New Utility Business Models Endorsed By National Legislative Organization

By Bill Oakey, September 20, 2022, Revised September 21, 2022

I will cut right to the chase. Austin Energy’s rate review and hearings that began this spring should never have happened. This week, the various parties that filed their legal briefs will sit down for their first post-hearing meeting, to try to reach a negotiated settlement. In their squeaking chairs, they’ll be splitting hairs over revenue requirements, cost of service and which customer class is “subsiding” which other. All of this begs one fundamental question.  Should Austin Energy even be asking to raise rates, because “their rate design is not as efficient as their customers?”

The answer is no. In my 39 years of following Austin electric rate cases, I have never seen anything as convoluted, challenging and fascinating as this one. As this adventure winds down to a close, our City Council must grapple with several indisputable facts:

1. Not selling as much electricity is a positive outcome, and should become a stated goal in our quest to halt carbon-based power generation, and meet our City’s climate change goals.

2. Long before now, Austin Energy should have been compelled to tell the City Council and their customers how much of a budget surplus they have acquired from the biggest summer revenue windfall in their history. Just 76 miles from here, San Antonio has decided to give their utility’s customers refund credits for $42.5 million of their $75 million revenue surplus. Why are we facing a deadline in a rate case, without knowing whether Austin Energy will even need to cover the perceived shortfall that prompted the rate review? We could actually double the amount of our surplus, with Federal matching funds, under guidelines in the new Federal climate and energy legislation. Then we could use revenues identified in the rate hearings to wipe out the need for a rate increase.

3. Austin Energy’s own data, presented early in the rate review, shows that revenues exceeded expenditures every year, up until fiscal year 2020. The 100 year pandemic and the extraordinary 2021 winter storm made both of those years anomalies. Yet, Austin Energy’s charts paint those years as proof of a new trend of declining electricity sales. Compounding that fallacy is their August 2020 memo to the City Council, which projected a $19 million revenue surplus for 2021. In addition, 2021 brought a milder than normal summer. So there is no “known and measurable” evidence that there is a new trend of declining revenues going forward.

4. Raising base rates and manipulating rate designs in ways that discourage conservation is a completely backwards approach. It would boost utility revenues, to the detriment of climate change mitigation. Penalizing solar customers with unpredictable buyback rates would only make matters worse. All of these high costs would drive more affluent residents and businesses toward alternatives, at an accelerating pace over time. A Community Benefits Charge will eventually rise to unsustainable levels, as customer adoption of solar gradually climbs to 10%, 15%, 20% etc. of the city’s population. Utilities without a viable plan will be left with declining revenues, as their customers require less of their power.

The Root of the Problem Is a Broken Business Model

Ask yourself these basic questions. If you owned a business – any business – would you hire people to go out in the community, and offer your customers incentives to use less of your product? Would you put links on your website, offering rebates to customers who install things that get them out of your business altogether, part of the time? And finally, would you offer to pay them a special rate, if they give back any unused portion of your product? And you agree to put that unused product on the market, so that your competitors can sell it.

If you did those things, how long do you think you could stay in business? Well, suppose that your community grows very fast every year. Perhaps you can add enough new customers to keep the business going. But what happens when those things that customers install to get out of your business become so affordable and so attractive, that they explode in the marketplace?

Suppose that your business is regulated by your state or your city. You could tell your regulator that you are losing money, because you’re not selling enough of your product. Ask them for permission to raise your base prices, and increase the add-on fees. Even though the demand for that product is falling. And, because you did such a great job helping customers get less of your business, that demand is projected to keep falling, at an accelerating rate. Would your price increases keep you afloat, or would they just drive away your customers faster than ever?

Welcome to the electric utility business! You just acquired a hornet’s nest of a messy dilemma. And, the Federal government just passed landmark legislation to help thousands of families use less electricity. Climate change goals are so critical that you need to aggressively support selling less electricity from carbon-based power plants. Now you need to look for a way out of the dilemma. You need to start planning to move in a new direction – as expeditiously as possible.

New utility business models are being developed and implemented, both here and very successfully in Europe. Utilities should consider the new practices outlined in a 2019 report by the National Conference of State Legislatures. It is worth noting that nobody from Texas appears to have leadership roles in this organization – yet.

The NCSL Report Lays It All On the Line

This report begins with an all-too-familiar theme that has been hiding in plain sight for too long. Here are a few excepts from the Overview:

Overview

”Energy efficiency is an appealing option for state policymakers looking to lower energy costs, reduce air pollution and promote local economic growth. Utilities also recognize the benefits that energy efficiency can provide for ratepayers—such as lower utility bills, increased system reliability, reduced greenhouse gas emissions and increased customer satisfaction. When implemented on a large scale, energy efficiency measures may take the place of new power plants and transmission and distribution projects, reducing utility expenditures and risk while lowering costs.”

”Although energy efficiency can be a substitute for new power plants and power lines, it can lower utility earnings under traditional utility business models.”

“The current energy landscape is rapidly changing, with increased demand for clean energy, growing amounts of customer-sited energy generation and new distributed energy resource technologies. While efficiency is seen as a resource that lowers energy demand and increases productivity, the traditional utility business model creates substantial financial disincentives for utilities looking to develop these programs. As a result, many states are exploring and establishing policies that motivate cost-effective efficiency investments.”

Here is another excerpt that leads into the heart of the report:

“At least 44 states and Washington, D.C. have established utility revenue incentives for energy efficiency through decoupling mechanisms, lost-revenue adjustment mechanisms (LRAMs) and performance incentives. The next three tabs explore these approaches in detail and include state policy maps and summary tables.”

The Handwriting Is On the Wall

Utilities, including Austin Energy, need short term, midterm and long term strategies. Technology marches on. American ingenuity will inspire entrepreneurs in the marketplace to deliver what utility customers want. That train has already left the station. It’s better to hop onboard than to be left behind – wondering why people don’t like the idea of higher electric rates. After a brutal summer heatwave, in a period of record inflation and a housing affordability crisis.

I rest my case!

Musical Accompaniment for This Blog Piece:

1. “Wrong Road Again” – Crystal Gayle
2. “Why Don’t They Understand?” – George Hamilton IV
3. “The Times They Are A-Changing’ ” – Bob Dylan
4. “I Can See Clearly Now” – Johnny Nash
5. “The Writing On the Wall” – Adam Wade
6. “Down By the Station” – The Four Preps

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