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ORD 1997-10 - Entergy - Deny Rate Increase - Reduce 03-25-1997ORDINANCE NO. 97-10 AN ORDINANCE OF THE CITY OF HUNTSVILLE, TEXAS, DENYING THE REQUEST AND REDUCING THE RATES OF ENTERGY GULF STATES, INC. IN THE CITY OF HUNTSVILLE, TEXAS; PROVIDING FOR CONDITIONS, SEVERABILITY, AND REPEAL OF CONFLICTING ORDINANCES. WHEREAS the City of Huntsville is a regulatory authority under the Public Utility Regulatory Act (PURA) and has original jurisdiction over the rates of Entergy Gulf States, Inc. (GSU); and WHEREAS GSU is required under the terms of the merger agreement in Docket 11292 before the Public Utility Commission to file a rate proceeding to pass on to ratepayers benefits from such merger and other cost reductions which have occurred; and WHEREAS GSU on November 27, 1996, pursuant to PURA Section 2.212, made a filing with the Public Utility Commission and with cities exercising original jurisdiction which such filing includes, among other requests, a fuel factor increase and a request to surcharge prior fuel costs; and WHEREAS the schedule of rates proposed by GSU was suspended for a period of ninety (90) days from the effective date stated in GSU's Statement of Intent for further review and investigation; and WHEREAS certain local regulatory authorities have heretofore initiated a review of GSU rates; and WHEREAS GSU has agreed on May 7, 1996, that any overall Texas retail base rate reduction in this proceeding should be retroactive to June 1, 1996, with interest; and WHEREAS the quality of GSU's service should be considered in the determination of a reasonable return on GSU's invested capital; and WHEREAS the City having considered GSU's request after reasonable notice and public hearing, is of the opinion and finds that the relief requested by GSU should be denied and the rates of GSU should be reduced effective immediately; NOW, THEREFORE, BE IT ORDAINED BY THE CITY COUNCIL OF THE CITY OF HUNTSVILLE, TEXAS, THAT: SECTION 1: The rates, tariffs, and charges of GSU for electric power and energy sold within the City of Huntsville be revised to reduce annual base revenues by $43,614,000, a reduction of approximately 12.29%, on a Texas retail basis. The Schedules of Rates are required to be filed by Part 4 hereof resulting from said reduction are those under which the Company shall be authorized to render electric service and to collect charges from its customers for the sale of electric power and energy within the corporate limits of the City until such time as said Rate Schedules may be changed, modified, amended, or withdrawn, with the approval of the City Council. SECTION 2: The rates approved hereby fix the overall revenues of the Company at a level which will permit GSU a reasonable opportunity to earn a reasonable return on its invested capital used and useful in rendering service to the public over and above the Company's reasonable and necessary operating expenses. The rates approved hereby are just and reasonable. SECTION 3: The rates approved hereby shall be effective and in force for all consumption from and after the date hereof and shall be charged and observed thereafter until revised according to law. Billings for periods of consumption which include consumption both under the Company's existing rate and the rate established hereby shall be prorated, based on the days within each such period, as though daily consumption had been equal on each day throughout both such periods. SECTION 4: The base rates of all customer classes and each component thereof shall be reduced by the same equal percentage amount except for large power service and high load factor service, which shall remain unchanged. GSU shall file with the City a schedule of rates reflecting such rate design together with calculations supporting same no later than 10 business days from the date hereof. SECTION 5: Any and all GSU requests for any type relief or modification of existing tariffs, rates or schedules not specifically addressed herein is denied. SECTION 6: Notwithstanding any other provisions herein contained, the rates of GSU within the City of Huntsville shall not, in any case, exceed the rates of customers of GSU in unincorporated areas whether such rates for unincorporated areas are set prior to or after the adoption of this ordinance and it shall be unlawful for GSU, its agents, servants or employees to collect or attempt to collect higher rates within the City of Huntsville than are collected by GSU within unincorporated areas. SECTION 7: The action of the City Council of the City of Huntsville enacting this ordinance constitutes, on the date of its final passage, a final determination