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Item 6AM E M O R A N D U M September 15, 2010 To: Shana Yelverton, City Manager From: Sharen Jackson, Finance Director nd Subject: Ordinance No. 984, 2Reading, Approve a negotiated resolution between the Atmos Cities Steering Committee (“ACSC” or “Steering Committee”) and Atmos Energy Corp., Mid-Tex Division ("Atmos Mid-Tex" or "Company") regarding the company's rate review mechanism filing in all cities exercising original jurisdiction; declare existing rates to be unreasonable; requiring the company to reimburse cities’ reasonable rate-making expenses; adopt tariffs that reflect rate adjustments consistent with the negotiated settlement and finding the rates to be set by the attached tariffs to be just and reasonable; approve Atmos' proof of revenues; extending the RRM process for two cycles and adopting a new RRM tariff; ratifying the settlement agreement, including cost recovery for a steel service line replacement program; adopt a savings clause; determine that this ordinance was passed in accordance with the requirements of the Texas Open Meetings Act; declare an effective date; and require delivery of this ordinance to the company and the steering committee’s legal counsel. Action Requested: Approval of Ordinance No. 984. Background Information: The City, along with 148 other cities served by Atmos Energy Mid-Tex Division ("Atmos"), is a member of the Atmos Cities Steering Committee ("ACSC"). On March 15, 2010, Atmos filed with the City an application to increase natural gas rates pursuant to the Rate Review Mechanism ("RRM") tariff. The Atmos’ March RRM filing sought a $70.2 million rate increase. The City worked with ACSC to analyze the schedules and evidence offered by Atmos to support its request to increase rates. The purpose of the Ordinance is to approve rate tariffs (“Attachment A”) and proof of revenues (“Attachment B”) that reflect the negotiated rate change pursuant to the RRM process and to ratify a Settlement Agreement (“Attachment C”) recommended by the ACSC Executive Committee. The Settlement Agreement authorizes an extension of the RRM process, in modified form to eliminate the true-up component, for an additional two annual filings. The agreement also addresses the Atmos steel service line replacement program and authorizes current cost recovery. As a result of the negotiations, ACSC was able to reduce the Company's requested $70.2 million RRM increase to $27 million. Approval of the Ordinance will result in the implementation of new rates that increase the company’s revenues effective October 2010. The monthly bill impact for the average residential customer will be a $1.40 increase. During the time that the City has retained original jurisdiction in this case, consultants working on behalf of ACSC cities have investigated the support for the Atmos’ requested rate increase. While the evidence does not support the $70.2 million increase requested by Atmos, ACSC consultants agree that the Company can justify an increase in revenues of $21 million. The agreement on $27 million is a compromise between the positions of the parties. The alternative to a settlement would be a contested case proceeding before the Rail Road Commission on Atmos’ current application, would take several months and cost ratepayers millions of dollars in rate case expenses and would not likely produce a request more favorable than that to be produced by the settlement. The ACSC Executive Committee recommends that ACSC members take action to approve the ordinance authorizing new rate tariffs. Financial Considerations: None Strategic Link: F1 Adhere to financial management principles and budget Citizen Input/ Board Review: Public Hearing scheduled for October 5, 2010. Legal Review: Ordinance prepared by ACSC attorneys, Lloyd Gosselink Rochelle & Townsend, P.C. Alternatives: Deny Ordinance Supporting Documents: Ordinance No 984 Tariff (Attachment A) Proof of Revenues (Attachment B) Settlement Agreement (Attachment C) Staff Recommendation: Approve