16 Tex. Admin. Code § 25.231 - Cost of Service
(a) Components of
cost of service. Except as provided for in subsection (c)(2) of this section,
relating to invested capital; rate base, and §23.23(b) of this title,
(relating to Rate Design), rates are to be based upon an electric utility's
cost of rendering service to the public during a historical test year, adjusted
for known and measurable changes. The two components of cost of service are
allowable expenses and return on invested capital.
(b) Allowable expenses. Only those expenses
which are reasonable and necessary to provide service to the public will be
included in allowable expenses. In computing an electric utility's allowable
expenses, only the electric utility's historical test year expenses as adjusted
for known and measurable changes will be considered, except as provided for in
any section of these rules dealing with fuel expenses.
(1) Components of allowable expenses.
Allowable expenses, to the extent they are reasonable and necessary, and
subject to this section, may include, but are not limited to the following
general categories:
(A) Operations and
maintenance expense incurred in furnishing normal electric utility service and
in maintaining electric utility plant used by and useful to the electric
utility in providing such service to the public. Payments to affiliated
interests for costs of service, or any property, right or thing, or for
interest expense will not be allowed as an expense for cost of service except
as provided in the Public Utility Regulatory Act §36.058.
(B) Depreciation expense based on original
cost and computed on a straight line basis as approved by the commission. Other
methods of depreciation may be used when it is determined that such
depreciation methodology is a more equitable means of recovering the cost of
the plant.
(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 the Public Utility Regulatory Act
§36.060.
(E) Advertising,
contributions and donations. The actual expenditures for ordinary 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 electric utility for
services rendered to the public. The following expenses must be included in the
calculation of the three-tenths of 1.0% (0.3%) maximum:
(i) funds expended advertising methods of
conserving energy;
(ii) funds
expended advertising methods by which the consumer can effect a savings in
total electric utility bills;
(iii)
funds expended advertising methods to shift usage off of system peak;
and
(iv) funds expended promoting
renewable energy.
(F)
Nuclear decommissioning expense. The following restrictions must apply to the
inclusion of nuclear decommissioning costs that are placed in an electric
utility's cost of service.
(i) An electric
utility owning or leasing an interest in a nuclear-fueled generating unit must
include its cost of nuclear decommissioning in its cost of service. Funds
collected from ratepayers for decommissioning must be deposited monthly in
irrevocable trusts external to the electric utility, in accordance with §
25.301 of this title (relating to
Nuclear Decommissioning Trusts). All funds held in short-term investments must
bear interest. The level of the annual cost of decommissioning for ratemaking
purposes will be determined in each rate case based on an allowance for
contingencies of 10% of the cost of decommissioning, the most current
information reasonably available regarding the cost of decommissioning, the
balance of funds in the decommissioning trust, anticipated escalation rates,
the anticipated return on the funds in the decommissioning trust, and other
relevant factors. The annual amount for the cost of decommissioning determined
pursuant to the preceding sentence must be expressly included in the cost of
service established by the commission's order.
(ii) In the event that an electric utility
implements an interim rate increase, including an increase filed under bond, an
incremental change in decommissioning funding must be included in the
increase.
(iii) An electric
utility's decommissioning fund and trust balances will be reviewed in general
rate cases. In the event that an electric utility does not have a rate case
within a five-year period, the commission, on its own motion or on the motion
of commission staff, the Office of Public Utility Counsel, or any affected
person, may initiate a proceeding to review the electric utility's
decommissioning cost study and plan, and the balance of the trust.
(iv) An electric utility must perform, or
cause to be performed, a study of the decommissioning costs of each nuclear
generating unit that it owns or in which it leases an interest. A study or a
redetermination of the previous study must be performed at least every five
years. The study or redetermination should consider the most current
information reasonably available on the cost of decommissioning. A copy of the
study or redetermination must be filed with the commission and a copy provided
to the Office of Public Utility Counsel. An electric utility's most recent
decommissioning study or redeterminations must be filed with the commission
within 30 days of the effective date of this subsection. The five-year
requirement for a new study or redetermination must begin from the date of the
last study or redetermination.
