Item 20 Base Rate Review Briefing — original pdf

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Item 20 Austin Energy’s 2022 Base Rate Review: Introduction and Initial Briefing Russell Maenius, Vice President - Finance March 21, 2022 © 2022 Austin Energy Disclaimer Certain information set forth in this presentation contains forecasted financial information. Forecasts necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance. Although the forecasted financial information contained in this presentation is based upon what Austin Energy management believes are reasonable assumptions, there can be no assurance that forecasted financial information will prove to be accurate, as actual results and future events could differ materially from those anticipated in such forecasts. In addition, this presentation contains unaudited information and should be read in conjunction with the audited Comprehensive Annual Financial Reports for the City of Austin, which was published on March 14, 2022: https://assets.austintexas.gov/financeonline/downloads/annual_comprehensive_financial_report/annual_comprehensive_financial_report_2021.pdf 2 Agenda Summary Financial Needs Base Rate Review Process Base Rate Review Schedule 3 Summary Austin Energy Needs a Base Rate Review The Need The Process The Ask • • • Financial condition has declined due to lower revenues, resulting in $90 million+ in combined net losses in FY 2020 and FY 2021 ‘AA’ credit rating is in jeopardy due to dwindling cash balances and declining financial metrics Financial policies and bond covenants require a base rate increase • Details and proposal coming in mid-April • Base rate review process is open, public, and transparent • Austin City Council approves rates – outside City customers can appeal their rates to the Public Utility Commission of Texas • Base rate change to be effective January 2023 • Austin Energy needs your support in the base rate review process to ensure financial stability 4 Austin Energy’s Financial Needs Require Base Rate Review Decline in financial metrics jeopardize operations and credit rating Why review base rates and make changes now? 5 Austin Energy Serves 15 Communities Across Central Texas Austin Energy • Founded in 1895 • 3rd largest municipal utility in the nation with over 500,000 customers • ‘AA’ rated utility with $1.3B in revenue and $6B in assets • 437 square mile PUCT approved service territory with approximately half inside Austin’s city limits • 90% of customers are residential • 65% of energy is sold to business customers 6 Austin Energy is Focused on the Customer Providing reliable electric service, robust public benefits and affordable rates 1st Quartile Reliability for US Utilities Direct Costs of Utility Operations Generation/Power Supply Transmission Distribution Customer Services Corporate Services Debt Service Valuable Community Benefits Comprehensive Customer Benefits Costs Associated with City Policy Energy Efficiency Value of Solar Service Area Lighting General Fund Transfer Renewable Energy Portfolio Subsidies Associated with City Policy Customer Assistance Program State/School/Military Discounts Residential Average Monthly Bill for 2020 Second Lowest in Texas EL PASO ELECTRIC CO AUSTIN ENERGY SOUTHWESTERN PUBLIC… BROWNSVILLE PUBLIC… SOUTHWESTERN ELECTRIC… CITY OF SAN ANTONIO - (TX) CITY OF NEW BRAUNFELS -… PEDERNALES ELECTRIC… GREEN MOUNTAIN ENERGY… BLUEBONNET ELECTRIC… CITY OF DENTON - (TX) TEXAS AMIGO ENERGY RELIANT ENERGY RETAIL… TXU ENERGY RETAIL CO, LLC $89 $90 $100 $114 $117 $118 $118 $125 $126 $128 $130 $134 $149 $152 $164 7 Costs identified are not inclusive of all Austin Energy costs Source: U.S. Energy Information Administration Form 861, October 2021 How Does Austin Energy Compare to the Texas Market? System Average Annual Rates* by Calendar Year h W k r e p s t n e C 13.00 12.00 11.00 10.00 9.00 8.00 7.00 6.00 5.00 4.00 Austin Energy