| (a) Components of cost of service. Rates are based
upon a utility's cost of rendering service. The two components of
cost of service are allowable expenses and return on rate base.
(b) Allowable expenses. Only those expenses that are
reasonable and necessary to provide service to the ratepayers may
be included in allowable expenses. In computing a utility's allowable
expenses, only the utility's test year expenses as adjusted for known
and measurable changes will be considered. A change in rates must
be based on a test year as defined in §24.3(37) of this title,
relating to Definitions of Terms. Payments to affiliated interests
for costs of service, or any property, right, or thing, or for interest
expense are not allowed as an expense for cost of service except as
provided in Texas Water Code (TWC) §13.185(e).
(1) Components of allowable expenses. Allowable expenses,
to the extent they are reasonable and necessary, may include, but
are not limited to, the following general categories:
(A) Operations and maintenance expense incurred in
furnishing normal utility service and in maintaining utility plant
used by and useful to the utility in providing such service.
(B) Depreciation expense based on original cost and
computed on a straight-line basis over the useful life of the asset
as approved by the commission.
(i) Depreciation expense is allowed on all currently
used and useful depreciable utility property owned by the utility
and depreciable utility plant, property and equipment retired by the
utility, subject to the requirements of subparagraph (c)(2)(C) of
this section. Depreciation expense is not allowed for property provided
under explicit customer agreements or funded by customer contributions
in aid of construction. Depreciation expense is allowed for all currently
used and useful developer or governmental entity contributed property.
A utility must calculate depreciation on a straight-line basis over
the expected or remaining life of the asset, but is not required to
use the remaining life method if salvage value is zero. A utility
that does not use group depreciation and proposes to change the useful
life of an asset with an accumulated depreciation balance must not
change the accumulated depreciation balance and must adjust depreciation
expense going forward based on the changed useful life.
(ii) The depreciation accrual for all assets must account
for expected net salvage value in the calculation of the depreciation
rate and actual net salvage value related to retired plant. The utility
must submit sufficient evidence with the application establishing
that the estimated salvage value, including removal costs, is reasonable.
For a utility that uses group accounting, salvage value will be applied
to the asset group in depreciation studies. For a utility that uses
itemized accounting, salvage value will be applied to specific assets.
(C) Assessments and taxes other than income taxes.
(D) Federal income taxes on a normalized basis. Federal
income taxes must be computed according to the provisions of TWC §13.185(f),
if applicable.
(E) Funds expended in support of membership in professional
or trade associations, provided such associations contribute toward
the professionalism of their membership.
(F) Advertising, contributions and donations. The actual
test year expenditures for advertising, contributions, and donations
may be allowed as a cost of service provided that the total sum of
all such items allowed in the cost of service must not exceed three-tenths
of 1.0% (0.3%) of the gross receipts of the utility for services rendered
to the public. The following expenses are the only expenses that may
be included in the calculation of the three-tenths of 1.0% (0.3%)
maximum:
(i) funds expended advertising methods of conserving
water;
(ii) funds expended advertising methods by which the
consumer can achieve a savings in total utility bills; and
(iii) funds expended advertising water quality protection.
(G) Credit card and electronic payment processing fees.
Expenditures or fees charged by banks or companies for accepting and
processing credit card, debit card or other forms of electronic payment
from customers for water and sewer utility service may be allowed
as a cost of service.
(2) Expenses not allowed. The following expenses are
not allowed as a component of cost of service:
(A) legislative advocacy expenses, whether made directly
or indirectly, including, but not limited to, legislative advocacy
expenses included in professional or trade association dues;
(B) funds expended in support of political candidates;
(C) funds expended in support of any political movement;
(D) funds expended in promotion of political or religious
causes;
(E) funds expended in support of or membership in social,
recreational, fraternal, or religious clubs or organizations;
(F) funds promoting increased consumption of water;
(G) funds expended to mail any parcel or letter containing
any of the items mentioned in subparagraphs (A) - (F) of this paragraph;
(H) interest expense of processing a refund or credit
of sums collected in excess of the rate ordered by the commission;
(I) any expenditure found by the commission to be unreasonable,
unnecessary, or not in the public interest, including, but not limited
to, executive salaries, advertising expenses, rate case expenses,
legal expenses, penalties and interest on overdue taxes, criminal
penalties or fines, and civil penalties or fines; and
(J) the costs of purchasing groundwater from any source
if:
(i) the source of the groundwater is located in a priority
groundwater management area; and
(ii) a wholesale supply of surface water is available.
(c) Return on rate base. The return on rate base is
the rate of return times rate base.
(1) Rate of return. The commission will allow each
utility a reasonable opportunity to earn a reasonable rate of return,
which is expressed as a percentage of invested capital, and will fix
the rate of return in accordance with the following principles.
(A) The return should be reasonably sufficient to assure
confidence in the financial soundness of the utility and should be
adequate, under efficient and economical management, to maintain and
support its credit and enable it to raise the money necessary for
the proper discharge of its public duties.
(B) The commission will consider the utility's cost
of capital, which is the composite of the cost of the various classes
of capital used by the utility.
(i) Debt capital. The cost of debt capital is the actual
cost of debt, plus adjustments for premiums, discounts, and refunding
and issuance costs.
(ii) Equity capital. For companies with ownership expressed
in terms of shares of stock, equity capital commonly consists of the
following classes of stock.
(I) Common stock capital. The cost of common stock
capital must be based upon a fair return on its value.
(II) Preferred stock capital. The cost of preferred
stock capital is its annual dividend requirement, if any, plus an
adjustment for premiums, discounts, and cost of issuance.
(C) The commission will consider the efforts and achievements
of the utility in the conservation of resources, the quality of the
utility's services, the efficiency of the utility's operations, and
the quality of the utility's management, along with other relevant
conditions and practices.
(D) The commission may consider inflation, deflation,
the growth rate of the service area, and the need for the utility
to attract new capital.
(2) Rate base. The rate of return is applied to the
rate base. Assets retired before June 19, 2009, must be removed from
rate base before the rate of return is applied to the rate base. Components
to be included in determining the rate base are as follows:
(A) If a utility or its facilities were valued using
the process for establishing fair market value in Texas Water Code
(TWC) §13.305, the dollar value of the "ratemaking rate base,"
as defined in TWC §13.305(a)(2) and §24.238(b)(4) of this
title, relating to Fair Market Valuation, less accumulated depreciation.
(i) The installation date of the ratemaking rate base
is the filing date of the commission's final order approving the acquisition
of the ratemaking rate base in an application filed under TWC §13.301.
(ii) The ratemaking rate base will include an accrual
for Allowance for Funds Used During Construction (AFUDC), as defined
in §24.238(b)(2) of this title, relating to Fair Market Valuation,
for any post-acquisition improvements to the ratemaking rate base.
The accrual will begin on the date the improvement cost was incurred
and end on the earlier of:
(I) the fourth anniversary of the date the improvement
was placed in service; or
Cont'd... |
