January 27, 2012

 After several thousands of pages of reading, scores of meetings, and hours of deliberation, I can offer the following starting points for discussions on the Austin Energy proposed rate design.  Please see below for background details.

 Thanks,

Bill

 

Revenue Requirement Studies

• Reduce revenue to cover only projected operating losses this year

• Scrub the AE budget to find significant savings for the fiscal year 2013 budget

• Study financial policies, reserve funds, and capital improvement program to develop more defensible and transparent revenue requirement

• Prepare for future, frequent, and small rate increases over time to mitigate rate shock for most sensitive customers

 Fixed Charge

• Reduce to $10 for customer charge and $5 for electric service delivery charge

 5-Tier Rate Structure

• Keep 5-tier progressive structure

• Make first 250 kWh free with new fixed charges

• Recalculate rates for lower required revenue

 Customer Assistance Program

• Waive all fixed charges

 House of Worship

• Move to new commercial rates but eliminate demand charges on weekends
• Study Time of Use rates before proposing switch from commercial rates

 Schools

• Offer 10% discount on new rates

 Solar Programs

• Offer both Value of Solar rates and net metering options for customers to choose from

• Study and recommend multi-year fixed VOS rates and fixed rebate incentives to bolster the solar community’s business planning prospects

• Study VOS with economic development community benefits

 Out-of-City Customers

• Plan governance change to include out-of-city representation at “board of directors” level

 General Fund Transfer

• Plan change in General Fund Transfer to eliminate fuel revenue pass through and other, smaller transfers
• Plan change in EGRSO funding to include Austin Energy, Austin Resource Recovery, Austin Water Utility, and General Fund

Background

For the past several months the Austin community has been debating the good and bad of Austin Energy’s electric rate design proposal.  It’s been intense but healthy as folks from the Public Involvement Committee, the Electric Utility Commission, and scores of advocates have picked through the details of a design that is radically different from what we have now.  These volunteers should be commended for dedicating so much of their time and expertise for the benefit of the entire community.  In some cases, I don’t agree with their analysis, but in others I share their concerns.

Austin Energy has done an extraordinary job of putting together a design that tries to meet our community-endorsed objectives of energy efficiency, renewable energy, and energy conservation.  To their credit, the utility’s staff and leadership long ago embraced a model that would ultimately drive them out of business, and now they have started to steer the $1.4 billion company towards a different future, one that can sustain these important goals of ours all while keeping the lights reliably on.  The tough thing about the proposed design is that AE has lost its sharp focus on maintaining affordability for all of our ratepayers by asking our customers to absorb a 12% rate increase all in one go.  I think we should keep the parts of the design that help us get closer to our goals, tweak those that don’t, and slow the pace of the overall increase.

I am not satisfied with the research and analysis that support AE’s revenue requirement of an additional $126 million each year.  While the utility needs a significant structural fix to its business model, the revenue requirement has too many assumptions and lacks plain, understandable comparisons to our industry peers for me to feel comfortable passing on such a large increase to our customers.  I suggest that AE go back to work on the revenue requirement, paying particular attention to our financial policies, our reserve funds, and our project capital improvement program to more thoroughly substantiate the need for additional funds.  In the meantime, the utility will need to propose a smaller revenue increase that covers our projected losses for the year.  Once AE finishes its additional studies, we all should expect another rate increase that will help AE fix its structural imbalances and replenish the most critical of its reserve funds.

In the residential class I support the concept of higher fixed charges coupled with a progressive five-tier rate structure.  I think the design concept will help us get closer to achieving our ambitious goals of 800 MW of energy efficiency savings and 200 MW of solar generation by 2020 by separating revenues from the sale of electricity and by making the largest users pay the most.  But I don’t think the design properly acknowledges the value low energy users bring to our community.  Therefore, to offset the impact of the higher fixed charges, I suggest that the fixed charges cover the first 250 kWh all residential ratepayers use each month.  This could lessen the bill impact on all of our customers and could help those who use the least see smaller increases than originally proposed.

