Come This Winter: Part 3
Courtesy Pixabay
Come This Winter – Part 3: Austin Energy’s Biased Rate Case
Gaming the System
© Paul Robbins November 27, 2022
This is the third article in a series detailing energy utility bill increases that affect everything from household budgets to the world economy.
In This Story…
Rate Case Summary
Flaws in Rate Case Process
Inflated Revenue Requirement Estimates
Rate Case Ignores Half the Bill
Ignoring Value of Energy Conservation
Credit Agency Pressure
Austin Energy Appoints Its Own Judge
…the restrictions AE [Austin Energy] imposed in the [rate] process suggest that the entire exercise is simply designed to placate public desires to be heard rather than provide an actual forum for different interests to be presented to the City Council and have those views truly considered. This can only undermine public confidence in any rate decision the City Council will make, particularly one that closely lines up with AE’s recommendations.
– From NXP Semiconductors Final Brief in Austin Energy (AE) rate case, July 2022
The City of Austin has operated its municipally owned electric utility since 1895. It was, in fact, created to challenge a privately-owned utility that its citizens thought indifferent to the City’s future.
One expects a public utility to act on behalf of, well…the public, and protect the average person from the ravages of the market. By appearance, the local electric utility’s executives responsible for proposed bill increases seem, at best, insensitive; at worst, outrightly cruel.
Austin Energy has been planning a rate increase for several years, but it was postponed due to the Covid pandemic. Beginning in April of this year, an elaborate hearings process occurred, followed by a decision by a judge of administrative law in September. While the judge’s decision carries some weight as a professional determination, any and all of his conclusions can be ignored by the Austin City Council in their final decision this fall.
This story will explain the major issues in the current rate case, and more importantly, how the numbers were juked and the rules were rigged by the utility to slant the rate case to its preferred outcome. Some readers may dismiss this story as too wonkish. But for those who study governance, it is a classic example of how bureaucracies, public and private, bend and manipulate the rules theoretically designed to regulate them.
Ways that the rate increase can be mitigated or even eliminated will also be discussed.
Rate Case Summary
The current rate case deals with the “hard costs” of the utility – power plants, power lines, buildings, and employees – and can be profoundly complicated, both technically and politically. These costs are overlaid on top of increases for pass-through costs including fuel, regulatory costs paid to the Electric Reliability Council of Texas (ERCOT) grid manager, and Community Benefit Charges such as the utility’s energy efficiency and solar programs.
The proposed rate increase falls largely on the Residential Class. Austin Energy currently proposes a base rate revenue increase of $35.7 million per year. But it wants to increase rates for the Residential class by $46.2 million.
And it will increase the average Residential bill (875 kwh) by $136 increase, while customers that use 3 times the average will see a $556, 13% decrease at the beginning of 2023. This is in addition to an 18% increase in fuel costs and regulatory fees that went into effect November 1.
Various parties or “interveners” have joined this rate case to challenge how it affects their interests. They are made up of advocates for various rate classes (Residential, Commercial, Industrial), as well as interveners advocating for the environment and renewable energy.
Flaws in Rate Case Process
• Biased Test Year – A utility’s rate increase proposal is built around a “test year.” This packages consumption and costs for a typical recent year as a base, tweaking it to adjust for average temperatures (which affects air conditioning and heating) and price factors.
In the current rate case, Austin Energy chose to use 2021 as a test year, to the bewilderment of several interveners. This year included both the highly abnormal Covid pandemic, as well as Winter Storm Uri, which knocked out power to 220,000 Austin Energy ratepayers, some for as long as 6 days. Critics believe that 2021 will underestimate consumption and revenues, creating a need to increase rates when the money may not really be necessary.
• Limited Discovery Questions – Parts of rate cases can be highly complex. Austin Energy limited each intervener to only 50 questions apiece. Even though the utility took 7.5 months to develop its rate proposal, interveners were allowed a maximum of two months to submit their information requests. And if the utility answered the question insufficiently, the answer still counted against an intervener’s quota.
• Biased Rate Model – Utility rate proposals also involve a mathematical “model” allocating various power plants and power costs to different rate classes. Different rate models allocate more or less of the utility’s costs to Residential, Commercial, or Industrial customers.
This kind of rate “class war,” has been a fixture of contested rate cases for decades at a minimum, if not centuries. This will not likely change until there is world peace.
Nonetheless, Austin Energy chose a rate model preferential to its philosophy of placing an enormous rate burden on Residential customers.
Inflated Revenue Requirement Estimates
Courtesy Pixabay
A rate case requires the utility to justify all of its costs, including ones in the current bill, as well as requested increases.
This can lead to some bewildering alliances between the interveners. The war between Residential, Commercial, and Industrial rate classes over who pays for an increase is often bitter. But these same rivals ripping each other over rate-class allocation will often ally with each other to attack the utility’s rate increase itself, noting savings for the utility from various actions and strategies, and exaggerations and mistakes in the utility’s calculations.
Several of the interveners in this current case presented cogent evidence of unnecessary costs that, theoretically, could eliminate the need for a bill increase, and in some cases, even reduce bills.
The savings are detailed below. Theoretically, there is enough potential savings for a rate decrease.
Rate Case Ignores Half the Bill
Austin Energy refused to discuss anything other than hard costs (power plants, power lines, buildings, employees) in its rate case. However, soft costs or “pass-through costs”, including fuel and transmission fees now make up over half of gross revenue.
Customers do not pay rates as much as they pay bills – both hard and soft costs.
As explained earlier in this series, increased fuel costs and regulatory fees have raised the cost for the average Residential customer by 18%, $187 a year.
