Texas Administrative Code
Title 16 - ECONOMIC REGULATION
Part 2 - PUBLIC UTILITY COMMISSION OF TEXAS
Chapter 26 - SUBSTANTIVE RULES APPLICABLE TO TELECOMMUNICATIONS SERVICE PROVIDERS
Subchapter J - COSTS, RATES AND TARIFFS
Section 26.201 - Cost of Service
Universal Citation: 16 TX Admin Code § 26.201
Current through Reg. 50, No. 13; March 28, 2025
(a) Application. Unless the context clearly indicates otherwise, in this section the term "utility," insofar as it relates to telecommunications utilities, shall refer to dominant certificated telecommunications utilities (DCTUs).
(b) Components of cost of service. Except as provided for in the Public Utility Regulatory Act (PURA), Chapters 58 and 59, or subsection (d)(2) of this section, relating to invested capital; rate base, rates are to be based upon a 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.
(c) Allowable expenses. Only those expenses which are reasonable and necessary to provide service to the public shall be included in allowable expenses. In computing a utility's allowable expenses, only the utility's historical test year expenses as adjusted for known and measurable changes will be considered.
(1) Components of allowable expenses.
Allowable expenses, to the extent they are reasonable and necessary, and
subject to the rules in this section, 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 to the public. Payments to affiliated interests for costs of service,
or any property, right or thing, or for interest expense shall not be allowed
as an expense for cost of service except as provided in the PURA
§53.058.
(B) Depreciation
expense based on original cost and computed on a straight line basis as
approved by the commission.
(C)
Assessments and taxes other than income taxes.
(D) Federal income taxes on a normalized
basis. Federal income taxes shall be computed according to the provisions of
PURA §53.060.
(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 shall not exceed
three-tenths of 1.0% (0.3%) of the gross receipts of the utility for services
rendered to the public. Funds expended advertising methods by which the
consumer can effect a savings in total utility bills shall be included in the
calculation of the three-tenths of 1.0% (0.3%) maximum.
(F) Accruals credited to reserve accounts for
self insurance under a plan requested by a utility and approved by the
commission. The commission shall consider approval of a self insurance plan in
a rate case in which expenses or rate base treatment are requested for such a
plan. For the purposes of this rule, 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 utility must present a cost benefit analysis performed by a
qualified independent insurance consultant that demonstrates that, with
consideration of all costs, self insurance is a lower cost alternative than
commercial insurance and that the ratepayers will receive the benefits of the
self insurance plan. The cost benefit analysis shall 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.
(G) Postretirement
benefits other than pensions (known in the utility industry as "OPEB"). For
ratemaking purposes, expense associated postretirement benefits other than
pensions (OPEB) shall be treated as follows:
(i) OPEB expense shall be included in a
utility's cost of service for ratemaking purposes based on actual payments
made.
(ii) A 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 shall be made only in the context of a full rate case.
(iii) A utility shall not be allowed to
recover current OPEB expense on an accrual basis until GAAP requires that
utility to report OPEB expense on an accrual basis.
(iv) For ratemaking purposes, the transition
obligation shall be amortized over 20 years.
(v) OPEB amounts included in rates shall be
placed in an irrevocable external trust fund dedicated to the payment of OPEB
expenses. The trust shall be established no later than six months after the
order establishing the OPEB expense amount included in rates. The utility shall
make deposits to the fund no less frequently than annually. Deposits on the
fund shall 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 utility shall, 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 a utility
terminates an OPEB trust fund established pursuant to clause (v) of this
subparagraph, it shall notify the commission in writing. If excess assets
remain after the OPEB trust fund is terminated and all trust related
liabilities are satisfied, the utility shall file, for commission approval, a
proposed plan for the distribution of the excess assets. The utility shall not
distribute any excess assets until the commission approves the disbursement
plan.
