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09-D Atmos Energy Interv AGENDA INFORMATION SHEET PROJECT: Ratification ofIntervention in Railroad Commission GUD No. 9530 BACKGROUND: . Pursuant to Gas Utilities Docket No. 8664, dated November 25, 1997, Atmos/TXU Gas was ordered by the Railroad Commission of Texas to file a prudence review every three years to demonstrate that its gas costs are reasonable and necessary. . Atmos/TXU Gas made a filing at the Railroad Commission of Texas on or about September 24,2004, now docketed as GUD No. 9530, for a gas cost prudence review of $2.2 billion in previously incurred and billed gas costs. Atmos completed its purchase ofTXU's gas utility operations on October 1, 2004. . These costs are twice the cost of gas purchases included in TXU's filing for the previous three-year period. This is despite the fact that one of the representations made by TXU to settle the last prudence review was that it had renegotiated a gas purchase contract for an expected benefit to ratepayers of over $20 million. Testimony included with this filing indicates that over half of all gas supply purchases during this three-year period were made on the spot market. . When TXU made its last three-year prudence review filing many of the same cities who participated in GUD No. 9400 intervened in that docket jointly and were ultimately successful in achieving a settlement of all issues with TXU. TXU also reimbursed the cities' expenses. . An effort was made recently to negotiate a resolution of the gas prudence docket, as well as other outstanding regulatory issues with Atmos/TXU Gas. Atmos/TXU Gas rejected that settlement offer. . A December 10, 2004 intervention deadline was established by the examiners; however, later intervention is permissible. An intervention was filed on behalf of the Steering Committee and the City of Arlington. DESCRIPTION: The attached resolution will ratify the intervention filed on behalf of the City of Arlington, appoint as the City's representative on a Cities' Steering Committee, and require Atmos/TXU Gas to reimburse the City reasonable costs associated with the City's participation in GUD No. 9530 or any subsequent proceeding. RECOMMENDA TION: Approve a resolution ratifying the City's intervention before the Railroad Commission of Texas regarding the filing of a gas cost prudence review by Atmos Energy Corporation, formerly TXU Gas Company (Atmos/TXU Gas); designating a representative of the City to serve on a steering committee; and requiring reimbursement of reasonable legal and consultant expenses. STAFF CONTACT: City Manager Tony Williams, City Attorney Larry W. Schenk; City Finance Director Gene Anderson. ADDITIONAL MATERIALS: Resolution and other supporting materials are attached. DRAFT F:ALICEIRESWORKICURRENTI ATMOS Energy Intervention Res December 30. 2004 RESOLUTION NO. A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF PARIS, PARIS, TEXAS, AUTHORIZING INTERVENTION BEFORE THE RAILROAD COMMISSION OF TEXAS IN GAS UTILITIES DOCKET (GUD)NO. 9530; AUTHORIZING PARTICIPATION WITH OTHER CITIES SERVED BY ATMOS ENERGY CORPORATION, FORMERLY KNOWN AS TXU GAS COMPANY, IN ADMINISTRATIVE AND COURT PROCEEDINGS INVOLVING A GAS COST PRUDENCE REVIEW RELATED TO A FILING MADE IN SEPTEMBER OF 2004 AS REQUIRED BY THE FINAL ORDER IN GUD NO. 8664; DESIGNATING A REPRESENTATIVE OF THE CITY TO SERVE ON A STEERING COMMITTEE; REQUIRING REIMBURSEMENT OF REASONABLE LEGAL AND CONSULTANT EXPENSES; MAKING OTHER FINDINGS RELATED TO THE SUBJECT; AND PROVIDING AN EFFECTIVE DATE. WHEREAS, the City Council and/or residents of the City of Paris, Texas are customers of Atmos Energy Corporation, formerly known as TXU Gas Company, (Atmos/TXU Gas) and the City is a regulatory authority with an interest in the rates and charges of Atmos/TXU Gas; and, WHEREAS, Atmos/TXU Gas made a filing at the Railroad Commission of Texas on or about September 24, 2004, now docketed as GUD No. 9530, for a gas cost prudence review of $2.2 billion in previously incurred and billed gas costs; and, WHEREAS, the filing made by Atmos/TXU Gas was required by the terms of the Final Order of the Railroad Commission in GUD No. 8664; and, WHEREAS, ratepayers of Atmos/TXU Gas, including the City of Paris and its residents would be entitled to a pro rata portion of a refund associated with any costs found to have been unreasonable; and, WHEREAS, the City of Paris and its residents could benefit from coordination with other Cities in a review of the reasonableness of the gas costs of Atmos/TXU Gas and the joint participation in the Railroad Commission proceedings and any subsequent litigation or appeal related to those gas costs; and, WHEREAS, the reasonable costs associated with the participation of Cities in this rate-making proceeding are reimbursable from the Company; NOW, THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF PARIS, PARIS, TEXAS: Section 1. That the findings set out in the preamble to this resolution are hereby in all things approved. Section 2. That intervention