of rates for GSU within the City of Huntsville in accordance with Public Utility Regulatory Act § 2.212, SECTION 8: Nothing contained in this ordinance shall be construed now or hereafter as limiting or modifying, in any manner, the right and power of the City under the law to regulate the rates and charges of GSU. SECTION 9: Should any part, sentence or phrase of this ordinance be determined to be unlawful, void or unenforceable, the validity of the remaining portions of this ordinance shall not be adversely effected. No portion of this ordinance shall fail or become inoperative by reason of the invalidity of any other part. All provisions of this ordinance are severable. SECTION 10: All ordinances, resolutions, or parts thereof, in conflict herewith are repealed to the extent of such conflict. PASSED AND APPROVED this 25th day of March, 1997. CITY F H VIL , TEXAS Wil iam B. Green, Mayor A S W _ Dannql Welter, City Secretary VED: Scott Bouhis, City Attorney Mardi 17, 1997 DIVERSIFIED UTILITY CONSULTANTS, INC. 7800 SHOAI, CREEK BLVD., SUITE 246 SOUTH, AUSTIN. TX 78757 TELEPHONE (512) 4543500 Mayors and City Council Members Cities Served by Entergy Gulf States-Texas RE: Entergy Gulf States, Inc. Rate Request Dear Mayors and City Council Members: I Diversified Utility Consultants, Inc. ("DUCI") is pleased to present this report regarding the investigation of Entergy Gulf States, Inc. ("Company" or "EGSI") proposal to increase rates and implement the Company's seven year Transition to Competition Plan (" Transition Plan"). The Company's rate filing is a required rate filing under the merger plan approved by the Public Utility Commission of Texas ("PUCT" or "Commission") in Docket No. 11292. This is the Company's first rate filing reflecting the impact of the GSU/Entergy Merger. As you may recall GSU (now Entergy Gulf States, Inc.) and Entergy made many representations of future fuel cost savings and non-fuel operation and maintenance (" O&W) savings that would result from the merger. Those representations of proposed savings were embodied in the Stipulation Agreement ("Agreement") and in PUCT Docket No. 11292. This post merger rate case was intended for the purpose of capturing the expected savings for customers. The Company's filing can be described as a four-part filing consisting of. (1) fuel factor and fuel reconciliation proposal, (2) base rate revenue requirement request, (3) cost allocation and rate design proposal, and (4) transition to competition proposal. The following is a summary of the Company's key rate proposals in this case: Surcharge ratepayers $41.4 million to collect the claimed fuel under recovery for the period July 1995 through June 1996; Increase the existing fuel factors by $14 million, or 6% per annum I effective March 1997;' • Increase base rates by $12,960,000 or 2.89% for the transfer of nuclear fuel costs to base rates (associated with the adjustment is a $12,960,000 reduction to reconcilable fuel expenses)'; • Revise fuel factors downward by about $8 million or 3.1% per annum if the nuclear fuel expense is transferred from reconcilable fuel to base rates. The net result of the Company's rate revenue proposals is a $41.4 million surcharge to be collected over 12 months starting in July 1997 and a $19.6 million or 2.84% per annum increase in total rates.' The promised fuel cost decreases and promised non -fuel ( "O&M ") efficiency savings resulting from the merger have not materialized under the Company's new proposal. Actually, the Company's claimed costs have increased and ratepayers will experience a $61 million ($41.4 million plus $19.6 million) or 8.8% increase in bills in the first year under the Company's proposals. In contrast, the Cities' consultants are recommending a $43,614,000 base rate reduction from exi -sting base rates. The savings resulting from the merger fails to meet the representations made in Docket No. 11292, which formed the basis of the Commission's approval of the merger. Instead of reduced rates, the Company is offering ratepayers a new set of promises, proposals, and guarantees for the future. The Company claims this new set of promises promotes three goals in the anticipated environment of competition consisting of. (1) customer service, (2) lower costs, and (3) improving shareholder value.' A review of the Company's proposal, both rates and proposed Transition Plan, indicates that rates are substantially overstated and the Transition Plan is unnecessary 'EGSI's Application, Volume 1, page 14. 'This transfer represents a very unusual movement of costs between the two components of a customer's bill (i.e., base costs plus fuel costs equal the total bill). 