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current rates in 2001 were no longer valid.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: