Savings or Slush?

The City and Austin Energy defend the utility's emergency fund

Savings or Slush?
Illustration By Doug Potter

So far, all has been pretty quiet on the city budget front -- evidence, perhaps, that City Manager Toby Futrell's share-the-pain strategy, and months of lowered expectations for city spending, have had some effect. But one question keeps popping up, much to City Hall's ire: While other departments face staff and service cuts and employees go without raises and citizens live through hard times, city-owned Austin Energy has $183 million in cash in the bank. Why not spend it to shore up the rest of the budget? Or to lower electric rates?

That's the query being posed, most vocally, by longtime environmental and consumer analyst/advocate Paul Robbins, joined by Gray Panthers local co-convenors Charlotte Flynn and Clint Smith. "It is unconscionable that the city's electric utility holds $183 million in cash while the rest of the city government is in crisis," Robbins told the City Council last month in one of his regular appearances. "Money used to lower electric bills can offset tax increases to keep other city services operating. This money can be used either to lower bills immediately through one-time transfers, or buy down a considerable amount of the debt and lower bills permanently."

To which City Hall responds three ways: Austin Energy needs that money. The utility already pays amply for other city services. And even if the $183 million were gathering dust, we shouldn't rely on it to bridge the gaps in the budget. All arguments that may carry this round -- but which won't forever quash the questions born of the complicated relationship between Austin Energy, City Hall, and the citizens.

Waiting on Dereg

What Robbins calls the "slush fund" is Austin Energy's Debt Management Fund, created to house "excess electric utility cash" by the City Council in December 1996, as part of its major push to get AE ready for the new era of electric deregulation. (The same effort led to the "rebranding" of the former Electric Utility Dept.) Back then, many felt it inevitable that the Legislature would in 1997 open up the entire Texas retail electric market to competition, and that Austin Energy would be a sitting duck if it didn't cut its costs instead of raising its rates, which haven't changed since 1994. One way of reducing costs was to pay down some of the utility's sizable debt, which at the time stood at $1.78 billion. Debt service still consumes about 22% of AE's total budget.

As it happened, electric dereg was delayed and, when SB 7 was passed in 1999, municipally owned utilities like AE were allowed to retain their monopoly status. In 1999, AE came back to the City Council to ask for permission to use the DMF to "improve its competitive position" in other ways, "including, but not limited to, funding capital needs in lieu of debt issuance." The council agreed when it adopted the FY2000 budget, at which point AE had $221 million in the DMF.

It has since spent $36.8 million from the DMF to fund the Sand Hill Energy Center gas-turbine power plant; $10 million also went from the DMF in the FY2002 budget to establish the Repair and Replacement Fund "for providing extensions, additions, and improvements to the Electric System." (While the RRF is sometimes described as the "Holly fund," nothing limits its funds to fixing or replacing the Holly Power Plant.) Only $2.2 million has actually gone to debt reduction.

Those are AE's official numbers; in Robbins' reading, which includes not only the DMF but other pay-as-you-go AE cash outlays on capital projects, the utility has actually "overcollected" nearly $500 million since 1996 and spent more than half of it on power generation. Those new facilities include both Sand Hill and the 19 mini-plants (fuel cells, micro-turbines, etc.) that make up AE's "distributed generation" system. These investments, AE has said over the years, have helped it avoid building a massive new plant, made shutting down the aging and controversial Holly plant more feasible, and kept the utility from having to routinely buy power on the volatile, expensive, Enron-sodden open market.

Building AE infrastructure this way irks Robbins on principle: "Are the voters going to get to vote on the next power plant?" he asked the council rhetorically earlier this month. (Unlike in California, nothing requires us to vote on power plants per se, only on bonded indebtedness to build them.) If the DMF were spent on debt defeasance as originally intended, he says, it could lower the average household's electric bill by $37 a month. Even a one-time transfer of $22 million, Robbins and Flynn argue, could eliminate the monthly $5 user fee charged to every AE customer.

Over or Under?

This line of reasoning baffles AE and City Hall, since -- in the words of AE Vice President Roger Duncan -- "by paying for Sand Hill with cash instead of debt, we avoided a bunch of interest payments." The difference between using the DMF to pay down existing debt and using it to avoid future debt, and the resulting pressure on AE's rate base, is lost on Futrell. "It's virtually the same," she says.

Futrell and AE brass get more annoyed when Robbins describes the DMF proceeds as "overcollections," or even more pointedly as "overcharging" the customers. "We have very low residential rates," Futrell argues. "Tell me who's being overcharged." Indeed, the city argues, residential and small-business ratepayers already are paying rates below the cost of service, and have been since before the DMF was established, and the neediest residents are eligible for even more subsidized "lifeline" rates. Large commercial customers make up the difference.