And since large Commercial and Industrial rates are lower than Residential rates, the percentage of bill increases caused by pass-through fuel and regulatory cost increases stunned these customers as well. A typical Austin hospital, for instance, will receive a 25% bill increase amounting to $457,000 annually, just for pass-through costs.
During the rate case, ways that fuel costs and other riders could be lowered were ignored because the utility intentionally limited the scope of the proceedings.
There are at least two ways that fuel costs might be lowered or adjusted to lower the bill. The first is to extend the mortgage schedule of Austin’s biomass plant. (Due to the plant’s history, debt financing is included in the fuel cost rather than the rate.)
The second is to adjust the fuel cost monthly rather than annually. This would likely lower the amount of funds required as a reserve. Austin Energy used to adjust fuel costs monthly, but changed it to an annual adjustment to provide predictability for its customers. Such predictability, however, is small consolation to Austin customers whose budgets are already reeling from inflation.
If these pass-through cost increases were not galling enough, Austin Energy would not go public with its request for these increases until the week before the utility asked for City Council approval. Though the utility knew there would be an increase of some kind for the better part of a year, it blindsided the public, with no effective time to prepare.
Ignoring Value of Energy Conservation
Since 1977, the City of Austin has developed a culture of energy conservation.
It began with its first building code requiring increased efficiency in buildings in about 1977. In 1981, the City implemented its first conservation-based progressive rate. The following year, Austin began structured programs that incentivized conservation retrofits. This was followed by a voluntary program for advanced efficiency in new buildings in 1985, which transitioned to the Green Building Program in 1991.
While these programs won national and even international recognition, their cumulative value in the real world over decades has been proven. In 2021, Austin Energy had the lowest average Residential consumption in ERCOT, 26% below the average.
In 2021, Austin had the lowest average Residential consumption of the top 10 utilities in ERCOT. It was 26% lower than the ERCOT average.
Conservation strategies amounted to about $200 in average annual savings per Residential customer for fuel and regulatory costs in 2021. Conservation also deferred 940 MW of peak power, enough to displace $1.2 billion in gas generators (2023 dollars). In addition, energy-efficiency strategies have prevented a considerable amount of air pollution and carbon emissions.
Eliminating the progressive rate structure will obviously harm this successful multi-decade effort to collectively lower bills. However, due to the twisted rules of the rate case, savings for pass-through costs and future power plant costs could not even be considered.
Credit Agency Pressure
The Utility Doubles As Ventriloquist
Celmakie, Wiki Commons
Almost all local governments in the U.S. take on debt to finance their capital improvement projects. These borrowers are scrutinized by credit agencies, who rate the financial risk.
Recently, Fitch Ratings downgraded Austin’s bonds. Though still a very good credit risk of “AA-“, Fitch cited weaker cash flows and more debt as reasons. Such a downgrade can increase the interest rate of future borrowing. But what was particularly curious was Fitch’s public comment advocating a rate increase.
The Stable Outlook…assumes the implementation of AE’s proposed base rate increase in January 2023. The rate adjustment remains subject to city council approval, which AE anticipates will occur in October to November 2022. The planned rate increase is projected to contribute an additional $48 million in base rate revenues…
A cynical person might get the impression that Austin Energy was lobbying Fitch to pressure the City Council to approve a rate increase. Curious, I sent an Open Records request to the City asking to view the utility’s communications with the agency. Instead, the City responded by asking for a Texas Attorney General’ opinion to exempt “some” of the information because it was competitive. (Not that it should be surprising, but the utility did not provide “some” of the information that was not competitive either.)
The pending Attorney General decision on release has delayed the review of information that might exonerate suspicions that the utility is operating in an overtly political and opportunistic manner.
Austin Energy Chooses Its Own Judge
In Austin’s rate case, the administrative law judge that determines if rates are fair is called an Impartial Hearings Examiner (IHE). After considering what is often exhaustive (and sometimes horrendously boring) testimony and evidence, the IHE made a ruling on the arguments of the utility and the rate-increase interveners.
While the opinion of the IHE is given weight, it is not sovereign. There have been hearings before the City Council in November, with another hearing schedule December 1 (during the run-off elections of City Council members). The Council has the option to affirm or completely disregard the IHE’s recommendations.
However, an important matter that no one has considered is who commissioned this presumedly objective judge. Under an Open Records request, it was revealed that the IHE was chosen by three people who worked for Austin Energy. The utility’s recommendation was subsequently confirmed by City Council. So even if the IHE’s objectivity was beyond question, the process itself was tainted.
No one would remotely consider allowing any of the interveners to appoint the judge that rules on their case. Having Austin Energy choose him was just as flawed.
Something In Common
As one of 10 active interveners in the Austin Energy rate case, I find myself locked in a contradiction.
As a Residential consumer advocate, the Commercial and Industrial customers who are interveners would be considered my natural adversaries, as they argue that even more of the rate increase be placed on the Residential class. However, I find myself having more in common with them than I do the utility.
The Commercial and Industrial customers may be motivated by self-interest, but at least they care about rooting out unjustified costs.
All the rate-case parties have had their access to information, and subsequent effectiveness, constrained as the utility seeks to foist its rate increase on the city as winter approaches.
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This is the third article in a series on how utility bills are dramatically rising locally, nationally, and around the world.
Robbins is an environmental activist and consumer advocate who has lived in Austin for almost five decades. He is editor of the Austin Environmental Directory, a sourcebook of environmental issues, products, services, and organizations in Central Texas. The publication has been offered free to the public since 1995, and can be accessed free online.
Thanks to Tony Switzer and Gail Vittori for reviewing this story.
Continue to Part 4: Power Piracy in Europe ->