Austin City Council decides to continue study of rate hike proposals
On March 1, 2012, the Austin City Council decided to postpone a decision on whether or not Austin Energy’s proposed rate case would be approved.
Leaving politics and who is “right” or “wrong” aside, the equitable distribution of energy costs is at the core of the issue.
The Financial Perspective:
“Austin Energy has proposed raising its rates 8.7 percent this spring, with another 3.8 percent increase in 2014. The utility has not raised its base rates in 17 years and has exhausted almost all but its emergency reserves to cover deficits of $76 million in 2009 and $86 million in 2010.”(1)
The Management Perspective:
According to Austin Energy General Manager Larry Weis, the consequences of an unsuccessful rate increase could include the following:
• A less reliable grid.
• An eroding ability to deal with emergencies, such as power plant failures.
• Cutbacks in energy efficiency programs and other long-term investments that require up-front spending.
• Having to pass on quick-to-emerge opportunities to buy into cheap natural gas or wind facilities, for lack of cash on hand.(2)
The public advocacy perspective:
“A consultant hired by Austin Energy concluded that many medium to large businesses have been paying far more than the actual cost of serving them electricity.” As a result, Austin Energy proposed that homes and small businesses pay for more, which would result in a ~20% rate increase for residential customers.
Tom Smith, executive director of the Texas branch of consumer advocacy group Public Citizen stated: “One of the questions before the council is, who should the rates really benefit? Do you choose a cost-of-service model that benefits the hundreds of thousands of residential consumers or 20 or so large industrial consumers and data centers that consume 18 percent of the power?”(3)
My perspective:
Other than how many pennies it takes for me to get one dollar in change, I am unable to recall any consumer good (critical to my daily existence) that costs the same today as it did 17 years ago. According to the U.S. Inflation calculator, it would cost $1.51 today to buy what $1.00 could in 1995 – 51% inflation.(4) At the outset, Austin Energy’s rate increase proposal is actually incredibly reasonable.
Let’s get one more thing clear: Austin Energy in a municipally owned utility. Translation: Austin Energy is wholly owned by the City of Austin. What this means is that Austin Energy lacks the “corporate greed” motive to punish individuals and small businesses to the benefit of big corporate clients.
For example, starting in 2009, Austin Energy customers receiving State Medicaid benefits or Travis County Energy Assistance Program benefits were automatically enrolled in the City of Austin utility discount program. Noted as “one of the most generous in the nation, [the program] provides utility bill discounts of about $45 per month for an average customer. As a result of the automatic signups by the City, the number of low income customers receiving utility bill discounts has been increased 82% from 4,501 customers in 2008 to 8,164 in 2009. The discounts saved participants $3.1 million in 2009 – an average of about $400 per participant.”(5)
This current rate case episode is not a big energy company hiring a special consultant to excessively allocate expenses to small customers who cannot protect themselves. Instead, this rate case is about equitable expense allocation across a customer base. Many customers receiving financial assistance undoubtedly and deservedly need it. Many individuals and small business customers, who currently pay less than the true cost-of-service, benefit as well.
But here’s the problem: Those ‘20 or so large industrial consumers and data centers that consume 18 percent of the power’ provide jobs and tax revenue to the City of Austin. The large industrial customers and data centers are also sophisticated enough to understand the “electricity premium” they pay to be located in Austin. At some point, these large customers have to focus on their own cost structure and unjustly high electricity prices in an electricity-intensive industry leads to relocation.
In conclusion, Austin Energy’s management is telling the City Council that the utility risks serious financial and service complications if rates are not higher. Austin Energy is one of the leading and most innovative utilities in the country and its managers have multiple decades of experience. The City Council should vote with the utility experts before Austin puts its owned utility into bankruptcy.

(2) Ibid.
(3) Ibid.


1 Comment

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One response to “Austin City Council decides to continue study of rate hike proposals

  1. joelmeyer21

    Ironically, I think a lot of the outrage over the rate case stems precisely from the fact that Austin Energy has kept their electricity rates low for so long. I think that most rational people are willing to accept the fact that things get more expensive over time, but after 17 years of paying the same rate it is not surprising that people are up in arms. I wonder why the decision was made to hold off the inevitable rate increase for so long over at AE. Surely there is a way to gradually increase rates on a year-by-year basis based on projected cost shortfalls. Obviously you don’t want to have to go through the headache of a rate case every year, but I wonder if a formula could be adopted that could help determine rates on a more frequent basis. I think that would be an easier pill for most residents to swallow.

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