It is recommended that the City Council adopt the attached ordinance approving a tariff authorizing an annual Rate Review Mechanism as a substitution for the annual interim rate adjustment process filed by Atmos Energy Corporation d/b/a Atmos Energy Corporation, Mid-Tex Division, to govern the process of annual rate adjustment proceedings for customers within the City of Fort Worth.

Under the Gas Utilities Regulatory Act, the City of Fort Worth has original rate regulatory authority over utilities providing retail natural gas to customers in the City. The purpose of this Mayor and Council Communication is to adopt an ordinance approving an agreed Rate Review Mechanism (RRM) tariff as filed by Atmos Energy Corporation, Mid-Tex Division (Atmos) that will provide an orderly process for the City annually to review Atmos' rates for its customers within the City of Fort Worth.  The RRM is an annual rate review mechanism that serves as an alternative to the rate adjustment mechanism established by state law and known as the Gas Reliability Infrastructure Program (GRIP).  This RRM has been negotiated between Atmos and the Atmos Cities Steering Committee (Steering Committee), a cooperative coalition of 171 cities served by Atmos, of which the City of Fort Worth is a member.

Adoption of this tariff will establish the criteria used in calculating future rate adjustments, but it will not change the rates currently being paid by Atmos customers in the City of Fort Worth.

Prior Council Action

On May 16, 2006, City Council adopted Resolution No. 3348-05-06, which authorized the participation with other cities in the Atmos Energy Corporation service area to form a standing Steering Committee with the authority to act on behalf of its members in any proceeding relating to gas utility regulation (M&C G-15202).

On June 4, 2013, City Council adopted Ordinance No. 20782-06-2013, approving an agreed upon RRM tariff as filed by Atmos to govern the process for future annual rate adjustments proceedings for customers within the City of Fort Worth through 2017.  

Background

Prior to 2003, in order to recover costs of capital investments, a gas utility had to initiate a full ratemaking proceeding.  In order to relieve gas utilities of having to go through a full rate making process, the legislature enacted GRIP in 2003 to allow a gas utility to annually adjust rates to account for capital improvements made between rate cases, with all adjustments being subject to a "true up" process as part of utility's next ratemaking process.  While the GRIP did allow gas utilities a more rapid recovery of capital investments, the process focused solely on the cost of the investments and did not take into account any changes in the utility's other operating costs or its revenue and did not provide cities with a meaningful opportunity to participate or the ability to recover their rate case expenses.  Additionally,  the administrative nature of the GRIP did not include any type of regulatory review or oversight before rate adjustments went into effect.

Unlike GRIP, the RRM process provides for rate adjustments that are based on a more comprehensive rate review that takes into account revenues and other operating expenses rather than focusing solely on the cost of capital investments.

In order for the RRM process to continue to function as an alternative to the GRIP process, Fort Worth and other cities that exercise original jurisdiction must adopt a tariff that authorizes the RRM process.

Recommendation of RRM

The Steering Committee and its legal counsel recommend approval of the new RRM tariff by all Steering Committee member cities for the reasons discussed below.

The RRM process takes into account not only capital investment costs but also a utility's revenues (that may be increasing) and expenses (that may be declining), which could result in a lower overall cost to customers.  In addition, the RRM can alter how costs are ultimately passed through to customers.  Under a GRIP process, Atmos would be authorized to pass all adjustments for its capital investment costs through to its customers in the form of an increase in the fixed monthly customer charge.  The RRM tariff provides customers with a measure of protection against increases in their fixed monthly charges that would not be available under the GRIP process.  In addition, the RRM tariff provides a mechanism for cities to review Atmos annual expenses and capital investments and to make adjustments, or disallowances, for expenses or investments considered to be unreasonable or unnecessary, with the cities' costs (including fees associated with hiring expert consultants and legal counsel) being reimbursed by Atmos on a monthly basis.

The RRM tariff on which the 2017 rates were based allowed a rate of return on equity of 10.50 percent. The revised RRM tariff reduces that to 9.8 percent.  The revised RRM tariff also captures the reduction in federal income tax rates from 35 percent to 21 percent, and should result in a rate reduction effective by mid-March, 2018.  Prior RRM tariffs allowed Cities only three months to review the Company's filing.  The new revised tariff expands that time period by two months.  New applications by the Company should be made on or about April 1 of each year, with new rates effective October 1.  A rate order from the Railroad Commission in an Atmos pipeline rate case adopted the position of the Steering Committee with regard to incentive compensation related to Atmos' Shared Services Unit that reduced allowed expenses, and that reduced level of expenses will be applicable under the new RRM tariff.

It should be noted that failure to adopt the revised RRM tariff,  Atmos would make annual GRIP filings with the Railroad Commission, which would result in an administrative review of the rate application and deny any participation by the City.  

Staff agrees with the Steering Committee's position and recommends that the City Council adopt the attached ordinance authorizing the revised RRM tariff for 2018.  As noted above, adoption of this RRM tariff will not affect the rates that are currently being charged to Atmos customers in the City.

This M&C does not request approval of a contract with a business entity.

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