appears in August 25 • 1995 and August 25 • 1995 (Cover).