There are two really big items posted on the July 18 City Council agenda which appear to be fundamentally contradictory to each other. Among other things, they raise the age-old question of does one hand know what the other hand is doing.
In one item posted by Austin Energy and new City Manager T.C. Broadnax, Austin’s public electric utility is proposing to sell its environmentally innovative and successful chilled water system. Austin Energy also proposes to hire J.P. Morgan Securities LLC to serve as consultant on that endeavor. J.P. Morgan Securities LLC is an affiliate of the biggest banking firm in the world.
Meanwhile a separate “Item from Council” would direct the City Manager “to create a feasibility study” on the “establishment of a public bank,” that is a bank run by the City of Austin.
Yes, one item proposes to hire a wing of the biggest banking firm in the world to help sell/privatize an City asset while another calls for the creation of a City run “public bank.” The “public bank” would, among numerous other things, “provide non-predatory banking services for the public.”
Another way of saying it is that one item proposes to sell/privatize an existing City operation while the other would venture into an area that has previously been delegated entirely to private financial institutions and credit unions.
As it turns out, this pairing didn’t last until the actual Council meeting. Shortly before press time, the Austin Independent learned from Austin Energy that the utility has pulled down their item, although officials say it could return at some point..
While the sell the chilled water system item is gone for now, it still makes sense to look at the item in order to assess the circumstances that led Austin Energy officials to make such a proposal. The “public bank” item is still standing. So we will examine that as well.
Although the two items are indeed contradictory and seemingly at cross purposes, it is important to note that one comes from the City Manager (third floor of City Hall) and the City electric utility while the other is an item from Council (second floor). Council opposition to the Austin Energy item didn’t emerge until the local chapter of AFSCME, the city employees union, posted a tweet opposing the sale. The Council opposition came quickly after that, with Council Member Zo Qadri reposting AFSCME’s statement two hours and two minutes later, and promising he would be voting no.
Austin City Council Member Zo Qadri, the first Council Member to raise objections to the proposed sale of the district cooling system; and also the lead sponsor of the “public bank” item
Chilled Water System/District Cooling System
The Austin Independent learned about the proposed sale in a July 12 Austin Monitor story by Jo Clifton. Clifton also provided a good summary of what the chilled water system aka “district cooling system” does:
“The utility’s district cooling system operates four plants: two downtown, one in the Domain and one at Mueller. District cooling uses electricity to chill water during nighttime hours when there is less demand for electricity. This reduces peak energy demand and improves the system’s overall efficiency.”
The agenda item would have authorized the hiring of “J.P. Morgan Securities LLC (JPM),” acronym the City’s:
- “for consultant support to assist in the evaluation of a potential sale of the District Energy and Cooling system” and to
- “act as the financial advisor to facilitate this complex process and provide strategic advice, analysis, and other support to navigate this potential sale.”
Method of Paying J.P. Morgan Appears to Provide Incentive To Sell
So far we’ve talked about the contradictions between the two items. There is also a rather obvious contradiction within the backup for the Austin Energy item. According to the official Council backup, J.P. Morgan Securities LLC is being hired to provide “consultant support to assist in the evaluation of a potential sale (italics added).”
A section shortly after that discusses how the consultants will be paid: “JPM (J.P. Morgan) will be compensated on a percentage fee basis if a sale is completed.” No other ways of paying J.P. Morgan LLC are mentioned in the request for Council approval and Austin Energy confirmed that the idea was for J.P. Morgan to be paid on a fee only basis.
Basing the payment for J.P. Morgan’s work “on a percentage fee basis if a sale is completed” clearly builds in a financial incentive for the company to favor a sale; even though the City backup cautions that the company will only be doing an “evaluation” of a “potential sale.”
Basing the payment for J.P. Morgan’s work “on a percentage fee basis if a sale is completed” clearly builds in a financial incentive for the company to favor a sale.
We’ll come back to Austin Energy later in the article for some historical and financial context. Now, let’s take a look at the Council Members’ proposal for a “public bank.”
Why A Public Bank?