customers have received a net benefit of $1.76 Billion compared to the Texas average Austin Energy improved to 97.5% of the Average for Texas 2001 2004 2007 2010 2013 2016 2019 Austin Energy Texas Entities (filtered) ERCOT Texas Entities (filtered) Source: U.S. Energy Information Administration Form 861 *Note: Includes base rates and pass-through rates 8 h W k r e p ¢ 0.12 0.10 0.08 0.06 0.04 0.02 0.00 How has Austin Energy Trended Over Time? System Average Annual Rates* by Calendar Year Nominal System Rate 6.4% base rate increase - First base rate change in nearly 20 years 1994 base rate increase 6.7% base rate decrease Real System Rate 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 Actual System Rate Adjusted for inflation *Note: Includes base rates and pass-through rates 9 Are All Rates Going To Be Impacted? No...The base rate review will only impact base rates – then remain stable over multiple years FY 2021 Electric Revenue Pass-Through 48% Base 52% • Base rate review only impacts base rates. Base rates are about one-half of a residential customers’ bill – even less for business customers • Only 3 base rate changes in the last 3 decades • Current financial policy requires base rate review every 5 years at a minimum • Revenues were assessed in FY 2019 and deemed adequate (See memo to Council dated August 27, 2020) Only 3 Base Rate Changes In The Last 3 Decades 6.4% increase No Change for nearly 20 years 6.7% decrease Base Rates Pass Through Rates 1994 2013 2017 2023 Source: Audited Financial Statements 2021. 10 What Does Base Rate Revenue Pay For? Costs to Own and Operate the System Vehicle Expenses Vehicles, fuel and maintenance Vegetation Management Tree trimming and related work Principal and Interest Payments On bonds and commercial paper Customer Care Services such as call centers and utility billing Information Technology Purchases and support contracts Supplies and Equipment To operate and maintain the electrical system and power plants Employees Salary, benefits, pension contributions General Fund Transfer Other direct and indirect City services Does Not Include Customer Assistance Program Energy Efficiency Program Transmission related costs Power purchases from ERCOT District energy and cooling Streetlights • • • • • • 11 Why are Costs Outpacing Revenues? The current rate structure relies too heavily on kWh sales for revenue This drives base costs Customer growth drives increased infrastructure investment and higher operating costs Steady Customer Growth This drives base revenues Relatively Flat Sales 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2014 2015 2016 2017 2018 2019 2020 2021 Customers Energy - kWh Sales Not Adjusted for Weather Source: Fund Summary Statements 2014-2021 12 New Residential Construction Uses 50% Less Electricity Average Residential kWh per Bill All Residences Overall, 820 0 0 7 4 1 7 0 8 6 5 6 6 4 7 6 1 2 6 3 8 5 6 7 4 9 7 3 Single Family 3 4 1 , 1 2 6 1 , 1 0 1 1 , 1 0 8 0 , 1 Overall, 1065 1 5 0 , 1 7 9 9 4 4 9 6 7 8 4 3 8 3 3 7 2 4 6 Multi-Family Overall, 592 0 4 5 7 1 5 8 5 5 3 3 5 8 2 5 3 9 4 6 7 4 7 5 4 6 7 3 9 3 3 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 2 1 0 2 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 9 1 0 2 0 2 0 2 1 2 0 2 YEAR RESIDENCE BEGAN SERVICE YEAR RESIDENCE BEGAN SERVICE YEAR RESIDENCE BEGAN SERVICE L L I B R E P H W K 1 3 6 2 1 0 2 e r P L L I B R E P H W K 2 1 0 2 e r P 6 6 8 7 5 8 L L I B R E P H W K 2 1 0 2 e r P 13 Draft Housing Permits at All-time High with Dramatic Increase in Multi-Family Travis County Residential Building Permits (Jan. 2003 -Dec. 2021 rolling 12-month total) Single Total Multi 30,000 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 n a J - 3 0 0 2 n a J - 4 0 0 2 n a J - 5 0 0 2 n a J - 6 0 0 2 n a J - 7 0 0 2 n a J - 8 0 0 2 n a J - 9 0 0 2 r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O r p A l u J t c O l u J r