Big, Contentious Austin Energy Rate Hike Finally Arrives at Council

A speaker opposed to the Austin Energy base rate increase testifies at a Nov. 15 City Council hearing (Photo by Jana Birchum)

In April, Austin Energy revealed a big ask: It wants to change its base rate structure for the first time since 2017. Back then, the city-owned utility gave customers a discount; this time, it wants to do the opposite, saying the basic costs of operating AE (the city's largest department) require more money. The utility's original proposal would have increased the average residential customer's bill by $20 per month; City Council got that lowered to $15, but has also, since the rate case began, reluctantly approved another $15 per month AE rate increase, primarily to cover the rising cost of natural gas. Now, the rate case is reaching its natural end, with Council set to vote on Dec. 1 on some form of base rate increase, with many political balls in play as it does so.

How Broke Is Austin Energy?

Even though Council is ultimately AE's board of directors, as a public utility in Texas the city's power company has to go through a statutory administrative hearing process before it can simply change its rate structure – that's the "rate case." Right now, the base rate – the fixed amount on your bill before the charge per kilowatt-hour of electricity you've used – is $10, about the same as Lubbock and San Antonio, the state's other two large, city-owned utilities. The AE rate structure then has five tiers that charge a customer more the more energy they use. AE wants to raise the base rate to $25 and move to a three-tier structure, which environmental advocates feel would disincentivize conservation and actually shift a higher cost burden to low-income customers while giving the biggest users a decrease.

AE's reasoning for changing the base rate (also called the customer charge) is simple: It needs to recoup $90 million in net losses from 2020 and 2021 and avoid them going forward. AE's original "revenue requirement" – the additional funding it wants to bring in each year to do this – was $48 million a year, which was brought down to $35 million after finding a calculation error. The judge of the rate case process, the independent hearing examiner, suggested $31 million.

The independent consumer advocate, John Coffman and his team, hired to represent the interests of residential and small commercial ratepayers in the case, countered with $6.5 million, for several reasons. The ICA disagrees with the cost audit methodology that AE used to get to $35 million, and ethically disagrees with the 150% base rate increase, which many stakeholders feel would cause rate shock. "Me and my team feel that there needs to be much more moderation and concern over spreading the pain more equitably across the different sizes of customers," says Coffman.

There are a number of issues Coffman takes with AE's assessment of its revenue requirement, outlined in the ICA's exceptions document, that make the difference between $35 million and $6 million. These include disputes about employee head counts in the city's 311 call center (which AE pays for); the size of the transfer AE makes each year into the city General Fund (typically described as the "dividend" that Austinites earn from the utility they own); the impact of the pending sale of AE's old Town Lake Center headquarters on Barton Springs Road; and the time frame used to project future costs, which included several months at the peak of the COVID pandemic (when the utility suspended late fees as a relief measure) as well as Winter Storm Uri. "If they come down closer to our number," says Coffman, "a lot of these other issues become easier, because there's less money you have to charge the people."

In a Council public hearing Nov. 15, AE rebutted those issues point by point. The hearing examiner sided with AE on many of these justifications, but notably rejected the use of 2021 as the "test year" for determining the revenue requirement, saying that AE "better explain Win­ter Storm Uri's impact." Council Member Kathie Tovo agreed, saying she was "compelled by interveners' testimony … it did seem to me that revenue on most years is higher." Austin Energy counsel Thomas Brocato said the utility has already adjusted for Uri's impact.

An electric meter in North Austin on February 15, 2021, following Winter Storm Uri (Photo by John Anderson)

Use Less, Still Pay More?

A different issue is the compression of AE's rate structure from five tiers to three, which the IHE didn't weigh in on except to express concern about rate shock for those not enrolled in AE's Customer Assist­ance Program, which provides bill relief to (some, but not all) low-income customers, and to "recommend that AE either revisit its current rate design or consider a targeted assistance program like CAP, perhaps to be phased out over time."

Coffman points out that AE was an early adopter of a progressive rate design that incentivized conservation and that the proposed change is "going to result in some really big winners and some really big losers. I don't think that the losers are aware of what is at risk. There's some people that are going to get a 30% or more increase in their bill. It's going to be low-income people, people who live alone, people who live in apartments." Coffman's counterproposal is for four tiers: "We're trying to move rates in the direction that Austin Energy wants to move them, but just not as radically and not as much at one time.

