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Res 071-94 5/3/1994RESOLUTION NO. ' I i - G A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF WICHITA FALLS, TEXAS, AUTHORIZING THE CITY MANAGER TO EXECUTE A CONTRACT WITH REED-STOWE & CO. , INC. , FOR THE PURPOSES OF PERFORMING A REVIEW AND AN ANALYSIS OF THE APPLICATION OF LONE STAR GAS COMPANY TO INCREASE NATURAL GAS SERVICE RATES IN THE CITY OF WICHITA FALLS; FINDING AND DETERMINING THAT THE MEETING AT WHICH THIS ORDINANCE WAS DISCUSSED WAS OPEN TO THE PUBLIC AS REQUIRED BY LAW. BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF WICHITA FALLS, TEXAS, THAT: SECTION 1. The City Manager be and is hereby authorized to execute a contract with Reed-Stowe & Co. , Inc. , for the purposes of conducting a review and an analysis of the application of Lone Star Gas Company for an increase in the natural gas service rates in the City of Wichita Falls, in accordance with the contract attached hereto and made a part hereof for all purposes. SECTION 2 . It is hereby officially found and determined that the meeting at which this resolution was passed was open to the public as required by law. PASSED AND APPROVED this the 3rd day of May, 1994. 7---------- ..411 M A Y ATTEST: City Clerk IREE11—STOVE Co. INCORPORATE D April 19, 1994 Mr. Greg Humbach City Attorney City of Wichita Falls 1300 7th Street Wichita Falls, Texas 76037 Dear Mr. Humbach: Reed-Stowe &Co., Inc. is pleased to have this opportunity to propose our services to the City of Wichita Falls in its review and analysis of an application by Lone Star Gas Company (LSG) to increase natural gas service rates. We are highly versed in reviews of this nature in that we have conducted numerous rate analyses not only involving LSG, but also of other natural gas distribution companies in Texas, Oklahoma, and Arizona. More specifically, our conduct of the previous rate request In Wichita Falls gave us the familiarity with the City's system which enables us to provide such a review efficiently and economically. We are proposing to conduct the following tasks: Detailed Review of the Company Fling and Supporting Documentation Development of the Appropriate Rate Base Development of the Appropriate Test Year Operating Income Development of the Appropriate Capital Structure and Weighted Cost of Capital Determination of Overall Revenue Requirements Development of Appropriate Customer Class Cost of Service/Rate Design Preparation of Final Report Presentation to City Council The detailed analyses to be performed during each task are identified in the following sections. In addition, we have provided a not-to-exceed cost estimate for professional services required to conduct the proposed engagement, and have identified the individuals responsible for the review. 12770 COIT ROAD AT L8J FWY.,SUITE 1 107 101 W. SIXTH STREET SUITE 225 DALLAS,TEXAS 75251 AUSTIN, TEXAS 78701 214)458-9388 512)479-0991 FAX(214)458-0205 FAX [512]479-8992 Mr. Greg Humbach April 19, 1994 Page 2 DETAILED ANALYSES Task 1: Detailed Review of Filing During Task 1, we will perform an in-depth review of LSG's rate filing package and supporting workpapers. The purpose of this task is: To determine,document and challenge,if required,the Company's rationale, methodologies, and assumptions used in developing: Selected test year Selected capital structure Invested capital (rate base) Test year operating income Weighted cost of capital including the cost of equity used in arriving at overall rate of return Proposed revenue deficiency including tax conversion Cost of services by customer class Proposed rate design and pricing of services To develop a detailed request for information to properly analyze specific issues raised during the course of the review of the filing package Task 2: Development of the Appropriate Rate Bass In order to determine the appropriate level of invested capital (rate base) on which LSG should earn a return from the ratepayers in Wichita Falls, we will perform the following activities: Perform a five-year historical analysis of: Investment per customer Investment per MCF sold Percentage of servicing plant Major changes in plant Identify investor and non-investor supplied funds Challenge, if appropriate, allocation methodologies employed to assign corporate,division and/or district investment to the City's distribution system Analyze other rate base additions and deductions and their development, e.g. Mr. Greg Humbach April 19, 1994 Page 3 Cash working capital - actual, lead lag, 1/8th formula Prepayments Unrestored post PURA ITC Customer deposits Etc. Task 3.Development of the Appropriate Test Year Operating income The activities to be conducted during Task 3 include but are not limited to the following: Perform five-year historical analysis of: MCF sales/customer Customer growth Operating expenses/revenues Labor expense/total operating expenses Etc. Review detailed expense items to determine the inclusion of regulatory prohibited and/or limited expenses,i.e.,merchandising,advertising,political advocacy, etc. Challenge, if appropriate, allocation methodologies employed to assign corporate, division and/or district expenses to the City's distribution system Based upon review, analysis and Company's responses to requests for information, challenge the appropriateness, or lack thereof, of Company proposed adjustments to actual test year operating results. These adjustments may include, but not be limited to: Normalization Weather - annual approach versus month by month Removal of abnormal maintenance Inclusion and/or abandonment of facilities Etc. Year-end annualization Customer growth - annual average approach versus month to month Employee levels and related wages Insurance and taxes (specifically 1986 Tax Bill) Miscellaneous, e.g., postage, vehicle fuel, etc. Mr. Greg Humbach April 19, 