Last month, Council took the unprecedented step of voting for a new, independent board to oversee Austin Energy. This is what it feels like to take a step toward privatizing Austin Energy.
What’s bugging me about all this is that, supposedly, neither the Electric Utility Commission nor Council can manage AE. I was under the impression both acted as oversight and that we hire professionals to manage and run AE. Now we need an added layer of bureaucracy to manage? If so, then exactly what IS the job of the AE GM? Day to day operations? If that’s all the GM at AE does, would it not be possible to, I don’t know, possibly ask a little more?
Then there’s the rate increase issue which has apparently been settled with the Texas Public Utility Commission. The PUC didn’t like the increase and the carve outs for churches, among other things. What they really don’t like are the city functions funded out of AE and the transfers from AE to the city. I’ll go with them on the stuff being run out of AE, that probably should be placed with the city directly. However, the transfer payments are a really simple matter… they’re dividends to the owner. The criticism I’ve seen from the PUC regarding the increase apparently missed the poor financial decision that necessitated the increase to begin with, funding too much expansion out of current revenues rather than debt. While this does keep the overall debt load low, it requires much larger amounts of cash up front, straining the operating budget in the short term and necessitating revenue increases (otherwise known as a rate increase funded by you and I). With funding available at extremely low rates, functionally about 1-1.5% over the long run rate of inflation, funding much of any expansion out of cash would be a bad idea since most of the interest expense will be less of a strain on future cash flows. Effectively, it’s free money. Of course, it has to be paid back but what has to be paid back will be worth much less in the future than it is now. While you’re paying the debt back at an effective interest rate of 1.5%, the asset you purchased with the debt is increasing in value. However, the debt remains constant.
Of course, AE and some of those in favor for the board are fond of pointing out that funding additional expansion with debt will likely drag down AE’s credit rating which would increase the interest rate on the debt. This is true, but it’s a very small increase (10-20 bps over pricing at the current rating which translates to an extra $1-3 million per year in interest costs on a 30 year $1 billion bond issue… peanuts considering the amounts we’re talking about are nowhere near the $10 million/yr AE is talking about, according to the published UTILITY* bond spreads) and can be easily covered with a more gradual rate increase and growth, something that would also refill all the reserve accounts.
Why not stagger the rate increases at 2% per year for three years, then up 1% per year for the next eight years and eliminate the stupid provision mandating money be set aside every year to pay down some of the long term borrowing. Frankly, at any time between now and 2043 there will be an opportunity to refinance those credits or, if things go really well, pay them off. It’s clear AE needs more operational and financial flexibility to effectively manage the balance sheet, using the same capital many times over rather than worrying about paying it down to zero… this would save enormously on costs associated with future borrowings. AE could also set up hedges to offset long term rate risks. In the end, none of this will be especially necessary since electric rates will be going up and the targeted increases will have already been approved by Council giving the bond holders the security they will need. The increases, coupled with AE’s long term average growth, should be more than enough to cover service on new issuance and rebuilding of the reserve funds. Further, with a preapproved rate increase package in place, it’s unlikely the rating agencies would downgrade.
Without access to AE’s financial modeling or detailed financial information, I’m forced to use best guess from published sources (you’ll note I’m not pulling anything into this that’s not available online… I’m working this purely from information Council would be able to access). Even still, crude as my estimates may be, it’s clear AE could easily be restructured which makes the push for the ‘independent board’ all the more puzzling and leads me to the conclusion that this is a first step in privatizing AE.
Forget the wood pellet power plant. Private and public utilities BOTH make bad decisions from time to time based on imperfect information, like future projections for feedstock prices that ended up being way off. Hell, investment banks made that mistake as well. Given that bad decision making is a constant in enterprises run by humans, why is the damn wood pellet plant everyone’s favorite whipping boy? One need look no further than the former TXU, now EFH, for a case in how badly things can go for private sector utilities. If you think what I’m proposing is unreasonable, just wait until we privatize AE and then an LBO firm comes knocking on the door.
We’ve been extremely lucky for two decades with AE. It’s kept our utility rates low, maintained service and allowed the City to fund a lot of what it wants to do. Now it’s time to do some tweaking and make sure that can continue into the future. It’s time for some modifications, but it’s not time for a complete restructuring of how AE is managed.
*I used utility bond spreads rather than municipal to generate a worst case scencario