Austin Energy makes a case against giving more to the city’s General Fund

During a budget work session on July 30, Austin Energy made a case for not transferring an extra $4 million to the city’s General Fund, which goes toward basic city services like parks, fire, police and EMS.

The city’s ratepayer-owned utility is the largest of the city’s enterprise funds and currently transfers $115 million every year to the general fund. In the contentious 2022 rate case, City Council froze the General Fund transfer at a 11.6 percent transfer rate each year. However, from Fiscal Year 2024-25, keeping the same rate, the transfer would already increase to $125 million. Now, city budget staff is looking at a proposal to bump that to 12 percent, meaning a $4 million increase to $129 million, that an Austin Energy spokesperson told Council would “impact the key financial metrics of the utility.” Those financial metrics are appraised by credit ratings agencies, and if Austin Energy’s rating goes down, the cost to repay loans on large purchases would go up – and the utility might have to raise rates on consumers to meet those rising costs.

Austin Energy is already at risk of a ratings downgrade, due to one of the key metrics ratings agencies look at: cash reserves. Austin Energy’s policy is to have 150 days of cash on hand to cover emergency operations – most utilities have a 200-day reserve – and it’s not even hitting that goal. Austin Energy has had two events recently when it’s had to dip into its reserves: One was during the pandemic, when revenues were down due to reduced rates, and the other was last year when, during congested grid conditions, Austin Energy had to pay $250 million to buy energy from the ERCOT market because there’s no readily dispatchable generation within Austin Energy’s region. That $250 million was half of Austin Energy’s cash reserves, said Austin Energy General Manager Bob Kahn. He told Council that Austin Energy has been in violation of the 150-day reserves policy since 2021.

“If we don’t hit 150 minimum in the next five years, I think we risk a downgrade” from an AA to BBB rating, Kahn said. That would cost ratepayers about $43.7 million over 30 years. 

Cash on hand also affects how the city responds to extreme weather emergencies. Council Member Leslie Pool was quick to defend Austin Energy’s hesitation, saying, “This is our savings account that provides us the buffer to be able to operate appropriately when our residents are screaming at us saying, ‘We can’t turn on our lights and all the food in our refrigerator is spoiling.’”

Kahn added that during Winter Storm Uri, San Antonio’s CPS Energy lost $850 million and Brazos Electric Power Cooperative went bankrupt – though Austin Energy actually made money from selling energy. “That’s what keeps me awake at night, that something will blow through and we’re gonna have to come up with a bunch of money for that,” Kahn said.

Council Member Chito Vela pointed out that FEMA can reimburse in the event of a disaster, but Council Member Paige Ellis cautioned that FEMA is notoriously slow to respond: “There’s at least four or five years’ backlog of FEMA reimbursing us. I’m very concerned with tapping into reserves to fund initiatives that should be ongoing funds. $4 million, to me, is not worth risking your credit rating.”

Council Member Vanessa Fuentes seemed more optimistic about the benefits of an extra $4 million transfer “to help us fund absolutely critical initiatives related to the resiliency of our community. I just ask that we maintain that consideration because the risk to our bond rating is one that we will maintain as a city for the next four years” – as Austin Energy is already falling short of its 150-day reserves policy. 

Another concern brought up by Mayor Kirk Watson was that if Austin Energy starts struggling financially, the Texas Legislature – which is hostile to Austin’s utility being publicly owned – will be extra vigilant this session.

“Because of what has recently happened in Houston with Centerpoint, I anticipate that the next session will once again be one that talks about power and energy,” Watson said. “And we are always going to be a part of that discussion.” 

It’s a pretty tight year budget-wise, especially for General Fund services like the parks department, so an extra $4 million would be helpful – but Council is balancing the benefits and risks of having a publicly owned utility. Because of energy efficiency programs, Austinites have the second-lowest bills in Texas behind El Paso. But in order to maintain that, costs are offset by Austin Energy’s commercial customers like Samsung and NXP Semiconductors. Because the Legislature is friendly to business and generally unfriendly to Austin, Austin Energy having to charge higher rates to their biggest commercial customers in order to fund Austin’s parks department could be politically treacherous.

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