1994 Page 4 Known and measurable changes (subsequent to test year end) New wage contracts Increases/decreases in operating expenses and/or revenue related taxes Inclusion of attrition and/or pricing elasticity Etc. Task 4: Development of the Appropriate Capital Structuretructure a n Weighted Cost of Capital During Task 4, the following analyses will be conducted: Determine appropriate capital structure Actual versus hypothetical Latest available Adjusted to reflect new financing Inclusion of short-term debt, if appropriate Determine the embedded cost, net of premium, discount and issuance expense of the following components: Lori-term debt (including current portion) Preferred stock Short-term debt(if appliCable) Year-end debt Compensating balances Develop cost of equity with review of: Comparable earnings approach Discounted cash flow (market approach) Recent decisions in Texas and other jurisdictions Develop weighted cost of capital Task 5: Determination of Overall Revenue Requirements Based on our recommendations with regard to the rate base, operating income and weighted cost of capital, we will develop our recommended overall revenue requirements Mr. Greg Humbach April 19, 1994 Page 5 for LSG's operations in the Wichita Falls Distribution System. At the conclusion of this Task, we will submit to the City, a "draft" summary of our findings to this stage of the engagement. Task 6: Development of Customer Class Customer Service Rate DesignP9 Once we have determined the appropriate revenue requirements for the Wichita Falls Distribution System, we will develop the requirements by customer class. The activities to be performed include the following: Determine appropriate cost allocation methodology to be employed, i.e.: Company's proposed (unknown at this writing) Zero intercept United Seaboard Other By application of selected allocation methodology, determine the adjusted test year Cost of service Return contribution by class Utilizing the results of the class cost allocation study and responses to the rate design information requests, develop recommended rate design to achieve total revenue requirements identified in Task 5. Upon completion of Task 6,we shall submit to City staff members a"draft"of our findings, conclusions, and recommendations pertaining to customer class cost allocation and rate design. As you recall, the issue of rate design played a significant role in the overall determination of rates in the previous case due to the large volume of transportation customer sales. We will again be paying particular attention to this issue during our analysis. Task 7: Preparation of Final Report This task represents the assimilation of the "draft" findings, conclusions, and recommendations of Task 2 through Task 6 submitted to City staff members as indicated within the task descriptions. It is anticipated that incorporation of City staff members comments and the finalization of the report can readily be performed within sixty days of engagement assuming: Mr. Greg Humbach April 19, 1994 Page 6 Company is timely in responding to requests for information Company is cooperative in providing accessibility to data City is timely in providing comments on submitted drafts Task 8: Presentation to City Council Upon completion of our final report, Reed-Stowe & Co., Inc. will present our findings to the City Council of Wichita Falls. Prior to such presentation, we propose to meet with LSG representatives to discuss the report and obtain comment from LSG. Such a meeting allows for candid exchange of positions with respect to rate making methodologies and brings to focus those areas of discussion most critical for Council understanding. PROPOSED PROJECT COST Based on the tasks identified above and an elapsed timeframe of approximately sixty (60) days from receipt of the engagement, we propose that our fees to conduct the review will not exceed $19,500, etout-of-pocket expenses. In the event that the City of WichitaPP Falls desires a level of effort different from that set forth above,we are willing to adjust our fees and anticipated timing accordingly. Reed-Stowe & Co., Inc. bills its clients based an the actual hours worked at stipulated billing rates plus out-of-pocket expenses. We bit on a monthly basis with payment due ten days from receipt and provide detail as to the analyses conducted. The above are estimates of our professional fees and expenses and provide a not-to-exceed project cost. However, if the actual hours worked are less than those included in the development of these projections, the City of Wichita Falls will be billed only for those hours. Conversely, if the actual hours are more than estimated, Reed-Stowe & Co., Inc. will bill only up to the not-to-exceed costs as presented. PROJECT PERSONNEL We are proposing a project team comprised of essentially the same individuals who conducted the previous analysis of LSG proposed rates for the City. Mr. Jack E. Stowe, Jr. will act as Project Director and will be responsible for the overall successful conduct of the engagement. Ms. Connie Cannady and Mr. Dave Yanke will perform the day-to- day project activities and will coordinate the information requirements from the Company. Mr. Greg Humbach April 19, 1994 Page 7 ACCEPTANCE If this letter is in agreement with your understanding of the engagement and services to be provided, please sign one copy and return to our Dallas office. We have enclosed our firm qualifications and the resumes of the proposed project team members to assist you in evaluating the unique qualifications of Reed-Stowe & Co., Inc. If you have any questions regarding this letter, please feel free to contact Mr. Jack E. Stowe, Jr. or Ms. Connie Cannady at (214) 458-9388. Very truly yours, teCt d- 3-111,-re er", e-t&C. Reed-Stowe & Co., Inc. City of Wichita Falls Accepted by: Title: Date: