05-C1 ATMOS Cities Settlement Agreement

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In addition to the four GRIP surcharges, base rates charged to customers served by Atmos Mid-Tex have increased as the result of two system-wide cost of service rate filings since 2004. The Company's current request to increase base rates would be the third system-wide cost of service increase for customers in Atmos Mid-Tex's service area since 2004. In the most recent cost of service rate request, GUD No. 9670, the Railroad Commission of Texas ("RRC" or "Commission") issued an order in Mazch, 2007, approving new system-wide rates for customers of Atmos Mid-Tex. Residential customers were impacted disproportionally by the Commission's final order, with residential rates increasing by $10 million annually, despite an overall system-wide rate increase of $5 million. System-wide rates charged to residential customers in the Atmos Mid-Tex region were also increased by several million dollars in 2004 in GUD No. 9400. In GUD Nos. 9400 and 9670, the hearings examiners that heard the testimony and evaluated the evidence recommended that rates be reduced for customers. However, in both cases, the Railroad Commission reversed key decisions of its own hearings examiners, ultimately issuing final orders that approved rate increases instead of the recommended rate reductions. Reasons Justifving Settlement: During the time that the City has retained original jurisdiction in this case, consultants working on behalf of ACSC members have investigated the support for the Company's requested rate increase. While the evidence does not support the $52 million increase requested by the Company, ACSC consultants agree that the Company can justify an increase in revenues of at least $8 million and that there is a reasonably high probability that the RRC would award an increase of at least $10 million. A contested case proceeding before the RRC on the Company's current application will 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 Settlement Agreement. This Settlement Agreement achieves several desirable outcomes, including: • Reverses rate design decisions that unfairly impact residential ratepayers • Does away with piecemeal ratemaking problems inherent to the GRIP surcharge process • Eliminates exposure to potential court reversal of the multi-million dollar Poly-1 Pipe disallowance (Atmos' issue on appeal in Docket No. 9400) • Avoids uncertainty and potential negative consequences of Railroad Commission rate review (in the two most recent rate cases affecting Atmos Mid-Tex customers, the Commission has reversed rate reductions recommended by its own hearings examiners in favor of rate increases) • Implements an expedited rate review process that includes the cities and allows review of all aspects of Atmos' cost of service Atmos Rate Ordinance Staff Report 2