BILL ANALYSIS

Senate Research Center	H.B. 2774
88R8719 JXC-F	By: Thompson, Ed (Nichols)
	Water, Agriculture & Rural Affairs
	5/5/2023
	Engrossed

AUTHOR'S / SPONSOR'S STATEMENT OF INTENT

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. H.B. 2774 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.

H.B. 2774 amends current law relating to the treatment of income tax expenses in rate proceedings for water and sewer utilities.

RULEMAKING AUTHORITY

This bill does not expressly grant any additional rulemaking authority to a state officer, institution, or agency.

SECTION BY SECTION ANALYSIS

SECTION 1. Amends Section 13.185(f), Water Code, as follows:

(f) Requires that the related income tax benefit, if an expense is allowed to be included in utility rates or an investment is included in the utility rate base, be included in the computation of income tax expense to reduce the rates. Prohibits the related income tax benefit, if an expense is not allowed to be included in utility rates or an investment is not included in the utility rate base, from being included in the computation of income tax expense to reduce the rates.� Requires that the income tax expense be computed using the statutory income tax rates. Requires that the amount of income tax that a consolidated group of which a utility is a member saves, because the consolidated return eliminates the intercompany profit on purchases by the utility from an affiliate, be applied to reduce the cost of the property or service purchased from the affiliate.

Deletes existing text requiring that income taxes, if a utility is a member of an affiliated group that is eligible to file a consolidated income tax return and if it is advantageous to the utility to do so, be computed as though a consolidated return had been filed and the utility had realized its fair share of the savings resulting from the consolidated return, unless it is shown to the satisfaction of the regulatory authority that it was reasonable to choose not to consolidate returns. Deletes existing text requiring that the amounts of income taxes saved by a consolidated group of which a utility is a member due to the elimination in the consolidated return of the intercompany profit on purchases by the utility from an affiliate be applied to reduce the cost of those purchases.

SECTION 2. Makes application of this Act prospective.

SECTION 3. Effective date: September 1, 2023.