3EGSI's Application, Volume 1, page 22 which consists of a $12.9 million increase in base rates and a $6 million increase in its fuel factor. '`Direct testimony of Gerald D. McInvale, Vol. 9, tab 22, p. 21, lines 11 -14. 5 and contains a totally new set of conditional promises regarding future rates.5 After review of the Company's filing, the Cities' consultants have concluded that the Company's claimed base rates are excessive and costs for Texas retail ratepayers are overstated. Among other things, the Company's request includes: • A $12,960,000 transfer of nuclear fuel costs to base rates; • Inclusion of over $8.4 million of excessive amounts of nuclear O&M expenses; • Inclusion of over $24 million in rate base that is neither used nor useful to Texas ratepayers; • Inclusion of over $11 million of nonrecurring merger related and cost savings expenditures, of which about $10.2 million occurred outside the test period in this case; and • Inclusion of over $9.6 million in excessive depreciation charges. The Cities' rate consultants have addressed numerous ratemaking issues raised in the filing. The issue before each City is whether the Company's current base rates and charges are excessive. Cities' rate consultants have concluded the answer to that question is an unequivocal yes. Thus, despite more than $76 million of base rate reductions that have occurred since the merger Agreement in Docket No. 11292, the Company continues to earn an excessive return. Excessive earnings are expected to continue given the Company's projection of $650 million of non -fuel O&M savings over 10 years in Docket No. 11292 and the lower level of cost experienced by the electric utility industry overall. This is the first case where the impacts of the merger and the full impacts of the enormous employee reductions and other cost reduction programs are reflected in base rates. These lower costs are supported by the Company's claim that non -fuel O&M merger related savings have been in excess of $50 million in the past year. The curious result of these $50 million in merger savings is that the Company's half or $25 million is included in this case as a benefit to shareholders (and a cost to ratepayers), but somehow ratepayers face a rate increase. 'The Company's requested $41.4 million fuel cost surcharge and requested changes to the fuel factor charges have not been reviewed as part of this report and recommendation. Co The consultant's ana4rses of the Company's current cost of service for Texas retail customers indicate that the Company's existing base rates and charges are excessive by about $43,614,000 per year. The following table contains a summary of the issues addressed and the dollar impact of each on a stand alone Texas retail basis. ENTERGY GULF STATES, INC. Texas Retail Base Rate Cost of Service Schedule of issues Lune No. Issue Texas Retair Stand Alone Impact 1 Return on Equity (ROB) Sz Capital Structure (at 9.6% ROE) ($24,653,000) 2 Plant Held for Future Use ($641,000) 3 Unanuntized Cost Savings Expenditures in Rate Base ($1,370,000) 4 Cash Working Capital ($1527,000) 5 Reverse Transfer of Nuclear Fuel to Base Rater ($12,960,000) 6 Payroll & Payroll Benefits ($2,976,000) 7 Nuclear O&M Expense ($8,418,000) 8 O&M Savings Tracker $3,722,000 9 Property Insurance Reserve Expense ($3,285,000) 10 FERC Accounts 912 & 9I3 ($768,000) 11 Depreciation Expense ($9,672,000) 12 Amortization Expense for Contra AFUDC 6r. Canc. Loss R.B. ($5,196,000) 13 Amortization Expense for Unamortized Cost Savings Expenditures ($4,922,000) 14 Property Tax ($5,934,000) 15 Allocation Adjustments ($1,418,000) 16 Interactive Effects ($694,000) 17 Revenue Related Fees & Taxes {$1 x215.000} 18 TOTAL Texas Retail Stand Alone Impact ($81,927,000) 'The Company has filed two cost of service studies. One study indicates EGSI could justify a $25.3 million increase at a 10.2% return on equity. The Company proposes to base rates on existing rates adjusted for the transfer of $12.9 million of nuclear fuel to base rates. All adjustments are made to the Company's higher claimed increase. 