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1978 10 19 CC Minutes, Special81019 -1 MINUTES OF THE SPECIAL MEETING OF THE CITY COUNCIL OF THE CITY OF BAYTOWN October 19, 1978 The City Council of the City of Baytown, Texas, met in special session on Thursday, October 19, 1978, at 6:45 p.m. in the Council Chamber of the Baytown City Hall with the fol- lowing members in attendance: Jody Lander Jimmy Johnson Ted Kloesel *Mary E. Wilbanks Eileen Caffey Emmett 0. Hutto Fritz Lanham Dan Savage Scott Bounds Karen Petru Absent: Allen Cannon Eileen P. Hall Councilman Councilman Councilman Councilwoman Councilwoman Mayor City Manager Assistant City Manager City Attorney Deputy City Clerk Councilman City Clerk Ordinance - Authorizing Change Order No. 1 to a Contract with Water Tank Service Company for Repair to the East James Water Tower Water Tank Service Company is making repairs on the East James Water Tower at the present time and repainting it. The Administration did not include in that contract, the installation of an overflow pipe on this elevated storage tank which should have been included. The Administration has been informed by the State Health Department that this overflow pipe should be installed. At present, the overflow pipe extends past the top of the tank, allowing overflow to flow onto Lhe ground and onto a house located beside the tank. While the contractor is on the site, the Administration would like to issue a change order to have the overflow pipe installed. The pipe will be about 120 feet long and will be attached to a leg of the water tower. The cost is $3,950. The Administration recommended approval of the ordinance. In response to a question from Councilman Johnson, Norman Dykes, City Engineer, explained that the overflow pipe would bring the water down to the ground where City forces plan to run a pipe to storm drainage nearby. Councilwoman Wilbanks moved for adoption of the ordinance; Councilman Johnson seconded the motion. The vote follows: Ayes: Council members Lander, Johnson, Kloesel, Wilbanks and Caffey Mayor Hutto Nays: None ORDINANCE NO. 2564 AN ORDINANCE AUTHORIZING A CHANGE ORDER TO THE CONTRACT WITH WATER TANK SERVICE COMPANY FOR THE RECONDITIONING OF THE EAST JAMES STREET WATER TOWER AND PROVIDING FOR THE EFFECTIVE DATE HEREOF. 81019 -2 Minutes of the Special Meeting - October 19, 1978 Reconvene the Public Hearing on the Request of Houston Lighting and Power Company for Rate Increase At 7:00 p.m., Mayor Hutto reconvened the public hearing on the request of Houston Lighting and Power Company for a rate increase, and asked that anyone desiring to testify, sign the register since this registry would determine speaking order. Mayor Hutto administered the oath to those desiring to speak. Mayor Hutto explained that on July 14, 1978, Houston Lighting and Power Company filed a request with the City of Baytown for a major rate increase. The City received no complaint about the increase within 45 days. Tonight's hearing is for the purpose of receiving information from the company and the public regarding the propriety of the proposed rate change. Jim Schaffer, Division Manager for Houston Lighting and Power Company, presented the company's position on the matter. He stated that the last general change in electric rates in Baytown was granted in April, 1976. That change was actually a reduction of temporary rates granted in December of 1975. The rate schedules approved in April, 1976 included a Cost of Service Adjustment which was implemented with the hope of slowing down the deterioration in rate of return, and thereby extending the period of time in which the present rates would produce a satisfactory return on investment. The Cost of Service Adjustment, although a small monthly amount, has been successful as it has enabled Houston Lighting and Power to operate under the present rates for a longer period of time than possible without it. But even with this adjustment clause, many cost factors not covered by it have forced a steady decline in rate of return. That rate of return has now dropped below the level necessary to provide sound financing of the company's business. Although many of the factors of general inflation faced by all businesses have contributed to the problem, the primary factor in Houston Lighting and Power's declining financial position has been the high cost of new construction. For many years Houston Lighting and Power has used natural gas to fuel generating plants and during this time, the construction costs and fuel costs were relatively low. Just as the City of Baytown must shift from ground water to surface water, Houston Lighting and Power faces the requirement of converting from natural gas to use of other fuels which must be done quickly. The cost of building generators which utilize oil, coal, lignite and uranium as a fuel source are substantially higher than the costs to build generators fired by natural gas. For example, in the early 1970's, Houston Lighting and Power could build moderately- sized, gas -fired generating plants for about $70 million. Today a coal -fired plant with the same generating capability costs about $184 million. Within 10 years the same plant is projected to cost over $669 million. Because Houston Lighting and Power's service area continues to grow significantly faster than other parts of the nation, the demand for electricity here also is growing at an unprecedented rate. Population in our service area grew by about 96,000 people last year. This brings the total population to 2.7 million, and it is expected to rise almost another million by 1985. 81019 -3 Minutes of the Special Meeting - October 19, 1978 In addition, most people are using more electricity despite energy conservation efforts. In fact, the typical residential customer uses 68 percent more electricity than just 10 years ago. Last year, Houston Lighting and Power customers increased elec- tricity consumption by more than 12 percent, or more than double the national average of 5.2 percent. To keep up with this tremendous growth and, at the same time, reduce dependency on natural gas, Houston Lighting and Power will have to maintain a construction program which will total 1 billion, 600 million dollars ($1,600,000,000) in the next three years. This year alone, over 490 million was expended toward new construction. That's almost $2 million each working day of the year. The $490 million is more than double the expenditures for the five years - 1970 through 1975. Houston Lighting and Power utilizes the most efficient equipment and operating procedures to reduce day -to -day operating costs which is reflected in the fact that Houston Lighting and Power's rates have consistenly been among the lowest in the nation. Houston Lighting and Power's continuing concern over cost reduction has prompted the employ of outside experts for the last several years. These experts have conducted studies of operations and have recommended improvements, many of which have been implemented to increase operating efficiency and reliability of service. Energy conservation programs designed to educate Houston Lighting and Power customers and to assist them in using energy wisely and efficiently have been initiated. Mr. Schaffer emphasized that the rates filed with Council are based on a system -wide operating structure just as our rates in Baytown have been for many years. This system -wide concept of rate application will continue to provide lower rates for Baytown customers than the rates which would be required if Baytown was considered separately. Stated another way, the rate of return received in Baytown is lower than the system -wide rate of return; therefore Baytown customers benefit from the system -wide rate. Mr. Schaffer reassured Council that Houston Lighting and Power Company will continue to practice their long- standing record of sound and prudent financial management. He, also stated that Houston Lighting and Power did not take lightly the responsibility of providing their customers with the best electric service technology allows. Houston Lighting and Power's ongoing objective is to keep rates at the lowest possible level consistent with good service and sound operation. After his presentation, Mr. Schaffer introduced different representatives from his company and law firms that have been involved in the hearings with the Public Utility Commission. Mayor Hutto recognized Quin McWhirter, who indicated that he along with the other representatives would make themselves available to assist in trying to answer questions rather than making a formal presentation. *Councilwoman Wilbanks left the meeting. Mayor Hutto recognized Jack E. Stowe, Jr., a Senior Consultant on the Management Services Staff in the Dallas Office of Touche Ross and Company of Dallas, Texas. Mr. Stowe gave a brief summary of the findings that his company made as a result of the study. Mr. Bounds explained that the City of Baytown was authorized by Council to inter- vene in the Public Utilities Commission rural rate hearing concerning Houston Lighting and Power's request for rate increase. As part of that agreement, the City of Baytown joined with the City of Houston and other cities in the area. Touche Ross and Company was hired by the cities to analyze Houston Lighting and Power Company's rates. Mr. Stowe reviewed the different testimonies, recommendations and 81019 -4 Minutes of the Special Meeting - October 19, 1978 schedules made by Pat Loconto, Sam Rhodes and himself. A copy of the testimony of Touche Ross and Company concerning their study of Houston Lighting and Power Company's rates, along with a tape of this public hearing are on file in the City Clerk's office. Council had a few questions concerning adjustments and schedules mentioned by Mr. Stowe and after his presentation, Mr. Stowe clarified some of these questions. Councilman Lander commented that Houston Lighting and Power is talking about some very sizeable investments within the next few years in order to meet anticipated growth, and asked if the $51,000,000 was sufficient to meet this projected growth. Mr. Stowe responded that it is his company's opinion that it is. Councilman Lander suggested that Council be given ample time to study the verbal and written information presented, and then to schedule a work session. Councilman Kloesel requested that Mr. Schaffer explain the reference to small monthly increases. Mr. Schaffer explained that the small monthly adjustments referenced earlier pertained to cost of service adjustments and fuel adjustments. The cost of service adjustment was included for the first time in the last rate increase back in 1975. Some of the things that the cost of service adjustment includes are labor costs, which do not include executive salaries, depreciation, the revenue requirements for securities that have fixed costs, such as bonds, dividends on preferred stock and bank loans. Some of the things that are not included in the cost of service adjustment are executive salaries, materials and supplies that the company purchases, advertising expenses, dues, donations, contributions, office supplies and expenses, such as ad valorem taxes, and the return to common stockholders and related income taxes. In response to a question from Council, Mr. Rick Cambell, Manager of Accounting Services, explained that the cost of service adjustment clause covers those items of expense which are for the most part difficult and impossible for the company to control. The financing cost of the company, such as interest and preferred dividends, are set by the financial market place, basically in New York and is determined by competition. Houston Lighting and Power is not just competing with other utilities for funds, but with IBM, Exxon, and even the federal government. Salaries of the company employees must keep up with the cost of living. Inflation, as it relates to wages, is beyond the company's control Bob Webb, representative of the firm Baker and Botts, which firm is representative of Houston Lighting and Power Company, stated that the company's rate filing package is by requirement of the Public Utility Commission a very lengthy document which includes a great deal of detail. The company and the consultants for the City are basically in agreement in principle; however there is a disagreement as to certain details of accounting, what should be included in the property, and other similar matters which is not really unusual. City Council, when adopting a budget for the City of Baytown, will have some disagreements as to appropriate level of exenditures and the necessary tax revenues to accomplish that level. Basically, this same concept will be utilized to determine the rates necessary for Houston Lighting and Power to operate. Testimony filed by Houston Lighting and Power substantiates the amount of property owned by the company and the rate base as of March 31, 1978. The property owned by Houston Lighting and Power is valued at its original cost, less depreciation as reflected on the books of the company. This is how accountants figure out what a business is worth. In keeping the with Utility Act, the current value was assessed by adjusting that value for age and condition of the plant. Mr. Stowe came up with another value. The major 81019 -5 Minutes of the Special Meeting - October 19, 1978 portion of the $270,000,000 adjustment is the fact that Mr. Stowe and his colleagues believe that land never increases in value and as a consequence, only the original cost of the company's land, some $90,000,000 has been included, whereas the company has revalued its land through a comprehensive appraisal arriving at a value of some $600,000,000, and weighted those two components, original cost and current cost of land and figured that into the rate base. It is up for Council to determine which is the more realistic approach. As to the matter of how much cost, adjustments are made for abnormal conditions such as strikes or unusual weather, as well as normal working conditions. The disagreement is not that the adjustments have to be made, but the amount to said adjustments. There are disagreements as to the value of the land, and the number of adjustments, but the real disagreement is how much money is enough to persuade the investors throughout this entire country to come with an additional $1,600,000,000 over the next three years for this company. Some of it borrowed, some of it secured through the sale of stocks. Council has the same