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Item 4ICITY OF SOUTHLAKI Item 41 MEMORANDUM May 28, 2014 To: Shana Yelverton, City Manager From: Sharen Jackson, Chief Financial Officer Subject: Resolution No. 14-029, Denying Atmos Energy Corp., Mid -Tex Division requested rate change Action Requested: Approval of Resolution No. 14-029, Denying Atmos Energy Corp., Mid -Tex Division ("Atmos") requested rate change. Background Information: The City, along with over 160 other cities served by Atmos, is a member of the Atmos Cities Steering Committee ("ACSC"). On February 28, 2014, Atmos filed with the City an application to increase natural gas rates pursuant to the Rate Review Mechanism ("RRM") tariff. The filing sought a $45.7 million rate increase system -wide based on an alleged test -year cost of service revenue deficiency of $49 million. The estimated base rate impact for a residential customer would be an increase of 9.41 %. ACSC engaged attorneys and consultants to review Atmos rate increase. During the review, the consultants determined the evidence does not support the $45.7 million increase requested however the consultants agree Atmos can justify an increase in revenues of a much lesser amount closer to $19 million. ACSC and Atmos have engaged in some settlement discussions but both parties are too far apart in their positions to reach a compromise. Rates cannot change without the adoption of rate ordinances by cities. The purpose of the resolution is to deny the rate increase requested by Atmos. Under the RRM tariff, Atmos may appeal the rate decision of the cities to the Railroad Commission; such appeal must be filed within thirty (30) days of the City action. The resolution also authorizes the City to participate as a party to the appeal in conjunction with the ACSC, and requires Atmos to reimburse the City for its rate case expenses associated with the City's review of the RRM filing, and with the appeal of the City's denial of the rate increase. Page 2 of 2 The ACSC Executive Committee and ACSC legal counsel recommend all member cities to adopt a resolution denying the requested rate increase and participate in Atmos' appeal of this decision at the Railroad Commission. Financial Considerations: Atmos will reimburse the cities for their reasonable rate case expenses. Legal counsel and consultants approved by ACSC will submit monthly invoices that will be forwarded to Atmos for reimbursement. No individual city incurs liability for payment of rate case expenses by adopting a denial resolution. Citizen Input/ Board Review: None required Legal Review: Lloyd Gosselink Rochelle & Townsend, P.C. prepared the resolution. Alternatives: Approve or deny resolution Supporting Documents: Resolution No. 14-029 Staff Recommendation: Approval of Resolution No. 14-029 RESOLUTION NO. 14-029 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SOUTHLAKE, TEXAS, DENYING THE RATE INCREASE REQUESTED BY ATMOS ENERGY CORP., MID-TEX DIVISION UNDER THE COMPANY'S 2014 ANNUAL RATE REVIEW MECHANISM FILING IN ALL CITIES EXERCISING ORIGINAL JURISDICTION; REQUIRING THE COMPANY TO REIMBURSE CITIES' REASONABLE RATEMAKING EXPENSES PERTAINING TO REVIEW OF THE RRM; AUTHORIZING THE CITY'S PARTICIPATION WITH ATMOS CITIES STEERING COMMITTEE IN ANY APPEAL FILED AT THE RAILROAD COMMISSION OF TEXAS BY THE COMPANY; REQUIRING THE COMPANY TO REIMBURSE CITIES' REASONABLE RATEMAKING EXPENSES IN ANY SUCH APPEAL TO THE RAILROAD COMMISSION; DETERMINING THAT THIS RESOLUTION WAS PASSED IN ACCORDANCE WITH THE REQUIREMENTS OF THE TEXAS OPEN MEETINGS ACT; ADOPTING A SAVINGS CLAUSE; AND REQUIRING DELIVERY OF THIS RESOLUTION 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"), a coalition of approximately 164 similarly situated cities served by Atmos Mid -Tex that have joined together to facilitate the review of and response to natural gas issues affecting rates charged in the Atmos Mid -Tex service area; 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 4400408.1 1 process controlled in a three-year experiment by ACSC Cities as a substitute to the current Gas Reliability Infrastructure Program ("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, in 2013, ACSC and the Company negotiated a renewal of the RRM tariff process for an additional five years; and WHEREAS, the City passed an ordinance renewing the RRM tariff process for the City for an additional five years; and WHEREAS, the RRM renewal tariff contemplates reimbursement of ACSC Cities' reasonable expenses associated with RRM applications; and WHEREAS, on or about February 28, 2014, the Company filed with the City its second annual RRM filing under the renewed RRM tariff, requesting to increase natural gas base rates by $45.7 million; and WHEREAS, ACSC coordinated its review of Atmos Mid-Tex's RRM filing through its Executive Committee, assisted by ACSC attorneys and consultants, to investigate issues identified by ACSC in the Company's RRM filing; and WHEREAS, ACSC attorneys and consultants have concluded that the Company is unable to justify a rate increase of the magnitude requested in the RRM filing; and WHEREAS, ACSC's consultants determined the Company is only entitled to a $19 million increase, approximately 42% of the Company's request under the 2014 RRM filing; and WHEREAS, the Company would only be entitled to approximately $31 million if it had a GRIP case; and 4400408.1 2 WHEREAS, the Company's levels of operating and maintenance expense have dramatically risen without sufficient justification; and WHEREAS, the Company has awarded its executives and upper management increasing and unreasonable levels of incentives and bonuses, expenses which should be borne by shareholders who received a 23% total return on investment in 2013; and WHEREAS, the Company requested a drastically high level of medical expense that is unreasonable and speculatively based upon estimates; and WHEREAS, ACSC and the Company were unable to reach a compromise on the amount of additional revenues that the Company should recover under the 2014 RRM filing; and WHEREAS, the ACSC Executive Committee, as well as ACSC's counsel and consultants, recommend that ACSC Cities deny the requested rate increase; and WHEREAS, the Company's current rates are determined to be just, reasonable, and in the public interest. NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SOUTHLAKE, TEXAS: Section 1. That the findings set forth in this Resolution are hereby in all things approved. Section 2. That the City Council finds that Atmos Mid -Tex was unable to justify the appropriateness or the need for the increased revenues requested in the 2014 RRM filing, and that existing rates for natural gas service provided by Atmos Mid -Tex are just and reasonable. Section 3. That Atmos Mid -Tex shall reimburse the reasonable ratemaking expenses of the ACSC Cities in processing the Company's RRM application. Section 4. That in the event the Company files an appeal of this denial of rate increase to the Railroad Commission of Texas, the City is hereby authorized to intervene in such appeal, and 4400408.1 3 shall participate in such appeal in conjunction with the ACSC membership. Further, in such event Atmos Mid -Tex shall reimburse the reasonable expenses of the ACSC Cities in participating in the appeal of this and other ACSC City rate actions resulting from the 2014 RRM filing. Section 5. That the meeting at which this Resolution was approved was in all things conducted in strict compliance with the Texas Open Meetings Act, Texas Government Code, Chapter 551. Section 6. That if any one or more sections or clauses of this Resolution is adjudged to be unconstitutional or invalid, such judgment shall not affect, impair, or invalidate the remaining provisions of this Resolution and the remaining provisions of the Resolution shall be interpreted as if the offending section or clause never existed. Section 7. That a copy of this Resolution shall be sent to Atmos Mid -Tex, care of Chris Felan, Manager of 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. RESOLVED this day of , 2014. ATTEST: City Secretary Mayor APPROVED AS TO FORM: City Attorney 4400408.1 4