The $22 combined fixed charges are too much for our customers to pay in the first years of the new design.  Instead, I suggest that we increase our combined fixed charge to $15 per month, with $10 paying the customer charge and $5 going toward electric delivery charges.  In future years, it may be necessary to increase these charges back to the $22 level, or higher.  But it is not acceptable to me to ask our customers to increase their fixed charges by so much all at once.

For our low income customers, I suggest we waive all fixed charges each month.  And since the first 250 kWh will be essentially free for all residential customers our low income ratepayers could experience a real benefit as well.  With these program details in mind, I’d like Austin Energy to enroll as many low income customers as we can.  AE’s current proposal would increase the number of Customer Assistance Program enrollees to approximately 18,000, up from about 9,000 today.  If we can work with our CAP partners to further increase that number to at least 25,000, we will be serving our community to the best of our current abilities.

Like many others, our houses of worship have been asked to accept a substantial increase to their current rates.  We must acknowledge the charitable work they perform in our community but also recognize the burden many of them place on the system during weekday evening programming.  AE has proposed that we switch all houses of worship to Time of Use rates.  This is a wonderful concept but it hasn’t been studied enough yet; we just don’t know what the overall impact Time of Use rates will have on their operations.  Instead, I suggest we keep houses of worship on the proposed commercial rates complete with the associated demand charges but eliminate those demand charges during weekends all year long.  At the same time, AE can further study TOU rates and how they are likely to impact houses of worship.  Once more conclusive evidence is developed we can then have an informed conversation about what rate structure may be best for our worship community.

With 5 MW of rooftop solar already installed, and another 30 MW just brought online in Webberville, we have made some good, but small steps towards achieving our 200 MW goal.  And there are many that would like us to increase that goal to 300 MW of rooftop solar.  Whatever the goal may be, we need to have rate structures flexible enough to stimulate this burgeoning sector in as many directions as possible.  With that in mind, I suggest we keep the Value of Solar rate in place but also offer a net metering option for our customers to choose from.  In addition, we might want to provide some certainty to the solar business community so that they can make reasonable plans to build and grow their companies.  Instead of adjusting the Value of Solar rate each year, I suggest we look at fixing the VOS rate and our solar rebate incentives for a multi-year period.  We could also design the solar rebate and VOS programs to slowly and predictably scale down as the market reaches sustainable pricing levels.  Future programs might be designed to have fixed incentive and VOS rates for multiple years so that we can provide the transparency our solar businesses need. 

While we enact these changes now, Austin Energy must continue its work to prepare for future, frequent and small rate increases over the next several years.  In order for the public to accept these increases, AE should:

• Scrub its budget to find significant savings for the fiscal year 2013 budget, savings that will ultimately reduce the need for higher rate increases in the future;
• Conduct detailed studies analyzing our financial policies, reserve funds, and capital improvement program to ensure the revenue requirements are defensible and comparable;
• Work with the City’s financial staff to study the General Fund Transfer methodology and policy to explore how to eliminate the fuel revenue pass through and other, smaller transfers;
• Place greater strategic emphasis on energy efficiency programs, not just on funding levels but on outcomes to promote effective and innovative programs;
• Redo the Value of Solar study to consider economic development impacts and advise whether those benefits should be reflected in VOS rates, in economic development programs, or in other arenas;
• Reconsider our solar program strategy to slow the ramp down of rebates.  Instead, rebates could be set at multi-year fixed levels that step down at major capacity thresholds and should be predictable for business community planning.

The City Council also needs to prepare for future, smaller rate increases over the next several years.  Waiting 17 years has done none of us any good and we would be wise to plan several small increases over the coming decade.  Council should also conduct a serious debate about the governance structure of the utility to consider providing representation at the “board of directors” level to customers who live outside of the city limits.  This change in particular is one that should be considered in the next few months.

I believe these measures could bring some much needed financial stability to Austin Energy, help move the utility closer to a sustainable business model, and ease the rate increase burden on our customers.  Are my suggestions a perfect compromise?  Probably not.  But it moves us further along and provides the utility, our ratepayers, and Council with a clearer path to follow so that we can make better, timely, and more agreeable decisions in the future.