Item 2- Draft Recommendation TGS Franchise 1 of 2 Revised — original pdf

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PROPOSED AMENDMENTS Resource Management Commission 20260120-02 Recommendation on Texas Gas Service Franchise Introduction The City of Austin (The City) has a 20-year franchise agreement with Texas Gas Service (TGS), which is the company’s license to operate in the city limits. That franchise agreement expires in October of 2026. The renewal of the franchise is a once-in-a-generation opportunity to correct or reform longstanding problems that include high rates, high fuel costs, poorly designed rate structures, poorly performing energy conservation programs, scant funding to assist low-income ratepayers, and lack of progress in shrinking the company’s carbon footprint with the company. 1.0 Selection of Company and Term of Franchise WHEREAS, Texas Gas Service, the fifth consecutive owner of the main private gas utility that has provided service in the city limits of Austin since the 1870s, has never participated in a competitive process to determine if the company offers ratepayers adequate or better service; and WHEREAS, the current term of the franchise is 20 years (a 10-year initial period with a subsequent 10-year automatic renewal with minimal conditions), is too long a time period to lapse without a revised regulatory agreement; and 1.1 High and Inequitable Rates WHEREAS, Texas Gas Service (TGS) residential gas rates have gone up about 132% 108% between 2016 2019 and 2025, which is 96 79% above inflation; and WHEREAS, Texas Gas Service has proposed three rate increases since 2024; and WHEREAS, these rate increases are largely driven by the cost of capital expansion or improvements of the system, and no city or state regulator has the ability to prevent these expenditures prior to their occurrence; and WHEREAS, TGS does not collect full payment for new infrastructure (known as Contribution in Aid of Construction or Capital Recovery Fees) required for new customers, thus subsidizing new customers while increasing gas bills of existing customers; and WHEREAS, when Austin Energy and Austin Water implemented full capital recovery fees, they experienced rate decreases; and WHEREAS, the recent combination of TGS Central Texas and Gulf Coast regions for purposes of ratemaking has raised Austin’s bills while lowering bills in the Coastal region; and 1.2 Rate Structure (Conservation-Based Rates that Also Help Low-Income Customers) WHEREAS, Austin’s municipal utilities have progressive tiered rates that charge less per unit for less usage, while Texas Gas Service has historically maintained a regressive flat rate, which discourages conservation and adversely affects lower-income ratepayers who typically consume less energy; and 1.3 1.2 Low-Income Assistance WHEREAS, TGS currently has no customer assistance program that reduces monthly gas bills for low-income customers; and WHEREAS, TGS only provides minimal funding for emergency bill payments for low-income customers; and WHEREAS, in contrast, Austin Energy and Austin Water provide substantial funding for these kinds of low-income assistance; and 1.4 1.3 High Fuel Costs WHEREAS, fuel costs, which are added to rates as part of the total gas bill, have spiked in recent years due to increased storage and pipeline demand charges; adding to affordability problems; and 1.5 Securitization Costs WHEREAS, the $3.5 billion for gas purchased under predatory conditions that occurred during Winter Storm Uri was so expensive that the costs were amortized over 16 years, and Austin TGS residential ratepayers will pay about $38 a year until the debt is retired (in about 2039); and WHEREAS, neither TGS or the City of Austin (which itself consumes natural gas) have never legally challenged these outrageous costs; and 1.6 1.4 Franchise Fees WHEREAS, the City of Austin levies a 5% franchise fee on the gross receipts of rates and normal fuel costs, which support the City’s General Fund services; and WHEREAS, when fuel costs go up because of predatory fuel costs, the City receives a windfall franchise fee that magnifies that financial pain for consumers; and WHEREAS, the City exempts franchise fee collections from public entities (including governments, educational institutions, and hospitals that provide indigent health care), which does not always occur in other Texas cities; and 1.7 1.5 Energy Conservation WHEREAS, TGS Texas Gas Service (TGS) has been planning and operating rResidential energy conservation incentive programs that do not pay for themselves in reduced fuel costs or reduced fuel consumption 2; and WHEREAS, some of these conservation programs are more effective largely targeted at marketing gas appliances rather than assisting consumers with cost-effective energy savings energy efficiency 3; and WHEREAS, TGS conservation program incentives are, on average, much higher than those offered by other gas utilities around the country 4; and WHEREAS, Austin Energy already runs similar conservation programs for energy efficiency building improvements and serves most of the same customers as