(2)
Expenses not allowed. The following expenses shall 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 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) additional funds
expended to mail any parcel or letter containing any of the items mentioned in
subparagraphs (A)-(E) of this paragraph;
(G) 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 utility has
put bonded rates into effect, or when the utility has otherwise been ordered to
make refunds;
(H) 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.
(d) Return on invested capital. The return on invested capital is the rate of return times invested capital.
(1) Rate of return. The commission shall
allow each utility a reasonable opportunity to earn a reasonable rate of
return, which is expressed as a percentage of invested capital, and shall 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. 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 shall 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 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 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 shall consider the utility's cost of capital,
which is the weighted average of the costs of the various classes of capital
used by the 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 shall 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 utility plant used by and useful to the utility in providing
service.
(i) Original cost shall be the
actual money cost, or the actual money value of any consideration paid other
than money, of the property at the time it shall have been dedicated to public
use, whether by the 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 shall be computed on a straight line basis.
(iii) Payments to affiliated interests shall
not be allowed as a capital cost except as provided in PURA
§53.058.
(B)
Working capital allowance to be composed of, but not limited to the following:
(i) Reasonable inventories of materials and
supplies held specifically for purposes of permitting efficient operation of
the utility in providing normal utility service. This amount excludes
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 shall be subject to the standards set forth in PURA
§53.058.
(iii) A reasonable
allowance for cash working capital. The following shall apply in determining
the amount to be included in invested capital for cash working capital:
(I) Cash working capital for all DCTUs shall
in no event be greater than one-twelfth of total annual operations and
maintenance expense, excluding amounts charged to operations and maintenance
expense for materials, supplies, and prepayments.
(II) For telephone cooperatives, one-twelfth
of operations and maintenance expense excluding amounts charged to operations
and maintenance expense for materials, supplies, 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), (V), and (VI) of this clause.
(IV) For all telephone DCTUs with 31,000 or
more access lines, 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 utility.
(-d-) All funds received by the utility
except electronic transfers shall be considered available for use no later than
the business day following the receipt of the funds in any repository of the
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 utilities the balance of cash and
working funds included in the working cash allowance calculation shall 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 shall be calculated by measurement of the
interval between the mid-point of the annual service period and the actual
payment date of the utility.
(-g-)
If the cash working capital calculation results in a negative amount, the
negative amount shall 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 utility does not file a lead lag study or the 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-twelfth of operations
and maintenance expense will be presumed to be the reasonable level of cash
working capital.
(VI) For all
investor-owned telephone DCTUs with fewer than 31,000 access lines, cash
working capital shall be calculated by any method that the commission
determines to be reasonable, subject to subclause (III) of this
clause.
(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. The inclusion of construction work in progress
is an exceptional form of rate relief. Under ordinary circumstances the rate
base shall 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 the
utility has proven that:
(i) the inclusion is
necessary to the financial integrity of the utility; and
(ii) major projects under construction have
been efficiently and prudently planned and managed. However, construction work
in progress shall not be allowed for any portion of a major project which the
utility has failed to prove was efficiently and prudently planned and
managed.
(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 utility
shall 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 telecommunications utilities in
USOA account 2001; or
(-b-) for
telecommunications cooperatives, the equivalent of USOA account 2001.
(II) Where each addition comprises
at least 10% of the utility's requested rate base, exclusive of post test year
adjustments and construction work in progress (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 utility; or,
(II) the reasonable price, if the addition
represents a purchase, subject to original cost requirements, as specified in
PURA §53.053.
(iii)
Post test year adjustments for known and measurable rate base decreases to
historical test year data will be allowed only when subclause IV of clause (i)
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 subclause (I) of clause (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 utility's books prior to the
rate year.
Disclaimer: These regulations may not be the most recent version. Texas may have more current or accurate information. We make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained on this site or the information linked to on the state site. Please check official sources.
This site is protected by reCAPTCHA and the Google
Privacy Policy and
Terms of Service apply.