"I think there's general consensus that the current rate design has led to people in Austin using less," says Coffman. "That's why Austin Energy is so concerned, is that they do see their energy use dropping over time. The disappointing thing is that their answer is to stop encouraging energy efficiency and conservation so much."

Aside from large customers like NXP Semiconductors, which are balking at increased energy costs, stakeholder pushback to the rate proposal has come in two flavors: socioeconomic and environmental. Many agree with Coffman that the proposal shifts too much of AE's cost burden onto its low-income customers. They also feel the new rate structure flies in the face of AE's 2020 Resource, Generation, and Climate Protection Plan for divesting from coal by 2035, which is supposed to "serve as a model for others in achieving immediate, large-scale environmental benefits and reducing emissions, while maintaining affordable electricity rates."

Texas Climate Jobs Action Fund held a joint rally Sept. 24 at AE's new headquarters at Mueller with local labor unions, Sierra Club Lone Star Chapter, Sunrise Austin, and PODER, citing both environmental and economic concerns about the rate increase and calling for greater labor protections by AE. Kaiba White with Public Citizen, one of the interveners in the case, says the proposal "is in direct conflict with all of the goals that Austin City Council has adopted, that in the past AE has even been supportive of.

"Those who are using less energy are lower-income," White continued. "Austin Energy has tried to kind of cherry-pick the data to make it seem like that's not the case. But people who have more money generally use more electricity; they have bigger houses, more appliances." AE told the Chron­­icle in an email that their "research shows that many low-income customers are currently subsidizing other high-income customers based on the existing rate design. Austin Energy's proposal is intended to lessen the burden on low-income customers."

Labor advocates have also called into question AE's worker protections in light of a rate increase they see burdening the working class. Power purchase agreements with wind and solar suppliers not owned by AE do not adhere to Workers Defense Project's Better Builder standards, which other city projects are required to do. TCJAF's Stephanie Corte said, "Texas construction workers face deadly working conditions, low pay, and unaffordable health care. Aus­tin Energy is a publicly owned utility, and we must ensure public resources are used responsibly in a way that allows construction workers to get home safe every night."

Early this summer, CM Ann Kitchen worked with labor leaders to try to extend those protections to workers on solar farms in West Texas, but Council's reaction was lukewarm and the issue was tabled. "The other perspective was, 'These are people not working in our community,'" explains Kitchen. "We're getting the benefits of what these workers are doing. So I don't think it's right to say we don't have to do what's fair."

Environmental advocates also take issue with how the rate proposal addresses the value to the utility of the generating capacity of customers' solar installations – the "value of solar," or "VoS" for short. Currently AE bases this number on a three-year rolling average but is proposing to change it to a flat rate based on one test year. "Instead of it being a calculation that takes into account the value provided by solar energy over the lifetime of a system, which is 25 to 30 years, at minimum, they're looking at just one year of value," says White.

"So as you can imagine, in this market, that would result in a lot more volatility. The problem with that is when an individual or business is thinking about purchasing solar, one of the key things most of them want to know is, how long will it take for it to pay off? Having a methodology that is more volatile is fundamentally a problem for increased adoption of solar, which is an established city goal." The advocates have proposed a five-year rolling average for calculating VoS and asked AE to develop a program for local distributed community solar installs, effective by October 2023.

Meeting in the Middle

Those changes to the VoS are part of a joint proposal issued two weeks ago by the ICA and three environmental groups (Sierra Club, Solar United Neighbors, and Public Citizen) as a compromise. This plan offers AE a $12 million revenue requirement and increases the base rate to $12 (a 20% increase as opposed to the original 150%). It revises the rate structure to four tiers, following the ICA's recommendation, and directs the utility to reopen its Resource, Generation, and Climate Protection Plan in light of possible federal funding that may be coming next year. "It's still a rate increase, just much lower," says Lone Star Sierra Club Conservation Director Cyrus Reed.

The document points out "the impending environmental compliance costs associated with the continued operation of [Fayette Power Project coal] plant" – which AE failed to divest as planned after a snag in negotiations with their co-owner, the Lower Colo­rado River Authority. So, the compromise suggests AE conduct a comprehensive update to the Resource Plan and come up with a new timeline for Fayette's retirement.

"There is a lot of money in the Inflation Reduction Act that is available for communities that are looking to get out of coal, and particularly to buy down debt," says Reed. "So there is potential that some of that money could be used in a negotiated settlement with LCRA."

