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Item 7B M E M O R A N D U M April 14, 2011 TO: Billy Campbell, City Manager FROM: Sharen Elam, Director of Finance Ext. 1713 nd Ordinance No. 857, 2 Reading, Denying TXU Gas Company’s request to SUBJECT: change rates in this municipality, as a part of the company’s Statewide Gas Utility System; Providing a requirement for a prompt reimbursement of costs incurred by the City; ______________________________________________________________________________ Action Requested: Approve Ordinance No. 857 Background Information: On May 23, 2003, TXU Gas Distribution Company filed a Statement of Intent to change gas rates in all municipalities within the TXU Gas Distribution System. On June 3, 2003, the City Council approved Resolution No. 03-037 to formally suspend the effective date of proposed new rates for the maximum period allowed by law. The resolution also authorized the joining of a coalition of cities “the coalition” working under the direction of a Steering Committee and authorized the filing of an intervention in the proceeding on TXU’s rate application pending at the Railroad Commission. 123 cities passed the suspension resolution and joined the coalition chaired by Jay Doegey, City Attorney of Arlington. There are 1.4 million customers on the TXU Gas system. Residents of the coalition total approximately 870,000 or approximately 63% of all TXU gas customers. If the City of Dallas (with about 234,433 customers) decides to join, the coalition will be speaking on behalf of nearly 80% of all customers and reflecting more than 80% of total sales volumes. Based on several meetings of the coalition, the Steering Committee has recommended all cities deny the rate increase. Approval of Ordinance would formally deny TXU’s proposed new rates. Listed below are finding of fact to justify denial of the new rates: TXU’s requested return on equity is unreasonable. 1. By far, the largest cost component of the Company’s request for a rate increase is associated with rate of return on equity. At a time when interest rates are at the lowest point in decades and investors’ expectations for return on investment are the lowest in many years, TXU proposes to increase its return dollars from gas operations by $60,255,075 (86.7 percent of the total rate increase). Such request is irrational in light of national economic conditions and outrageous in light of the fact that TXU Corporation recently wrote off more than $4 billion in shareholder equity related to poor or imprudent management of European Operations. Any increase in current return dollars is unjustified. The basis for proposed consolidation has not been established. 2. The Company’s filing fails to prove that it is reasonable and necessary to incorporate the pipeline cost of service into the distribution cost of service and to consolidate various regional distribution systems into a single statewide system. The City’s jurisdiction to increase pipeline rates has not been 3. established and, therefore, the proposed pipeline cost increase should be disallowed. The Railroad Commission has always exercised exclusive original jurisdiction over pipeline costs, while municipalities have exclusive original jurisdiction over gas distribution rates. With this filing, TXU has incorporated pipeline costs in excess of those previously approved by the Commission into the proposed distribution rate to be considered by the City, and all such pipeline costs should be disallowed. Revenue requirements should be reduced rather than increased. 4. Cities have provided consistent and more than fair rate relief to TXU over the past five years. This case should be thoroughly reviewed at the Railroad Commission from the perspective that current revenue requirements are excessive and that revenues should be reduced rather than increased by $70 million as proposed by TXU. The proposed consolidations should result in cost savings, not cost increases. The TXU filing should be denied pursuant to agreement with 5. the Company. Cities and TXU have reached a procedural agreement for development of a thorough rate hearing and consideration by the Railroad Commission. That agreement calls for TXU to extend Commission jurisdiction from 185 days to 300 days in exchange for Cities taking prompt action at the local level to allow perfection of all appeals before development of the case commences at the Commission. Financial Considerations: It is not anticipated that there will be any assessment or monetary encumbrance for participating Cities. Rate case expenses of Cities will be reimbursed by TXU and adequate funds appear to be available from old Lone Star Gas ratemaking funds (maintained at the City of Arlington) to cover initial costs until reimbursement is arranged. Citizen Input/ Board Review: Public hearing will be held on October 7, 2003. Legal Review: Ordinance reviewed by City Attorney Alternatives: Approve Ordinance No. 857 as presented or modify Supporting Documents: Ordinance No. 857 Staff Recommendation: Approval of Ordinance No. 857 ORDINANCE NO. 857 AN ORDINANCE OF THE CITY OF SOUTHLAKE, TEXAS, DENYING TXU GAS COMPANY’S REQUEST TO CHANGE RATES IN THIS MUNICIPALITY, AS A PART OF THE COMPANY’S STATEWIDE GAS UTILITY SYSTEM; PROVIDING A REQUIREMENT FOR A PROMPT REIMBURSEMENT OF COSTS INCURRED BY THE CITY; FINDING THAT THE MEETING AT WHICH THIS ORDINANCE IS PASSED IS OPEN TO THE PUBLIC AS REQUIRED BY LAW; AND PROVIDING FOR NOTICE OF THIS ORDINANCE TO TXU GAS COMPANY WHEREAS, on or about May 23, 2003, TXU Gas Company (the “Company”) filed with the City of Southlake (“City”), a Statement of Intent to change gas rates in all municipalities within the Company’s statewide gas utility system effective June 27, 2003; WHEREAS, the City has previously extended the effective date of the Company’s rate filing; WHEREAS, the City has exclusive original jurisdiction to evaluate the Company’s Statement of Intent as it pertains to the distribution facilities located within the City, pursuant to Texas Utilities Code §§ 102.001(b) and 103.001; WHEREAS, the Texas Utilities Code § 103.022 provides that costs incurred by the City in ratemaking activities are to be reimbursed by the regulated utility; WHEREAS, the City is participating with a coalition of over 120 other Cities in opposition to the Company’s filing at the Railroad Commission, said coalition being known as Allied Coalition of Cities (“ACC”), in GUD No. 9400 pending at the Commission; WHEREAS, ACC and the Company have reached a procedural agreement regarding the schedule for processing GUD No. 9400 that includes TXU’s concession to allow one hundred fifteen (115) additional days to process the rate case and ACC’s commitment that member Cities expedite the process of getting city action appealed to the Commission; WHEREAS, ACC and TXU jointly endorse the City’s denial of the Company’s rate application pending before the City; WHEREAS, counsel for ACC, upon review of the Company’s filing and upon consultation with various consultants, recommends findings that the Company’s proposal is unjustified and unreasonable; and NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF SOUTHLAKE, TEXAS: SECTION 1. The Company’s Statement of Intent to change gas rates within the City, as part of the Company’s statewide gas utility system, is found to be unreasonable because: (a) TXU’s requested return on equity is excessive, generating more than 86% of the requested increase in rates; (b) the basis for TXU’s proposed consolidations (of regional distribution systems and of pipeline costs with distribution costs) has not been established; (c) the City’s jurisdiction to increase pipeline rates has not been established and, therefore, the proposed pipeline cost increases should be disallowed; (d) revenue requirements should be reduced rather than increased; and (e) the TXU filing should be denied pursuant to agreement with the Company; and is therefore denied in all respects. SECTION 2. The costs incurred by the City in reviewing the Company’s application be promptly reimbursed by the Company. SECTION 3. This Ordinance shall become effective immediately from and after its passage, as the law and charter in such cases provide. SECTION 4. That it is hereby officially found and determined that the meeting at which this Ordinance is passed is open to the public as required by law and that public notice of the time, place and purpose of said meeting was given as required. SECTION 5. A copy of this ordinance, constituting final action on the Company’s application, be forwarded to the appropriate designated representative of the Company within 10 days as follows: Autry L. Warren, Director Gas Regulatory, TXU Business Services, 1601 Bryan Street, Dallas, Texas 75201-3402. first reading DULY PASSED and approved on by the City Council of the City of Southlake, Texas, on this the ______ day of __________, 2003. APPROVED: ____________________________________ Andy Wambsganss, Mayor ATTEST: ____________________________________ Lori Farwell, City Secretary second reading DULY PASSED and approved on by the City Council of the City of Southlake, Texas, on this the ______ day of __________, 2003. APPROVED: ____________________________________ Andy Wambsganss, Mayor ATTEST: ____________________________________ Lori Farwell, City Secretary APPROVED AS TO FORM: _____________________________ City Attorney PROPOSED FINDINGS SUPPORTING DENIAL OF TXU’S REQUEST TO INCREASE RATES FOR NATURAL GAS TXU’s requested return on equity is unreasonable. 1. By far, the largest cost component of the Company’s request for a rate increase is associated with rate of return on equity. At a time when interest rates are at the lowest point in decades and investors’ expectations for return on investment are the lowest in many years, TXU proposes to increase its return dollars from gas operations by $60,255,075 (86.7 percent of the total rate increase). Such request is irrational in light of national economic conditions and outrageous in light of the fact that TXU Corporation recently wrote off more than $4 billion in shareholder equity related to poor or imprudent management of European Operations. Any increase in current return dollars is unjustified. The basis for proposed consolidation has not been established. 2. The Company’s filing fails to prove that it is reasonable and necessary to incorporate the pipeline cost of service into the distribution cost of service and to consolidate various regional distribution systems into a single statewide system. The City’s jurisdiction to increase pipeline rates has not been established and, therefore, the proposed 3. pipeline cost increase should be disallowed. The Railroad Commission has always exercised exclusive original jurisdiction over pipeline costs, while municipalities have exclusive original jurisdiction over gas distribution rates. With this filing, TXU has incorporated pipeline costs in excess of those previously approved by the Commission into the proposed distribution rate to be considered by the City, and all such pipeline costs should be disallowed. Revenue requirements should be reduced rather than increased. 4. Cities have provided consistent and more than fair rate relief to TXU over the past five years. This case should be thoroughly reviewed at the Railroad Commission from the perspective that current revenue requirements are excessive and that revenues should be reduced rather than increased by $70 million as proposed by TXU. The proposed consolidations should result in cost savings, not cost increases. The TXU filing should be denied pursuant to agreement with the Company. 5. Cities and TXU have reached a procedural agreement for development of a thorough rate hearing and consideration by the Railroad Commission. That agreement calls for TXU to extend Commission jurisdiction from 185 days to 300 days in exchange for Cities taking prompt action at the local level to allow perfection of all appeals before development of the case commences at the Commission.