TGS. Austin’s programs have proven much more successful at achieving cost-effective energy savings than TGS' programs; and WHEREAS, there is precedent for the City of Austin to operate a gas utility conservation program, which took place between 1987 and 1997; and WHEREAS, TGS is currently in violation of its franchise, which requires it to implement energy conservation programs as part of its normal operations; and 1.6 Leak Detection and Repair WHEREAS, methane leaks are an inherent risk in the operation of gas utilities and can pose significant safety concerns for people, businesses and infrastructure; and WHEREAS, it is in the interest of the residents of the City of Austin to have visibility into the frequency and severity of methane leaks and the mitigation and repair procedures being employed to minimize the risk; and WHEREAS, minimum leak detection standards are established by federal and state law and the City’s current franchise agreements include only general provisions requiring gas utilities to comply with applicable federal and state regulations; and WHEREAS, the public has limited visibility into the efforts to detect and reduce leaks, the effectiveness of such efforts, the frequency, duration, and persistence of non-hazardous leaks, and the volume of methane emissions from ongoing leaks; and WHEREAS, current advanced leak detection and repair (LDAR) programs may include highly sensitive vehicle-mounted detectors, infrared optical imaging and other methodologies, but are continuously evolving; THEN BE IT THEREFORE RESOLVED that the City’s Resource Management Commission recommends that the Austin City Council implement the following policies related to the new Texas Gas Service franchise agreement: 2.0 Selection of Company and Term of Franchise • Instead of only negotiating with Texas Gas Service, the City of Austin should conduct a competitive bidding process from other utilities, with Austin Energy being one of the contenders. • tThe new franchise agreement should be limited to a 10-year term with a firm expiration date and no automatic renewal, as a shorter term will ensure greater regulatory accountability. • Over the proposed 10-year period of the next franchise, the City should consider alternative strategies to lower rates, including municipalization and competitive bidding by other gas utilities. • The agreement should maintain the City's option to purchase distribution system throughout the entirety of the franchise term. 2.1 High and Inequitable Rates In order to deal with high and constantly increasing rates, the new franchise agreement should include the following: • Henceforth, the City of Austin should demand preapproval of all capital expenditures relevant to its rates. • The City should oppose mergers of the Central-Gulf region with other TGS regions. If such a merger occurs during the 2025 rate case, Austin should require that the merger impacts as they concern the City be reversed. • Austin should demand full capital recovery fees for new hookups and developments in the same manner that it employs for its municipal electric and water utilities. This model should emulate how Austin Water collects water infrastructure improvements for the entire system from new customers as well as the infrastructure for the local infrastructure specific to these new customers.1 • Because TGS’s capital costs in all of its Texas service areas are merged into a single ratebase and allocated to all Texas TGS customers, regardless of where the capital project is located, Austin is concerned about and has a stake in the magnitude and prudence of all TGS capital projects. Therefore, The City of Austin, through the Resource Management Commission and the Austin City Council, should require an annual report by Texas Gas Service of its expected Plant Costs (Capital Improvements) for the coming year prior to their expense. • The City should hire a consultant to review the proposed Plant Costs for prudent expenditures. • This consultant should be funded with either an increased franchise fee or a bill rider similar to the Texas Gas Service’s Conservation Adjustment Charge or Austin Energy’s Community Benefits Charges. • Other large cities served by Texas Gas Service should be encouraged to co-fund this consultant and hold their own review of proposed Plant Costs. • Financial penalties should be specified in the franchise should TGS withhold information from the City or the consultant. 2.2 Rate Structure (Conservation-Based Rates that Also Help Low-Income Customers) • The City of Austin should require Texas Gas Service to implement a progressive residential tiered rate structure with no less than three tiers, and that monthly base-rate fees collect no more than 30% of the total rate base, reflecting the current rate structures of Austin Energy and Austin Water. 2.3 2.2 Low Income Assistance • The City should immediately require TGS to adopt an income-qualified monthly customer assistance program, to be phased in to enroll at least 7% of ratepayers in the Austin city limits by January 2029. This program could be funded with an increased franchise fee, a bill rider, or a modified rate structure. • The City should require TGS to fund at least $500,000 annually (to go up with annual inflation) for income-qualified emergency bill assistance in the Austin city limits, and to fund at least half of this with money paid by shareholders of the company. 2.4 2.3 High Fuel Costs • TGS and the City should investigate ways to lower purchased gas costs, gas storage costs, demand fees, and reservation fees to historical levels, including ownership of relevant infrastructure such as gas storage systems by the gas company or co-ownership by the gas company and Austin Energy, whose customers would also benefit from lower gas costs 2.5 Securitization Costs • Gas companies and City of Austin should consider filing lawsuits to recover the high predatory costs charged during Winter Storm Uri. 2.5 2.4 Franchise Fees • The 5% franchise fee levied by the City of Austin on all fuel revenue should exempt franchise fees on fuel charges when they reach unexpectedly high levels as a form of bill relief. • The City should conduct a benchmark study of large Texas cities to compare the practice of exempting public entities from natural gas utility franchise fees. If the City of Austin is found to be abnormally lenient in collecting franchise fees compared to other large Texas cities, then a phased-in collection of these fees should be enacted. 2.7 2.5 Energy Conservation Programs • Austin should take over planning and management of TGS conservation programs as part of the new franchise agreements, with charges for gas conservation programs paid by TGS. • If the City is not successful in negotiations to take over planning and management of TGS natural gas conservation efforts, then the City should: 1) advertise to gas utility customers when their conservation programs are not cost-effective as part of a consumer protection policy; 2) intervene and provide testimony at the Railroad Commission of Texas to ensure the conservation programs are as cost-effective as possible; 3) prohibit TGS from spending unutilized gas conservation program funds for any other purpose. • These funds should be collected with either an increased franchise fee specific to each rate class of customers or a bill rider similar to the Texas Gas Service’s Conservation Adjustment Charge or Austin Energy’s Community Benefits Charges. The funds from an increased franchise fee or bill rider can be allowed to change from year to year, with a not-to-exceed amount or percentage 5. • Under certain circumstances, increased franchise fee revenue can also be used for Austin Energy’s own energy conservation programs. • All previously collected conservation funds and previously purchased equipment for implementation of the Texas Gas Service program should be transferred to the City of Austin for continued operation of the programs. Previously collected TGS conservation funds should be directed towards low-income home weatherization. 2.6 Leak Detection and Repair The City should require that Texas Gas Service: ● Employ industry-leading advanced leak detection and repair technologies throughout the term of the agreement, including technologies that increase the speed and sensitivity of leak detection, expand the search footprint, reduce response time for gas emergencies, and/or increase the repair speed of leaks within the City, ● Regularly update its LDAR practices to reflect technological advancements, ● Submit annual reports to the City on the performance of its LDAR programs within the City. Information in reports could include but is not limited to: ■ LDAR practices & technology employed including leak detection survey frequency and mitigation strategies ■ Fugitive methane emissions and fugitive methane emissions rate ■ Average response time for gas emergencies ■ Average leak repair time ■ number of leaks repaired and analysis of any patterns of leaks found that could require broader, systematic remediation to improve gas system safety 1 The Commission particularly disagrees that revenue collected from new customers, for example during the first 10 years of their service, can be used as a justification for burdening existing customers by requiring them to subsidize the new development capital expenses. The City should require that this practice ends within the City and that developer contributions reflect the full cost of development so that existing customers are no longer burdened by system expansion. City should require that Austin ratepayers not be billed for uncollected development expenses within or outside of city limits. 2 Evidence sent to the Texas Railroad Commission, “TGS Conservation Letter to RRC,” on August 8, 2025. 3 Ibid. 4 Evidence sent to the Texas Railroad Commission, “2025 – Gas Utility Rebate Survey 1.0.xlsx,” on August 8, 2025. 5 Using 2025 data as a benchmark, funding the current TGS Residential conservation program would require a franchise fee increase from 5% to about 6.5% on the Residential class. Funding the current TGS commercial program would raise the franchise fee from 5% to about 5.35% to 5.7%. These costs were formerly collected with a bill rider.