The city Electric Utility Com­mis­sion, which has expressed serious doubts about AE's plan, met Monday, Nov. 14, to finalize the recommendation it made to Council the following day. After impassioned testimony from large AE customers against the changes; interveners like Sierra Club and Coalition for Clean, Affordable, and Reliable Energy (CCARE, which also advocates for major customers); and private citizens, EUC Chair Marty Hopkins presented EUC's recommendations. "Though we tried to reach unanimous consensus we were unable to do so," said Hopkins, so two resolutions ensued: one unanimous, one 6-3.

The unanimous resolution recommends either five or four tiers, limits the base rate increase to 20% or $2, and requests expansion of the Customer Assistance Program. The 6-3 vote would cap AE's revenue requirement at $15 million and adopt the ICA's rate design with four tiers. Recommenda­tions also include hiring a third party to update AE's 2015 non-nuclear decommissioning study and incentivizing community solar adoption. Hopkins said most EUC disagreement centered around the revenue requirement cap – she herself agreed with the IHE's $31 million figure.

CM Leslie Pool said, "I'm uncomfortable simply taking a midpoint [number] when I'm sure there's a reason why AE has pegged the requirement at $35.7 million. We have to be able to trust that number." Council members agreed that the case hinges on, as Mayor Pro Tem Alison Alter put it, a "really crisp summary of the elements of the $35.7 million you're asking for." After AE's detailed rebuttal to the ICA proposal, Kitchen called for a clear comparison of the AE, ICA, and IHE recommendations to be posted online; that can be found at bit.ly/3Eh8aNJ.

As for expanding the Customer Assistance Program, AE's Kerry Overton outlined that of the service area's 450,000 customers, 93,000 are discount-eligible but only 35,000 participate in the CAP. The utility plans to extend the program to as many as 60,000 participants over the next two years by expanding name-matching software and automatically enrolling those who benefit from school free lunch programs, to better align CAP with the low-income population.

Austin Energy told the Chronicle in an email, "It is important to remember that the Customer Charge is waived for CAP customers, meaning they would not pay the proposed $25 charge regardless of their usage." CM Pool recommended the expansion to help with rate shock, saying, "It doesn't look like there's a scenario where we won't have to raise rates a little bit, and likely by a lot."

"AE believes that this is the time to make a dramatic change toward exactly where they want to be," Coffman told the Chron­icle. "My theory of ratemaking is that you need to look at the data, and you move in [that] direction. But you need to also apply other public policy concerns, like the policy of encouraging energy efficiency and not dramatically impacting low users."

Both the EUC and Council are seeking to avoid all-at-once rate shock. CM Pool suggested a three-year implementation of the base rate increase and asked if a gradual approach to the revenue requirement is sustainable. Environmental and consumer advocate Paul Robbins, an intervener in the case, suggested doing a smaller rate increase now and then coming back before the normal five-year base rate check-in to see if a larger one is needed.

CM Tovo agreed: "Because of the dispute about revenue requirement and test year … [maybe] do something less drastic and then come back in a few years." Robbins, along with many interveners in the rate case, suggested postponing the Dec. 1 vote until a settlement is reached with AE. CCARE's Trey Salinas said, "If that means it takes an extra week, it takes an extra week."

Salinas continued that "you [Council] are the Public Utility Commission in this situation," referring to the state agency that hears rate cases from investor-owned utilities. "It is very common practice for PUC commissioners to take [only] parts of what the IHE recommends … Just wanna remind you of that."

AE told the Chronicle, "Typically revenues from rates cover costs … such as employees and equipment. However, we've been using our cash reserves to cover the rising costs for a few years. We're at a point now where we need to raise rates to put us back on stable financial footing." Coffman told Council the ICA's recommendations are "enough to give the utility what it needs. If you go higher, you will spur inflation in the city. We continue to believe $35 million is more than the PUC would offer … the truth is somewhere between $6 million and $35 million."

Sierra Club's Dave Cortez ended the public testimony Nov. 15 with a warning to Coun­cil: "You have a tremendous responsibility to be accountable to us, to hold the utility accountable to the people of Austin. Folks are hurting – you know this – and you have the chance right now to hold [AE] to a standard that will help keep people in this city."

* Editor's note Tuesday, Nov. 29, 1:09pm: This story has been updated. The story incorrectly stated Austin Energy reduced the revenue requirement from $48 million to $35 million due to negotiations; the change actually reflected a calculation error. We regret our error. ”