Given that AE is losing money on energy generation the next question is: Why?
2nd of a 3-Part Series
By Edward Henigin
Texas Insider Report: AUSTIN Texas The Austin City Council oversees Austin Energy and is responsible for its performance. The Austin City Council is not made up of electric utility experts and instead relies upon Austin Energy staff. This is a conflict of interest where well-meaning Council members may be misled unintentionally or otherwise by Austin Energy.
In the test year we discussed in yesterdays article and analysis Austin Energy spent $784 million to produce energy which it
sold to ERCOT. Outside of energy purchased for retail use this represented 64 of AEs costs.
The obvious next question is how much revenue did AE receive from those sales?
Austin Energy provides extensive details on costs in its Rate Filing Package however it does not disclose its wholesale energy sales revenue.
During the discovery phase of the rate case NXP/Samsung requested Austin Energys gross revenue in interrogatory 1-51 and Austin Energy objected to the question stating that this information was a competitive matter. The examiner presiding over the case required AE to respond but AE was allowed to ultimately answer in cryptic form with the following chart:
Figure 1
The chart does not directly provide the wholesale revenue but it does provide two revenue-related numbers.
Under cross-examination Austin Energys Elaina Ball explained that the Thermal Generation Net Revenue and Renewable Generation Net Costs in the chart are the negative of the marginal earnings from sales of those energy sources to ERCOT. Austin Energy earned $174 million relative to fuel costs for thermal generation and lost $80 million relative to short-run Operations and Maintenance" costs for renewable energy.
By presenting the values this way it would appear that AE had earned a total of $94 million ($174000000 - $80000000). However these are only the marginal revenues or the profit after taking out only the short-term marginal costs which is mostly fuel.
In order to determine the final profit (or loss) from energy sales you also have to account for the long-term fixed" costs for the energy production. Schedule G-6 in the Rate Filing Package provides those values and we can calculate the profit or loss by category of generation type:
Table 2
The math shows that Austin Energy lost $214 million on energy generation. This loss is embedded in Austin Energys retail revenue requirement in the current rate case.
- The entire $94 million short-term revenue is applied to the variable power supply adjustment (PSA) which is updated periodically (typically annually) outside of any rate case.
- The entire $308 million in long-term costs is included in the rate case and is covered via ratepayers base rates.
- After you factor in the $94 million in short-term revenue ratepayers end up paying $214 million more than they otherwise would if Austin Energy were not in the energy generation business.
Given that AE is losing money on energy generation the next question is why?
One common argument in Austin is that renewable energy is more expensive than the typical market rate and would thus cause losses. In fact renewable generation was 39 of the losses but only 25.57 of the total production.
While the losses on renewable generation were disproportionately large they still dont explain the majority of the overall losses.
Another possibility is that AE generation is optimally operated and the wholesale generation market overall is losing money. If this is true then Austin Energy and the relatively few other vertically integrated monopolies that operate generation are in a position to damage the market and private investors.
Austin Energy has the ability to pass generation losses on to ratepayers indefinitely and indeed is specifically doing so through this rate case. Private generators do not have this ability and would ultimately go bankrupt if they continue losing money year after year.
The end-game of this scenario is that all private generators are forced out of business and only competitors with captive funding like Austin Energy remain. This of course is very damaging to the long-term sustainability of the ERCOT energy market and raises possible anti-trust issues.
A third possibility is that AE generation is losing money due to mismanagement.
The Austin City Council oversees Austin Energy and is responsible for its performance. The Austin City Council is not made up of electric utility experts and instead relies upon Austin Energy staff for audits and reporting. This is a conflict of interest where well-meaning Council members may be misled unintentionally or otherwise by Austin Energy.
The real answer may be a combination of the above possibilities. Ultimately the Austin City Council is responsible for Austin Energy and will have to take action to minimize AEs losses.
The amounts discussed so far have been for Austin Energys fiscal year (and test year) ending 9/30/2014. What about other time
periods?
How long has wholesale generation been losing money how much total has it lost?
Edward Henigin is the Chief Technology Officer of Austin-based Data Foundry one of the nations leading wholesale and retail data center colocation disaster recovery and managed services companies.