(G) Accruals credited to reserve accounts for
self-insurance under a plan requested by an electric utility and approved by
the commission. The commission may consider approval of a self insurance plan
in a rate case in which expenses or rate base treatment are requested for a
such a plan. For the purposes of this section, a self insurance plan is a plan
providing for accruals to be credited to reserve accounts. The reserve accounts
are to be charged with property and liability losses which occur, and which
could not have been reasonably anticipated and included in operating and
maintenance expenses, and are not paid or reimbursed by commercial insurance.
The commission will approve a self insurance plan to the extent it finds it to
be in the public interest. In order to establish that the plan is in the public
interest, the electric utility must present a cost benefit analysis performed
by a qualified independent insurance consultant who demonstrates that, with
consideration of all costs, self-insurance is a lower-cost alternative than
commercial insurance and the ratepayers will receive the benefits of the self
insurance plan. The cost benefit analysis must present a detailed analysis of
the appropriate limits of self insurance, an analysis of the appropriate annual
accruals to build a reserve account for self insurance, and the level at which
further accruals should be decreased or terminated.
(H) Postretirement benefits other than
pensions (known in the electric utility industry as "OPEB"). For ratemaking
purposes, expense associated postretirement benefits other than pensions (OPEB)
must be treated as follows:
(i) OPEB expense
must be included in an electric utility's cost of service for ratemaking
purposes based on actual payments made.
(ii) An electric utility may request a
one-time conversion to inclusion of current OPEB expense in cost of service for
ratemaking purposes on an accrual basis in accordance with generally accepted
accounting principles (GAAP). Rate recognition of OPEB expense on an accrual
basis must be made only in the context of a full rate case.
(iii) An electric utility will not be allowed
to recover current OPEB expense on an accrual basis until GAAP requires that
electric utility to report OPEB expense on an accrual basis.
(iv) For ratemaking purposes, the transition
obligation must be amortized over 20 years.
(v) OPEB amounts included in rates must be
placed in an irrevocable external trust fund dedicated to the payment of OPEB
expenses. The trust must be established no later than six months after the
order establishing the OPEB expense amount included in rates. The electric
utility must make deposits to the fund at least once per year. Deposits on the
fund must include, in addition to the amount included in rates, an amount equal
to fund earnings that would have accrued if deposits had been made monthly. The
funding requirement can be met with deposits made in advance of the recognition
of the expense for ratemaking purposes. The electric utility must, to the
extent permitted by the Internal Revenue Code, establish a postretirement
benefit plan that allows for current federal income tax deductions for
contributions and allows earnings on the trust funds to accumulate tax
free.
(vi) When an electric utility
terminates an OPEB trust fund established pursuant to clause (v) of this
subparagraph, it must notify the commission in writing. If excess assets remain
after the OPEB trust fund is terminated and all trust related liabilities are
satisfied, the electric utility must file, for commission approval, a proposed
plan for the distribution of the excess assets. The electric utility must not
distribute any excess assets until the commission approves the disbursement
plan.
(2)
Expenses not allowed. The following expenses must never be 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 promoting 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 electricity;
(G) additional funds expended to mail any
parcel or letter containing any of the items mentioned in subparagraphs (A)-(F)
of this paragraph;
(H) payments,
except those made under an insurance or risk-sharing arrangement executed
before the date of the loss, made to cover costs of an accident, equipment
failure, or negligence at an electric utility facility owned by a person or
governmental body not selling power within the State of Texas;
(I) costs, including, but not limited to,
interest expense, of processing a refund or credit of sums collected in excess
of the rate finally ordered by the commission in a case where the electric
utility has put bonded rates into effect, or when the electric utility has
otherwise been ordered to make refunds;
(J) 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, legal expenses,
penalties and interest on overdue taxes, criminal penalties or fines, and civil
penalties or fines.
(c) Return on invested capital. The return on
invested capital is the rate of return times invested capital.
(1) Rate of return. The commission will allow
each electric 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 electric
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. A rate of return may be reasonable
at one time and become too high or too low because of changes affecting
opportunities for investment, the money market, and business conditions
generally.
(B) The commission will
consider efforts by the electric utility to comply with the statewide
integrated resource plan, the efforts and achievements of the electric utility
in the conservation of resources, the quality of the electric utility's
services, the efficiency of the electric utility's operations, and the quality
of the electric utility's management, along with other applicable conditions
and practices.
