Austin Energy transferring more every year into city’s general fund

January 28, 2012

By Marty Toohey

Even as Austin Energy’s budget has eroded, the city government has shifted increasingly large chunks of the utility’s earnings to fund other parts of the city budget.

It is a trend that threatens the utility’s long-term finances and that is helping drive Austin Energy’s need for a 12 percent rate increase, according to a variety of observers.

Complaints about Austin Energy’s general fund transfer and spending on things outside its core business are not new. But allegations of a stealth tax have traditionally been countered with arguments that Austin Energy is helping the entire city with proceeds that a private utility would turn over to shareholders.

Less remarked upon until recently: that Austin Energy’s contribution to the city general fund grew from $77 million in 2006 to $105 million this year. Meanwhile, its net earnings went from $53 million to a projected negative $76 million, according to figures provided to the American-Statesman by the utility.

"The level of the transfer is exceptionally high. We’ve been sending you memos about this for years," Steve Smaha , a member of the city’s Electric Utility Commission, told the City Council at a recent work session on the rate increase. "By complaining about the rates, you’re in part complaining about the transfers."

For a city government dealing with a stagnant economy, such statements are unpalatable —as evidenced by Council Member Mike Martinez’s retort: "If you want to cut that transfer, tell me which 15 fire stations you want to close. … At some point, we have to understand (the transfer is) the benefit to a community of owning its utility."

But the arguments have caught the ear of Mayor Lee Leffingwell. He said that the city cannot significantly cut the transfer in one year but does rely too heavily on its utility.

He also said the reliance on the utility is unfair to the approximately 45,000 Austin Energy customers who live outside the city limits: They help pay for city services in a city they don’t live in, can’t vote for the council members who make utility policies and have no alternative to Austin Energy’s monopoly service.

Adding another layer of tension: A group of well-funded customers outside the city limits has organized in opposition to the increase. They recently formed a nonprofit that is courting water districts, homeowners associations and other organizations in preparation to have a rate increase reviewed by the state’s Public Utility Commission.

Austin Energy critics hope the review would end with some of the utility’s spending being declared illegal.

"It would be expeditious if our concerns were addressed at the local level," said Dick Brown , a semiretired lobbyist leading the effort. "The size of Austin Energy’s transfer is outside the norm, and we think it’s unfair and unjust."

Unrelated spending

In addition to the transfers to the city’s general fund, Austin Energy partially finances several programs that have been tucked into the utility’s budget through the years. Collectively, Austin Energy provides an estimated $150 million to $180 million in annual spending unrelated to generating or selling electricity.

Smaha, a tech investor by day who appears to have done the most thorough review of the spending, said the total "has increased between 5 percent and 10 percent every year I’ve been involved" going back to the mid-2000s. The assessment is shared by Shudde Fath, a member of the Electric Utility Commission who for years has objected to the city’s growing reliance on the utility.

Smaha said the trend cannot be squared with a much-touted City Council goal: that once the current rate-increase proposal is approved, Austin Energy’s costs do not rise more than 2 percent a year.

"It’s very hard," Smaha said, "to have a 2 percent cap when your biggest debt obligation goes up 5 percent to 10 percent a year."

Transfer formula

Until recently, the general fund transfer had escaped scrutiny for the most part.

Austin Energy transfers 9.1 percent of the money it collects to the city’s general fund, an amount well within what state law allows. In 2012, the transfer is budgeted at $105 million. It is considered analogous to the dividends issued to the shareholders of a privately owned utility.

Such transfers are common, according to a 2009 analysis by the American Public Power Association. But a 6 percent transfer is more typical, according to the analysis, which also warns of the financial risks posed by an arcane accounting practice that has concerned the Electric Utility Commission for years.

It works like this:

When calculating what Austin Energy transfers, city accountants use a formula that depends partly on how much Austin Energy pays for the fuels that run its power plants. The more Austin Energy pays for fuel, the more money it sends to the general fund, and fuel charges to consumers don’t make up the difference in net earnings.

It is essentially an accounting quirk — and one Electric Utility Commission members say has caused Austin Energy to commit increasing amounts to general city operations, even as the utility’s financial outlook became increasingly troubled.

"To say we can just grab the money as it comes is tough for the utility," Bernie Bernfeld , a utility commission member, told the council at its Jan. 17 work session. He said the council did not respond to years of warning, "and that’s why the voices have been getting louder and louder. I think we feel we’ve been ignored."

Commission concerns

City leaders have also tucked between $50 million and $80 million worth of other initiatives and city costs into Austin Energy’s budget. They range from the Economic Growth and Redevelopment Services office to the Climate Protection Plan to numerous other programs and sponsorships.

An ongoing concern of the Electric Utility Commission is the growing budget of the economic development office, which tracks trends, evaluates the economic pros and cons of various initiatives, manages programs for cultural arts and music, evaluates tax incentive proposals, and charts long-term priorities, among other functions.

The office was moved onto Austin Energy’s books in 2001 amid a budget crunch. In 2007, its budget was $4.8 million; in 2011, it was $10 million.

Commission members say the money would be better spent softening the rate increase.

"That department’s budget is growing at a phenomenal rate, which happens in a bureaucracy when the arm that’s paying the bills doesn’t oversee what it’s funding," commission Chairman Phillip Schmandt said. "When it comes to economic development, we think low electricity prices would do a lot more to attract business than anything the (economic development department) can do."

Smaha points to other spending, such as $650,000 since 2009 for the African American Men and Boys Conference and Hispanic Futures Conference, as well as $341,000 to provide Christmas lighting and power lines the utility runs from its poles into community events.

"These are noble activities, and if the city wants them, it should pay for them," Smaha said. "The transfer might make it (through a state review) in its entirety, but the rest would be highly questionable."

Partly to disarm such arguments, Leffingwell has floated the idea of two rate structures: one for customers inside the city and a lower one for customers outside it. He has not proposed specifics.

Brown, the lobbyist opposed to the rate increase, said customers outside the city should get at least a 15 percent discount, which he says is Austin Energy’s markup to pay for activities outside its core business.

Brown said he expects no trouble securing the approximately 2,500 signatures necessary to have a rate increase reviewed by the state. He also dismisses the notion that customers outside the city limits benefit from spending on Austin’s streets, economic growth and other services.

Austin officials "have never quantified the value of the spending inside the city limits to those outside it," Brown said.

"Should Lakeway or Pflugerville put a surcharge on Austin residents who come to town?"

mtoohey(at); 445-3673

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