HOUSE COMMITTEE ON STATE AFFAIRS DISCUSSES MUNICIPAL RATE CASE AUTHORITY

On October 24, 2012, the House Committee on State Affairs held a public hearing to address the following interim charge: “Identify inefficiencies in the regulation of public utilities in order to minimize the cost of regulation to consumers.”   The committee heard from two witnesses whose testimony was about original city ratemaking jurisdiction in utility rate cases. 

In late December, the House Committee on State Affairs issued its interim report, which raised concerns within the League.  Accordingly, this week, League staff met with Representative Byron Cook, who chairs the House Committee on State Affairs to express those concerns and seek clarification about the committee’s intent.  He assured the League that the interim report was merely a report reflecting the testimony of the witnesses and was NOT a recommendation to end original jurisdiction.  Chairman Cook pointed out that the report does NOT recommend legislative action on this issue and he stated that he has no plans to file legislation to eliminate original jurisdiction over ratemaking.  

The testimony of concern to the League, (from Bill Peacock of the Texas Public Policy Foundation and Chuck Harder of CenterPoint Gas Utility), recommended that original municipal jurisdiction over utility rate cases be eliminated.  Their testimony was summarized in the interim report’s conclusion that:

Lawmakers could consider making the statutory changes necessary to move the original jurisdiction for investor owned utility rate cases from municipalities to the Railroad Commission of Texas, for gas, and the Public Utility Commission of Texas, for electricity. Additionally, other policy changes that may simplify the process and reduce regulatory costs could be explored.

The following are excerpts from the report related to the electric rate case process:

  • Costs paid by consumers could be reduced if statutes were amended to streamline and update regulatory requirements.  (Page 30.)
  • While this [municipal jurisdiction] may have been the most efficient regulatory system when it was established, it currently creates some inefficiencies and increases regulatory costs, which are ultimately passed on to consumers. Virtually all the rate proceedings that originate at the municipal level are ultimately appealed and transferred to the PUC because of the desire of utilities to maintain system-wide rates. When cases are transferred, the rate process often starts at the beginning again, which results in more time and money being spent on rate regulation than is necessary. These costs get folded into the rate base, increasing electricity costs.  (Page 30.)
  • Witnesses testified at the October 24th House Committee on State Affairs hearing that original jurisdiction for [investor-owned utility] rate cases could be transferred legislatively from the municipalities to the state. The PUC already has the expertise and a regulatory system in place to appropriately handle rate regulation. Municipalities interested in maintaining their role as an advocate could still participate as a party to the rate setting process. However, municipal involvement would not be essential because other entities, such as the Office of Public Utility Counsel and the PUC have a responsibility to ensure that customers have access to adequate and efficient services at fair, just, and reasonable rates. (Page 31.) 
  • Additional regulatory cost savings may be achieved if portions of the Texas Utilities Code were amended. The statute allows municipalities participating in the ratemaking process to hire attorneys, accountants, engineers, rate consultants and auditors. The provision requires the utility, and ultimately the customer, to reimburse the municipality for the cost of these professional services. If original jurisdiction was transferred to the PUC, it would not be necessary for cities to participate, and the additional costs for professional services would not be passed to the consumer, unnecessarily increasing their electricity bills. Cities could still participate in the rate proceeding in the same manner as any other affected customer, but would bear their own legal expenses, just like other customers. (Page 31.)

The following is an excerpt from the report related to the gas rate case process:

  • When the system for gas utility regulation was established, it was reasonable to give each individual municipality the responsibility for regulating their own rates and services. Over the years, the market has changed, and the current framework is no longer the most efficient option. Because each city regulates its own utility, there are effectively over a thousand gas utility regulators in Texas. Working with many city regulators is a complicated process that is resource intensive and time consuming. More efficient regulation could be achieved if a single entity was responsible for gas utility regulation. (Page 32.)

Despite the testimony of witnesses at the hearing, municipal participation and original ratemaking jurisdiction historically save consumers money in the form of lower rates. 

Below are three examples of stranded cost cases – involving CenterPoint, AEP-Texas Central Company, and Texas-New Mexico Power Company – that are often referred to as the largest cases in the history of the Public Utility Commission (PUC).  They also contained some of the largest disallowances of rate increases requested by the utilities.  Cities were major participants in each of these cases.  Here are the facts associated with the three proceedings:

CenterPoint

Docket No.

Filed

Final Order

Amount Requested

Amount Granted

Hearing Days

Cities' Cost

Utility's Cost

29526

3/31/04

12/14/04

$4,249,000,000

$2,300,000,000

15

$4,771,380*

$19,260,734

*Includes expenses for the City of Houston and GCCC for Docket Nos. 24835, 26195, 29526, 30485, 30706.

AEP-Texas Central Company

Docket No.

Filed

Final Order

Amount Requested

Amount Granted

Hearing Days

Cities' Cost

Utility's Cost

31056

5/23/05

4/4/06

$2,406,339,203

$1,475,933,779

7

$2,544,452*

$4,973,553*

*Includes expenses for Docket Nos. 27035, 27207, 30749, 30706, 30762, 31056, 31126, 32475.

Texas-New Mexico Power Company

Docket No.

Filed

Final Order

Amount Requested

Amount Granted

Hearing Days

Cities' Cost

Utility's Cost

29206

1/22/04

7/22/05

$377,000,000

$110,600,000

4

$462,514*

Not indicated

*Plus $49,920 for estimates.

Here are the facts associated with two more recent cases:

Oncor

Docket No.

Filed

Final Order

Amount Requested

Amount Granted

Hearing Days

Cities' Cost

Utility's Cost

35717

6/27/08

8/31/09

$275,000,000

$115,000,000

28

$1,295,918

$6,737,009


 
Oncor

Docket No.

Filed

Final Order

Amount Requested

Amount Granted

Hearing Days

Cities' Cost

Utility's Cost

39829

1/7/11

8/26/11

$535,000,000

$136,700,000

0

$661,285.01

$8,088,149.75*

*Includes additional expenses associated with Docket No. 35717 and the 2012 EECRF docket.

As is apparent, city participation in rate cases has saved consumers hundreds of millions of dollars, with relatively miniscule costs incurred by the cities.  It is unlikely that the staff of any state agency has the resources or the wherewithal to accomplish those same results.  In fact, municipal original jurisdiction over gas cases often results in settlement at the city level.  Without it, a state agency would likely be overwhelmed.

Specifically on the issue of original ratemaking jurisdiction, the City of El Paso requested that the electric provider serving the city justify its existing rates and explain why they should not be reduced.  In response to this local exercise of original jurisdiction, the electric provider filed Docket No. 39869 at the PUC, to request a rate increase of $26.25 million.  After intervening in the PUC case, the city ultimately negotiated a $15-million rate reduction, and all rate case expenses were absorbed by the electric company as opposed to consumers.  Without the exercise of original jurisdiction to force a review of the utility’s rates the city might never have had the chance to achieve such a beneficial result. 

Original jurisdiction provides many benefits to consumers:  (1) a city can take action to reduce rates or force concessions that benefit city residents when a company is overearning and the state agency refuses to take action; (2) a city can, particularly in gas rate cases, resolve a rate increase request at the local level, which helps to avoid costly litigation at the state level; (3) discovery that is begun at the local level reduces the amount of discovery necessary once a case gets to the state agency; and (4) local media is more likely to follow rate regulatory matters when the city is involved, which leads to greater transparency and greater citizen confidence that someone is looking out for their interests.

Municipal jurisdiction is an important reminder of a vital public trust held by private utility companies.  Cities were once the exclusive providers of many utility services.  Years ago, decades in some cases, some Texas cities chose to delegate the provision of utility services to private companies.  Those firms were given something by those cities that few other businesses in America enjoy:  a monopoly to provide services within a city, lasting in perpetuity.

What cities are unwilling to depart with, however, is the jurisdiction of the city council over utilities, which allows them to help determine what rates are reasonable in exchange for that monopoly.

League staff pledged to work closely with Chairman Cook, his staff, and the House State Affairs Committee members on any legislation that might affect cities in this area during 2013, and thanked the Chairman for his interest and expertise on issues that affect cities.

The full report is available at
http://www.house.state.tx.us/_media/pdf/committees/reports/82interim/House-Committee-on-State-Affairs-Interim-Report-2012.pdf.

TML member cities may use the material herein for any purpose.
No other person or entity may reproduce, duplicate, or distribute any part of this document without the written authorization of the
Texas Municipal League.

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