'Consultants recommend that nuclear fuel remain in the fuel factor; that it not be moved to base rates. However, the adjustment does not mean that $12.96 million of nuclear fuel will be disallowed. It simply means it will not be collected in base rates. The following table reconciles the Texas retail stand alone impacts from the table above to the consultants recommended base rate decrease to existing rates shown on the Cities' revenue requirement schedule. ENTERGY GULF STATES, INC. Texas Retail Base Rate Decrease to Existing Rates Line No. Issue Texas Retail I Total Texas Retail Stand Alone Impact ($81,927,000) 2 Company Supported but Not Requested Rate Increase $25,353,000 3 Reverse of Nuclear Fuel to Base Rates $12.960,000 4 Total Base Rate Decrease to Existing Rates ($43,614,000) The Agreement in Docket No. 11292, which provides that merger related non -fuel O&M savings are to be shared 500/o/50o10 between ratepayers and shareholders, does not impact this proposed rate reduction. The sharing mechanism approved by the PUCT allows GSU to retain $14,862,000 of calculated savings. In other words, the Company has claimed to have already captured all the merger related savings to be had. Thus, the consultants recommended $43,614,000 base rate reduction is not related to merger created savings.' VYWle the consultants are recommending a base rate reduction of $43,614,000 per year, the consultants' analyses are not yet complete. The consultants have had numerous problems getting responses to many key discovery requests from the Company.' Moreover, often times when the Company did respond, such responses were inadequate. The problem has become so severe that the Administration Law Judge, in the case before the PUCT, has threatened the Company with sanctions. Because of these discovery problems, no adjustment to affiliate transactions can be provided at this time. Cities' consultants on affiliate expenses will evaluate "The calculation of the savings tracker was adjusted for errors and other necessary adjustments flowing from the consultants recommendations. These adjustments are discussed in the actual report. 'The Company's lack of cooperation with discovery in this case is surprising in light of EGrSI president Karen Johnson's promise to Cities Steering_ Committee to cooperate with Cities to avoid the litigious environment of the past. r documentation as it is received and will make a recommendation by the time this case goes before the Commission. There are other issues which are being evaluated in the case before the PUCT. For this reason, the consultants' recommended $43,614,000 Texas retail rate reduction will likely change when this case is presented to the PUCT. Cities' consultants recommend that base rates be reduced. If rates are reduced by Cities when exercising their original jurisdiction, the consultants also recommend the following: i. The rate reduction should become effective immediately; ii. Refunds for service back to June 1, 1996 should be credited on customers next billing cycle; iii. Lower rates and refunds should be assigned to each customer rate class, except the High Load Factor Service and Large Power Service classes, in proportion to the resulting percentage obtained by dividing the ultimately approved base rate reduction by the test year level of Texas retail base rates for the classes receiving the reduction, (12.29% if the Cities consultant's recommended $43,614,000 reduction is adopted). The High Load Factor Service and Large Power Service rates should remain unchanged; iv. Each component of each rate tariff, except the High Load Factor Service and Large Power Service tariffs, should be reduced by the above noted percentage reduction (i.e., each customer charge, energy charge and demand charge); V. The Company should provide each City with a revised schedule of rates, tariffs and all underlying support for the calculations within ten (10) business days of the passage of the City's ordinance and shall further correct such new tariffs and charges back to the effective date for any errors identified by Cities within ten (10) business days from receipt of such tariffs and charges; and vi. The Cities find that the rate case expenses incurred in performing its regulatory responsibility under Section 2.106 (a) of the Public Utility Regulatory Act ("PURA!') are reasonable and shall be reimbursed by the Company within ten (10) business days after receipt of invoice(s). 110 The Company has proposed what is described as a comprehensive Transition Plan. The Transition Plan is described more fully in the report. Specifically, EGSI proposes to change the ratemaking approach to rate cases by collecting 100% of River Bend investment over the next seven years. However, the Transition Plan does not address the River Bend costs not found prudent in Docket No. 7195. Recently, the Supreme Court of Texas remanded the Docket No. 7195 River Bend issues to the PUCT. Given the uncertainties associated with River Bend costs, it is premature to consider the Company's Transition Plan proposal. The balance of this report is presented in three sections: (1) executive summary, (2) a more detailed discussion of the various adjustments, and (3) schedules setting forth the cost of service analyses. Sincerely, Diversified Utility Consultan , Inc.