Austin Energy’s Future Rate Hikes

Michael Giberson

A few years ago Lubbock’s municipal electric utility was in a tight financial spot that threatened to put it and the city into bankruptcy.  When the utility pushed through a rate increase, customers started switching to competing electric utility Xcel.  The dwindling customer base forced the municipal utility to find another way out of their difficulties.  The utility reorganized management, negotiated some complex deals to reduce wholesale power costs, and made their rates competitive again.  It worked, Lubbock Power & Light is financially secure today and still offering competitive rates.

Austin Energy, the municipal utility for the Texas capital, foresees tough times ahead and the need to either “significantly raise electric rates” or “start losing millions by 2011.”  Fortunately for the utility, Austin Energy is a monopoly and its customers cannot escape rate increases so easily. (See Marty Toohy’s article, “Electric utility proposes major rate increase,” in the Austin American-Statesman.)

3 thoughts on “Austin Energy’s Future Rate Hikes

  1. Fascinating case! But this latest capsule explains a lot.

    People not close to the public-power model may not realize that the alternative to full cost recovery in public power is bankruptcy. (Either that or a bailout.) The idea of “losing money” is not the same in public power as in private power. In private power, where investors have only an *opportunity* to earn a return, a loss of returns *is* a loss. The investor doesn’t have a future claim on foregone profits. In contrast, publicly owned entities don’t “lose” money, they simply lose ground, deferring cost recovery to a later date. [In some instances, public-power entities can be observed to be way “ahead” on cost recovery, owing to long-term lack of competition and oversight. Such entities can lose a little ground with ease.]

    In monopoly public-power, the designated risk taker is the captive customer. In the absence of bad decisions or outcomes for the utility, the public-power customer enjoys lower prices for power, but is unwittingly self-insured against bad outcomes. If the utility takes risks, they are clearly risking the customers’ money; bankruptcy is not usually one of the branches on the decision tree. (In private power, on the other hand, the stockholder stands as a compensated risk-taker, one who can actually lose money, depending on the state of regulatory capture.) In a static comparison, all things being equal other than ownership, public power costs less. But as utilities evolve dynamically, taking risks over a long period of time, public power entities can easily eat up any cost advantage that they may have had. Keep in mind that public power accumulates its “losses,” keeping them on the tab until they’re recovered. It’s path-dependent evolution, and dumb luck may play a big part.

    For this reason of cumulative losses, competition in public power may not be sustainable, depending on circumstances. Risk-taking by a public-power entity in a competitive situation is very dangerous. Once the public utility starts losing customers because of high cost, it finds itself on a slippery slope, spiraling toward bankruptcy. The extent to which it can forestall bankruptcy is determined by where it stands vis-à-vis cost recovery. The public-power entity can lose ground for a while, but eventually its creditors catch on. I can imagine that a public-power entity in direct competition over a long period of time would be as efficient as it could be and would not be “ahead” in cost recovery.

    So, the buyout of the competing network in Lubbock makes sense as a defensive move, especially following a brush with bankruptcy several years ago.

  2. That is, it “makes sense as a defensive move” on the part of the utility. The more interesting question is whether it “makes sense” for local power consumers.

  3. Ha! That is a wholly different question, I fully agree.

    It is sometimes said that public-power entities have only an incentive to minimize cost, whereas an IOU has an incentive to maximize profits. But in the absence of regulation or competition, I’m wondering where this cost-minimization incentive is supposed to come from. I’m guessing that customers of long-standing, unregulated, monopoly public-power are somewhat dependent on the benevolence and intelligence of the utility management. Neither is guaranteed, and in observing the current state of many such entities I wonder if the people in charge today really understand what they’re supposed to be doing. Why are many public-power entities over-collected? That is, they have zero debt (all assets are paid for) and substantial net income in excess of substantial depreciation expense. Some are piling up cash, as if that’s the mark of a job well done. Obviously, these aren’t economists in charge.

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