(C) The commission
may, in addition, consider inflation, deflation, the growth rate of the service
area, and the need for the electric utility to attract new capital. The rate of
return must be high enough to attract necessary capital but need not go beyond
that. In each case, the commission will consider the electric utility's cost of
capital, which is the weighted average of the costs of the various classes of
capital used by the electric utility.
(i) Debt
capital. The cost of debt capital is the actual cost of debt at the time of
issuance, 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 market value.
(II) Preferred stock capital. The cost of
preferred stock capital is the actual cost of preferred stock at the time of
issuance, plus an adjustment for premiums, discounts, and refunding and
issuance costs.
(2) Invested capital; rate base. The rate of
return is applied to the rate base. The rate base, sometimes referred to as
invested capital, includes as a major component the original cost of plant,
property, and equipment, less accumulated depreciation, used and useful in
rendering service to the public. Components to be included in determining the
overall rate base are as set out in subparagraphs (A)-(F) of this paragraph.
(A) Original cost, less accumulated
depreciation, of electric utility plant used by and useful to the electric
utility in providing service.
(i) Original
cost must be the actual money cost, or the actual money value of any
consideration paid other than money, of the property at the time it would have
been dedicated to public use, whether by the electric utility which is the
present owner or by a predecessor.
(ii) Reserve for depreciation is the
accumulation of recognized allocations of original cost, representing recovery
of initial investment, over the estimated useful life of the asset.
Depreciation must be computed on a straight line basis or by such other method
approved under subsection (b)(1)(B) of this section over the expected useful
life of the item or facility.
(iii)
Payments to affiliated interests must not be allowed as a capital cost except
as provided in the Public Utility Regulatory Act §36.058.
(B) Working capital allowance to
be composed of, but not limited to the following:
(i) Reasonable inventories of materials,
supplies, and fuel held specifically for purposes of permitting efficient
operation of the electric utility in providing normal electric utility service.
This amount excludes appliance inventories and inventories found by the
commission to be unreasonable, excessive, or not in the public
interest.
(ii) Reasonable
prepayments for operating expenses. Prepayments to affiliated interests will be
subject to the standards set forth in the Public Utility Regulatory
§36.058.
(iii) A reasonable
allowance for cash working capital. The following applies in determining the
amount to be included in invested capital for cash working capital:
(I) Cash working capital for electric
utilities must in no event be greater than one-eighth of total annual
operations and maintenance expense, excluding amounts charged to operations and
maintenance expense for materials, supplies, fuel, and prepayments.
(II) For electric cooperatives, river
authorities, and investor-owned electric utilities that purchase 100% of their
power requirements, one-eighth of operations and maintenance expense excluding
amounts charged to operations and maintenance expense for materials, supplies,
fuel, and prepayments will be considered a reasonable allowance for cash
working capital.
(III) Operations
and maintenance expense does not include depreciation, other taxes, or federal
income taxes, for purposes of subclauses (I), (II), and (V) of this
clause.
(IV) For all investor-owned
electric utilities a reasonable allowance for cash working capital, including a
request of zero, will be determined by the use of a lead-lag study. A lead-lag
study will be performed in accordance with the following criteria:
(-a-) The lead-lag study will use the cash
method; all non-cash items, including but not limited to depreciation,
amortization, deferred taxes, prepaid items, and return (including interest on
long-term debt and dividends on preferred stock), will not be
considered.
(-b-) Any reasonable
sampling method that is shown to be unbiased may be used in performing the
lead-lag study.
(-c-) The check
clear date, or the invoice due date, whichever is later, will be used in
calculating the lead-lag days used in the study. In those cases where multiple
due dates and payment terms are offered by vendors, the invoice due date is the
date corresponding to the terms accepted by the electric utility.
(-d-) All funds received by the electric
utility except electronic transfers must be considered available for use no
later than the business day following the receipt of the funds in any
repository of the electric utility (e.g. lockbox, post office box, branch
office). All funds received by electronic transfer will be considered available
the day of receipt.
(-e-) For
electric utilities the balance of cash and working funds included in the
working cash allowance calculation must consist of the average daily bank
balance of all non-interest bearing demand deposits and working cash
funds.
