A Dissection of Deregulated Texas Electricity & Regulated Austin Electricity

Posted on Posted in TER News, Texas Electricity News

I ran across a very interesting article that discusses some of the changes that are taking place with Austin Energy, which services one of the last major regulated cities in Texas (along with San Antonio). The article itself is a good read, but there’s also a lot of information that shines some light on a lot of misconceptions about our DEREGULATED areas of Texas as well. So I want to go through here and discuss and expound on some paragraphs from the article and compare it to deregulated Texas electricity.

First, lets set the stage. People who are against deregulation in Texas almost always point to Austin electricity being cheaper than the deregulated areas and attempt to (erroneously) make a connection between Austin’s low rates and utility regulation. It’s a lazy argument to make, but people do it anyway, and it always gets on my nerves. Well, now Austin is now raising their rates for the first time in SEVENTEEN years. It will be a 13% rate increase. So they will no longer be cheaper than the other areas of Texas. And to be honest, they haven’t been cheaper in years, but now people won’t be able to point to them falsely anymore, either. Why the 13% rate hike?

Seventeen years without increasing its base rate has left Austin Energy with a $131 million shortfall, prompting a 13 percent systemwide rate increase that the utility says is necessary to make ends meet. Opponents, however, believe the increase burdens residential customers in favor of industrial and commercial users.

As fuel costs have risen over the years, customer bills have been riddled with increasing power supply charges used to meet the utility’s growth, said Larry Weis, general manager of Austin Energy. The rate redesign will bring power supply charges to zero and embed the cost within the new rates.

Although talk of a rate redesign first began nearly a decade ago, and while the utility has been operating at a loss for years, it was not until AE presented its Resource, Generation and Climate Protection Plan to 2020 last year that the utility felt it necessary to increase rates in order to meet the city’s growth and need, Weis said.

Personally, I find this absolutely staggering. And not in a good way. I’m not sure where to start with just how wrong it is for a utility to run in the red for year after year after year to the point of running up a 131 million dollar debt. How absolutely irresponsible is it for any company, public or private, to be allowed to borrow money simply because they refused to operate like a normal company and RAISE RATES TO MEET THE COSTS? If this is a hallmark of what regulated electricity is all about, I personally want no part of it. Although it’s hardly shocking these days for a government agency to be running up debt with little concern for accountability.

But not only is it insane that they’ve simply been operating in increasing debt for so long without acting before now, it also means that Austin’s rates have actually been MUCH HIGHER all along. At least, that is what my interpretation was of the 2nd paragraph quoted above. It says customer’s rates have been riddled with power supply charges to compensate for the growth of demand. That implies that much of this has already been passed onto the customers already, but that it still isn’t enough to have met their needs, hence their debt. At least that is how I’m interpreting things. If I’m correct, it simply means Austin Energy has been tacking on more money to each bill, but it simply wasn’t listed as the Energy Charge. Which means people kept getting to brag about how cheap Austin’s rates were completely erroneously. And on top of all of THAT, they were STILL accruing a huge debt. How big?

Even if the rate redesign was implemented in January 2012, the utility would have a $30 million deficit for the 2011–12 fiscal year, a $75 million deficit for the 2012–13 fiscal year, and ultimately would not break even until 2016, Clark said. Until the 19 large industrial user contracts expire in 2015, they account for $20 million of the deficit every year. Their rates would then be raised in 2015 to meet the $20 million needed.

Their debt is so big, as well as the demand, that even if they implement the rates changes they will STILL be operating in the red until 2016. Buy then the estimated debt will be 236 million dollars. And that might not even include interest. So more than a quarter of a BILLION dollars that they won’t even be able to start paying down until 2016. And that’s if they can even pay it down at all, as opposed to just continuing to break even.

Deregulated electricity has plenty of detractors…but this would NEVER be allowed to happen under our system. Market forces keep the companies honest or they go out of business. Regulated utilities have caps on how much profit they can make, which they exchange for less risk in their marketplace which comes from a lack of competition, among other things. Shockingly enough, when government and politics are responsible for making the decisions and managing entities like a utility company, debts pile up and bureaucracy prevents timely change to evolve with the marketplace. Don’t believe me? Read the following excerpts and tell me I’m wrong:

Electric Utility Commission member Linda Shaw joined the commission in 1994, the moment the commission began a lengthy series of meetings concerning the last rate redesign.

Shaw said as more utilities become deregulated across the state, the competitive market rises, resulting in sales and buying of electricity based more on who has the lowest price and not the best long-term goal.

“If you charge too much for your energy, if you put it out there to sell and it costs you more than what the market bears—you can’t sell your idle generation,” Shaw said.

In the past, AE has paid for expansion with cash, but recently the utility has had to borrow more and more.

“We have gotten to the point we don’t have cash to do those things; we have to borrow,” Weis said. “Cost of transmission has gone up and a piece of a copper wire has gone up. All of these costs have gone up significantly. We have not addressed that and that is why it’s time.”

The Electric Utility Commission can only give guidance to the City Council and has no hand in the final decision. Shaw expects that the rate redesign will not pass through City Council smoothly, however, and it might be appealed to Texas’ Public Utility Commission.

“There has already been some inclinations [by the Public Involvement Committee] that they feel rates are not fair,” Shaw said. “It will be appealed to the PUC, which, of course, would examine everything.”

They’ve been trying to redesign the rate for SEVENTEEN YEARS? Some of the electricity companies in deregulated areas change their rates every DAY. How else can you explain that other than the fact than getting government and politicians out of the way and turning things into a true business allows for necessary change in the marketplace? Shaw said it herself…the market forces are more effective in setting rates than politicians. These people couldn’t even take into account an increase in costs like copper wire. What is that old adage about too many cooks spoiling the soup? And on top of that, because there are politics and bureaucracy involved, the necessary rate changes might not go through because a city councilman who votes for it might lose his seat next time from angry constituents. And Austin Energy’s own committee might challenge the rate hikes as unfair as well? How does any of this make sense?

So, to sum up, regulated electricity in Austin has resulted in a massive debt and an inability to make even small changes to evolve along with the electricity market…to the tune of 17 years to figure out how to raise rates to meet costs. Politics and bureaucracy create infighting and slow down the process even further by creating individual interests that might conflict with the necessary changes that a utility needs to make to cover costs. And all of this is on the heels of the revelation that Austin’s regulated electricity actually hasn’t been cheaper than the deregulated areas this entire time.

Personally, I’ll take deregulated electricity any day of the week and twice on Sunday.

7 thoughts on “A Dissection of Deregulated Texas Electricity & Regulated Austin Electricity

  1. Excellent well writtten article depicting the problamatic government bureaucracy’s failure to address the cost of doing business. It seems that such rampant apathy towards a business like solution is well founded in most of government – Federal, State, and Local.
    I cannot understand why the citizens of both Austin and San Antonio have not yet demanded that their cities become
    deregulated as other large cities of Texas.

  2. Austin is an interesting example of how regulated electricity really only restricts the options of energy consumers. It also shows how a non-competitive market produces an energy provider who runs up a 131 million dollar debt. Deregulated energy in Texas has, for the most part, been a huge success by lowering prices and increasing supply.

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