TITLE 16. ECONOMIC REGULATION

PART 2. PUBLIC UTILITY COMMISSION OF TEXAS

CHAPTER 24. SUBSTANTIVE RULES APPLICABLE TO WATER AND SEWER SERVICE PROVIDERS

SUBCHAPTER C. ALTERNATIVE RATE METHODS

The Public Utility Commission of Texas (commission) adopts the repeal of 16 Texas Administrative Code (TAC) §24.76, relating to System Improvement Charge, and replaces it with new 16 Texas Administrative Code (TAC) §24.76, relating to System Improvement Charge. The commission adopts the repeal of §24.76 without changes. The repeal will not be republished. The commission adopts this new rule with changes to the proposed text as published in the November 28, 2025 issue of the Texas Register (50 TexReg 7651). The new rule implements Texas Water Code §13.183(c) as revised and Texas Water Code §13.183(c-1)-(c-4) as enacted by Senate Bill (SB) 740, Section 4, during the 89th Legislature (Regular Session). The new rule establishes specific procedural requirements and deadlines associated with system improvement charge (SIC) applications. Specifically, the new rule overhauls the SIC application process by revising the form, manner, and content of information and documentation that a utility must file with the commission. The new rule also aligns §24.76 with the procedural timelines and the specific requirements related to the Office of Public Utility Counsel (OPUC) established by SB 740. The rulemaking also includes several commission-prescribed forms, including the SIC application form required by SB 740, a template notice for utilities to issue to ratepayers when establishing a SIC, two separate Excel filing schedules for SIC applications for water service and sewer service, and an instruction form for the SIC filing schedules. The rule will be republished.

The commission received comments on the proposed rule from the City of Houston (Houston); CSWR-Texas Utility Operating Company, LLC (CSWR); the Office of Public Utility Counsel (OPUC); Karen Ricks (Ricks); SJWTX, Inc. d/b/a The Texas Water Company (SJWTX); Texas Association of Water Companies, Inc. (TAWC); and Texas Water Utilities, L.P. (TWU).

General Comments

Commission Jurisdiction

Houston recommended that proposed §24.76(a) and (c) should be revised to state that the rule applies only to the SIC applications under the commission's jurisdiction. Houston explained that Texas Water Code §13.183 authorizes municipalities with original jurisdiction to "implement their own rules for handling SIC applications from utilities under their jurisdiction." City of Houston provided draft language consistent with its recommendation. OPUC supported Houston's recommendation to clarify that the proposed rule only applies to SIC applications filed by entities under the commission's jurisdiction. TAWC commented that Houston's recommended change to specifically exclude municipally owned utilities from the commission's jurisdiction is unnecessary. TAWC explained that a municipality may adopt its own ordinance implementing a SIC independently, therefore Houston's proposed revision is unnecessary. TAWC indicated that several municipally owned utilities, particularly smaller or resource-constrained jurisdictions, may not be aware of their ability to adopt a SIC ordinance and that "[a]ddressing this gap would help ensure more consistent and informed use of SIC authority statewide."

Commission response

The commission revises §24.76(a) and (c) to clarify that the section and application requirements apply to "a utility under the commission's jurisdiction."

Internal cross-references

OPUC recommended that cross references to "this title" should be replaced to "this chapter", where appropriate in the rule. OPUC commented that referencing "this title" (i.e., Title 16 of the Texas Administrative Code) encompasses rules by at least six different state agencies. OPUC further commented that "this chapter" is more appropriate as it would refer to "Chapter 24, Part 2 of Title 16," which are the commission's water rules.

Commission response

The commission declines to implement the recommended change. Across the Texas Administrative Code there may be several instances of a specific chapter. For instance, "Chapter 22" appears in Title 1, Title 4, Tile 13, Title 16, Title 19, Title 28, and Title 43. The reference to "Title 16" is intended to ensure the Chapter 22 that is applicable to the commission rules. For this reason, the usage of "of this title" is common practice among Texas state agencies (e.g., Title 16, Part 1, Chapter 3 of the Texas Railroad Commission's rules and Title 30, Part 1, Chapter 290 of the Texas Commission on Environmental Quality's rules both use the phrase "of this title" over 200 times and "of this chapter" less than five times).

"Shall" vs. "must" or "will"

OPUC recommended that the proposed rule use the term "shall" as used in statute, instead of replacing it with the word "must." OPUC maintained that the Legislature is intentional when selecting words such as "shall" in drafting bill language. Therefore, to ensure legislative intent is followed, the proposed rule should use the term "shall." OPUC emphasized that if the Legislature intended to use a different word than "shall" it would have done so and that the Texas Code Construction Act explicitly defines the terms "shall" and "must" with specific meanings. Specifically, "shall" imposes a duty while "must" imposes a condition precedent per Texas Government Code §311.016(2) and (3). As such, the two terms are not interchangeable. OPUC further commented that the term "shall" is not an outdated term as it is still used in modern legal authorities such as The Texas Rules of Civil Procedure, Texas Disciplinary Rules of Professional Conduct, and Texas Code of Judicial Conduct.

Commission response

The commission declines to implement the recommended change. The commission acknowledges the general applicability of the TCCA to the commission's rules. See Texas Government Code §311.002(4) (applying the TCCA to "each rule adopted under a code"). However, forgoing use of the term "shall" or replacing the term with "may," "must," or another contextually relevant term is appropriate and not inconsistent with the TCCA. As indicated by OPUC, the TCCA does separately indicate a specific construction for the terms "may," "shall," "must," and "may not" under Texas Government §311.016(1)-(3) and (5). However, the statute also establishes that: "[t]he following constructions apply unless the context in which the word or phrase appears necessarily requires a different construction or unless a different construction is expressly provided by statute" (emphasis added). This provision indicates a general level of flexibility in usage and interpretation of various modal verbs. More importantly, the TCCA does not require the usage of "shall" as opposed to "must" or "may" when implementing statutes in agency rules. Therefore, the commission is not prohibited by law from utilizing other modal verbs to replace "shall." Lastly, commenters have not identified specific instances where the usage of a different modal verb has resulted in ambiguity as to the intended meaning.

Nature and framework of SIC applications

Rule requirements generally

TAWC, CSWR, TWU, and SJWTX commented that the proposed rule imposes overly burdensome requirements on SIC applicants that should be reduced. TAWC, CSWR, TWU, and CSWR noted that other commission rules, even those governing comprehensive base rate cases, do not require the level of production required under the rule. CSWR emphasized that the proposed rule should specify "a reasonable level of production that balances the need to confirm accuracy against the cost of absolute precision" rather than make it more difficult for utilities. TWU and SJWTX explained that the proposed requirements are more akin to what would be required in a comprehensive base rate proceeding or are analogous to a "mini-rate case" rather than what is appropriate for an expedited surcharge proceeding without a commensurate benefit. TWU and SJWTX contended that the overly prescriptive requirements of the proposed rule do not account for certain safeguards inherent to SICs, such as reconciliation in the utility's next comprehensive base rate proceeding and requirements in the existing rule to file such a rate case within a specific time period from commission approval of a SIC based on the utility's classification (i.e., Class A, B, C, or D). TWU and SJWTX further commented that requiring excessive information or imposing burdensome formatting and presentation requirements would materially increase SIC application case expenses that will ultimately be paid by ratepayers and are ultimately unnecessary given NARUC requirements and commission oversight and review. TWU and SJWTX maintained that a streamlined SIC filing process with reasonable information requirements, supplemented by later reconciliation, is the most effective way to implement SB 740 and effectuate the legislative intent of reducing the time required for the commission process SIC applications. OPUC opposed all recommendations from utility commenters that would decrease the amount of supporting documentation and evidence that a SIC applicant must provide as such changes would be harmful to ratepayers.

Commission response

The commission disagrees with the utility commenters that the application requirements under the new rule are overly burdensome and tantamount to a comprehensive base rate proceeding. In past SIC proceedings, such as Project 55577, the commission has emphasized the importance of filing organized and comprehensive applications in commissioner memos and final orders. The commission has accordingly taken steps to address shortcomings in utility SIC applications while also complying with the directives of SB 740 to develop a commission-prescribed form in accordance with §13.183(c-1)(2). As such, the requirements for SIC applications in both the adopted rule and forms represent information commission staff, intervenors, and the presiding officer need to evaluate a SIC application. Ultimately, an application containing all necessary information from the outset will ensure SIC proceedings are streamlined. Delays in the processing of SIC applications have been primarily due to the disorganization and difficulty in reviewing those applications. The adopted rule takes steps to address such shortcomings in part by providing a comprehensive list of requirements each SIC application must meet. The commission further notes that the rule-prescribed schedule for filing SIC applications and the requirement to reconcile SIC costs in a comprehensive base rate proceeding does not address the fundamental issue of deficient SIC applications being filed at the outset. The long-term benefit of requiring utilities to file more organized and detailed applications outweighs any short-term issues associated with compliance. Ratepayer costs associated with SIC applications will be decreased overall through shorter proceedings due to superior applications being filed.

SJWTX recommended referring to "administrative completeness" rather than "sufficiency" throughout the rule for clarity.

Commission response

The commission agrees with SJWTX and implements the recommended change.

OPUC's comments generally

OPUC generally recommended that utilities be required to file all documentation for costs substantiating eligible plant in a SIC application, impose higher organization standards on SIC applicants due to previously deficient applications, and maximize intervenor participation and discovery in the SIC proceeding itself. TAWC and TWU generally opposed OPUC's comments on the proposed rule and forms. TAWC commented that several of OPUC's comments mischaracterize investor-owned utility operations under commission oversight and legislative intent for providing the SIC mechanism. TAWC disagreed with OPUC's premise that the procedural efficiencies in the proposed draft "incentivize utilities to game' the SIC process, evade Commission requirements, or submit incomplete applications." TAWC maintained that investor-owned utilities are, and remain subject to, commission recordkeeping requirements and enforcement authority regardless of how the SIC application process is structured. TAWC further emphasized that sampling or similar procedures do not reduce public transparency or accountability. Instead, they are practical tools for managing voluminous information that preserve the commission's ability to request additional documentation. TAWC also disagreed with OPUC's assertion that application delays primarily originate "from disorganized recordkeeping or premature filings." TAWC stated this characterization is uncharitable and overlooks the difficulty and complexity inherent to organizing voluminous, asset-level data and "the evolving interpretation of SIC requirements over time." TWU commented that OPUC "fundamentally misunderstand[s]…the nature of SIC proceedings and the role of administrative completeness review under SB 740." Specifically, TWU remarked that OPUC conflates administrative sufficiency (i.e., the "threshold determination that an application contains the required information to commence the statutory review period") with substantive review of a SIC application on the merits with a full evidentiary record. TWU noted that this distinction is essential to preserve the 60-day statutory deadline for substantive commission review. TWU explained that administrative completeness should be construed in accordance with §24.8, relating to Administrative Completeness, and standard commission practice. TWU stated that administrative completeness is "determined using objective, clearly defined criteria" and not through "open-ended information demands or quasi-adjudicative processes that would effectively toll the statutory timeline before it begins."

Commission response

The adopted requirements provide clear standards for SIC applications filed with the commission both to implement the new statutory requirements and to ensure utilities file organized and robust applications. More specifically, the adopted requirements for SIC applications reflect a holistic consideration of all information the commission has determined to be necessary for both administrative completeness and review on the merits. In the long term, the benefits of such heightened requirements outweigh the associated costs. Moreover, the timelines for the commission's review of administrative completeness do not- and could not- toll the 60-day statutory deadline, beyond the statute's 15-day good cause extension. The commission addresses OPUC's specific recommendations under the headings below.

Burden of proof in SIC applications

OPUC opposed recommendations from utility stakeholders that would shift the burden of proof away from the utility. OPUC also opposed utility recommendations to replace the documentation requirements of §13.183(c-2) with "[a]lternatives, adjustments, or affidavits." OPUC cautioned that utilities regularly include ineligible costs in SIC applications under existing §24.76, even after a commission finding of administrative completeness, and that such applications still continue to a hearing on the merits despite being materially deficient. OPUC referenced Projects 55577 and 56974 in support of its position. OPUC maintained that the adopted rule should "reduce the potential for Staff recommending applications be deemed administratively complete when the submitted information fails to comply with Commission standards as set out in Commission-prescribed forms." OPUC reiterated that Texas Water Code § 13.183(c-3) requires production of 100% of all documentation substantiating each eligible cost. OPUC acknowledged that while production for SIC applications can be voluminous, "volume is not an excuse for statutory compliance." OPUC asserted that properly organized SIC applications facilitate expeditious review, which was highlighted by the commission's final order in Project 55577. OPUC noted that between Texas Water Code §13.183(c) and Texas Water Code 13.131(a), the commission has "clear authority to require utilities to submit organized and easily readable data relating to capital expenditures recoverable under TWC § 13.183, for the benefit of allowing applicants expedited recovery through an alternative ratemaking process." Therefore, the commission should require utilities to provide an executable Excel spreadsheet with links to PDFs that contain "complete and accurate invoices for all claimed costs in compliance with TWC § 13.183 and NARUC methodology" (emphasis added) rather than a sample for audit or transaction ledger. OPUC noted that the commission could also require (1) affidavit certifications concerning the compilation of such records to be produced as part of the SIC application and (2) submission of only proper capital expenditures compliant with NARUC accounting standards. OPUC cited Chairman Gleeson's memorandum in Project 55577 as well as commission orders in Projects 54430, 55577, and 56871, finding SIC applications to be materially incomplete as support for its recommendations.

Commission response

The commission agrees with OPUC that a utility has the burden of proof under Texas Water Code §13.184(c). The commission also has comprehensive authority over a water or sewer utility's books and records under Texas Water Code § 13.131, including the system of accounts, organization of books and records, and accounting methods used by a utility. Accordingly, the commission notes that utilities do not have any presumption that costs are eligible plant simply by opening their books and records to inspection. Additionally, the commission has the general authority under Texas Water Code § 13.132(a)(1) to require a utility within its jurisdiction to report "any information relating to themselves and affiliated interests both inside and outside this state that it considers useful in the administration of [Texas Water Code Chapter 13], including the form, manner, and timing of any reports." The commission agrees with OPUC that "properly organized SIC applications facilitate expeditious review." The commission notes that the application form already includes an affidavit (Attachment D-2) which requires a utility to attest to the veracity of the information filed with a SIC application and compliance with commission rules.

Ricks supported standardizing identifying information to ensure regulatory oversight. Ricks opposed the assertions by utility commenters that the documentation requirements of the proposed rule are overly complicated or burdensome as NARUC accounting standards already impose requirements for utility books and records. Ricks noted that clear disclosure of active connections and CCN history under proposed §24.76(d)(1)(B) and (C) are foundational evidentiary requirements necessary for the commission to verify the utility's classification and ensure compliance with the annual limit of one SIC application per year under Texas Water Code §13.183(c). Ricks maintained that reconciliation under §24.76(h) is an inadequate customer protection because it can be deferred for up to eight years for Class C and D utilities. Ricks explained that if a SIC application is imprecise, the ratepayer in effect provides the applicant utility with a multi-year no cost loan for potentially ineligible costs.

Commission response

The commission agrees with Ricks that the proposed requirements are neither overly complicated nor unduly burdensome. However, the commission disagrees that, in the event a utility over-earns using a SIC, ratepayers effectively provide the applicant with "a multi-year no cost loan for potentially ineligible costs." If the commission determines that a utility is over-earning, any refund is issued with carrying costs and interest, meaning the SIC was not an interest-free loan. The length of time between the overcharge and recovery is also accounted for when calculating the refund and the applicable interest and carrying costs.

Comments of Ricks

Considerations from other states for SIC proceedings

Ricks recommended that the commission "rewrite the proposed rule to ensure it provides a streamlined process for utilities without placing an undue financial burden on the thousands of Texas ratepayers" that rely on essential water and sewer service. Ricks submitted general comments urging the commission to adopt a rule that would ensure compliance and consistency with the intended statutory purpose of a SIC. Specifically, Ricks referenced recent, direct experience as a ratepayer with SIC applications filed in Projects 53428 and 55577. Ricks emphasized the necessity of "a robust planning and protective framework" for SIC proceedings given "the absence of a comprehensive planning requirement and a meaningful revenue cap allowed for streamlined cost recovery without sufficient forensic verification of service improvements" in those proceedings. Ricks noted that the legislative intent to expeditiously incentivize utility investment in water and sewer systems must be appropriately balanced with utility transparency, commission oversight, and the statutory mandate under §13.182 that rates be just and reasonable. Ricks cautioned that "administrative completeness" must remain a robust standard that complies with the substantiation requirements of Texas Water Code §13.183(c-2).

Commission response

The adopted rule is the commission's rewrite of §24.76 to streamline the SIC application process with the additional requirements of SB 740. The rule accounts for what is practicable in an expedited, interim rate proceeding while addressing historical issues with SIC proceedings to ensure applications are processed efficiently.

Ricks provided a comprehensive history of SICs across the United States, the development of the concept of "eligible property" (i.e., "eligible plant"), the introduction of the Texas SIC framework in SB 700 from the 86th Legislature, and comments filed in the commission's first interim rate rulemaking Project 45112. Ricks further noted the procedural history of the commission's SIC rule (i.e., the existing version of §24.76 proposed and adopted in Project 50322), including the advocacy of stakeholders and final commission determination.

Commission response

Ricks's comments recommend a completely revised SIC rule. The commission implements SB 740 within the existing SIC framework and the adopted rule does not contemplate a complete overhaul of the current process, despite making major changes. A cross-comparative study of other states' SIC-related rules is impractical and unnecessary in this rulemaking. Specific issues such as the Long-Term Infrastructure Improvement Plan (LTIIP) and a revenue cap are addressed under the appropriate heading. Finally, the commission notes that Ricks only submitted reply comments, meaning other commenters did not have an opportunity to respond to her proposals. Where possible and appropriate, Ricks's comments have been treated like initial comments.

Chapter 24 Rule Review

Ricks recommended the commission extend the 58391 rulemaking or alternatively open a new project to review §24.76 under the Chapter 24 rule review. Ricks commented that the adoption of the proposed rule potentially conflicts with and circumvents the commission's statutorily required Chapter 24 rule review required under Texas Government Code Chapter 2001 (APA), §2001.039 that must be initiated on September 1, 2026 "effectively postponing a full evaluation of the SIC's impact on the public interest until 2031."

Commission response

This rulemaking cannot be extended due to SB 740's September 1, 2026 implementation deadline and the six month adoption deadline associated with rulemakings generally under APA §2001.027. The re-adoption of §24.76 in this rulemaking does not conflict with the commission's rule review schedule listed under Project 54474. This rulemaking does not preclude §24.76 from being included in the Chapter 24 rule review.

LTIIP and recovery cap

Ricks noted that the proposed rule omitted certain consumer protections, such as the LTIIP and the revenue cap imposed by Pennsylvania's counterpart rule. Cf. Item #8, Project 45112 (Pennsylvania Model- Act of Feb. 14, 2012 P.L. 72 No. 11, Cl. 66) with Item #10, Project 45112 (Aqua Text Strawman for Texas SIC).

Commission response

The commission declines to implement an LTIIP or a cap on SIC recovery because those proposals are out of scope and not required by statute. Texas Water Code §13.183 neither requires an LTIIP or prescribes a cap for SIC recovery; it only establishes the right of a water or sewer utility to recover costs the commission deems eligible in a streamlined proceeding. The commission generally notes that similar regulatory mechanisms, such as a SIC, necessarily vary between states for a number of reasons, whether it be due to pre-existing statutes and requirements, the overarching regulatory scheme applicable to utilities in that state, or even the nature of the resource subject to regulation (e.g., water) within the historical and practical realities of the state. What is appropriate for Pennsylvania or Indiana may not be appropriate for Texas. The closest apparent analogy to an LTIIP in Chapter 13 is the capital improvements plan required by Texas Water Code §13.244(d)(3) and §24.233, relating to Contents of Certificate of Convenience and Necessity Applications, as a prerequisite to a Certificate of Convenience and Necessity (CCN). Moreover, the limitations on "eligible plant" under §24.76(b)(3) and the commission's review of such plant appears to function similarly to the Pennsylvania LTIIP in terms of ensuring the applicant utility carries its burden of proof and the scope of the SIC application is appropriately limited. A recovery cap is also not appropriate for a SIC as it would add an additional level of complexity on how to establish the cap. If a SIC application includes ineligible plant, parties can challenge inclusion of that plant. If a SIC order authorizes an inordinately high recovery, commission staff can indicate that the utility should be called in for a comprehensive base rate proceeding. Nothing prevents commission staff from requesting that the commission require a utility come in for a comprehensive rate case for any reason, including over-earning or under-earning. If a utility has a SIC for recently acquired systems that were brought into its consolidated rate structure through initial acquisition rates then adding SIC charges may justify a recommendation that a utility come in for a comprehensive base rate case.

NARUC Account Ranges and defining "project"

Ricks commented that the proposed draft "continues to mirror the utility-friendly drafts of Project 45112" and therefore perpetuates the flaws of the existing rule by omitting mandatory planning requirements and using broad NARUC account ranges (i.e., 304-339 for water), rather than "specific, non-revenue-producing replacement assets" as used in other states such as "Pennsylvania, New Jersey, Delaware, Illinois, and most other states." Ricks commented that the proposed rule does not clearly define what constitutes a single, discrete "project" and instead utilizes a general "catch-all" for general plant. Ricks emphasized that projects "must be restricted to non-revenue-producing physical infrastructure.".

Commission response

The NARUC accounts listed in the definition of "eligible plant" under §24.76(b)(3) are correct and up to date for purposes of a SIC. "Non-revenue producing assets" is an ambiguous and unworkable standard. Per §13.183(c) and (c-2), the standard for inclusion of costs in a SIC is what the commission considers to be "eligible" to ensure infrastructure investment that is not already included in the applicant's rates is timely recovered. The commission declines to make any change in response to Ricks's comment.

Ambiguity concerning the cessation of a SIC

Ricks commented that the proposed rule is ambiguous as to when a SIC surcharge must cease being billed prior to reconciliation in a comprehensive base rate proceeding.

Commission response

A SIC continues through the next comprehensive base rate proceeding until the utility either implements (1) its proposed rates after the expiration of the suspension period specified by Texas Water Code §§13.187(e) or 13.1871(g), (2) interim rates, or (3) final rates after the issuance of the commission's final order setting rates.

Cost causation

Ricks commented that the proposed rule violates the cost causation principle. Specifically, Ricks stated that the proposed rule allows for the inclusion of capitalized overheads without explicitly adopting the NARUC prohibition against "arbitrary percentages." Ricks further stated that the proposed rule allows for recovery of costs of furniture or general equipment under Accounts 339 and 389 (Other Plant for water and sewer, respectively) "that do not directly improve water delivery or service quality."

Commission response

The commission disagrees with Ricks and declines to implement the recommended changes. The connection between the cost causation principle and Ricks's variously cited proposals is unclear. The "arbitrary percentages" prohibition for capitalized overhead appears to refer to 7 Code of Federal Regulations (CFR) § 1767.16(d)(2)(ii), 18 CFR Parts 101 and 201, which prohibit "[t]he addition to direct construction cost of arbitrary percentages or amounts to cover assumed overhead costs in the context of assumed overhead payroll costs for purposes of electric or gas plant." Moreover, this prohibition is a requirement of the Federal Power Act that does not apply to water or sewer service in Texas. While this does not preclude the commission from adopting the change, the commission declines to do so because it is unnecessary. The recommendation, if implemented, would appear to impact the utility's revenue requirement or entail a form of prudence review. The reasonableness of SIC-related costs will be reviewed in a subsequent rate proceeding

Accumulated Deferred Income Taxes (ADIT) and customer protections

Ricks commented that the proposed rule lacks certain essential customer protections. Specifically, proposed §24.76(e) does not deduct Accumulated Deferred Income Taxes (ADIT) and therefore allows utilities to "earn a return on zero-cost capital provided by ratepayers." Additionally, Ricks indicated that the existing and proposed SIC methodology fails to require offsets for retired plant which enables utilities to double recovery by earning a return on both old, non-existent assets and the replacement assets.

Commission response

The commission agrees with Karen Ricks and implements the recommended change to revise §24.76(c)(3)(B) to address adjustments for ADIT and the addition of new §24.76(c)(3)(B)(iii) which requires a SIC application to "include ADIT adjustments related to the effects of accelerated depreciation expense, including bonus depreciation, of eligible plant." The commission also revises "reconcilable cost" under §24.76(e)(3) by adding new §24.76(c)(3)(B) to require ADIT associated with eligible plant in service to be deducted from reconcilable costs. The addition of adjustments for ADIT in a rate proceeding is consistent with standard commission ratemaking practice. Cf. with §25.243(b)(4), relating to Distribution Cost Recovery Factor (DCRF) (defining "net distribution invested capital as "[d]istribution invested capital less accumulated depreciation and adjusted for any changes in distribution-related accumulated deferred federal income taxes…") (emphasis added) and §24.41(c)(3)(A), relating to Cost of Service (stating that the commission will deduct certain items from rate base, including accumulated reserve for deferred federal income taxes, when considering rate applications under Texas Water Code §13.187 and §13.1871). Moreover, adjusting for ADIT ensures utilities do not receive government-subsidized cost-free capital- ensuring that a utility does not accrue the tax benefits of accelerated depreciation without an attendant and proportional reduction in rates to prevent over-recovery. Lastly, ADIT adjustments comport with current Internal Revenue Service regulations and practice regarding bonus depreciation. See Internal Revenue Code §168(f)(2) (specifying requirements for utility tax normalization); See generally IRS Notice 2026-11. The commission also makes conforming revisions to Schedule B in the SIC Filing Packages by renaming Line 3 to Subtotal Net Plant in Service/Reconcilable Cost and adding new Line 4 for the ADIT deduction and new line 5 to account for the Total Reconcilable Cost. The commission also reflects these changes in the Instructions for the SIC Filing Packages.

Ricks observed that the proposed rule does not provide for a short-term mechanism to reset a SIC if a utility over-earns due to connection growth that significantly increases utility revenue. Ricks further stated that the rule does not include a quarterly earnings test that is used in other jurisdictions such as Pennsylvania and New Jersey where a SIC can be reset to zero upon over-recovery. Instead, the rule relies on reconciliation in a rate case on a 4-to-8 year cycle.

Commission response

The commission declines to implement the recommended changes because they are unnecessary. Over-earning will be accounted for and corrected in a comprehensive base rate case. Additionally, the heightened filing and organizational requirements for SIC applications in the adopted rule will facilitate review by commission staff and intervenors and ensure ineligible costs are disallowed. A load growth adjustment is addressed under the appropriate header.

Questions for Comment

The proposal for publication included four questions for comments with multiple subparts each.

Question 1 (Samples for audit and filing of all supporting documentation)

Proposed §24.76(d)(1)(J)(ii) required a SIC application to include, for each capital project included in the application, either (1) a transaction ledger describing all associated supporting documentation or (2) all supporting documentation. If an applicant elects to provide a transaction ledger, a "sample for audit" must be provided under proposed §24.76(d)(2). Specifically, proposed §24.76(d)(2) described a process by which the sample for audit would be determined by the presiding officer based on the recommendation of commission staff that will be determined prior to a sufficiency determination.

Houston supported the proposed sample for audit methodology and opposed a "one-size-fits all" process advocated by other commenters. TAWC, TWU, CSWR, and SJWTX, primarily defended the concept of a sample for audit and opposed any recommendation that would replace the sample for audit with a requirement to file all supporting documentation with a SIC application. OPUC and Ricks opposed the sample for audit concept in the proposed rule, including any alternative methodologies for the usage of such a sample for audit either by a SIC applicant or commission staff. OPUC and Ricks emphasized that a SIC applicant must file all of the information listed under Texas Water Code § 13.183(c-2) for each claimed eligible cost. OPUC maintained that a transaction ledger, sample for audit, or representative sample, as contemplated in the proposed rule, is inconsistent with Texas Water Code § 13.183(c-2). Specifically, OPUC stated that Texas Water Code § 13.183(c-2) requires "[a] SIC applicant to substantiate each claimed eligible cost' of eligible plant' not already included in rates with receipts, invoices, contracts, or other documentation of eligible costs." OPUC asserted that representative sampling would permit cost recovery for SIC applicants that substantiate only a portion of the eligible costs claimed in a SIC application that are not already included in the applicant's rates. OPUC contended that the Legislature did not intend representative sampling to be used when it listed specific records in the statute, such as invoices and receipts, that must be provided before a SIC application can be deemed administratively complete by the commission. OPUC emphasized that while the SIC process was intended to allow for the expedited recovery of infrastructure investments without a prudence review, it is contrary to legislative intent to permit utilities to "recover for costs that they are not required to prove." OPUC supported the use of a transaction ledger only as an organizational tool for a SIC applicant that could assist the commission and intervenors to efficiently review the application. OPUC further commented that past SIC applications have been extremely disorganized, making it difficult for both the commission and intervenors to evaluate SIC applications. OPUC commented that, per Texas Water Code §13.301, the alternative ratemaking processes under Texas Water Code §13.183 were adopted to protect the public interest in the rates and services of public utilities. In contrast, allowing SIC applicants to recover for expenses that they are not required to prove, and for which ratepayers must pay, is not in the public interest. OPUC noted that as of December 19, 2025, ten SIC applications have been filed with the commission since the SIC rules were adopted in 2021. OPUC noted that the SIC rule has been "utilized by some of the largest and most highly sophisticated utilities in Texas who have the ability to provide supporting documentation for the expenses they are requesting to recover from ratepayers." Accordingly, the commission should obligate these utilities to maintain sufficient records necessary to substantiate the eligible costs included in a SIC application. TWU and TAWC opposed OPUC and Ricks's recommended revisions to require a SIC applicant provide "complete documentation" as the proposal is impractical given the expedited timeline. TWU and TAWC maintained that OPUC and Ricks's approach to SIC applications is unworkable because it does not account for "the practical realities of utility operation" where larger utilities may include tens of thousands of individual transactions with its SIC application which, if complete documentation for each transaction were required "would result in filing packages of hundreds of thousands of pages." TWU and TAWC stated review of applications with 100% of all documentation would be neither efficient nor cost-effective, whereas representative sampling using a transaction ledger strikes an appropriate and practical middle ground that promotes transparency and auditability while avoiding any unnecessary burdens and expenses. TWU commented that a transaction ledger balances the need for substantiation with administrative sufficiency by providing "objective, predictable criteria for determining administrative completeness," which enables the commission to meaningfully review SIC applications within the statutory timeframe. TWU also noted that OPUC's position conflates administrative completeness with substantive sufficiency and indicated that the issue to be addressed at the administrative completeness stage is "whether the application contains the information required by the rule not whether that information, once reviewed, will support the utility's claimed costs." As such, whether documentation supports the utility's claimed costs is an issue for the substantive merits review, not sufficiency.

Commission response

The commission agrees with OPUC and Ricks and revises §24.76 to (1) remove samples for audit and the transaction ledger from the adopted rule and (2) require an applicant to file all substantiating documentation with its SIC application. The commission notes that the omission of explicit language does not preclude commission staff from performing a sample for audit, as discussed below. Texas Water Code §13.183(c-2) states: "[a]n application for a system improvement charge…may not be considered complete by the [commission] unless, to substantiate each claimed eligible cost of a utility's eligible plant that is not already included in the applying utility's rates, the application includes [receipts, invoices, contracts, or other documentation]" (emphasis added). In every exercise of statutory interpretation logical inferences may be made, but one must always begin with the plain language. See City of Richardson v. Oncor Elec. Delivery. Co., 539 S.W.3d 252, 261 ("A statute's unambiguous language controls."); Silguero v. CSL Plasma, Incorporated, 579 S.W.3d 53, 59 (Tex., 2019). ("In interpreting statutes, we must look to the plain language, construing the text in light of the statute as a whole…The statutory terms bear their common, ordinary meaning, unless the text provides a different meaning or the common meaning leads to an absurd result… The statutory words must be determined considering the context in which they are used, not in isolation."); See also Texas Government Code §2001.042. A plain interpretation of the statute requires that the applicant utility substantiate each claimed eligible cost as a prerequisite to a determination of administrative completeness. A reasonable way to achieve this interpretation is to require the presentation of documentation for all requested recovery items with the application. The filing of all substantiating documentation enables intervenors to fully exercise their participatory rights, particularly with regards to discovery, when reviewing SIC applications. This requirement, however, does not mandate any particular manner of review for commission staff when making a recommendation on application sufficiency. Commission staff may use a sampling methodology to evaluate whether the applicant utility has presented an administratively complete application. This reflects the reality that it may not always be practical to scrutinize every single claimed cost or supporting document before making a sufficiency recommendation.

OPUC commented that if any form of sampling is implemented, then the sample should be randomized without any input from the applicant utility. Specifically, the random sampling should be derived from information included in the transaction ledger "across all transaction types, including all NARUC account numbers, work orders, affiliate costs, capitalized overhead, timesheet for labor, interest expenses, allocated overhead, etc." OPUC explained that random sampling is necessary to ensure applicant utilities do not cherry-pick its samples for audit and therefore only maintain adequate records for the types of information that the commission routinely requests. OPUC further emphasized that it and other intervenors should be authorized to work with commission staff to ensure the sample is representative.

Commission response

The commission declines to implement OPUC's recommended changes because they are moot. Samples for audit and the transaction ledger have been omitted for the rule. The commission notes that commission staff are still permitted to audit a sample of a SIC applicant's filed documentation for each project or NARUC account included in the application.

Question 1a (Alternatives to sampling generally)

Should the proposed rule specify one or more alternative methodologies by which a sample or audit may be derived that would either (1) allow an applicant to provide relevant information at the outset of its application or (2) be used by commission staff when determining its sample for audit?

Hybrid sampling (OPUC proposal)

OPUC opposed sampling and any alternative methodologies for sampling on the basis that the concept is inconsistent with Texas Water Code § 13.183. However, OPUC presented an alternative "hybrid" methodology if sampling is preserved in the adopted rule. Ricks opposed OPUC's hybrid approach proposal while SJWTX was amenable to the concept of a hybrid sample but noted the proposed version is ambiguous and could delay the processing of SIC applications. TAWC expressed openness to alternatives to other means of verifying the accuracy of supporting documentation without producing all substantiating documents in a SIC application. TWU expressed support for a hybrid approach for sampling of larger and smaller assets as proposed by OPUC, provided that documentation requirements are reasonable, there are clearly defined timelines for the commission's sufficiency determination, discovery is structured and limited, and reconciliation in a base rate proceeding serves "primary safeguard against inaccuracy or over-recovery."

Commission response

The commission declines to implement any alternatives to sampling for audit as the issue is moot. The commission omits all references to a sample for audit or transaction ledger from the adopted rule and revises §24.76 to require a SIC applicant file all substantiating documentation.

Specific comments regarding hybrid sampling

OPUC recommended that, if the commission proceeds with usage of the proposed sampling and audit methodology, that a hybrid approach be used. Specifically, OPUC recommended that the applicant should be required to provide receipts, invoices, contracts, or other documentation for all eligible plant not already included in the utility's rates if the cost of the asset exceeds $30,000.00. For eligible plant that is less than $30,000.00, a transaction ledger can be used for selection of the sample for audit. OPUC explained that a hybrid approach balances the need for sampling with addressing the prevailing issues associated with supporting documentation in SIC proceedings, including the lack of adequate recordkeeping practices among SIC applicants. OPUC noted that expenses of over $50,000 generally account for 10% or less of the total number of assets included in the SIC application. OPUC contended that there is great value in enabling the commission and intervenors to review a SIC applicant's low-cost expenses, which generally comprise the majority of assets included in a SIC. OPUC referenced its responses in filed in Docket No. 58681 as well as the SIC applications filed by utilities under Docket Nos. 58681, 55585, and 54201 in support of its position that only a small proportion of assets included in a SIC application are greater than $50,000. However, OPUC indicated that requiring samples for audit over a certain dollar value is problematic because low-cost expenses, which generally make up the majority of expenses in a SIC application, can amount to millions of dollars. OPUC provided draft language consistent with its recommendation. Ricks opposed OPUC's hybrid sampling approach or any other alternative methodology for deriving a sample for audit from Class A and B utilities for purposes of a SIC. Ricks remarked that any sampling methodology, regardless of design, is "inherently insufficient to verify the data integrity of high-volume transaction ledgers." Specifically, Ricks stated that OPUC's proposed $30,000 hybrid sample threshold is insufficient because it could lead to instances where a utility could recover large amounts without providing any substantiation if the utility aggregates its total costs using low-cost assets (i.e., less than $1,000). Ricks commented that in Docket Nos. 58682, 54201, and 55585 prove that a $30,000 sample for audit threshold, as proposed by OPUC, is "mathematically insufficient to protect ratepayers from mass-asset aggregation." Ricks alternatively recommended a requirement to substantiate all assets that exceed $20,000 in the aggregate and, for all other assets if the utility elects to use a transaction ledger, require a random sampling of 50% of the ledger entries for 100% invoice verification. TAWC disagreed with OPUC that representative sample violates Texas Water Code § 13.183(c-2) and maintained that sampling appropriately balances supporting eligible costs and preserving the expedited nature of SIC proceedings. If more production is required, TAWC indicated this would turn a SIC application into a "mini rate case," which is contrary to legislative intent. TAWC further stated that while NARUC prescribes a system of accounts, it does not "instruct each company precisely how to maintain its accounting records and support." Moreover, different classes of utility may have different recordkeeping practices that may have varying levels of sophistication. TAWC emphasized that "recordkeeping is not a one-size fits all endeavor and requiring utilities to retrofit their records to match new prescriptions in a Commission SIC rule just to obtain a SIC is untenable." TWU supported a hybrid approach to samples for audit as OPUC recommends if the commission "determines that some level of detailed documentation is appropriate," but emphasized that any sampling methodology must be clearly defined in the rule to provide regulatory certainty and avoid disputes. TWU maintained that "[a]llowing parties or Staff to negotiate sampling parameters on an ad hoc basis would defeat the purpose of a streamlined process and invite delay and inconsistency."

Commission response

The commission declines to implement a hybrid approach for samples for audit because it is moot. As stated previously, the commission omits all references to a sample for audit or transaction ledger from the adopted rule and revises §24.76 to require a SIC applicant file all substantiating documentation. The commission generally agrees with OPUC and Ricks regarding a utility's application obligations, and confirms that commission staff may undertake any appropriate method of application review in its administrative sufficiency recommendation, including sampling of costs and documentation. Further, OPUC and other intervenors are not restricted from conducting their own review of applications in the manner they see fit.

Other alternative sampling proposals

CSWR recommended the proposed rule specifically define the necessary sample size for an audit, rather than authorize a case-by-case determination for a sample size for each SIC application. CSWR stated that ad hoc determinations of samples sizes are overly complicated and only create additional obstacles for commission review. CSWR proposed using a sample size between 8.5% to 10% is adequate to avoid confusion and delay in SIC proceedings but expressed openness to alternative thresholds. OPUC and Houston opposed CSWR, TAWC, and TWU's recommendation to limit a sample for audit to a maximum of 10% if a sample for audit methodology is retained in the adopted rule. OPUC explained that a 10% sample size is insufficient given the scope of SIC applications. In support of its position, OPUC cited Docket No. 55585 where the applicant utility requested SIC cost recovery of "4,728 individual assets" for a total of "$61.1 million." OPUC noted that a 10% sample for audit of $61.1 million would only result in a review of $6.11 million of the SIC costs. OPUC further emphasized most of utility documentation issues in SIC applications concern the recordkeeping of small individual expenses, which in fact comprise the majority of costs included in a SIC applications. However, OPUC agreed with CSWR that the sample for audit procedure is overly complicated and that the commission should define an appropriate sample size in the adopted rule. Houston noted that materiality thresholds for a sample for audit may differ on a case-by-case basis.

Commission response

The commission declines to implement a hybrid approach for samples for audit because it is moot.

Ricks maintained that automatic, 100% reconciliation is the industry standard for ensuring "data integrity in infrastructure recovery. Ricks referenced Illinois 220 ILCS 5/9-220.3 and Indiana IC 8-1-31 in support of that conclusion. Ricks emphasized that due to the interim nature of SIC recovery, "holistic forensic scrutiny" is required for a SIC application, regardless of whether the commission requires a sample for audit of a transaction ledger. Ricks noted that additional discussion is needed on "Digital Verification Ledger," where every Excel entry for an asset, regardless of dollar value "is hyperlinked to its corresponding invoice or contract, as a condition of administrative completeness and to apply the intent of [SB 740] to Class C and D utilities."

Commission response

The commission declines to make any change in response to Ricks's comments on reconciliation because elimination of the transaction ledger and sampling from the adopted rule substantially addresses her concerns. Moreover, reconciliation of the entirety of a SIC is performed in the utility's next comprehensive base rate proceeding. Workpaper Schedule C-2 requires a breakdown of documents and costs associated with NARUC accounts and projects. Moreover, Workpaper Schedule C-4 also requires independent asset-level identification if the applicant used group depreciation in its last comprehensive base rate proceeding. Additionally, requiring hyperlinks to a corresponding invoice or contract is unnecessary as Workpaper Schedule C-2 requires page number cross-references.

Requirement to provide additional or other information for SIC applications

TAWC, TWU, CSWR, and SJWTX opposed the authorization included throughout the rule for the presiding officer or commission staff to require additional information for a SIC application or a sample for audit because it is unduly burdensome. TAWC, TWU, CSWR, and SJWTX recommended the general authorization to require additional information be replaced with clearly defined filing requirements and a straightforward post-sufficiency review process. TAWC and TWU stressed that the legislative intent of SB 740 was to ensure SIC applications have clear timelines and impose procedural certainty. In contrast, allowing for requests of additional information outside of discovery invites "uncertainty, delay, and the potential for procedural disputes that occur outside the statutory review period." More specifically, the authorization is ambiguous as to the type of information that may be used to support eligible costs and does not provide a defined timeframe for response. Therefore, SIC applicants can neither reasonably anticipate nor prepare for compliance with requirements that are not clearly enumerated within the rule. Further, it would be imprudent for the commission to rule that a SIC application is deficient without limiting the requirements for sufficiency to those clearly defined in the rule. TAWC and TWU remarked that RFIs are more appropriate as that provision authorizes commission staff and other parties to seek additional information only after a SIC application has been deemed sufficient and preserves the timeline prescribed by SB 740. TAWC commented that any additional requests for information should occur after sufficiency review of the SIC application is completed. TWU noted that the provision gives commission staff "effectively unlimited discretion to determine during the administrative review stage what unspecified additional information' may be required for a SIC application to proceed" invites disputes over whether particular information is necessary before sufficiency is determined. TWU stated that such disputes would in turn delay the sufficiency review of the SIC application and therefore effectively toll the statutory deadline. TWU commented that such a level of discretion is not appropriate for a streamlined proceeding with a statutory deadline and risks SIC applications being subject to indefinite extension through undefined informational demands at the administrative sufficiency stage. CSWR noted that the additional information authorization is unnecessary because the requirements of the provision are addressed by other rules. Specifically, CSWR noted that an administrative law judge may already require additional documentation from an applicant, find an application deficient, and require the production of additional information to cure the deficiency. SJWTX commented that while TWC § 13.183(c-2)(4) references "other documentation of eligible costs," the commission should use this statutory discretion to specifically identify all other forms of documentation, such as testimony, rather than grant an unspecific discretion for commission staff and the presiding officer to subjectively request information on an ad hoc basis. OPUC opposed TAWC, TWU, CSWR, and SJWTX's recommended changes as the deletion would make the SIC application documentation requirements overly permissive and would invite further ambiguity concerning the documentation a SIC applicant must provide. OPUC further commented that the omission is inconsistent with the requirement of Texas Water Code § 13.183(c-2) for applications to include "other documentation" in addition to "receipts, invoices, or contracts." OPUC commented that the provision should be preserved if the commission proceeds with a sample for audit methodology. OPUC maintained that the presiding officer should be authorized to request additional information if issues are discovered with a SIC applicant's supporting documentation. OPUC also noted that proposed §24.76(d)(3)(A) would be unnecessary if the commission required the provision of all supporting documentation rather than proceed with allowing for a sample for audit.

Commission response

The commission agrees with TAWC, TWU, CSWR, and SJWTX and deletes the various provisions that authorize commission staff or the presiding officer to request additional information. Further information may be requested through discovery by commission staff or intervenors. The commission believes OPUC's concerns regarding overly permissive documentation requirements and ambiguity can be addressed on a case-by-case basis through the discovery process. The commission agrees with OPUC that §24.76(d)(3)(A) is no longer necessary given that sampling and the transaction ledger are omitted from the rule. The commission accordingly revises §24.76(d)(1)(J)(iii)(III) and deletes §§24.76(d)(1)(J)(iv)(V), 24.76(d)(1)(Q), 24.76(d)(3)(A)(i)(III) (previously §24.76(d)(5)(A)(i)(III)), and proposed §24.76(d)(3).

Question 1b (Criteria for alternative methodologies)

If alternative methodologies should be specified by the rule (1) what should those methodologies be based on (i.e., number of assets, dollar amount for assets, number of projects, dollar amount for projects, or a combination thereof) and (2) what should the percentage thresholds be to provide sufficient assurance that the sample for audit adequately supports the eligible plant placed into service detailed in the SIC application?

OPUC reiterated that alternative methodologies such as a sample for audit should not be used for SIC proceedings as such methodologies are inconsistent with the letter and intent of SB 740 as well as other obligations a utility has to provide information under existing commission rules. Specifically, OPUC stated the cost documentation required by SB 740 are all part of the utility's books and records which should always be available to the commission, regardless of whether the utility is applying for a SIC. OPUC further remarked that NARUC requires such books and records to be maintained to provide "full information as to any item included in the account" such that each entry is supported "by such detailed information as will permit ready identification, analysis and verification of all facts relevant thereto." As such, providing such records does not present an undue burden on the applicant utility, particularly given the limited time frame under which a SIC can be applied for and imposed. OPUC commented that the use of a sample for audit will create incentives for utilities to "bypass and circumvent basic Commission record keeping requirements and make it easier for the utilities to game' the SIC process." OPUC commented that a sample for audit is inconsistent with the public interest objective of Chapter 13 of Texas Water Code under §13.001(a) and stated that utility commenter's alternative proposals to providing 100% of all documentation are contrary to the statutory 60-day timeline (or 75 days with good cause). Specifically, OPUC stated it is unclear how discovery can be conducted in the expedited timeline if an application contains missing or incomplete information. Ricks commented that no percentage threshold for a sample for audit is sufficient for purposes of a SIC. Ricks commented that "mandatory 100% Forensic Reconciliation" is the default requirement for any SIC application where the number of included items creates a margin of error that "exceeds the capacity for manual administrative review." By way of example, Ricks referenced the SIC application filed in Docket No. 53428 where 14,615 items were identified that totaled an investment of over $2.6 million. Ricks emphasized that total reconciliation is essential for consumer protection to prevent "materiality gaps" where SIC applications can avoid commission scrutiny. Specifically, Ricks contended that allowing a sample for audit or dollar-value threshold to be used for a SIC application "shifts the risk of unnecessary small-scale investments entirely onto the ratepayer." Ricks noted that the NARUC Uniform System of Accounts requires utilities to furnish "readily full information" for any item included in an account.

Commission response

As stated previously, the commission deletes all references to a sample for audit or transaction ledger from the adopted rule and revises §24.76 to require a SIC applicant file all substantiating documentation. Accordingly, the commenters' respective positions on alternate methodologies are inapplicable to the adopted rule.

Question 1c (Replacement of sample for audit with alternative methodology)

If such an alternative methodology is determined, should it replace the currently proposed sample for audit process or be an additional available option for the sample for audit?

OPUC expanded upon its alternative recommendation under Q1a stating that the eligible assets of a SIC applicant under $30,000 should be subject to an approximately 25% random sampling threshold that is adjustable on a case-by-case basis. OPUC remarked that, given the discovery limitations in the proposed draft, the only manner in which such a sample for audit may be taken and evaluated is to require "briefing and additional time to accommodate this additional step in an expedited review process." OPUC reiterated that that the commission should ensure that the utility is not involved in selecting the sample for audit. Ricks recommended that a "Holistic Forensic Reconciliation" should be required for SIC applications in lieu of a sample for audit for all Class A and B investor-owned utilities. Ricks further recommended that any Holistic Forensic Reconciliation methodology should be paired with (1) a "Mandatory Earnings Test" that is consistent with the Pennsylvania standard to prevent surcharges while a utility is over-earning; and (2) a "3-Year Eligibility Window" where eligibility for a SIC by Class A and B investor-owned utilities "must be contingent upon the completion of a comprehensive general rate case within the preceding three years" to ensure that base rates remain "forensically grounded" and subject to regular and rigorous scrutiny.

Commission response

The commission declines to implement a hybrid approach for samples for audit so the commenters' respective positions on this issue are inapplicable to the adopted rule. Ricks's proposed "Mandatory Earnings Test" is unnecessary given that over-earning will be addressed in the utility's next comprehensive base rate proceeding. Similarly, the eligibility window recommendation is unnecessary given the SIC application schedule under §24.76(c)(2)(D).

Question 2 (Procedural timelines for commission review of a SIC application)

SB 740 (89R) Section 4 revised Texas Water Code §13.183(c) to require the commission to "enter a final order on a request for a system improvement charge…not later than the 60th day after the date the utility commission determines that a complete application for a system improvement charge has been filed." The commission uses a sufficiency review and recommendation by staff and a subsequent order by the presiding officer as the functional equivalent of a commission determination on "completeness." SB 740 Section 4 does not specify a timeline by which the commission must deem an application "complete" (i.e., sufficient). Similarly, proposed §24.76 does not impose a time limitation for between application filing and the sufficiency determination.

TWU and SJWTX commented that the adopted rule should establish a firm 60 calendar-day deadline beginning from the date a completed application is received. TWU and SJWTX asserted that the text of the §13.183, as revised by SB 740, requires a SIC application to be substantively reviewed and a final order issued within 60 days. TWU and SJWTX asserted that "[r]eferences in TWC § 13.183 to a complete' application necessarily mean administrative completeness, not a fully litigated record" and contended that this interpretation aligns with §24.8 (relating to Administrative Completeness) and Texas Water Code § 13.183(c-3). Both TWU and SJWTX also cited the commission's final order in Docket No. 55577 as support for the proposition that Texas Water Code §13.183, as amended by SB 740, creates a regulatory framework where the commission should review a SIC application on the merits and issue a final decision in 60 days. Specifically, TWU and SJWTX stated that §24.8(a) establishes a 30-day default period for administrative completeness review. TWU and SJWTX also stated that Texas Water Code § 13.183(c-3), which prohibits a SIC application from being deemed complete before the 30th day prior to filing, implies a short timeline for commission review of administrative completeness. TWU further recommended that, in ensuring a streamlined process for SIC proceedings, the adopted rule should "avoid introducing procedural or informational requirements that undermine the Legislature's timeline." TWU and SJWTX cautioned that the commission's review for administrative completeness of a SIC application should not become a "quasi-adjudicative process involving extensive information demands or disputes" that renders the statutory 60-day deadline "unworkable and effectively moot." TWU emphasized that the main objective of the rulemaking "is to identify a reasonable universe of information sufficient to establish administrative completeness while preserving the efficiencies the Legislature intended" and maintained that cost considerations are essential to that goal. Similarly, SJWTX recommended the commission implement SB 740 in a manner that harmonizes the rule with the legislative intent. Specifically, SJWTX cited the bill analysis for SB 740, which states that the amended statute implements "a 60-calendar day time limit that runs from the day a completed SIC application is received."

Commission response

The commission disagrees with TWU and SJWTX that the statutory deadline established by SB 740 begins on "the date a complete application is received." Texas Water Code §13.183(c), as revised by SB 740, provides that the commission must "enter a final order on a request for a system improvement charge under this subsection not later than the 60th day after the date the [commission] determines that a complete application for a system improvement charge has been filed" (emphasis added) in conjunction with a 15-day allowable extension for good cause. The commission agrees with TWU and SJWTX that "complete application" as used in the statute is equivalent to "administrative completeness" under §24.8. To avoid confusion, the commission revises the header for §24.76(d)(5)(A) to replace "Sufficiency determination" with "Determination that a complete application has been filed" and makes conforming changes to §24.76(d)(5)(A)(i), (ii), (vi), and (viii) and §24.76(d)(5)(B) to refer to "administrative completeness" (or equivalent context-appropriate term such as "complete application") instead of "sufficiency." The commission notes, however, that the terms "sufficiency" and "administrative completeness" refer to the same concept. As stated in the final order in Docket No. 55577, "A review of an application's administrative completeness is performed to determine whether the Commission has received sufficient documentation to allow Commission Staff to evaluate the merits of an application." More specifically, "the sufficiency determination for purposes of triggering deadlines in Rule 24.76 bears only on the determination to advance the application to a substantive review." In this way, "sufficiency is synonymous with administrative completeness." The commission disagrees with TWU and SJWTX's interpretation of the final order issued in Docket No. 55577. In that case, the commission noted that the SIC applicant conflated the standard for administrative completeness with a utility's burden of proof. More specifically, the commission stated that "it would place semantics above substance to suggest that an application is legally sufficient just because it has been found administratively complete. Whether or not one uses the term sufficiency, the utility bears the burden of proof by a preponderance of the evidence to show that its application meets the applicable statutory and rule requirements and complies with prior Commission orders." As noted previously, the 60-to-75-day statutory deadline for the issuance of a final order on a SIC application only applies after an application is deemed administratively complete. The plain text of the statute, not a bill analysis, controls. Moreover, the statute does not impose a deadline for commission review of administrative completeness. However, it does prohibit an application from being determined administratively complete unless the application includes receipts, invoices, contracts, or other documentation to substantiate each claimed eligible cost of a utility's eligible plant that is not already included in the applying utility's rates. Consistent with the final order in Docket No. 55577 and TWC §13.183(c-2), it is the responsibility of the SIC applicant to present an application that allows commission staff and the presiding officer to expeditiously determine the administrative completeness of that application. That is, "if a review is to be expedited, it must be presented in a manner that lends itself to expedited review."

TAWC generally referred to its comments and proposed redlines in response to Question 2. TAWC, TWU, SJWTX recommended that SIC applications be processed within the 60-day statutory period. TAWC also opposed the usage of any "deficiency" determinations to extent time for the commission to review SIC applications. TAWC generally requested the rule provide specific SIC application requirements that can be met by utilities "without costly preparation or litigation." TAWC stated that OPUC's proposals recommending procedural changes are "unrealistic" as they would induce delay in the sufficiency review period and significantly extend the substantive review period of SIC applications beyond the statutory timeframe. TAWC maintained that "[a]llowing for infinite sufficiency review is plainly contrary to" legislative intent.

Commission response

The commission disagrees with TAWC, TWU, and SJWTX that SB 740 necessitates the processing of a SIC application within 60 days. The specific language of the statute provides for a 60-day statutory deadline that may be extended for 15 days for good cause after the commission determines that a complete application has been filed. The 60-day statutory deadline only applies to merits review of a SIC application and does not apply to the initial administrative completeness review portion. The requirements of the adopted rule are intended to promote the filing of robust and organized applications. The adopted rule will not interfere with the 60-75-day deadline because that period only begins after the determination of a complete application. The presiding officer can therefore establish an appropriate procedural schedule for review of both the administrative completeness phase and the substantive merits evaluation portion of a SIC application.

Question 2a (Procedural timeline for administrative completeness review and opportunity to cure)

Considering all other aspects of the application (i.e. a potential sample for audit, review of supporting documentation, requests for information), should a procedural timeline be added to the proposed rule that governs the time period between an applicant filing a SIC application and the commission's determination of application sufficiency?

TAWC, CSWR, TWU, and SJWTX commented that the rule should be streamlined in a fashion that is more efficient and timelier than a comprehensive base rate proceeding given the letter and intent of SB 740 and the pre-existing safeguards that are present in the rule such as reconciliation of SICs in a base rate proceeding. Houston opposed adding a specific procedural timeline in the rule governing the time period between the time the applicant files a SIC application and the commission making a determination of application sufficiency. Houston stated that while it supports expediting infrastructure investment, the complexity of SIC filings and the potential impact that SICs may have on ratepayers does not support the inclusion of a specific timeline for review of SIC sufficiency. In contrast, OPUC and Ricks recommended a 45-day deadline from the date a SIC application is filed for staff to make a recommendation on sufficiency and a 55-day deadline for the presiding officer to declare the application to be administratively complete. OPUC stated that a specific procedural schedule for sufficiency review of SIC applications should be established in the rule given the various procedural deadlines prescribed by SB 740. OPUC emphasized that the deadline should not be too short to ensure that presiding officer and commission staff have sufficient time to review an application to determine whether it is complete. OPUC remarked that the recommended deadlines "assume that the applicant is required to file a complete application with all the cost documentation required by SB 740." TWU supported the removal of provisions that would allow for "indefinite extension of the administrative review period" and opposed language that would permit commission staff "unlimited discretion to request additional information" prior to a commission determination on administrative completeness. TWU commented that deadlines for sufficiency review are only effective if accompanied by "clearly defined, objective criteria for determining administrative completeness." SJWTX opposed OPUC's proposed 45-day deadline for the commission's sufficiency review of a SIC application recommended that the "standard 30-day period" should be applied instead. SJWTX stated that a 30-day period aligns with the statutory deadline for OPUC's comments on §13.183(c-4) and is "consistent with the nature of a review for administrative completeness" as a determination of whether an application includes sufficient documentation to proceed to substantive commission review. SJWTX provided draft language consistent with its recommendation.

Commission response

The commission agrees with Houston and revises §24.76(d)(3)(A)(iii) and §24.76(d)(3)(B) to clarify that the presiding officer will establish a procedural schedule for the SIC application. The commission declines to implement the specific procedural timelines for administrative completeness review proposed by OPUC and SJWTX because those timelines may not always be suitable to ensure adequate review. Allowing the presiding officer to set a procedural schedule on a case-by-case basis ensures that enough time is available depending on the size and quality of a SIC application. In response to TWU's concerns of "indefinite extension of the administrative review period" and "unlimited discretion [of commission staff and the presiding officer] to request additional information," SB 740 does not impose a timeline by which the commission is to determine whether a SIC application is administratively complete. Moreover, TWU's concern is substantively addressed by the elimination of provisions authorizing additional information to be requested as stated previously and by the changes related to curing deficient applications discussed below.

Opportunity to cure deficient applications

OPUC and Ricks recommended that if the presiding officer finds the application deficient and the applicant fails to cure the deficiency within five days, the application should be denied and the applicant required to bear the rate case expenses associated with filing the incomplete application. OPUC and Ricks provided draft language consistent with their recommendation. OPUC expressed strong opposition to providing SIC applicants multiple opportunities to cure deficiencies and maintained that an applicant seeking to utilize a streamlined commission proceeding should be sufficiently prepared. OPUC explained that its recommended disallowance of SIC applicants from recovering attorney fees and other rate case expenses would incentivize utilities to provide accurate and complete applications and supporting documentation. Ricks supported OPUC's proposals to "attach financial consequences to filing quality" and noted that the proposed rule omits a "Deficiency Forfeiture Clause." Specifically, Ricks recommended that if a SIC application is dismissed for administrative insufficiency or if a final order denies recovery for more than 25% of the requested costs due to a failure to provide the documentation required by Texas Water Code §13.183(c-2), then the applicant should be prohibited from requested or recovering any rate case expenses associated with that SIC application in any future rate case. Ricks stated that such a provision is necessary to comply with the requirement that rates be just and reasonable under Texas Water Code §13.182. Ricks also recommended that denial of a SIC application should be "with prejudice" if the utility fails to provide necessary information or cure a deficiency within five days. Ricks proposed further discussion to establish that a utility's "reasonable and necessary regulatory expenses do not include costs associated with correcting documentation included in a SIC application that does not comply with NARUC standards. Ricks provided draft language consistent with her recommendation. TAWC, TWU, and SJWTX opposed OPUC and Ricks's recommendations that would "eliminate or severely restrict an applicant's ability to cure deficiencies." TAWC noted that denying applications and requiring re-filing as a default remedy for minor or technical errors would only serve to lengthen SIC proceedings, waste commission resources, and "delay the deployment of capital for needed system improvements." TWU and SJWTX noted that re-filing of an application and re-issuing notice to ratepayers would confuse ratepayers and result in unnecessary expense. TWU maintained that automatic denial "frustrates the goal of ensuring complete applications and encourages formalistic disputes rather than substantive resolution in order to prejudice the utility's ability to seek rate relief." TWU further commented that if the commission implements the five-day cure period, it should be eligible for extension for good cause shown. SJWTX similarly recommended that the deadlines for curing deficiencies or supplemental recommendations on sufficiency be flexible and in proportion to any deficiencies. SJWTX noted OPUC's proposed revisions are unnecessary because a finding of deficiency does not impact the 60-day statutory timeline which begins only when an application is deemed administratively complete. SJWTX provided draft language consistent with its recommendation.

Commission response

The commission declines to implement OPUC and Ricks's recommended revisions concerning deficient applications because they are inefficient and overly punitive. Additionally, requiring dismissal "with prejudice," as Ricks recommends, would essentially mean that mere organization deficiencies would permanently prevent a utility from recovering necessary infrastructure costs for all time. The commission agrees with TAWC that dismissing an application and requiring re-filing would lengthen SIC proceedings, waste resources, and potentially delay capital infrastructure improvements. However, the commission acknowledges and agrees with OPUC's previously stated concerns with deficient SIC applications. The commission accordingly revises the relevant rule provisions to (1) provide a single opportunity to cure eligible cost-related deficiencies in a SIC application within five calendar days and (2) to require the disallowance of any costs included the SIC application that are not cured within the prescribed timeline. The commission accordingly adds new §24.76(d)(3)(A)(vii) which limits a SIC applicant to a single opportunity to cure eligible cost-related deficiencies in a SIC application. However, an applicant will have additional opportunities to cure application deficiencies unrelated to eligible costs if authorized by the presiding officer. This approach ensures that ineligible costs are not included while preserving administrative efficiency. The provision requires that any claimed eligible cost included in the application that is found deficient after the cure period is to be excluded from the application and disallowed from recovery in the current SIC proceeding. The provision, however, does not prevent a SIC applicant from appealing any order finding there to be eligible cost-related deficiencies or arguing on the merits that such eligible costs were sufficiently supported in the application and should not be disallowed. The provision further specifies that a SIC applicant is not precluded or restricted from seeking recovery of disallowed costs in a subsequent rate proceeding and authorizes the presiding officer to impose specific requirements to allow costs to be presented with adequate documentation in a subsequent rate proceeding. The commission also adds new §24.76(d)(3)(A)(vi) to clarify that commission staff must file a recommendation on administrative completeness of an amended application within a time period prescribed by the presiding officer. The commission also makes conforming revisions to §24.76(d)(3)(A)(iv)(I) and (II) and §24.76(d)(3)(A)(v)(II) and clarifying changes to and §24.76(d)(3)(A)(viii).

OPUC stated that administratively incomplete applications should be dismissed in accordance with §22.181(d)(7) after a single opportunity to cure. OPUC commented that the basis for dismissal should include "(1) failure to maintain records supporting the SIC request in accordance with NARUC record-keeping standards and Commission standards; (2) failure to furnish records in accordance with Commission-prescribed forms; (3) submitting voluminous deposits of records that lack required information or any index permitting cross reference; (4) submitting records that do not provide all required information or that fail to link to supporting information; (5) forestalling access to its records internally and requiring special training or permission to examine and copy records beyond a Protective Order Certification; (6) proffering records that are not in a searchable or executable format, and (7) failing to certify records that are in conformity with applicable Commission rules.

Commission response

The commission declines to implement OPUC's recommended criteria for dismissal an application as they are unnecessary and overly punitive. The single opportunity to cure eligible-cost related deficiencies and disallowance of uncured costs from an application substantively address OPUC's concerns. The presiding officer will determine whether the criteria for dismissal under §22.181 are met on a case-by-case basis.

Question 2b (Procedural timeline for sample for audit)

Should there be a specific timeline associated with the proposed sample for audit under proposed §24.76(d)(2)? If yes, please provide details. Answers to this question may incorporate any alternative proposals provided in response to Question 1.

Houston opposed the implementation of a timeline for samples for audit for the same reasons it opposed a procedural timeline for sufficiency review. Specifically, the complexity and potential ratepayer impact of a SIC application does not lend itself to the establishment of specific timelines for either. As part of its alternative recommendation, OPUC stated that any sample for audit timelines "must be contained within the same timeline for the determination of sufficiency." OPUC supported imposing a deadline for the sample for audit if the commission proceeds with implementing a sample for audit methodology. Ricks expressed support for OPUC's comments responding to Question 2b.

Commission response

The commission declines to implement a procedural timeline for an audit as it is moot. Because the sample for audit and transaction ledger have been removed from the rule, it is unnecessary to prescribe a procedural timeline for a sample for audit.

Question 3 (Prohibition on replacement assets from being included in a SIC)

Proposed §24.76(c)(3)(B) prohibits any assets from being included in a SIC application that have replaced existing plant to provide the same service or level of service. The provision also defines "existing plant" as including plant that is included in the utility's current rates established in the utility's most recent base-rate proceeding and excluding eligible plant that is included in the utility's current SIC for a proceeding in which the utility seeks to amend its SIC. In a previous SIC contested case, the commission requested that parties brief the following threshold policy question "Should the utility be required to offset costs that are no longer needed because of the improvements included in the system improvement charge?" In the commission's preliminary order, the commission stated: "Neither the Texas Water Code nor Commission rules provide for offsetting of costs in the context of a system improvement charge. Whether or not the costs are still needed because of the improvements included in the system improvement charge is irrelevant. Because there is no legal basis for this type of offset, the utility should not be required to offset costs in a proceeding for a system improvement charge. To the extent that a utility is recovering costs in base rates that are rendered unnecessary by improvements included in a system improvement charge, the appropriate inquiry is whether the utility is overearning and therefore whether the Commission should initiate a proceeding under TWC § 13.186(a)." (Docket No. 53109, Preliminary Order at 3 (Aug. 25,2022)).

Question 3a (Prohibitions on replacement assets and the Texas Water Code)

Does the Texas Water Code prevent the Commission from establishing the prohibition in proposed §24.76(c)(3)(B)?

CSWR, TAWC, TWU, and SJWTX commented that SB 740 neither requires nor contemplates such a prohibition, and opposed the inclusion of the prohibition in §24.76(c)(3)(B). Houston, OPUC, and Ricks stated that Texas Water Code § 13.183(c-2) does not prevent the commission from establishing the prohibition in proposed §24.76(c)(3)(B), and emphasized that the statute in fact requires it. Houston, OPUC, and Ricks supported the inclusion of the prohibition or, alternatively, the addition of a retirement offset to prevent double recovery and ensure just and reasonable rates. CSWR and TAWC stated that the prohibition is effectively a form of prudence review that is inappropriate for a SIC proceeding and that the proposed language is ambiguous. Specifically, CSWR indicated that if the provision were to be read literally, "it could be interpreted to prohibit a utility from seeking recovery of investments that are repairs or replacements of existing assets." CSWR emphasized that the purpose of a SIC is to promote repairs to existing infrastructure and that utilities are obligated by law to only make prudent investments. Any imprudent investments will be reviewed and reconciled in a future comprehensive rate proceeding. CSWR noted that a "utility has no incentive to replace assets that are already providing adequate service or seeking recovery of costs that it will be required to refund in the future." TAWC and TWU stated that the provision not only discourages timely capital replacements, but is also an unnecessary and overly complicated restriction on the plant a utility may include for recovery in a SIC. TAWC and TWU noted that whether a replacement improves service or provides the same service or level of service are inherently subjective and the provision will only cause disagreements with intervenors, which will further complicate and increase costs associated with SIC proceedings. TAWC and TWU emphasized that replacements inherently improve service because newer plant will extend the useable life of a water or sewer system, reduce failure risk, and enhance operational reliability regardless of whether the utility "receives no other specific service improvement from replaced plant." TAWC explained that "[j]ust because replaced assets remain in existing base rates does not mean that a utility should not be able to start earning on new replacement assets within the limitations of the SIC rule." TAWC remarked that adjusting a utility's full rate structure to account for all changes since the utility's last base rate case is improper. Specifically, TAWC stated that SICs are intended to be an expedited process focused on infrastructure investment, not a review of all of a utility's cost of service changes. TAWC further commented that any concerns of a utility overearning are addressed through the commission's oversight of a utility's annual report and the reconciliation process detailed in the proposed and existing rule. TAWC alternatively proposed the inclusion of a "depreciation adjustment mechanism as part of the SIC to account for retirements" but noted such a mechanism would add complexity to the SIC process. Specifically, the provision could be revised to account for depreciation of retired plant within a SIC proceeding as well as associated revisions to other portions of the rule to reflect that change. However, TAWC noted that adjusting for the entirety of a utility's cost of service changes prior to a base rate proceeding is fundamentally incompatible with the concept of a streamlined SIC proceeding. TAWC provided redlines consistent with its recommendation. TWU stated that the proposed language would effectively require a granular, asset-by-asset review of whether replacement plant provides the same service or level of service as retired facilities that "necessarily implicates depreciation, net plant, and cost-of-service considerations that the Commission has expressly excluded from SIC proceedings." TWU commented that neither Texas Water Code §13.183 nor the existing commission rule conditions SIC recovery on whether new infrastructure replaces existing plant or incrementally improves service. TWU remarked that the prohibition "materially disincentivizes proactive capital investment by encouraging utilities to defer necessary replacements until a full base rate case" and therefore is contrary to the legislative intent of a SIC proceedings encouraging timely infrastructure investment. SJWTX commented that SB 740 does not permit the inclusion of the prohibition on SIC recovery of retirements and is silent on the issue. SJWTX remarked that capital investment in replacements should not be prohibited if the replacement is necessary to provide safe and reliable service. Houston and OPUC opposed the utility commenters position that replacement plant improve service "if only through the replacement asset being able to remain in service for a longer period of time than the asset originally providing service." Houston and OPUC also opposed TAWC's recommendation that "only the depreciation effect of the replacement should be recognized in SIC rates." More specifically, Houston opposed a limited approach to recognizing offsets "as there is no substantive difference between components of the offset and no basis for adjusting for the return of' invested capital without also recognizing the return on' portion and associated effect that reduction in return will have on tax expense." Houston stated that TAWC "recognizes that other offsets will occur because of retirements but submits that those adjustments should be left for base rate proceedings." Houston recommended that if documentation of costs or investments that are included in rates is either unavailable or unrepresentative of the current system, "a full rate proceeding would be justified before SIC recovery occurs." Houston commented that the only assets that are eligible for recovery through a SIC are those associated with actual infrastructure or improvements to water or sewer systems that produce tangible benefits for customers that are not already included in the applicant utility's rates. Houston stated the inclusion of such costs would constitute a "mathematically-provable over-recovery of return on investment, depreciation expense, and related federal income taxes in rates." Houston explained that replacement of existing plant or plant that did not improve service for existing customers should be prohibited from recovery through in a SIC (e.g., the replacement of a meter at the end of its service life with an effectively identical meter from a different manufacturer). However, Houston noted that in some instances replacements may be warranted for inclusion and recovery through a SIC, such as for the replacement of assets that pose a risk to public health. Similarly, OPUC noted that a SIC is an additional charge to base rates for all capital assets included in the application. OPUC explained that base rates "include a return on investment, income tax on that return, and depreciation expenses on assets that are used and useful in providing service to the utilities' customers" and if a SIC includes those same elements for a replacement asset, then the utility would then result in "the utility overearning at the expense of its customers." OPUC explained that this is because the utility is earning a return on the replacement items incorporated into the SIC, which are existing plant already placed into service, and on the replaced items that were incorporated into the utility's commission-approved rates which are plant that are no longer in service. OPUC indicated that if a utility were to file a base rate application instead of a SIC, the utility would be prohibited from including both assets in rate base as "as the asset that was retired from service is no longer used and useful in providing service," which eliminates the risk of over-collection and therefore prevents rates that are not just and reasonable. CSWR, TAWC, TWU, and SJWTX disagreed with Houston, OPUC, and Ricks that allowing replacements to be recovered in a SIC will lead to double recovery or over-earning. SJWTX stated that OPUC's comments neither address Texas Water Code § 13.131(c) which requires the commission to "fix proper and adequate rates and methods of depreciation, amortization, or depletion of the several classes of property of each utility" nor does it account for §24.41(c)(2), relating to Cost of Service, which applies to retirements.

Commission response

The commission generally agrees with Houston, OPUC, and Ricks's alternative recommendation to account for replacements of retired plant in a SIC proceeding using an offset mechanism to ensure a utility is not recovering both the cost of the original asset and the replacement. As such, the commission implements a replacement plant offset under §24.76(c)(3)(B)(i). Further discussion of the new provision addressing retirements and replacements in SIC proceedings is included under the headings for Question 3b below. In response to TAWC's citation of the commission final order in Docket No. 55577, the decision to not consider the replacement of retired assets in that proceeding and Docket No. 53109 reflects case-by-case determinations that have prevailed in the absence of explicit rule language. In Docket No. 55577's final order, conclusion of law 15 established the following: "A system improvement charge proceeding does not address accounting for replacing retired plant, which would require reconciliation." Stated differently, replacements of retired plant- if not properly netted out (i.e., if the cost of the existing plant were included in the SIC)- would be subject to reconciliation in a base rate proceeding. This is what currently occurs in interim transmission cost of service (interim TCOS) and distribution cost recovery factor (DCRF) proceedings under §§25.192(h) and 25.243. While it is true that a SIC functions as a rate rider (i.e., a charge additional to base rates) whereas interim TCOS effectively rolls forward (i.e., are incorporated) into base rates, accounting for retirements in a SIC proceeding can be performed without affecting base rates. As OPUC noted, the commission's final order in Docket No. 56974 required an accounting of replacement assets for retired plant to address the potential for over-recovery. The commission generally agrees with Houston and OPUC's concerns regarding the risk of double recovery, but also acknowledges the importance of encouraging the replacement of assets to improve service as expressed by TAWC and SJWTX. The commission agrees with TAWC and TWU that excluding replacement plant would discourage the timely replacement and improvement to infrastructure. Similarly, the commission agrees with Houston that any approach to replacement plant is an inquiry into whether an improvement has occurred based on commission discretion to prevent over-earning. This replacement plant offset strikes an appropriate balance between affording utility the opportunity to recover costs associated with replacement assets while mitigating the risk of double recovery by excluding costs associated with the retired asset that are already being recovered for in base rates.

TAWC and TWU stated that if the legislature intended to categorically exclude replacement plant from SIC eligibility it would have explicitly done so. TAWC and TWU further commented that the exclusion of replacement plant would "fundamentally alter the scope and utility of the SIC mechanism" and goes beyond revising the commission rule to address technical implementations or resolve omissions. Instead, it is a substantive policy change restricting SIC eligibility in a manner that the Legislature did not authorize. TAWC noted that the prohibition would discourage timely capital replacements and "overly complicate and restrict the plant a utility may include for recovery through SICs" and is contrary to the position taken by the commission in previous final orders. TWU remarked that the commission "lacks authority to make such a fundamental change through rulemaking." TWU contended that the commission's decision in prior proceedings reflect "a considered judgment that the streamlined nature of SIC proceedings is incompatible with the complex factual and legal determinations required to evaluate plant retirements, replacement issues, and potential offset calculations."

Commission response

The proposed language excluding replacements of retired plant from inclusion in a SIC is reasonable given the comprehensive review of replacements and retirements conducted in a base rate proceeding. Moreover, such an exclusion does not contradict the plain language of the statute. The silence of Texas Water Code § 13.183 on retirements does not prohibit the commission's capability to address the issue through a rulemaking. As stated previously, past commission orders have taken varying positions on replacements of retired assets in SIC proceedings on a case-by-case basis. Regardless, the position taken in a final order in one or more proceedings, or even the absence of language on a specific issue in a prior version of a commission rule, does not preclude the commission from making a different policy decision through a rulemaking. The addition of the replacement plant offset under §24.76(c)(3)(B) and §24.76(c)(3)(B)(i) substantially addresses the concerns of all stakeholders and represents a compromise position on the issue. Replacement assets undergo comprehensive review in the utility's next base rate proceeding where the commission thoroughly evaluates the prudence of the utility's decision to replace the asset and the ability of the replacement asset to provide improved service.

"Reconcilable cost"

Ricks commented that the current definition of "reconcilable cost" in §24.76(e)(3) is legally insufficient because it omits retirement offsets required by the NARUC Uniform System of Accounts for Class A water and sewer utilities and fails to deduct ADIT. Specifically, the failure to account for retirement offsets allows for double recovery by SIC applicants by only focusing on new plant installed and not subtracting old plant that was removed or retired. Ricks explained that this allows utility recovery on both the "ghost asset" and the replacement asset simultaneously and inherently inflates "reconcilable costs." Ricks further remarked that the failure to deduct ADIT allows an applicant utility to include the entire net book value of its assets as reconcilable cost and therefore earn a high rate of return on what effectively becomes "an interest-free loan" from ratepayers and inflates the SIC revenue requirement. Ricks stated that reconcilable cost is equivalent to the original costs of eligible plant less (1) accumulated depreciation; (2) any costs for plant provided by explicit customer agreements or funded by customer contributions in aid of construction (CIAC); (3) ADIT associated with the eligible plant; and (4) the net book value of any plant retired or replaced by the eligible plant projects. Ricks explained the proposed revision to the reconcilable cost methodology would require a utility to "net out' the tax benefits and the ghost assets," therefore ensuring that a SIC only pays for incremental improvement to a water or sewer system.

Commission response

The commission agrees with Ricks's position with respect to ADIT. As stated previously, the commission revises "reconcilable cost" in §24.76(e)(3) to require adjustments for ADIT. The addition of the replacement plant offset under §24.76(c)(3)(B) in addition to new §24.76(c)(3)(B)(i) and §24.76(e)(10) substantively address Ricks's retirement asset-related concerns. The discussion of ADIT is addressed under the appropriate header.

Question 3b (Accounting and offset for retired assets)

If the Texas Water Code does not prevent the Commission from establishing the prohibition under proposed §24.76(c)(3)(B), should the Commission, in lieu of establishing the prohibition, consider revising the methodology for calculating the SIC such that it accounts for retirements (i.e., "offsets"), thus requiring a utility to offset the costs that are no longer needed because of the improvements included in the system improvement charge but that are still being reflected in the utility's base rates? If so, include an explanation and proposal, if any, as to what extent the methodology should be revised.

TAWC indicated that a depreciation adjustment may be appropriate in a SIC proceeding to prevent double recovery of assets. TAWC noted that base rates can only be changed in a comprehensive base rate proceeding where a complete "offset" may occur, not through a SIC. Houston, OPUC, and Ricks disagreed with TAWC that the commission has already addressed the recognition of retirements and found it to be outside the scope of SIC proceedings. Houston, OPUC, and Ricks also recommended the commission include such an offset in the adopted rule but differed in their approaches. Houston remarked that, to the extent that the replacement of existing assets results in improvements to service, an offset would be required to avoid any over-recovery in rates, similar to those made in interim proceedings for electric distribution or transmission investments before the commission. Houston stated that in Docket No. 53109 the commission found that neither the underlying SIC legislation nor the applicable rules allowed for the offsetting of such costs. Houston offered the following hypothetical: A utility replaces a capital asset in a SIC proceeding for which it is recovering $1 per customer for under base rates. The replacement asset benefits customers and is proposed for recovery in the SIC proceeding at a rate of $2 per customer. Houston indicated that if no offset for the increased cost of service is included in rates for that capital asset in the SIC proceeding, the utility would therefore collect a total of $3 for in-service assets for which it only should be recovering $2 for. This would result in an over-recovery of $1 per customer unless costs unrelated to the capital asset increased by $1 since the utility's last comprehensive base rate proceeding. Houston maintained that that the cost recovery provisions of Texas Water Code §13.183 "are not intended to provide a de facto allowance for other unrelated cost increases." Houston remarked that not including such an offset would violate the principle that rates must be set at a level that permits the utility a reasonable opportunity to earn a reasonable return on invested capital that is used and useful. Houston explained that not including an offset would authorize a utility to recover a return on investment "higher than invested capital and on assets no longer used and useful." Houston also stated that not including an offset would violate Texas Water Code § 13.183(e) which requires any rates established through alternative ratemaking methodologies to be just and reasonable. Houston commented that its analysis extends to any expansion-related investments made by a utility, as "recovery of the average investment in infrastructure needed to serve a customer is already included in base rates." Houston noted that, similar to replacements, any expansion-related assets that result in service improvements must be "offset by the associated average cost of similar assets being recovered in base rates." OPUC and Ricks also recommended revising §24.76(e) to alter the methodology for calculating the SIC such that it accounts for retirement offsets. OPUC maintained that the proposed rule language governing SIC calculations should account for retirements by requiring the utility to offset the costs that are no longer necessary because of the improvements included in the SIC but that are still included in the utility's base rates. OPUC indicated that a base rate proceeding, not a SIC, is the appropriate mechanism for recovery of a utility's operation and maintenance costs. OPUC disagreed with TAWC that replacements are improvements to service, but only repairs where subpar service is brought back to its previous baseline. OPUC stated that it is "it is neither just nor reasonable for ratepayers to pay not only for the improved eligible plant but the initial plant that has been replaced" as it constitutes double recovery. OPUC stated that NARUC accounting standards establish that when an asset is "retired from utility plant, with or without replacement, the book cost thereof shall be credited to the utility plant account in which it is included." (NARUC Uniform System of Accounts for Class A Water Utilities, Accounting Instruction No. 27 (1996).) OPUC accordingly maintained that allowing SIC applicants to recover for new replacement assets without a reduction in rates associated with the corresponding retirement of the original asset would result in an over-recovery. OPUC noted that, in Docket No. 56974, the commission ordered the SIC applicant to address the potential for over-recovery when presenting replacements for retired assets. If the commission accounts for retirements in the proposed rule, OPUC alternatively recommended the allowable net book value of asset for the purpose of the SIC calculation be calculated as "[n]et book value of the replacement asset net book value of the replaced asset at the time of the previous rate case" and depreciation expense of the asset claimed in the previous rate case to be deducted from the depreciation expense of the replacement asset. As part of its alternative recommendation, OPUC further recommended that the proposed rule require the SIC applicant to "file a copy of the asset listing, including a detailed description of those assets included in its last rate case, indicating the net-book value of the asset at the time of the previous rate case and the claimed depreciation expense" and also provide "a reconciliation and tracking key that identifies the asset in the present application and links that asset to the specific line item from the previous rate case." OPUC indicated that if a utility cannot provide such information, the amount should be prohibited from inclusion in the SIC to prevent over-recovery because cost substantiation is a prerequisite for just and reasonable rates. OPUC maintained that its proposed alternative recommendation does not prohibit the utility from recovering a return on replacement assets as those may be recovered in the utility's next comprehensive base rate proceeding. Ricks also proposed additional discussion on requiring that project descriptions include the original cost of the retired asset for reconciliation purposes and to require "any utility using group depreciation be mandated to perform a new, itemized depreciation study as a condition of the reconciliation proceeding." Ricks provided draft language consistent with her recommendation

Commission response

The commission generally agrees with commenters that the adopted rule should account for replacements of retired plant. As stated previously, the commission agrees with TAWC that the more practical approach is to properly account for replacements and retirements through an adjustment mechanism in a manner that does not change base rates or involve prudence review. Accordingly, the commission adds new §24.76(c)(3)(B) and §24.76(c)(3)(B)(i) to require a replacement plant offset. Under the new provision, a SIC application must include incremental invested capital less any retirements. Specifically, for each replacement asset for which recovery is sought, the SIC application must identify specific criteria identified by the SIC Filing Package to ensure that existing plant that has been replaced is not recovered through a SIC. Any replacement assets that do not comply with the provision will be disallowed from recovery in the SIC proceeding. The removal of retired assets will ensure there is no double recovery; this avoids a situation in which--although the commission monitors utility annual reports for indications of over-earning a utility could potentially over-earn for years before reconciliation in a comprehensive base rate proceeding. The commission also revises §24.76(e) as recommended by OPUC and Ricks to account for the replacement plant offset in the SIC calculation. The commission also adds new §24.76(e)(10) which establishes that the replacement plant offset is equivalent to the total annual depreciation expense for existing plant plus the product of the rate of return approved by the commission and the total net plant for existing plant. In response to Ricks's comment about requiring utilities to provide project descriptions for retirements, Workpaper Schedule C-3 accomplishes that objective. The commission also makes conforming revisions to Workpaper Schedule C-3 to account for the replacement plant offset and new definitions of "existing plant" and "replacement plant." Specifically, the commission adds four new columns - [E] Annual Depreciation Expense For Existing Plant; [F] Accumulated Depreciation (As Of End of Test Year From Last Comprehensive Base Rate Proceeding); [G] Net Plant For Existing Plant (As Of End of Test Year From Last Comprehensive Base Rate Proceeding); [H] Date of Retirement, and [I] Replacement Plant Description. The commission also revises the titles for columns [A]-[D] to clarify that they apply to existing plant and adds a new table to WP SCH-C3 to reflect the replacement plant offset calculation and revises Notes 1 and 3 to reflect the new definitions. The commission declines to require a utility use group depreciation in a base rate case as it is out of scope.