Ordinance No. 984 ORDINANCE NO. 984 AN ORDINANCE OF THE CITY COUNCIL OF THE CITY OF SOUTHLAKE, TEXAS, (“CITY”) APPROVING A NEGOTIATED RESOLUTION BETWEEN THE ATMOS CITIES STEERING COMMITTEE (“ACSC” OR “STEERING COMMITTEE”) AND ATMOS ENERGY CORP., MID-TEX DIVISION (“ATMOS MID-TEX” OR “COMPANY”) REGARDING THE COMPANY’S THIRD RATE REVIEW MECHANISM (“RRM”) FILING IN ALL CITIES EXERCISING ORIGINAL JURISDICTION; DECLARING EXISTING RATES TO BE UNREASONABLE; REQUIRING THE COMPANY TO REIMBURSE CITIES’ REASONABLE RATEMAKING EXPENSES; ADOPTING TARIFFS THAT REFLECT RATE ADJUSTMENTS CONSISTENT WITH THE NEGOTIATED SETTLEMENT AND FINDING THE RATES TO BE SET BY THE ATTACHED TARIFFS TO BE JUST AND REASONABLE; APPROVING ATMOS MID-TEX’S PROOF OF REVENUES; EXTENDING THE RRM PROCESS FOR TWO CYCLES AND ADOPTING A NEW RRM TARIFF; RATIFYING THE SETTLEMENT AGREEMENT, INCLUDING COST RECOVERY FOR A STEEL SERVICE LINE REPLACEMENT PROGRAM; ADOPTING A SAVINGS CLAUSE; DETERMINING THAT THIS ORDINANCE WAS PASSED IN ACCORDANCE WITH THE REQUIREMENTS OF THE TEXAS OPEN MEETINGS ACT; DECLARING AN EFFECTIVE DATE; AND REQUIRING DELIVERY OF THIS ORDINANCE TO THE COMPANY AND THE STEERING COMMITTEE’S LEGAL COUNSEL. WHEREAS, the City of Southlake, Texas (“City”) is a gas utility customer of Atmos Energy Corp., Mid-Tex Division (“Atmos Mid-Tex” or “ Company”), and a regulatory authority with an interest in the rates and charges of Atmos Mid-Tex; and WHEREAS, the City is a member of the Atmos Cities Steering Committee (“ACSC” or “Steering Committee”), a coalition of approximately 148 similarly situated cities served by Atmos Mid-Tex that have joined together to facilitate the review of and response to natural gas Atmos RRM Ordinance 1 issues affecting rates charged in the Atmos Mid-Tex service area (such participating cities are referred to herein as “ACSC Cities”); and WHEREAS, pursuant to the terms of the agreement settling the Company’s 2007 Statement of Intent to increase rates, ACSC Cities and the Company worked collaboratively to develop a Rate Review Mechanism (“RRM”) tariff that allows for an expedited rate review process controlled in a three year experiment by ACSC Cities as a substitute to the current GRIP process instituted by the Legislature; and WHEREAS, the City took action in 2008 to approve a Settlement Agreement with Atmos Mid-Tex resolving the Company’s 2007 rate case and authorizing the RRM Tariff; and WHEREAS, the 2008 Settlement Agreement contemplates reimbursement of ACSC Cities’ reasonable expenses associated with RRM applications; and WHEREAS, on or about March 15, 2010, Atmos Mid-Tex filed with the City its third application pursuant to the RRM tariff to increase natural gas base rates by approximately $70.2 million, such increase to be effective in every municipality that has adopted the RRM tariff within its Mid-Tex Division; and WHEREAS, ACSC Cities coordinated its review of Atmos Mid-Tex’s RRM filing by designating a Settlement Committee made up of ACSC representatives, assisted by ACSC attorneys and consultants, to resolve issues identified by ACSC in the Company’s RRM filing; and WHEREAS, the Company has filed evidence that existing rates are unreasonable and should be changed; and WHEREAS, independent analysis by ACSC’s rate expert concluded that Atmos Mid-Tex is able to justify an increase over current rates of $21 million; and Atmos RRM Ordinance 2 WHEREAS, Atmos Mid-Tex has commenced a program to replace steel service lines based on a relative leak repair risk analysis; and WHEREAS, the Steering Committee has entered a Settlement Agreement (“Attachment C” to this Ordinance) with Atmos Mid-Tex to: (1) increase base rate revenues by $27 million; (2) extend the RRM process, with modifications for an additional two cycles and to thereafter require the filing of a system-wide Statement of Intent rate case on or before June 1, 2013; and (3) in the interim to allow current recovery of incremental direct costs of the steel service line replacement program in rates set via this ordinance and in future RRMs; and