p A t c O n a J - 0 1 0 2 n a J - 1 1 0 2 n a J - 2 1 0 2 n a J - 3 1 0 2 n a J - 4 1 0 2 n a J - 5 1 0 2 n a J - 6 1 0 2 n a J - 7 1 0 2 n a J - 8 1 0 2 n a J - 9 1 0 2 n a J - 0 2 0 2 n a J - 1 2 0 2 14 Average Residential Customer Summer Consumption Down 22% Since 2009 Higher billings in lower tiers and a reduction in higher tiers results in unrecovered costs Tier 1 Tier 2 Tier 3 Tier 4 Tier 5 FY 2009 FY 2021 In 2021 51.1% of summer bills averaged < 899 KWH Underpriced KWH Sales In 2009 49.1% of summer bills averaged < 1149 KWH Current 5-tier structure based on 2009 consumption 0 9 9 9 9 1 9 9 2 9 9 3 9 9 4 9 9 5 9 9 6 9 9 7 9 9 8 9 9 9 9 9 0 1 9 9 1 1 9 9 2 1 9 9 3 1 9 9 6 1 9 9 5 1 9 9 9 9 4 9 1 1 KWH BOUNDARY 9 9 8 1 9 9 7 1 9 9 0 2 9 9 1 2 9 9 2 2 9 9 3 2 9 9 4 2 9 9 5 2 9 9 6 2 9 9 7 2 9 9 8 2 9 9 9 2 9 9 0 3 9 9 1 3 9 9 2 3 9 9 3 3 9 9 4 3 15 S L L I B F O T N E C R E P 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Why is a Base Rate Review Needed Now? Costs are outpacing revenues Base Rate Costs v. Base Rate Revenue $ f o s n o i l l i M $1,000 $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 B a s e r a t e d e c r e a s e 2014 2015 2016 2017 2018 2019 2020 2021 Revenues Costs Source: Audited Financial Statements 2014-2021 When costs exceed revenue, cash is used to fill the gaps Cash and Reserve Balances $689 $690 $690 $598 $550 Minimum Balance Needed $480 $618 $558 Costs exceed revenue $800 $700 $600 $ f o s n o i l l i M $500 $400 $300 $100 $- $402 $200 $257 2014 2015 2016 2017 2018 2019 2020 2021 Jan-22 Source: Audited Financial Statements 2014-2021. Unaudited Financial Statements 2022. 16 How Does Austin Energy Build Its Cash Balance? We do not earn a profit and we can not sell shares to generate equity funding (A) Reserve Expense in Base Rates Contributions to Working Capital (Millions of $) Audited 2017 $5 Audited 2018 $0 Audited 2019 $0 Depreciation & Amortization expense $154 $156 $198 Less: Principal on debt Less: Cash for construction (B) Depreciation contribution (C) Net margin contribution (37) (63) $54 $12 (36) (59) $61 $58 (66) (67) $65 $3 $68 Audited 2020 $0 $290 (78) (80) $132 ($34) Audited 2021 $0 $284 (81) (143) $60 ($57) Contributions to Working Capital (A+B+C) $76 $119 $98 $3 Source: Audited Financial Statements 2017-2021 17 Why are Adequate Cash Balances so Critical to Austin Energy? Austin Energy expenses total over $1.3 Billion every year and we have $1.8 Billion of debt Financial policies: Require a minimum of $480M Liquidity: Ensure investors and vendors will be paid timely Cash Management: Manage ebbs and flows of cash resulting from seasonality and pass-through expenses Capitalization: Cash funding of projects to maintain a favorable capital structure Cash and Reserves 9/30/20 $380 9/30/21 $278 12/31/2021 $170 $690M $618M $574M $0 $200 $400 $600 $800 Committed Working Capital Uncommitted Working Capital Contingency Reserve Power Supply Stablization Reserve Capital Reserve Source: Audited Financial Statements 2020-2021. Unaudited Financial Statement 2022 18 Key Financial Metrics Declining Minimum or Target 2017 2018 2019 2020 2021 Operating Margin 10% 10% (3%) (5%) 8% $58 6% $3 Net Income/(Loss) (Millions of $) > $0 $17 ($34) ($57) Days Cash on Hand 150 Days 205 224 218 222 Debt Service Coverage > 2.0 3.4 3.6 4.0 2.1 213 1.8 Debt to Capital < 50% 44% 44% 52% 53% 54% Source: Audited Financial Statements 2017-2021 19 Policies Require That Revenue Deficiencies be Addressed Austin Energy Policies, Bond Covenants and Credit Agency Concerns • Section 4 Master Bond Ordinance: Requires the City to fix rates to pay all current operating expenses. If net revenues are insufficient, the City shall cause such rates to be revised and adjusted to comply with the rate covenant. • Austin Energy Financial Policy #17: A rate adequacy review shall be completed every five years, at a minimum, through performing a cost-of-service study. Electric rates shall be designed to generate sufficient revenue to support the full cost of operations and to ensure a minimum debt service coverage of 2.0x on electric utility revenue bonds. • Moody’s October 2020 Credit Report: Factors that could lead to a downgrade: • • “Failure to implement needed rate increases in a timely manner or political intervention resulting in deterioration of key financial metrics.” “Adjusted debt service coverage ratio (DSCR) falls below 1.8x and adjusted days liquidity on hand of less than 150 days for an extended period.” 