Fact Checking on the "Cost of Service" Arguments

In this electric rate case, you will hear a lot about "cost of service."  Are the big high tech companies paying more for electricity than what it costs to serve them, while residential homeowners are paying less than their fair share?  Or is it the other way around?  Austin Energy's proposed rate increase makes the assumption that residential ratepayers have been paying much less than their true cost for a good many years.  But is there something wrong with that picture?

You bet there is!  Not surprisingly, there is more than one utility industry model for calculating cost of service.  Without going into too much inside jargon, we can tell you that Austin Energy has recommended the AED model, which favors the large industrial ratepayers.  The consumer advocates and community organizations that we represent support the BIP model.  It is also very important to note that since the last rate case in 1994, Austin Energy has been using a cost of service model that is very similar to BIP.  Their sudden switch to a different model that is punitive to residential and small business ratepayers is a major part of our opposition to this unfair rate increase.

Cost of service models assign the costs of energy generation power plants to each category of customers.  The AED model lumps all the power plants together, including the expensive coal and nuclear plants.  It then measures those costs on the single hottest day of the year - the system peak.  The truth is that Austin Energy meets residential demand during peak summer hours using the much less expensive natural gas power plants.

Merle Moden, former chair of the City Electric Utility Commission, said this about the AED model, which favors industrial ratepayers, "The single-most important shortcoming of the Industrial Model is its failure to match the demands for electricity throughout the year among the various classes with the required actual costs of generation to meet those demands."  The bottom line in this rate case is that using the AED model would unfairly allocate $25.4 million in costs to the residential class, compared to the BIP model.  (Source: Austin Energy Rate Recommendation, page 85).

The BIP model measures the appropriate generation usage throughout the year for each type of customer, and does so both accurately and fairly.  You do not have to just take our word for it. The Electric Reliability Council of Texas (ERCOT) uses the BIP model for its pricing of electricity that is bought and sold through the statewide power grid.

And yet, Austin Energy has been promoting the notion that residential ratepayers have gone for years without paying their true cost of service.  Check out these two news articles that propel this myth:

http://www.statesman.com/news/on-way-out-water-electric-rate-deals-for-1809361.html?viewAsSinglePage=true

http://www.statesman.com/news/local/should-austins-homes-bear-brunt-of-electric-rate-1850128.html?printArticle=y