(-f-) The lead on federal
income tax expense must be calculated by measurement of the interval between
the mid-point of the annual service period and the actual payment date of the
electric utility.
(-g-) If the cash
working capital calculation results in a negative amount, the negative amount
must be included in rate base.
(V) If cash working capital is required to be
determined by the use of a lead-lag study under the previous subclause and
either the electric utility does not file a lead lag study or the electric
utility's lead-lag study is determined to be so flawed as to be unreliable, in
the absence of persuasive evidence that suggests a different amount of cash
working capital, an amount of cash working capital equal to negative one-eighth
of operations and maintenance expense including fuel and purchased power will
be presumed to be the reasonable level of cash working capital.
(C) Deduction of
certain items which include, but are not limited to, the following:
(i) accumulated reserve for deferred federal
income taxes;
(ii) unamortized
investment tax credit to the extent allowed by the Internal Revenue
Code;
(iii) contingency and/or
property insurance reserves;
(iv)
contributions in aid of construction;
(v) customer deposits and other sources of
cost-free capital;
(D)
Construction work in progress (CWIP). The inclusion of construction work in
progress is an exceptional form of rate relief. Under ordinary circumstances
the rate base must consist only of those items which are used and useful in
providing service to the public. Under exceptional circumstances, the
commission will include construction work in progress in rate base to the
extent that:
(i) the electric utility has
proven that:
(I) the inclusion is necessary to
the financial integrity of the electric utility; and
(II) major projects under construction have
been efficiently and prudently planned and managed. However, construction work
in progress must not be allowed for any portion of a major project which the
electric utility has failed to prove was efficiently and prudently planned and
managed; or
(ii) for a
project ordered by the commission under §
25.199 of this title (relating to
Transmission Planning, Licensing and Cost-recovery for Utilities within the
Electric Reliability Council of Texas), if the commission determines that
conditions warrant the inclusion of CWIP in rate base, the project is being
efficiently and prudently planned and managed, and there will be a significant
delay between initial investment and the initial cost recovery for a
transmission project.
(E) Self-insurance reserve accounts. If a
self insurance plan is approved by the commission, any shortages to the reserve
account will be an increase to the rate base and any surpluses will be a
decrease to the rate base. The electric utility must maintain appropriate books
and records to permit the commission to properly review all charges to the
reserve account and determine whether the charges being booked to the reserve
account are reasonable and correct.
(F) Requirements for post test year
adjustments.
(i) Post test year adjustments
for known and measurable rate base additions (increases) to historical test
year data will be considered only as set out in subclauses (I)-(IV) of this
clause.
(I) Where the addition represents
plant which would appropriately be recorded:
(-a-) for investor-owned electric utilities
in FERC account 101 or 102;
(-b-)
for electric cooperatives, the equivalent of FERC accounts 101 or
102.
(II) Where each
addition comprises at least 10% of the electric utility's requested rate base,
exclusive of post test year adjustments and CWIP.
(III) Where the plant addition is deemed by
this commission to be in-service before the rate year begins.
(IV) Where the attendant impacts on all
aspects of a utility's operations (including but not limited to, revenue,
expenses and invested capital) can with reasonable certainty be identified,
quantified and matched. Attendant impacts are those that reasonably follow as a
consequence of the post test year adjustment being proposed.
(ii) Each post test year plant
adjustment will be included in rate base at:
(I) the reasonable test year-end CWIP
balance, if the addition is constructed by the electric utility; or,
(II) the reasonable price, if the addition
represents a purchase, subject to original cost requirements, as specified in
Public Utility Regulatory Act §36.053.
(iii) Post test year adjustments for known
and measurable rate base decreases to historical test year data will be allowed
only when clause (i)(IV) of this subparagraph and the criteria described in
subclauses (I) and (II) of this clause are satisfied.
(I) The decrease represents:
(-a-) plant which was appropriately recorded
in the accounts set forth in clause (i)(I) of this subparagraph;
(-b-) plant held for future use;
(-c-) CWIP (mirror CWIP is not considered
CWIP); or
(-d-) an attendant impact
of another post test year adjustment.
(II) Plant that has been removed from
service, mothballed, sold, or removed from the electric utility's books prior
to the rate year.
Notes
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