On way out: water, electric rate deals for residents

Sept. 1, 2011

By Marty Toohey
Austin American-Statesman Staff

For decades, Austin businesses have paid higher water and electric rates to cut homeowners and renters a break on their monthly bills.

Austin households will probably not enjoy the arrangement much longer.

The city’s water and electric utilities are phasing out the residential subsidies built into their rates.

The Austin Water Utility is already well into the process, having shifted about 28 percent of its bills from commercial to residential water bills since the mid-1990s, a process it expects to culminate with another 7 percent added in the next five to seven years.

Austin Energy is preparing a similar shift, on an accelerated scale. The electric utility plans to raise overall rates 13 percent in January – but is recommending residential rates rise 23 percent.

That means the average Austin home could be paying between $10 and $20 more a month for electricity, on top of rising water and wastewater rates.

"It’s always an issue – which customers are subsidizing whom," Austin Energy General Manager Larry Weis said. "I personally think our proposals are fair."

The decision to subsidize residential utility customers appears to date back to 1979. The city’s Electric Utility Commission, after examining rates for years, recommended the philosophy, and the City Council adopted it.

"The general concept is that, as a municipally owned utility, is there a social responsibility to help those who can least afford to pay for water and electric?" said former Austin Mayor Bruce Todd, who served on the commission. "Like all philosophies, it holds merit to a point. The question then becomes what that point is."

Several factors shaped the commission’s recommendation. It freed up households to spend more money, helped low-income residents and, not insignificantly, appealed to homeowners who tend to make more noise in city elections than business owners.

Calculating what it actually costs to serve a particular home or business is difficult, Todd said. For example, it involves, among many other steps, figuring out who is responsible for things like new power plants that supply electricity to the entire system.

City utility officials say they are using industry-standard methods, which determined that residential customers have not been close to paying their way.

The average home now pays 71 percent of what it actually costs the city to provide its electricity, when the cost of maintaining the poles and wires and customer-service center are taken into account, according to Austin Energy calculations. By contrast, small and medium-size businesses are paying close to the actual "cost of service," the utility figures.

Under Austin Energy’s proposal, which is subject to City Council approval, homes would pay 95 percent of the cost to serve them.

Austin Energy is facing annual shortfalls of $137 million, which is why it is overhauling its rate structure for the first time since 1994. The utility attributes 95 percent of that shortfall to residential customers paying less, according to the utility’s estimates.

The council already approved the Water Utility’s plan to cut the subsidy entirely.

In the early 1990s, businesses were paying 35 percent "above cost," said David Anders, an assistant director for the utility. The utility has been gradually whittling the imbalance, which is now about 7 percent.

But that shift has accompanied mounting costs at the Water Utility, which projects that the average residential water/wastewater bill will rise 37 percent by 2016.

Not everyone agrees homes have gotten a sweet deal.

Peck Young, a longtime political activist and consultant who served on the Electric Utility Commission, said its 1979 recommendation was based on studies suggesting smaller homes actually had a negligible effect on the electric system.

"The small-end user doesn’t underwrite anybody," Young said. "The guy who has a 4,000-square-foot house with a heated pool drives the utility’s costs. The big companies drive the utility’s costs."

Young said focusing the attention on homes – and focusing most of the rate increase on them – overlooks the fact that some large companies have also been paying much lower than average rates.

A dozen or so large companies, such as Samsung and Spansion, pay lower electric rates that are written into contracts that do not expire until 2015.

City officials reasoned that the lower rates were an acceptable trade-off for attracting and retaining the companies.

Young disagrees: "Giving these companies a deal is actually a risk, because if they leave when their contract is up, we’re stuck with an empty space, a power station we built to serve them and the money the rest of us lost so they could have cheap power."

Hoping to diffuse criticism that the rate increase will hit the poor hardest, Austin Energy plans to double the $4 million it now spends each year on various low-income assistance programs, spokesman Ed Clark said.

The utility has also proposed a menu of rate-restructuring options. The City Council is scheduled to choose one option by the end of the year.

In the least progressive rate proposal, a household that uses a relatively small amount of electricity – 300 kilowatt hours – would see its monthly bill rise by about 60 percent, to $37. A power-hungry home – one using 4,000 kilowatt hours – would see its bill rise 23.5 percent, to $496.

Another scenario would reward the average home, while hitting power-hungry and conservation-minded households hardest. The average home’s bill would rise just 5 percent. The home that uses a lot of electricity would see its bill rise 39 percent, and the conservation-minded home’s bill would rise 41 percent.

The most conservation-friendly proposal would charge a low-use household a flat $30 monthly fee, about $6 more than it would now pay. An average home would pay about 11 percent more, while one that hits 4,000 kilowatt-hours would pay an additional 29 percent.

mtoohey(at)statesman.com; 445-3673

If you go

The Austin Water Utility will present its rates at 4 p.m. today at City Hall, 301 W. Second St. The city’s Electric Utility Commission will discuss proposed electric rates at 6 p.m. today at Austin Energy headquarters, 721 Barton Springs Road. The commission will hold more hearings on Sept. 19, Oct. 3 and Oct. 17. The City Council will also hold hearings on the proposed electric rate increases, but those dates are not set.

Paying for policy shift

Austin is moving away from a decades-old policy of having businesses subsidize residential water and energy rates. This shift means that almost all of a coming electric rate increase will be borne by residential customers, while the shift has been ongoing for water/wastewater customers and will contribute a small amount to projected increases:

Projected average monthly residential electric bill (for 1,000 kilowatt hours, a typical home’s yearlong average):

2011: $92.33

2012: from $102 to $113, depending on which rate structure the City Council chooses.

Most classes of commercial customers would see little increase under the rate designs the city is considering.

Projected average residential water/wastewater bill:

  • 2011: $64.88
  • 2016: $88.72
  • Cumulative, compounded increase: 37 percent

The water portion of the bill is projected to rise 61 percent. Of that, 7 percent is due to phasing out the residential subsidy.

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