20 Austin Energy’s Base Rate Review Process A structured process designed to provide an independent recommendation What comes next? How does the process work? 21 Guiding Principles for Establishing Base Rates Equitable and fair rates Stable bills and simple rates Protect vulnerable customers Preserve energy efficiency and conservation Austin Energy will need to balance multiple guiding principles during this base rate review 22 Base Rate Review Process • • • • Public, transparent process similar to the 2016 rate case Includes Impartial Hearing Examiner and Independent Consumer Advocate • Independent Consumer Advocate’s role is to represent residential and small business customers throughout the process Establishes guidelines, roles and responsibilities Community outreach and open participation to all customers Revenue Requirements: Actual Austin Energy spending for a given “test year” Cost of Service Model: Classify the revenue requirements and allocate based upon usage Rate Design: Pricing structure that collects needed revenue and meets policy intent Rate Filing Package Public Process: Impartial Hearings Examiner Proceedings Electric Utility Commission: Review and Recommendation City Council Austin Energy Committee & Council Proceedings New Rates 23 Targeted Community Outreach • Customer groups have different concerns and will be impacted differently • Public meetings: April – May • Present need for base rate review and rate recommendations • Feedback opportunities at meetings and through comment forms • Explain how to participate in the process Residential • Virtual and in-person public meetings • Support for CAP customers, with involvement from community partners Small to Mid-Sized Businesses • Virtual and in-person meetings • Additional outreach through local business and stakeholder groups Large Key Accounts • Virtual and in-person meetings • Key Accounts team to lead engagement 24 Austin Energy Base Rate Review Timeline Finalize Preliminary Rates and Insights / Begin COA meetings March 1, 2022 AEUOC Presentation April 5, 2022 File Tariff Package / Discovery Begins April 18, 2022 End of Discovery on Rebuttal July 8, 2022 Council Work Sessions November 2022 IHE Recommendation August 31, 2022 Proposal Development Public Outreach Public Participation, Discovery & Review Approval Implementation JAN FEB MAR APR MAY JUNE JULY AUG SEPT OCT NOV DEC EUC Presentation March 21, 2022 End of Briefing August 1, 2022 EUC Review of IHE Recommendation October 18, 2022 Unaudited financial data completed January 2022 End of Discovery on Direct June 1, 2022 Effective Date January 1, 2023 25 Expected Outcomes from the Base Rate Review • Full recovery of base rate costs, improved financial metrics, compliance with bond covenants, financial policies and ‘AA’ credit expectations • A revised residential rate structure that better recovers costs while enhancing fairness • Gradual move for each customer class to pay their share of costs • Greater equity for our more vulnerable customers through better rate design 26 ©2022 Austin Energy. All rights reserved. Austin Energy and the Austin Energy logo and combinations thereof are trademarks of Austin Energy, the electric department of the City of Austin, Texas. Other names are for informational purposes only and may be trademarks of their respective owners.