By Seidlits H.B. No. 2225
A BILL TO BE ENTITLED
1-1 AN ACT
1-2 relating to the components of invested capital and net income used
1-3 in establishing rates of a public utility.
1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-5 SECTION 1. Section 39(a), Public Utility Regulatory Act
1-6 (Article 1446c, Vernon's Texas Civil Statutes), is amended to read
1-7 as follows:
1-8 Sec. 39 (a) In fixing the rates of a public utility the
1-9 regulatory authority shall fix its overall revenues at a level
1-10 which will permit such utility a reasonable opportunity to earn a
1-11 reasonable return on its invested capital used and useful in
1-12 rendering service to the public over and above its reasonable and
1-13 necessary operating expenses. Reasonable and necessary operating
1-14 expenses shall include an amount of income taxes calculated as
1-15 provided in Sections 27(e) and 41(c)(2) and (3) of this Act.
1-16 SECTION 2. Section 41(a) and 41(c)(2) and (3), Public
1-17 Utility Regulatory Act (Article 1446c, Vernon's Texas Civil
1-18 Statutes), is amended to read as follows:
1-19 Sec. 41. The components of invested capital and net income
1-20 shall be determined according to the following rules:
1-21 (a) Invested Capital. Utility rates shall be based upon the
1-22 original cost of property used by and useful to the public utility
1-23 in providing service including construction work in progress at
2-1 cost as recorded on the books of the utility. The inclusion of
2-2 construction work in progress is an exceptional form of rate relief
2-3 to be granted only upon the demonstration by the utility that such
2-4 inclusion is necessary to the financial integrity of the utility.
2-5 Construction work in progress shall not be included in the rate
2-6 base for major projects under construction to the extent that such
2-7 projects have been inefficiently or imprudently planned or managed.
2-8 Original cost shall be the actual money cost, or the actual money
2-9 value of any consideration paid other than money, of the property
2-10 at the time it shall have been dedicated to public use, whether by
2-11 the utility which is the present owner or by a predecessor, less
2-12 depreciation. Invested Capital shall not include tax effects
2-13 associated with costs which were not incurred by the public utility
2-14 or included in the utility's reasonable and necessary operating
2-15 expenses.
2-16 (b) Separations and Allocations. Costs of facilities,
2-17 revenues, expenses, taxes, and reserves shall be separated or
2-18 allocated as prescribed by the regulatory authority.
2-19 (c) Net Income. By "net income" is meant the total revenues
2-20 of the public utility less all reasonable and necessary expenses as
2-21 determined by the regulatory authority. The regulatory authority
2-22 shall determine expenses and revenues in a manner consistent with
2-23 the following:
2-24 (1) Transactions with Affiliated Interests. Payment
2-25 to affiliated interests for costs of any services, or any property,
3-1 right or thing, or for interest expense shall not be allowed either
3-2 as capital cost or as expense except to the extent that the
3-3 regulatory authority shall find such payment to be reasonable and
3-4 necessary for each item or class of items as determined by the
3-5 commission. Any such finding shall include specific findings of
3-6 the reasonableness and necessity of each item or class of items
3-7 allowed and a finding that the price to the utility is no higher
3-8 than prices charged by the supplying affiliate to its other
3-9 affiliates or divisions for the same item or class of items, or to
3-10 unaffiliated persons or corporations.
3-11 (2) Income Taxes. Income taxes to be included in the
3-12 authorized cost of service by the regulatory authority shall relate
3-13 exclusively to the level of return on the public utility's invested
3-14 capital included in the utility's cost of service and its
3-15 reasonable and necessary operating expenses included in the
3-16 utility's cost of service. If the public utility is a member of an
3-17 affiliated group that is eligible to file a consolidated income tax
3-18 return, and if it is advantageous to the public utility to do so,
3-19 income taxes shall be computed as though a consolidated return had
3-20 been so filed and the utility had realized its fair share of the
3-21 savings resulting from the consolidated return, unless it is shown
3-22 to the satisfaction of the regulatory authority that it was
3-23 reasonable to choose not to consolidate returns. If the filing of
3-24 a consolidated income tax return results in tax savings for the
3-25 consolidated group, the savings shall be allocated to the member(s)
4-1 that generated the tax deductions or credits that gave rise to the
4-2 savings. The amounts of income taxes saved by a consolidated group
4-3 of which a public utility is a member by reason of the elimination
4-4 in the consolidated return of the intercompany profit on purchases
4-5 by the public utility from an affiliate shall be applied to reduce
4-6 the cost of the property or services so purchased. The investment
4-7 tax credit allowed against federal income taxes, to the extent
4-8 retained by the utility, shall be applied as a reduction in the
4-9 rate based contribution of the assets to which such credit applies,
4-10 to the extent and at such rate as allowed by the Internal Revenue
4-11 Code.
4-12 (3) Expenses Disallowed. The regulatory
4-13 authority shall not consider for ratemaking purposes, including the
4-14 computation of income tax expense or savings, the following
4-15 expenses:
4-16 (A) legislative advocacy expenses, whether made
4-17 directly or indirectly, including but not limited to legislative
4-18 advocacy expenses included in trade association dues;
4-19 (B) payments, except those made under an insurance or
4-20 risk-sharing arrangement executed before the date of loss, made to
4-21 cover costs of an accident, equipment failure, or negligence at a
4-22 utility facility owned by a person or governmental body not selling
4-23 power inside the State of Texas;
4-24 (C) Costs of processing a refund or credit under
4-25 Subsection (e) of Section 43 of this Act; or
5-1 (D) any expenditure found by the regulatory authority
5-2 to be unreasonable, unnecessary, or not in the public interest,
5-3 including but not limited to executive salaries, advertising
5-4 expenses, legal expenses, and civil penalties or fines.
5-5 The regulatory authority may promulgate reasonable
5-6 rules and regulations with respect to the allowance or disallowance
5-7 of any expenses for ratemaking purposes.
5-8 SECTION 3. The purpose of this Act is to clarify existing
5-9 law, and to express the original intention of the Legislature, in
5-10 light of recent court opinions which have misconstrued the original
5-11 intent of the Legislature and have misinterpreted the existing law
5-12 with regard to the proper treatment of income tax expenses for
5-13 ratemaking purposes.
5-14 SECTION 4. This Act shall govern all proceedings, orders,
5-15 judgments and decrees in rate applications pending or subject to
5-16 appeal as of the date of enactment of this Act, before any
5-17 regulatory authority or court, and to all rate applications filed
5-18 hereafter.
5-19 SECTION 5. The importance of this legislation and the
5-20 crowded condition of the calendars in both houses create an
5-21 emergency and an imperative public necessity that the
5-22 constitutional rule requiring bills to be read on three several
5-23 days in each house be suspended, and this rule is hereby suspended,
5-24 and that this Act take effect and be in force from and after its
5-25 passage, and it is so enacted.