Following is the full list of areas the City Manager is “directed to include. . . in the (public bank) feasibility study” although he is “not limited to” just those areas if others arise.
- “credit access for small businesses, especially those owned by or employing residents in socioeconomically disadvantaged neighborhoods,
- affordable, below-market, and social housing finance,
- climate change mitigation and green energy investment,
- governance and accountability,
- transformative credit programs for preserving and developing local economic growth and worker and tenant ownership, and
- developing and promoting inclusive, low cost, privacy-respecting and consumer-friendly payments services.”
The City Manager is to have this study completed by November 1.
The lead sponsor of the item is District 9/Central Austin representative Zo Qadri. His cosponsors are Ryan Alter, Vanessa Fuentes and Chito Vela.
Zo Qadri’s three co-sponsors on his proposal to create a “public bank” run by the City of Austin: Chito Vela, Vanessa Fuentes and Ryan Alter
While reasonable people will disagree, some of these items could be considered noble goals. Nonetheless, that brings us to the most obvious question about the City running a bank. Can a City government that for up to a decade now has experienced serious difficulty in providing some of its most basic services be counted on to create and successfully operate a bank? By the way, throughout this time, the Council has been led by people with noble goals.
Can a City government that for up to a decade now has experienced serious difficulty in providing some of its most basic services be counted on to create and successfully operate a bank?
Let’s take a brief look at the Council’s record on basic services. The police staffing crisis endures. The number of people experiencing homelessness has at least doubled since 2019 when the previous Mayor and Council started talking about ending homelessness in Austin. There have been serious problems with staffing the 911 call center, although the situation improved somewhat under Interim City Manager Jesus Garza, who has now departed. There are serious ongoing challenges with EMS staffing. . . .
So, we’ll see if the Council sponsors attempt to explain how the City will operate a public bank, a totally brand new City function, when they are failing at a number of traditional city services.
Another obvious question is: where is this idea coming from? That is answered somewhat in the Whereas section of the draft Council resolution; which is where the mention of “predatory lending” is located. The Whereases report that “a national movement is occurring of state and local entities creating public banks with the intent to create loans for a public purpose, re-invest city revenues locally, and provide non-predatory banking services for the public.” Specifically, “local cities, such as Philadelphia, San Francisco, and Los Angeles have filed legislation to create local public banks.”
Based on research for this article it does not appear that any of the cities mentioned have yet created a public bank although all three have considered it in some form. Also, the language in the item from Council does not say that a public bank has actually been created.
In 2018 the citizens of Los Angeles voted down a proposal for a public bank, but the City Council has now resurrected the idea and is evidently moving forward without another election.
That’s all the space or time we have for questions today. There are a lot of other questions that should be addressed along the way. Feel free to submit your own to the City Manager’s Office or the Council sponsors. If you do, please copy me. For now, however, let’s switch back to the Austin Energy item.
Those Who Refuse to Learn From History. . .
On Austin Energy’s sell the district cooling system proposal, we might invoke the maxim from George Santayana, “Those who do not remember the past are doomed to repeat it.” This has been said in slightly different ways since Santayana coined the phrase in 1905. For instance I think Winston Churchill slightly improved the quote in 1948 when he said, “those who fail to learn from history are condemned to repeat it.” For a modern Austin version we might say, “those who refuse to acknowledge history will screw up the future.”
What I’m referring to here is that there was a push around 30 years ago to sell Austin Energy, not the chilled water system, but the whole utility. That proposal was fought off by elected leaders like then Council Members Brigid Shea, Jackie Goodman and Max Nofziger along with a multitude of citizens who support public ownership of the utility — even as they disagree on much else.
I was one of those citizens opposed to selling the utility. Then I came onto the Council as Shea and Nofziger left (Goodman stayed). The sell the utility idea was pretty much dead by then, although it was still stirring. Our new Council ended that by building a four to three majority (there were seven members of the Council then, including the Mayor) that put the utility on a new course. That was done with the very able assistance of City Finance Director Betty Dunkerley. Austin Energy went on to become financially sound and to lead all the nation’s electric utilities in the use of renewable energy. (I was also employed by Austin Energy on a temporary basis after my time on the Council. For details click here.)
Given that history, I’m disappointed that the current leaders of Austin Energy do not appear to have totally absorbed the historical lessons from that era; that the people of Austin favor having a public utility, and that selling off public utility assets is never going to be a popular measure. I’m also disappointed that they appear to have constructed the J.P. Morgan pay structure in a way that incentivizes the consultants to favor a sale.
Then there’s the City Council. Although resistance from Council Members knocked this item off the agenda, my analysis is that their action had way more to do with the opposition of the union, and some activists, than with any knowledge of Austin Energy’s history. I base that on conversations and observations stretching over the last decade. In fact I would bet a month’s worth of air conditioning that no more than four members of the Council know even the history I detailed above (unless they just read it). Also, based on my observations they don’t understand the history or importance of public utilities in general, even though they claim to be “progressives.”
There are some exceptions, most notably Council Member Leslie Pool who has demonstrated publicly her knowledge of the Austin Energy history to which I refer.
Have Austin Energy Leaders Decided They Need to Sell Assets Just to Provide Basic Finances for the Utility?
I also don’t think that a failure to learn from history is the only factor that drove Austin Energy officials to put the item regarding the chilled water system item on the agenda. It is clear from reading the backup materials that utility leaders appear to be desperately trying to deal with some serious financial problems.
A memo from Broadnax’ on the proposed sale says (with the numbering below added by me for emphasis):
- “. . . a sale could improve Austin Energy’s ability to provide clean, affordable, reliable energy to customers by paying off debt and freeing up capital dollars for grid enhancements.
- Currently, the district cooling system is at capacity and needs substantial investment to continue to grow at a pace that is needed for Austin.
3. Austin Energy is financially limited in its ability to maintain and improve the core electric system while also growing district cooling to its full potential.”
Also, Austin Energy officials told the Austin Independent that the utility lost $5 million operating the district cooling system last year.
This sounds like a utility that is looking for assets to sell off so that it can finance basic operations and keep up with growth. Let’s review those three items.
Number one says that the utility could be more reliable and provide even more renewable energy generation than it does now if it had the funds from a sale of the chilled water system. At the same time, relates bullet number two, the cooling system (that they want to sell) is “at capacity” and needs investment. But, “Austin Energy is financially limited in its ability to maintain and improve the core electric system while also growing district cooling to its full potential.”
So, as I said above, Austin Energy is trying to sell this asset so they can fund some of their basic operations. Whether Austin Energy is in such dire straits financially should have been examined as part of the process, if the item had passed. But, really it should be examined regardless of the proposal’s fate.
It’s not like Austin Energy hasn’t made it known before that they are facing financial challenges. Most notably the utility came forward in 2022 with a rate increase proposal. The core element was an increase in the base charge from $10 to $25 per month. Yes, that’s a large increase, but base fees, or flat fees, are a way of guaranteeing a base, stable income for the utility i.e. helping it remain financially healthy while helping to prevent swings in revenue due to weather or other circumstances.
This 2022 proposal set off opposition from a wide array of environmental and social justice activists; some of whom called it a “predatory” rate increase. The most oft-invoked reason for opposing the increase was that it would hit poor people the hardest. Austin Energy officials, however, pointed out that base fees are waived for low-income customers enrolled in the utility’s generous and ever expanding Customer Assistance Program (CAP). (For instance, according to an Austin Energy presentation scheduled for the July 16 Council work session, and available in the backup, enrollment in CAP has increased from 33,140 accounts in the first quarter of 2023 to 63,732 at the end of the second quarter of this year. That is about 13% of residential accounts, slightly higher than the 2022 poverty rate of 12.4%.)