is hereby authorized in GUD No. 9530 and/or any successor docket at the Railroad Commission of Texas. Section 3. That the City of Paris is authorized to cooperate with other Cities within the Atmos/TXU Gas system and hereby designates as a representative to a Cities' Steering committee that shall direct the efforts of counsel and consultants and the course of settlement and/or litigation before the Railroad Commission or of an appeal to any court regarding any matter related to the gas cost prudence review filing made by Atmos/TXU Gas in 2004. Section 4. That Atmos/TXU Gas shall promptly reimburse the City's reasonable costs associated with the City's participation in GUD No. 9530 or any subsequent proceeding. Section 5. That this resolution shall be effective from and after its date of passage. PASSED AND APPROVED this loth day of January, 2005. Curtis Fendley, Mayor ATTEST: Sherian Dixon, Assistant City Clerk APPROVED AS TO FORM: Larry W. Schenk, City Attorney LLOYD GOSSELINK BLEVINS ROCHELLE & TOWNSEND, P.C. ATTORNEYS AT LAw 111 CONGRESS AVENUE SUITE 1800 AUSTIN, TEXAS 78701 TELEPHONE (512) 322-5800 TELECOPIER (512) 472-0532 www.lglawfirm.com 711 NORTH CARANCAHUA SUITE 700 CORPUS CHRISTI, TEXAS 78475 TELEPHONE (361) 654-3200 TELECOPIER (361) 654-3203 www.lglawfirm.com MEMORANDUM TO: Allied Coalition of Cities FROM: Betsy Todd and Geoffrey Gay DATE: December 9, 2004 RE: Atmos Gas Costs Prudence Review; GUD No. 9530 Many of you have recently received notice from Atmos Energy Corporation (formerly TXU Gas Company) of the filing at the Railroad Commission of a three-year gas cost prudence review. This filing is one in a series of triennial filings required by the Commission as part of the Final Order in Gas Utilities Docket (GUD) No. 8664, TXU's city gate gas rate case decided in 1997. The purpose of the filing requirement is to allow a periodic review of the prudence of TXU's gas purchases. TXU's Gas Cost Review documentation as to its purchasing practices, as well as the actual amount and cost of gas purchases for the period of November 1, 2000, to October 31, 2003, was filed at the Commission on September 24, 2004, and was assigned GUD No. 9530. The sale of TXU's gas utility operations to Atmos was completed on October 1,2004, and notice to customers of the filing ofGUD No. 9530 was approved on November 5, 2004. The hearings examiner assigned to the docket ordered Atmos to begin mailing notices to all cities served by the former TXU Gas Distribution-Transmission by November 9,2004. A copy of the notice is attached for reference. We have reviewed the documentation filed by the Company and it indicates that TXU purchased 1.93 Bcf of gas during the three year period covered by the review at a total cost of $2.2 billion. This is twice the cost of gas purchases included in TXU's filing for the previous three-year period. This is despite the fact that one of the representations made by TXU to settle the last prudence review was that it had renegotiated a gas purchase contract for an expected benefit to ratepayers of over $20 million. F or this filing, monthly average costs per MMBTU ranged from $2.34 to $8.17, with the average cost being $4.67. Testimony included in the filing indicates that TXU only sought to lock in prices for 35-40 percent of the gas needed to meet its anticipated winter demand during this three year period. Over half of all of the gas purchases were made on the spot market. If these or other purchases are found to be imprudent by the Commission, Atmos will be ordered to pay refunds to all of its customers. When TXU made its last three-year prudence review filing (GUD No. 9233), many of the same cities who participated in GUD No. 9400 intervened in that docket jointly and were ultimately successful in achieving a settlement of all issues with TXU. The cities' expenses were 1668\11~rnoO41209 1 handled in the same manner as in other rate cases: TXU reimbursed the cities' expenses and they were ultimately surcharged to customers. The savings achieved as a result of the settlement of that docket greatly exceeded the cities' costs surcharged to customers. We made an effort recently to negotiate a resolution of the gas prudence docket, as well as other outstanding regulatory issues (e.g. rate case expenses from GUD No. 9400) with Atmos. Since Atmos rejected that settlement offer, it is appropriate that Cities intervene in Gas Utilities Docket No. 9530 to evaluate the possibility of refunds attributable to excessive gas cost purchases. Attached is a form resolution to be used to authorize intervention by interested cities. Please forward any adopted resolutions as soon as possible so that interventions can be filed with the Commission. The examiners have established a December 10, 2004, deadline; however, later interventions can be filed as long as they do not cause further delay. We have filed an intervention on behalf of the Steering Committee and the City of Arlington. Interventions for other individual cities should be filed as soon as possible. Please contact us if you have any questions about this docket or city participation. Betsy Todd (512) 322-5831 (512) 472-0532 FAX btodd@lglawfirm.com Geoffrey Gay (512) 322-5875 (512) 472-0532 FAX ggay@lglawfmn.com 1668\11\rnrnoO41209 2 STATUS REPORT FOR A TMOS/TXU GAS DOCKETS *** SEE BOLD ED TEXT IN STATUS SECTION FOR ACTION NEEDED BY CITIES *** DOCKET NO.1 DESCRIPTION WHE RE STATUS DATE FILED PENDING GUD No. 9400 Full rate case filed Travis Final Order was issued by the RRC on May 25, 2004, Filed 5/2003 by TXU using 2002 County granting an $11.5 million annual rate increase, approving test year and asking (Austin) uniform rates throughout the system and shifting $17.6 TXU Appeal: for $70 million rate District million in costs from the commercial and industrial classes GN402652 increase, uniform Court to the residential class; the Final Order was appealed by Filed 8/17/2004 rates throughout TXU, all of the city groups, and Chaparral Steel; the appeal entire TXU Gas dockets have been inactive since the initial filings other service area, and to than interventions filed by various parties to the original shift more of total RRC docket. costs to residential customers GUD No. 9460 Curtailment rules RRC Closed docket: After transition to Atmos in October, 2004, Filed 5/2003 tariff severed from company filed motion to withdraw and Commission Severed 10/2004 GUD No. 9400 dismissed. GOO No. 9461 Quality of service RRC Active docket: cities have taken the position that service Filed 5/2003 rules tariff severed rules and regulations are within the exclusive jurisdiction of Severed 10/2004 from GUD No. 9400 cities and RRC does not have appellate jurisdiction as rates are not involved; briefing as to jurisdictional and other threshold issues will be filed in January and early February with a ruling by the examiner scheduled for late February or early March; hearing on the merits in June if not dismissed. GOO No. 9462 Line extension RRC Active docket: cities have taken the position that line Filed 5/2003 policy tariff severed extension policy determinations are within the exclusive Severed 10/2004 from GUD No. 9400 jurisdiction of cities and RRC does not have appellate jurisdiction as rates are not involved; company has filed a motion to dismiss; examiner asked for clarification of what rules will apply if docket is dismissed; further ruling expected in January or February, 2005. GUD No. 9463 Rider CAlF (capital RRC Pending but inactive docket: Proposed tariff is similar to Filed 5/2003 adjustment GRIP statute and was included in the May 2003 rate filing Severed 10/2004 investment factor) package before the GRIP legislation had finally passed. tariff severed from Atmos may dismiss this docket now that RRC has adopted GUD No. 9400 a GRIP rule to govern cases over which the RRC has original jurisdiction. 1668\OO\Status chart re Atmos- TXU Gas dockets Page 1 DOCKET NO.1 DESCRIPTION WHERE STATUS DATE FILED PENDING GUD No. 9517 Rate case expense RRC Hearing in October, 2004; Proposal for Decision issued Filed 5/2003 issue severed from December 15, 2004; examiner recommended approval of all Severed 4/2004 GDD No. 9400 expenses claimed by Atmos/TXD and by cities (total: $10.1 million); 3 year surcharge recovery mechanism recommended with same cost-shifting to residential class as approved in GDD No. 9400. GUD No. 9530 Triennial RRC Active docket: Informal discovery, review of information Filed 9/2004 (11/1/2000- by consultants and discussions with company in progress; 10/31/2003) gas cost hearing on merits currently scheduled for May 16,2005, if prudence review no settlement. INTERVENTION RESOLUTIONS NEEDED FROM CITIES NO LATER THAN THE END OF JANUARY, 2005. ***(see below re cities from which resolutions have been received.) City specific Notice of GRIP in- Cities Active cases in each city: Atmos is asking for an Filed 12/14-17/2004 city distribution additional $8.5 million ($6.7 from distribution rates; $1.8 in rate increase to be pipeline rates) in annual revenue due to "new" investments effective 2/15/05 during calendar year 2003. CITIES MUST FILE unless suspended by SUSPENSION RESOLUTIONS BEFORE FEBRUARY Cities 15 - IF POSSmLE, SHOULD BE PASSED BY MID- JANUARY. GUD No. 9560 Notice of GRIP RRC Active docket: This is the first GRIP filing at the RRC and Filed 12/17/2004 pipeline and the RRC staff has not determined what procedure will be environs rate used for these filings or what input city representatives may increase to be have. Discussions during the GRIP rulemaking suggested effective 2/15105 that only limited participation by cities may be allowed. A unless suspended by plan of action is being developed. The suspension RRC (RRC has resolution referenced above for the city filings will limited its authorize intervention in the RRC docket if allowed by the suspensions to 45 RRC. days) *** GUD No. 9530 Intervention Resolutions received from Cities of Arlington, Benbrook, Kerrville & Ro binson. 1668\OO\Status chart re Atmos- TXU Gas dockets Page 2 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.