problem, that is you sell bonds to finance municipal activities in Baytown, which like the Houston Lighting and Power Company has all the pleasure and pain that combines with growth. Mr. Webb asked, "how do you determine what is enough ?" Then he asked Council to look at Schedule No. 2 which reflected that the company must pay $115,000,000 a year on the debts that are shown on the preferred stock. Only then is the common shareholder paid. Mr. Webb explained that Schedule No. 2 reflects that $214,268,000 would remain after payment of preferred stock which would leave a little less than $100,000,000 a year for shareholders. Mr. Webb questioned if little less than $100,000,000 a year was enough as a return on $972,000,000 of common equity, a number about which there is no disagreement. Mr. Loconto feels that the company needs at a minimum of $132,000,000 and a maximum of 14.3 %, or about $139,000,000. The company feels that over 15% is needed which would be in the upper hundred millions. Adjustments must be made, the question is once you determine how much is enough, how do you determine how much money is needed. Mr. Webb maintained that the full $175,000,000 is what is needed. The $175,000,000 includes not only an adequate return, but those items of valuation and those items of accounting of which both sides agree. Mr. Webb summarized by saying that Council needed to determine who had been most reasonable in making determination of valuation of Houston Lighting and Power property, and he pointed out the key differences, are the weighting and whether land ever increases in value. Accounting adjustments would be another consideration in determining who had been more realistic in their approach. Then Council must determine a fair rate of return. Houston Lighting and Power feels the only fair rate of return must produce $175,000,000 additional dollars per year. Whereas, Touche floss and Associates feel that $51,000,000 would be reasonable. Mr. Bounds explained that as far as the actual hearing is concerned, that could be closed tonight. By November 19, if Council has not adopted a rate order, Houston Lighting and Power will be able to put into effect its proposed rates by posting bonds. Council would need to adopt a rate order by December 19 or extend its suspension order to preclude Houston Lighting and Power's proposed rate from taking effect at that time. If Council decides to suspend the rates for an additional period before December 19, the Council's final deadline would be January 18, 1979. Council would need to adopt a rate ordinance by that time or Houston Lighting and Power's proposed rates would go into effect. With no further testimony to be heard, Mayor Hutto closed the public hearing. Minutes of the Special Meeting - October 19, 1978 Mr. Bounds explained that Council could expect a ruling from the Public Utilities Commission prior to the bonding date. Mr. Bounds suggested that in order for Council to receive information that they might require before directing the Admin- istration to prepare a rate ordinance, it would be advisable to have another work session prior to or at the first meeting in November. After Lhis work session Council could decide on what action to take. Councilman Kloesel asked that this item be placed on the agenda for the next meeting in order that Council may receive a briefing from the City Attorney. Mayor Hutto suggested that a work session be scheduled for November 1 or November 2 however, Councilman Kloesel preferred a briefing be scheduled for the next Council meeting. At that time Council may schedule a work session if necessary. Councilman Lander commented that Council should be prepared to set a rate ordinance before November 19. Mayor Hutto stated that an item will be placed on the agenda for the next regular meeting so that Council may receive a briefing from the City Attorney and to discuss setting a rate ordinance. Councilman Lander suggested that the Council members read over the information that they received and after studying the information, contact the City Attorney to advise him of what kind of information is needed. Councilman Kloesel explained that the guidance he wanted from the City Attorney was background information on setting a rate order. Mr. Lanham said that the Administration can make a comparison of the recommendations of Houston Lighting and Power and those of the consultants, and spell out the steps that must be taken in order to get to the point of adopting a rate ordinance within the time restraints, but beyond that, it might be hard to give more information. Adjourn With no further business to be transacted, Councilman Kloesel moved to adjourn; Councilman Johnson seconded the motion. The vote for adjournment was unanimous. tP, Q:r - — -,--8 Karen Petru, Deputy City Clerk APPROVED: 49ileen P. Hall, City Clerk