HENIGIN: Has Austin Energy Fully Informed City Council in Private of the True Facts?

Austin City Council is not made up of electric utility experts & relies on Austin Energy staff 3rd of a 3-Part Series By Edward Henigin Texas Insider Report: AUSTIN Texas  In yesterdays article I closed by saying there were various possibilities as to why Austin Energy is losing money on its generation of energy. The Austin City Council oversees Austin Energy and is responsible for its performance. Ultimately the Austin City Council will have to take action to minimize AEs losses. 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 amounts discussed so far have been for Austin Energys fiscal year (and test year) ending September 30 2014. But:

1. What about other time periods?
2. How long has wholesale generation been losing money? And
3. How much total has it lost?

These questions are not answerable given the available public information however there is some indication as to the time periods of loss. The single largest driver to profitability is likely the Electric Reliability Council of Texas (ERCOT) energy rate. A good and handy proxy for the ERCOT energy rate is the industrial electric rate as reported to the EIA. The average industrial rate reported to the EIA by year is as follows:

Table 3

It would seem logical to presume that Austin Energy would have lost money when the average industrial rate was at or below the test year level and lost less (or perhaps earned a profit) when the average rate was higher. Given a $214 million loss in a year when the average industrial rate was 6.0/kwh presumably it lost that much or more in the fiscal years ending 2012 2013 and 2015. Its quite possible that the last time wholesale has turned a profit may have been 2010 right before ERCOT converted to the nodal market. FY2016 hasnt ended yet but for the 7 months already reported to the EIA (October 2015 April 2016 inclusive) the average industrial rate has been 5.1/kwh. We may be headed towards record losses and thus even bigger wholesale shortfalls that will have to be made up by captive retail ratepayers. We know what happened during the test year. The results for the last part of 2014 to the present and the immediate future are subject to suppositions for everyone other than AE (which has the information but refuses to reveal it). But these are important matters that deserve attention and scrutiny. Austin Energy and its staff however has likely not fully informed the City Council in private of the true facts and it certainly will not publicly discuss the true implications of its immense wholesale losses. The larger question is whether or not Austin Energy should be in the energy generation business in the first place. From a practical perspective Austin Energy is incurring large losses which it makes up from captive ratepayers who do not know that they are funding these losses. If ratepayers were to realize that their bills could drop substantially without any impact to their service they would more than likely demand that Austin Energy exit the generation business. The rationale for Austin Energy running wholesale energy production is that over time it makes more money than it loses providing a net benefit to ratepayers. It appears that AE wholesale generation provided a benefit for the 8 years between 2004 and 2011 (inclusive) and a loss from 2012 through today. The question therefore becomes: what total cumulative loss or how many years of losses should the city endure before it doesnt make sense to continue in this way? What is the contingency plan to protect ratepayers from the harm of continued losses potentially going on into perpetuity? While the City Council will need to grapple with those difficult questions its hand may be forced by lawmakers regulators or the courts. Austin Energys continued energy sales at a loss creates an unsustainable situation for the ERCOT energy market. Austin Energys continued participation in the energy market contributes to downward pressure on energy revenues earned by the entire market. In effect Austin Energy ratepayers are subsidizing all the other retail customers within ERCOT. Decreased revenues contributes to losses at other energy producers most of whom do not have captive ratepayers to fund those losses. At some point regulators or legislators will need to step in and affect changes to restore sustainability to the market and prevent private energy generators from going out of business en masse. These changes may include prohibiting government institutions from operating at a loss subsidized by captive ratepayers. It is also possible that private energy producers may decide to sue the City of Austin under antitrust law for unfair competition.

• PART 1:  WHY DOES AUSTIN ENERGY LOSE MONEY ON WHOLESALE GENERATION ASKS DATA FOUNDRYS HENIGIN
• PART 2:  AUSTIN ENERGY: LOSING $200 MILLION & SENDING RATEPAYERS THE BILL Given that AE is losing money on energy generation the next question is: Why?

Existing regulation poses a risk for Austin Energys wholesale business. Utility ratemaking includes as a foundational principle the concept of reasonable and necessary" which states that Only those expenses which are reasonable and necessary to provide service to the public shall be included in allowable expenses." It would appear that Austin Energys wholesale generation does not meet this test. Prior to 2010 Austin Energy dispatched (ramped energy production up and down) in response to Austin Energy customer load. In 2010 ERCOT transitioned to a nodal market where ERCOT became the single buyer of all wholesale energy production. Since then Austin Energy has dispatched its energy production in response to market prices and not to serve Austin Energy customers. Austin Energys generation fleet is for wholesale services only and does not support its retail services. To quote Austin Energy Austin Energy no longer serves its customer load with its own generation."

• Clearly AEs wholesale generation is not necessary to the provision of retail service as that generation wholly services the wholesale market and AE purchases all of its energy for retail service from ERCOT.
• AEs wholesale generation certainly doesnt appear reasonable" given that it is only losing money.

An AE ratepayer might sue the City of Austin on grounds that the rate ordinance illegally includes wholesale expenses that are not reasonable and necessary and that the rates are discriminatory and confiscatory and do not reflect a reasonable measure of use by or benefit to retail ratepayers. The courts might ultimately rule that AE cannot pass wholesale losses on to retail customers. The Texas PUC also has the authority to rectify anti-competitive or otherwise harmful wholesale activity. If the matter is raised the PUC could well decide that AEs cross subsidization of its wholesale operations harms the ERCOT market and block the practice. Austin Energy is a $1.5 billion per year organization with over 1500 employees. Its wholesale generation line of business is close to $800 million per year. The Austin City Council must have a strategy to optimize Austin Energy functions to the benefit of its constituents. Austin Energy is spending hundreds of millions of dollars of ratepayers money each year to cover the competitive losses of AEs wholesale generation operations. The Austin City Council must either explain why the historic and continuing losses are of commensurate benefit to its constituents or make changes dramatic if necessary to stem the losses. All Austin Energy customers are impacted by the losses whether they are residential low-income or small or large businesses. All Austin Energy customers deserve a fair and well run utility. We implore the Austin City Council to resolve this issue. 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.