BILL ANALYSIS

H.B. 2774

By: Thompson, Ed

Natural Resources

Committee Report (Unamended)

BACKGROUND AND PURPOSE

There is a difference in how tax expenses are calculated for water and sewer utility rate proceedings and for electric utility rate proceedings. For electric utility rates, tax expenses are calculated on a standalone basis. Regulated water and sewer utility rates are set based on cost of service which includes operating expenses, such as taxes, and a reasonable return on the utility's rate base. Currently, the tax expense included in a water and sewer utility's cost of service is the lower of either the tax expense based on standalone tax rate or the tax expense calculated using its parent company's tax rate. H.B. 2774 seeks to make the treatment of a water and sewer utility's income tax expenses consistent with the treatment of those expenses for an electric utility by requiring them to be calculated on a standalone basis, regardless of a utility's part in a larger corporation. The bill would also allow for a water and sewer utility's deferred taxes to be recognized for rate setting, thereby lowering cost of service and customer rates.

CRIMINAL JUSTICE IMPACT

It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.

RULEMAKING AUTHORITY

It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution.

ANALYSIS

H.B. 2774 amends the Water Code to establish the following with respect to the treatment of income tax expenses in rate proceedings for water and sewer utilities:

· if an expense is allowed to be included in utility rates or an investment is included in the utility rate base, the related income tax benefit must be included in the computation of income tax expense to reduce the rates;

· if an expense is not allowed to be included in utility rates or an investment is not included in the utility rate base, the related income tax benefit may not be included in the computation of income tax expense to reduce the rates; and

· income tax expense must be computed using statutory income tax rates.

The bill removes a provision requiring such a utility's income taxes to be computed for rate purposes as though a consolidated income tax return had been filed and the utility had realized its fair share of the savings resulting from that return if the utility is a member of an affiliated group eligible to file a consolidated return and it is advantageous to the utility to do so, unless it is shown to the satisfaction of the regulatory authority that it was reasonable to choose not to consolidate returns. The bill applies only to a rate proceeding that begins on or after the bill's effective date.

EFFECTIVE DATE

September 1, 2023.