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Item 5Kt.rry or -3outniaKC, i exas MEMORANDUM January 31, 2006 TO: Shana Yelverton, City Manager PROM: Sharen Jackson, Finance Director SUBJECT: Resolution No. 06 -009, Approve Settlement Agreement with TXU. Action Requested: Approval of Resolution No, 06 -009, Background Information: The City is a member of a 109- member city coalition known as the Steering Committee of Cities Served by TXU. The Steering Committee has been in existence since the late 1980s. It took on a formal structure in the early 1990s when cities served by TXU gave up their statutory right to rate case expense reimbursement in exchange for higher franchise fee payments. Empowered by city resolutions and funded by per capita assessments, the Steering Committee has been the primary public interest advocate before the Public Utility Commission, the Courts, and the Legislature on electric utility regulation matters dealing with TXU for nearly two decades. After months of consideration in 2004, the Steering Committee recommended that TXU be forced into a full scale review of its historic cost of service, something that had not occurred in more than a decade. In the fall of 2004, twenty Steering Committee cities passed resolutions requiring TXU Electric Delivery to show cause why the non - bypassable transmission and distribution charges should not be reduced. The rate inquiry was justified by several factors. First, the PUC categorized municipal accounts with broader commercial services accounts in the 2001 rate proceedings that led to the deregulated environment. This led to application of unfair demand ratchets and higher charges for municipal water pumping. It also led to extremely high charges for street lighting. Second, TXU had filed earnings monitoring reports at the PUC that established the Company was over - earning. Third, the Company had recently gone through massive reorganization and the hypothetical cost structures the PUC had used to . justify current rates in 2001 were no longer valid. The Steering Committee and TXU reached a settlement in early 2005 to delay the filing of rate information by TXU until the summer of 2006. The settlement terms called for TXU to work with cities on certain items of concern and to make annual cash payments of $8 million to the Steering Committee, which was then dispersed to member cities. Over the past several months, TXU and the Steering Committee have been discussing the possibility of modifying and extending the terms of the original settlement agreement and delaying TXU's July 2006 rate case filing. After comparing the benefits to be derived from accepting the settlement and delaying the rate case against the likelihood of success in achieving positive Shana Yelverton, City Manager January 31, 2006 outcomes for residential and city - specific issues in a rate case initiated in July 2006, the Steering Committee approved acceptance of the settlement agreement earlier this month. Key items of the Settlement Agreement are: L TXU will file a rate case in June 2008 with a December ending test year. 2. TXU will continue to make annual $8 million payments to the Steering Committee until a final order is entered in the 2008 rate case, which probably will not be until the end of 2009. This is a two year extension to the previously negotiated agreement. This reimburses Cities for excessive street lighting and water pumping rates. It brings approximately $38 million in value to the Steering Committee members between 2005 and 2009. 3. TXU will make two payments of $9 million to Steering Committee cities before January 31, 2007 for "beneficial public use." 4. All unexpired provisions of the last agreement will be preserved and the task forces referenced in the earlier agreement will still be created. 5, The Company will reimburse up to $40,000 per month to the Steering Committee for participation at ERGOT and the PUC. This is worth over $2 million. 6. Separate from the rate settlement, but linked in benefit under the Settlement Agreement, is the Company's commitment to increase franchise fee factors and permit all Cities who desire to receive quarterly franchise fee payments as opposed to annual payments to obtain that result. The franchise fee factor increase will produce approximately $27 million in benefit to Steering Committee members between 2006 and 2009 and approximately $12 million annually thereafter. The Steering Committee concluded that delaying a comprehensive rate case until June 2008 and immediately capturing beneficial financial terms was the optimal course of action for the reasons stated below. Most residential customers remain on price to beat (PTB) rates and no rate relief from successful prosecution of a rate case against the Company would flow to PTB customers, While the current PTB structure terminates January 1, 2007, policy makers at the Public Utility Commission (PUC) and the Legislature are discussing extending some form of PTB after January 1, 2007, Even if Cities won a considerable victory by reducing TXU's revenues by over $100 million, numerous parties representing different types of customers would fight amongst themselves over how the revenue reduction should be Shana Yelverton, City Manager January 31, 2006 allocated to reduce rates for the various classes of customers. There is no certainty that the residential and small commercial customers would receive any meaningful rate reduction. In the only major rate case to be litigated since deregulation occurred on January 1, 2002, the PUC found that the utility in question should have its overall revenues reduced, but nonetheless raised residential rates. Furthermore, even if significant rate reductions to residential and commercial tariffs could be achieved, benefits would not necessarily be passed on to end -users by the retail electric providers (REPs) that serve customers who have entered the deregulated market. Much of the benefit in cutting TXU Electric Delivery's rates would, under the present market structure; simply flow to the TXU affiliated REP. The Settlement Agreement provides $18 million for Cities