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