"I think people assume that we are a kind of corporate entity that gouges on occasion," said Mayor Pro Tem Jackie Goodman (typically the council member most sympathetic to Robbins and his AE issues) during the Council's discussion of the DMF last month. (Unlike other discussions of AE matters, which SB 7 allows the City Council to do privately -- much to Robbins' and others' annoyance -- the DMF issue has been aired in several council meetings.) In principle, AE rates could be set so that the utility had no "excess cash" -- but were that to happen, it would likely translate into lower rates for Dell and Motorola, not for you.

As it happens, the city's financial policies define the "excess cash" destined for the DMF as whatever's left over after the utility funds its ongoing operations and maintenance costs, and its debt service, and its current pay-as-you-go capital projects, and 45 days of working capital in cash reserves, and contributions to the Repair and Replacement Fund (the DMF's start-up contribution to the RRF was a one-time thing), and its annual transfer to the city General Fund. Futrell has raised the latter, in light of this year's budget crunch, from 8.8% to 9.1% of AE's revenue, or $72.9 million -- making up 16% of the total General Fund budget.

Right now, there is no "excess cash" for the DMF (or the RRF), although Duncan notes that the fund may still accrue interest in FY2003. According to the city's financial policies, this means AE is actually under-charging -- the policies state that "electric rates shall be sufficient to generate net revenues" for all these purposes, not just to break even on operations and debt service.

Spikes and Nukes

This state of affairs worries AE a bit; their current plan is to redefine the DMF as a contingency fund, plain and simple. "We do have a cash fund balance" in reserve already, Duncan notes, "but it's not huge compared to what we need, based on experiences other utilities have had in this wild market." City Hall and AE point to last year's experiences in Sacramento and Seattle, where the publicly owned utilities were decimated by the West Coast power crisis.

In Sacramento, the Municipal Utility District's $100 million rate-stabilization fund was drained in just 10 months by spikes in California wholesale power prices; SMUD had to raise its rates for the first time in over a decade and add a surcharge to bills to rebuild the fund. Seattle's City Light fared even worse: Even though it purchases only 10% of its power on the spot market, in two summers it lost $590 million, saw the bond houses downgrade its debt, raised rates 58%, and had to borrow money from the city of Seattle's general fund.

The same could happen here, AE says, if it were to lose a chunk of its generating capacity -- perhaps at Holly, or more likely at the South Texas Nuclear Project, which has already shut down once before for a full year, in 1993. That means the DMF "is not a huge slush fund just waiting to be spent," Futrell says. "No major utility is going to be out there without a good contingency fund. If the STNP goes down again for a year, that money would be gone. Gone."

However, Duncan says, AE hasn't yet determined if it needs the whole $183 million in a contingency fund. "We fully expect that we could take a portion of it and buy down debt," as Robbins advocates. "And we certainly could continue to pay for generation," as with Sand Hill, "but the council has to make that decision. We'd like to do that whenever we can, because it keeps rates low."

Reality Budgets

As Duncan alludes, because AE -- whatever its quasi-independent corporate identity and "competitive position" -- is a city department, the council could follow Robbins' lead if it so chose and, in his view, put rate-payers (that is, taxpayers and voters) first. But for years many at City Hall -- notably Futrell's predecessor Jesus Garza, and in their own ways Council Members Daryl Slusher and Beverly Griffith -- have wanted to wean the city budget from dependence on Austin Energy, at least to the degree that AE support of Austin's other endeavors itself threatens the utility's "competitive position." (Though not to the degree of raising property taxes to make up the difference.) Even though city financial policies allow for a General Fund transfer of up to 12%, Futrell was willing to go up to 9.1% -- the maximum allowed under the Council's 1999 resolution -- and no farther, even in the face of a $75 million budget shortfall.

AE pays for more than just General Fund services. The entire Economic Growth and Redevelopment Services office, for example, is funded by Austin Energy -- overseeing the new City Hall project, the redevelopment of Robert Mueller Municipal Airport, the new dispute resolution center, and paying a staffer charged with preserving Austin's "sense of place and cultural identity." AE money also found its way into Smart Growth incentive packages and line items like the Convention Center parking garage, which is slated to have an AE chiller plant on its roof.

Futrell's own mantra this budget season has been "structural balance" -- getting the budget permanently in line, not using AE funds, no matter how slushy, to bridge the current gaps. "Aside from all the other problems with [Robbins'] argument," she says, the DMF "is not an ongoing source of funds. There are all kinds of one-time tricks that you can use to balance the budget, but does the community want this to be a real budget? We've been passing virtual budgets that we can't implement the moment we pass them. It's the wrong thing for the community -- it creates false expectations among citizens and employees. It's not fair."

  • More of the Story

  • Austin Energy Budget

    A summary comparison of Austin Energy's current and recent budgets

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