to apply to "beneficial public use" in lieu of very uncertain residential rate reductions stemming from litigation. The annual $8 million payment to Steering Committee members was based upon a belief that street lighting rates are excessive and that water pumping demand ratchets are inappropriate. While the Company is obligated under the 2004 Settlement (approved by Steering Committee members in 2005) to support reduction to street lighting and pumping rates consistent with the annual payments to Cities, there is no guarantee that the PUC would approve such proposal. The proposed Settlement Agreement contains a number of benefits that would not be available as relief in a litigated rate case. The PUC has no jurisdiction to increase franchise fee factors or address when or how franchise fee payments are made. Cities unsuccessfully attempted to achieve franchise fee escalation in the last two general sessions of the Legislature and a favorable franchise fee change for Cities is unlikely to occur independent of the Settlement Agreement. Additionally, the Commission is unable authorize payments to Cities or any consumer representative for participation in ERCOT or market design matters. The Settlement Agreement delays rather than terminates a rate review. The Settlement Agreement obligates the Company to cooperate with Cities in reaching an understanding of Company operations prior to the filing of a rate case and further provides for reimbursement of Cities' expenses associated with review of Company affiliated transactions. The Steering Committee values the total benefits of the Settlement Agreement with TXU at approximately $85 million for the period 2005 — 2009 (this includes the franchise fee increases through 2009). Probabilities are less than 50 percent that the PUC in 2007 would reach comparable value at the end of a rate case. Moreover, there is no certainty that residential customers would receive any benefit even if the Commission ultimately reduced overall rates by $85 million. Shang Yelverton, City Manager January 31, 2006 Financial Considerations: The interest collected per lot would be reduced by $5,728 (difference from $7,924 to $2,494), Citizen Input/ Board Review: None required Legal Review: The Steering Committee's Attorney prepared Resolution No, 06 -009. Alternatives: Approve or deny resolution. Supporting Documents: Resolution No, 06 -009 Staff Recommendation: Approve Resolution No. 06 -009 ratifying the Settlement Agreement. All Steering Committee member cities must take action to approve the settlement in order for the benefits to flow to any member, All payments to be made by TXU will not be released until the settlement is fully ratified. RESOLUTION NO. 06 -009 RESOLUTION ACCEPTING SETTLEMENT WITH TXU ELECTRIC DELIVERY WHEREAS the City of Southlake, is a member of the Steering Committee of Cities served by TXU (Steering Committee); and WHEREAS the Steering Committee did encourage certain member cities to initiate show cause rate proceedings against TXU Electric Delivery (Electric Delivery); and WHEREAS Electric Delivery and the Steering Committee engaged in settlement discussions regarding abatement of any full -scale rate investigation and interim relief that may be available to Cities leading to a settlement in February 2005 that made Steering Committee members whole for their alleged excess costs associated with street lighting and water pumping in exchange for delay in Show -Cause filing requirements; and WHEREAS Electric Delivery has desired to further extend for two years the currently scheduled .June 2005 rate case filing in exchange for extension of payments to Cities under the February 2005 Agreement and other benefits to Cities; and WHEREAS the Steering Committee and Electric Delivery have reached a Settlement Agreement that extends the previously negotiated settlement terms by two years and adds benefits to Cities, including reimbursement for participation in ERCOT and market development activities and $18 million in funds for beneficial public use as may be determined in the discretion of Steering Committee member cities and which may include, but which is not limited to, energy education for citizens, reductions in rates for city services, investments in community facilities, and investment in energy efficiency measures; and WHEREAS current electric market constraints make it impractical to pass the ,potential benefits of rate reductions on to residential ratepayers, because most consumers remain on price to beat rates which are fixed by statute and rule, and the minority of consumers who have switched to service from a competitive retail electric supplier may only realize rate reduction benefits if their REP contract requires a pass - through of such rate reduction; and WHEREAS the Steering Committee and Electric Delivery have reached a separate agreement wherein the Company will increase franchise fee factors over a four -year period producing increased revenues for each member city; and WHEREAS Electric Delivery has committed to the Steering Committee during the period of rate case abatement to share information on certain company operations and procedures that should enhance the Cities' ability to appropriately exercise regulatory responsibilities in the rate proceeding that Electric Delivery has agreed to file on or before duly 1, 2008; WHEREAS the Settlement Agreement calls for immediate and long-term benefits to flow to all city members of the Steering Committee which in turn have indirect but positive benefit to all city residents and public safety in general; and WHEREAS the Steering Committee values the benefits of settlement to Cities at approximately $85 million between 2005 and 2009 and comparable value is unlikely to be achieved through litigation. THEREFORE BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF Southlake, Texas that: 1. The Extension and Modification of Settlement Agreement and Agreement to Resolve Outstanding Franchise Issues, both dated January 19, 2006, between the Cities' Steering Committee and TXU Electric Delivery is hereby ratified. Approved this day of , 2006. Mayor Attest: