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A TMOS RESOLUTIONS The two gas utility matters before you today deal with two different components of a typical customer bill. The gas bill customers receive has two general categories of charges: the cost of gas used; and the cost of service for getting the gas to the customer. The resolution related to Gas Utilities Docket No. 9530 (Gas Cost Prudence Review) deals with the cost of gas component of the bill. The cost of gas is not set in advance, but rather is subject to market conditions. The utility, however, is charged with the responsibility of making reasonable and prudent purchases based on those market conditions. The utility is not allowed to add any mark- up or profit to the cost of gas actually paid by the utility, and the utility's purchases may be examined periodically to determine whether only reasonable costs have been passed on to consumers. Since 1997, TXU Gas (now Atmos Mid-Tex) has been required by the Railroad Commission to submit proof every three years that its purchasing practices have been prudent and that only reasonable costs have been charged to customers. GUD No. 9530 is the filing covering TXU's gas purchases for 2001 through 2003. If the Commission determines that unreasonable costs have been charged to customers during those years, refunds may be ordered that would affect every customer of the utility. Without the cities' intervention, the utility's purchase practices may not be properly examined. The second resolution deals with Atmos' notice of intent to implement a new type of rate increase, called a GRIP increase, that applies to the second component of a gas bill, the cost of service charge. The cost of service is the component of the bill that is set in advance by the cities or the Railroad Commission. The rates Atmos is currently charging were approved by the Railroad Commission over the cities' objection just seven months ago (May 2004) and gave Atmos an $11.5 million annual revenue increase over what previous rates were producing. Now Atmos is using the newly enacted GRIP statute in an effort to increase its annual revenues by another 8.5 million. Cost of service rates are designed to recover the utility's operating costs (operation and maintenance, general and administrative, taxes, etc.) and also include the utility's approved profits (return) on its investment in the system. With this GRIP filing, Atmos is attempting to increase the profit component of its cost of service rates due to claimed increases in capital investment in its utility system in calendar year 2003, substantially above 2002 investment levels. The unique aspect of the GRIP procedure is that the Company is not required to include information in its filing as to whether its other operating costs have decreased, thereby resulting in profits above what were allowed to be included in its currently authorized rates. Atmos' current rates are designed to recover $98 million in annual profits. Atmos has stated publicly that its operating costs for 2005 will be as much as $45 million less than TXU's for operating the same system, resulting in additional profits in that amount. If so, Atmos should not be allowed to impose another $8.5 million rate increase on customers, but Atmos should be required to reduce its rates to avoid over-earning. Atmos has also stated that it plans to file for another GRIP increase in April of this year. Under the GRIP statute, unless the cities intervene, Atmos can continue to impose these increases without disclosing its full cost information for five and one-half years after its fIrst GRIP increase. The cities' only remedy is to suspend implementation of the GRIP increase and require the utility to disclose sufficient information to determine whether another rate increase so soon after the May 2004 increase is justified. This second resolution suspends the planned implementation of the GRIP increase.