Why Does Austin Energy Lose Money on Wholesale Generation Asks Data Foundrys Henigin

1st of a 3-Part Series By Edward Henigin Texas Insider Report: AUSTIN Texas Austin Energys budgeted costs and revenues must balance just like any private entity but Austin Energy is different from private businesses in an important way: a private entity can lose money and ultimately go out of business. Austin Energy simply passes all costs on to ratepayers and is never really at risk. Broadly speaking electric utility service in Texas is made up of 3 categories of entities:

1. Generators who produce energy
2. Transmission & Distribution Providers who carry the power to consumers; and
3. Retailers who buy electricity on the wholesale market and resell it to local consumers

85 of Texas energy consumers are in the ERCOT deregulated market where the 3 categories are independent and structurally separated. Within ERCOT retailers and generators compete on price and service: consumers can choose from a variety of retailers and generators compete with each other on price to sell their power to ERCOT. (ERCOT is the mandatory gateway between generators and retailers and as such is effectively a monopsony purchaser.) Transmission and distribution providers have their rates set by the Texas PUC. Austin Energy (AE) is within ERCOT but since it is a municipally-owned utility it has not had to open its local area to customer choice and retail competition. AE is still fully integrated in that it operates generation transmission and distribution. AEs generation transmission and distribution and retail service are combined together into a single entity and the residents of that territory do not have a choice for their retail service. AEs generation competes with private wholesale generators to sell energy within the ERCOT grid. The PUC regulates AEs wholesale transmission network when it is used to carry energy to other load serving entities like retail providers but AEs distribution and retail operations are exempt (for the most part) from PUC control. Instead since AE is a department of the City of Austin and therefore a governmental institution it is regulated" at the local level through City Council rate ordinances and its operations and practices are set by City authorities. Periodically Austin Energy performs an accounting of its revenues and expenditures and presents a proposal to update the rates it charges in order to cover all of its claimed costs and adapt the rates to changing conditions. This process is known as a rate case" and Austin Energy began just such a rate case in January 2016 with an expectation of final rate determination by the Austin City Council on August 29 20161. This rate case is based on revenues and expenditures from September 1 2013 through September 30 2014 known as the test year." Austin Energy revenues come from three sources:

1. Energy sales on the wholesale market
2. Wholesale transmission sales and
3. Rates paid by retail customers

The sum of those revenues must cover all expenses. Revenue from energy sales varies with ERCOT wholesale market conditions as do wholesale transmission sales. Customer funding makes up the balance. Thus retail customer rates are presently impacted both by Austin Energys system costs and wholesale market conditions. If AE loses money on the wholesale market ratepayers make up the difference. Austin consumers must pay for the costs they impose on AE for receiving retail service plus the remainder of any wholesale-related costs that AE does not recoup from its wholesale customers. Despite the fact that Austin Energy is a monopoly governmental institution it still has to operate under the rules of ERCOTs deregulated energy market. Before 2010 all of AEs self-owned generation was primarily dedicated to serving its retail load. In 2010 however ERCOT converted to a nodal market for energy. In the nodal market all generators sell all of their energy to ERCOT and all retailers buy all of their energy from ERCOT. ERCOT acts as a singular massive pool through which all energy sales flow.

• Austin Energy now sells all of the energy it produces to ERCOT in the same fashion as its private competitors.
• As a result Austin Energys production and its retail customers consumption have been entirely decoupled.
• The amount of power produced by Austin Energys power plants goes up or down based on how much money it can make by selling it to ERCOT and is not based on how much power Austin Energy retail customers are consuming.

Austin Energy operates its energy production called its wholesale group effectively as a separate business unit with its own costs and revenues and its own profit and loss. When Austin Energys wholesale business unit earns a profit that profit flows to ratepayers by decreasing their rates. But the reverse is also true: if the wholesale business unit suffers a loss that loss has to be made up by ratepayers. (There is one significant exception: AEs wholesale transmission operations earn $75 million per year but this amount does not directly benefit or offset retail ratepayers costs.) In the rate case test year (the year ending September 30 2014) Austin Energys costs broke down as follows:

Table 1

In the test year 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? 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.