Slide from July 16 Council work session presentation, provided by Austin Energy
This fact, that CAP customers do not have to pay the base fee, did little to quell the uproar from activists during the 2022 rate case. Responding to them, the Council slashed the proposed base fee down to $13 a month (slightly more than half the utility’s request) for the first year and then a $1 per month increase in each of the next two years. Even then four Council Members voted no. Those were: Alison Alter, Vanessa Fuentes, Kathie Tovo and Ann Kitchen. (It was the last meeting of their terms for Tovo and Kitchen.) The Council would most likely not even have made it to this point without the leadership of Council Member Pool, who acknowledged the need for a rate increase and worked what she could get through the Council.
If you’re wondering why I am advocating for higher utility bills, it’s because the financial health of the utility is essential to the overall health of the City government. I made this case in more detail during the rate increase process.
Many of the same groups and people who opposed the rate increase are adamantly opposing the JP Morgan proposal. In most cases that’s at least in part because they favor keeping the utility and its functions in public hands. To me that’s a good thing, but having a public utility comes with responsibilities; especially for those elected by the public to govern the utility.
Council Members have now pleased activists by shooting down the J.P. Morgan/district cooling system sale. That, however, does nothing for the financial health of the utility. A more responsible strategy would be to begin a process aimed at providing Austin Energy the money it needs for its operations and to carry out the policy goals that Council sets for it; and that the people of Austin expect.
In such a scenario it can’t be that activists and Council Members just blindly accept whatever dollar figure Austin Energy brings forward. Tension between activists and utility officials has been core to making Austin Energy into a nationally respected utility. However, people who demand more services, then oppose rate increases to pay for those services, should not be taken seriously.
Many Austin progressives are more than happy to point out that national Republicans often take credit for government projects and programs that they voted against. A lot of those same Austin progressives also demand costly policies from Austin Energy, then loudly oppose rate increases needed to pay for those policies. It’s not just activists who take this sort of approach either.
For instance, just three months after voting against Austin Energy’s 2022 rate increase, Council Member Vanessa Fuentes — arguably the Council’s most obvious weather vane — brought forward a resolution calling for burial of electric lines on infrastructure going forward. Fuentes’ move came after the ice storm where falling limbs knocked out power for thousands of residents, some outages continuing for days. Burying lines would definitely cut down on outages caused by wind or falling limbs and trees. Burying lines, however, would be a massive ongoing expense. To be totally fair, Fuentes didn’t advocate for burying lines and then opposed the funds to do so. Instead she voted against more money for Austin Energy first, then started advocating for more spending.
If Austin Energy is to be financially healthy, and be the kind of strong utility it once was, Council Members need to start being serious about their responsibility as the governing body of the utility. They could start by learning more about the history of Austin Energy and trying to develop a better understanding of why public utilities are so important.
Being more serious about their responsibilities for governing Austin Energy would also entail standing up to activists who seek more services — like more renewables, cost breaks for low income customers, and buried lines — but oppose collecting the funds to pay for them. That might damage the popularity of Council Members with some activists, but it would make for a much healthier utility, and would cut down on any rationale for selling off important utility functions.
Or maybe Austin Energy could just borrow some money from the City of Austin’s new public bank.
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Project Connect Update: In a previous story we wrote about a citizen lawsuit against Project Connect, the primary feature of which is a proposed light rail system — that is plagued by cost overruns. That suit was scheduled for trial on June 17, but was postponed until an appeals court rules on the current trial court’s jurisdiction regarding a filing from the Texas Attorney General’s Office. That filing challenges the Austin Transportation Partnership’s authority to issue bonds.
Vacation and summer reading note: The Austin Independent is going on summer vacation. We will return after Labor Day. We reserve the right to jump in if there is news or updates that just can’t be ignored.
For other summertime reading on local governance and politics, we suggest an important article by Amy Smith in the Austin Free Press. Smith writes about how many of the leading backers of switching to a 10-1 Council District system are now horrified by what the change has produced. The article is headlined: “Buyer’s Remorse: Some key architects of Austin’s 10-1 city council now ‘disgusted’ by their handiwork.”
Smith’s article is dated July 2. It will remain relevant all summer and well after the Austin Independent returns in September.
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