WHEREAS, the ACSC Executive Committee, as well as ACSC lawyers and consultants, recommend that ACSC members approve the attached rate tariffs (“Attachment A” to this Ordinance), which will increase the Company’s revenue requirement by $27 million; and WHEREAS, the attached tariffs implementing new rates and Atmos Mid-Tex’s Proof of Revenues (“Attachment B” to this Ordinance) are consistent with the negotiated resolution reached by ACSC Cities and are just, reasonable, and in the public interest; and WHEREAS, it is the intention of the parties that if the City determines any rates, revenues, terms and conditions, or benefits resulting from a Final Order or subsequent negotiated settlement approved in any proceeding addressing the issues raised in the Company’s Third RRM filing would be more beneficial to the City than the terms of the attached tariff, then the more favorable rates, revenues, terms and conditions, or benefits shall additionally accrue to the City; and WHEREAS, the negotiated resolution of the Company’s RRM filing and the resulting rates are, as a whole, in the public interest. Atmos RRM Ordinance 3 NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF SOUTHLAKE, TEXAS: Section 1. That the findings set forth in this Ordinance are hereby in all things approved. Section 2. That the City Council finds the existing rates for natural gas service provided by Atmos Mid-Tex are unreasonable and new tariffs and Atmos Mid-Tex’s Proof of Revenues, which are attached hereto and incorporated herein as Attachments A and B, are just and reasonable and are hereby adopted. Section 3. That Atmos Mid-Tex shall reimburse the reasonable ratemaking expenses of the ACSC Cities in processing the Company’s rate application. Section 4. That the Settlement Agreement, attached as Attachment C, which includes in addition to resolution of the Third RRM: (1) extension of a modified RRM process; (2) requirement that Atmos Mid-Tex file a system-wide Statement of Intent rate case on or before June 1, 2013; and (3) current recovery of incremental direct costs for a steel service line replacement program, is hereby ratified. Section 5. That to the extent any resolution or ordinance previously adopted by the Council is inconsistent with this Ordinance, it is hereby repealed. Section 6. That the meeting at which this Ordinance was approved was in all things conducted in strict compliance with the Texas Open Meetings Act, Texas Government Code, Chapter 551. Section 7. That if any one or more sections or clauses of this Ordinance is adjudged to be unconstitutional or invalid, such judgment shall not affect, impair or invalidate the remaining provisions of this Ordinance and the remaining provisions of the Ordinance shall be interpreted as if the offending section or clause never existed. Atmos RRM Ordinance 4 Section 8. That if the City determines any rates, revenues, terms and conditions, or benefits resulting from a Final Order or subsequent negotiated settlement approved in any proceeding addressing the issues raised in the Company’s Third RRM filing would be more beneficial to the City than the terms of the attached tariff, then the more favorable rates, revenues, terms and conditions, or benefits shall additionally accrue to the City. Section 9. That this Ordinance shall become effective from and after its passage with rates authorized by attached Tariffs to be effective for bills rendered on or after October 1, 2010. Section 10. That a copy of this Ordinance shall be sent to Atmos Mid-Tex, care of David Park, Vice President Rates and Regulatory Affairs, at Atmos Energy Corporation, 5420 LBJ Freeway, Suite 1862, Dallas, Texas 75240, and to Geoffrey Gay, General Counsel to ACSC, at Lloyd Gosselink Rochelle & Townsend, P.C., P.O. Box 1725, Austin, Texas 78767-1725. PASSED AND APPROVED this __________ day of ___________________, 2010. _________________________________ Mayor ATTEST: __________________________________ City Secretary APPROVED AS TO FORM: ___________________________________ City Attorney Atmos RRM Ordinance 5