Service extensions and acquisitions (Load growth adjustment)

Houston, OPUC, and Kaen Ricks commented that eligible plant should not include service extensions to new customers. Houston commented that the rates established in the last comprehensive base rate proceedings recover the average investment per customer create "a baseline from which any improvement to service or level of service is judged." By way of example, Houston remarked that "the cost of a meter installed at a new service location would not be recoverable in a SIC proceeding as the rates being charged to that new customer already include recovery of metering equipment." Houston explained that including the cost of the new or replacement meter in a SIC would result in the recovery of both the average cost of the meter through base rates and the cost of the newly installed meter through a SIC without any actual infrastructure improvements being made. Houston contended that allowing replacement or extension-related assets would result in a SIC becoming a "catch-all" of all assets placed into service by the utility over a given period. Houston emphasized that the general goal of Texas Water Code § 13.183(c) is to promote more affordable, reliable, and higher quality water service; encourage regionalization; and to ensure utilities are financially healthy. Houston also maintained that any extensions of service to new customers are prohibited from inclusion in a SIC because recovery would cause rates "to increase regardless of whether the actual investment per customer was higher or lower than the average investment per customer at the last time the utility's base rates were determined." Houston therefore argues that service extension investments do not result in service improvement. OPUC commented that eligible plant should exclude extensions of service to new customers because a SIC applicant "cannot show that it improved service by providing service to new customers that were not accounted for in the applicants last comprehensive rate case or SIC application." OPUC also opposed authorizing an acquiring utility to use a SIC to recover any investments made by the acquired utility. Ricks commented that "expansion-related assets designed to serve new growth" should not be included to prevent a SIC from becoming a "catch-all bucket" for any asset placed into service. Ricks encouraged further discussion of the forensic standard used in Illinois and New Jersey, where "recovery is limited to the replacement of existing distribution facilities rather than the expansion of the network."

Commission response

The commission acknowledges the concerns of Houston and OPUC regarding service extensions. The appropriate consideration is to account for new revenue from additional customers and how the utility is recovering such revenue. As such, new customers should not be grouped with existing customers in a SIC proceeding. A load growth adjustment is the appropriate method to account for the average cost of additional service extensions. Accordingly, the commission adds new §24.76(c)(3)(B) and §24.76(c)(3)(B)(ii) to account for service extensions, including new customer connections acquired through a sale, transfer, or merger, in SIC proceedings through a load growth adjustment. Specifically, the new provisions require the application of a load growth adjustment to offset the incremental costs included in the SIC application when the utility's customer count exceeds the amount used to establish rates in the utility's most recent comprehensive rate proceeding. Revenues associated with a load growth adjustment used to offset the gross SIC revenue required must be calculated as the product of: (1) the applicant's average revenue requirement per customer (i.e., the comprehensive rate proceeding revenue requirement divided by the number of connections the applicant had at the end of the test year); and (2) the increase in customer count since that rate proceeding, including any new customer connections associated with a sale, transfer, or merger. Any load growth-related costs that do not comply with the provision will be disallowed from recovery in the SIC proceeding. The commission also adds Workpaper Schedule C-5 to the Water and Sewer Filing Packages to reflect the addition of §24.76(c)(3)(B) and §24.76(c)(3)(B)(ii). The commission also revises §24.76(e) account for the load growth adjustment in the SIC calculation and adds new §24.76(e)(11), which establishes the load growth adjustment calculation.

Question 3c (Other relevant information for replacements of retired plant)

Provide any other context or information that may be relevant to Questions 3a and 3b, including, if necessary, a discussion of the methodologies implemented for similarly expedited electric rate proceedings such as §25.243 (relating to Distribution Cost Recovery Factor (DCRF)) and §25.192(h) (relating to Interim Update of Transmission rates).

Houston noted that, in addition to offsets, DCRF and TCRF proceedings "capture changes in average rate base per customer or kW of demand, not just the cost of improvements occurring on the system." Houston indicated that this approach is necessary to prevent "clear over-recovery of the return of and on invested capital by the utility." Houston remarked that the legislative intent for SIC proceedings to facilitate the timely and efficient recovery of certain costs necessarily requires those costs be appropriate for expedited recovery. And if such costs would either result in an over-recovery of investment-related costs or did not result in the benefits to ratepayers enumerated by statute, then those rates would be unlawful. OPUC agreed with Houston that the total SIC charges applicable to ratepayers should be assessed in a manner similar to expedited electric rate proceedings (i.e., by capturing changes in average rate base per customer or kilowatt or demand, not just the cost of improvements occurring on the system). OPUC commented that an analysis of actual costs to ratepayers would be invaluable to the commission when reviewing SIC applications and generally endorsed any rule changes that promote transparency concerning actual costs to ratepayers attributable to SICs.

Commission response

The commission generally agrees with Houston and OPUC's comments regarding the risk of over-recovery in SIC applications. The addition of the load growth adjustment, as discussed under the heading for Question 3b, substantially addresses these concerns.

Question 4 (SIC cost recovery limited to end of test year)

House Bill 2712 (89R) allows a utility to use a historic, future, or combined future and historic test year. Proposed §24.76(c)(1)(D) limits the cost recovery of a SIC to cost recovery of eligible plant placed into service subsequent to the end of the future test year or combined historic and future test year if the applicant used a test year in a base rate proceeding after September 1, 2026 that includes either only future data or combined historic and future data. The intention of this provision is to prevent overlap between any potential future test year period selected by the utility and the period covered by the SIC.

Question 4a (Test year prohibition on double recovery)

Should proposed §24.76(c)(1)(D) be maintained in the rule?

TAWC did not oppose the inclusion of proposed §24.76(c)(1)(D) in the rule but indicated that it may not be necessary because as long as "no double recovery is recurring, recovery of eligible plant costs through SICs should be allowed." TAWC commented that the rule could be revised to preclude such recovery instead of the language in proposed in §24.76(c)(1)(D). Houston supported maintaining proposed §24.76(c)(1)(D) on the basis that it minimizes the potential for double recovery of infrastructure investments. OPUC opposed TAWC's recommendation to allow SIC applicants to recover for eligible plant placed into service before the end of a future or combined test year. OPUC stated that TAWC's proposal would conflict with the requirement of Texas Water Code § 13.183 to substantiate eligible costs with receipts, invoices, and contracts as supporting documentation. OPUC noted that given the future-oriented nature of a future test year or combined test year, a SIC applicant would be unable to provide such documentation until costs were incurred. OPUC accordingly recommended proposed §24.76(c)(1)(D) remain as proposed. Ricks expressed support for the date boundary established in proposed §24.76(c)(1)(D) but noted that the proposed language "omits the forensic safeguards necessary to prevent a mathematically provable over-recovery when a utility uses a future or combined test year." Specifically, Ricks commented that the proposed rule omits an essential true-up or offset mechanism for utilities opting for a future test year. Ricks noted that Texas Water Code §13.184(d) requires the regulatory to require a refund from a utility if a future test year results in rates yielding more than a fair return. More specifically, Ricks observed that §24.76(c)(1)(D) only sets a date boundary, whereas future test years are based on projections of facilities to be in service. Therefore, if a utility using a future test year includes forecasts of a project in its base rate case and that project is delayed, "the utility still collects the base rate return." Ricks noted that if that same utility then files a SIC application for that same asset category once the project is actually placed into service, ratepayers effectively pay twice for that project until the utility's next comprehensive base rate case. For Class C and D utilities, the next base rate proceeding can be up to eight years from the date of the order approving a SIC. Ricks commented that additional language is needed to properly effectuate the "affordability mandate" of Texas Water Code § 13.183(c)'s "affordability mandate" and the refund requirements of Texas Water Code § 13.184(d).

Commission response

The commission declines to adopt the alternative standard for §24.76(c)(1)(D) (now §24.76(c)(1)(E)) proposed by TAWC. The commission agrees with Houston and OPUC that §24.76(c)(1)(E) should be maintained; however, the commission revises the provision for clarity. If the applicant used a future test year or combined test year in a base rate proceeding initiated after September 1, 2026, a subsequent SIC application is limited to cost recovery of eligible plant placed into service subsequent to the end of the future test year or combined test year. In response to Ricks's specific comments, no change is necessary as the provision explicitly prohibits costs included in the base rates of a future test year or combined test year. Moreover, reconciliation in a base rate proceeding will address any over-earning by the utility. The rulemaking to implement SB 2712 (89R) regarding future and combined test years is Project No. 59086.

Question 4b (Other considerations for prohibition on double recovery)

Are there any other considerations that should be addressed in proposed §24.76 to prevent the potential overlap of a future test year period and the period covered by the SIC. OPUC agreed with TAWC and City of Houston that the proposed rule, as it relates to future test years, sufficiently prevents risk of double recovery.

Houston and TAWC reiterated that the proposed rule "should be sufficient to mitigate the risk of double recovery from overlapping test years and SIC effective periods." OPUC agreed with TAWC and Houston that the proposed rule, as it relates to future test years, sufficiently prevents risk of double recovery.

Commission response

As discussed under the heading for Question 4a, the commission adopts §24.76(c)(1)(D) with revisions for clarity.

Commissioner Hjaltman Memorandum- OPUC's right to participate in SIC proceedings

On December 17, 2025, Commissioner Hjaltman filed a memorandum in Project 58391 that expressed concerns regarding OPUC's participatory rights in SIC proceedings in the context of the 30-day statutory comment period provided to OPUC by SB 740 under §13.183(c-4). The memorandum also noted that the changes of SB 740 do not share a uniform effective date. Namely, the expedited 60-75 statutory deadline only applies to SIC applications filed on or after September 1, 2026 whereas the new 30-day comment period took effect immediately upon the passage of SB 740. As such, the memorandum indicated that the varying effective dates raised questions as to OPUC's ability to continue participation in a SIC proceeding after it has submitted comments- particularly in the interim period between the effective dates.

OPUC recommended proposed §24.76(d)(5)(A)(iii) be revised to authorize OPUC to comment on the sufficiency of the SIC application no later than 30 days from the date the SIC application is filed. OPUC further recommended revisions to authorize OPUC to "continue to fully participate as a party to the proceeding beyond the 30th day" for the reasons already stated. OPUC commented these additions are necessary to prevent future instances where SIC applicants will "attempt to object to any participation by OPUC beyond the first 30 days. OPUC noted that Texas Water Code § 13.183(c-4) provides OPUC with the opportunity to comment on the sufficiency of an application and therefore the provision should be revised to prevent any future unnecessary litigation over OPUC's participation in SIC proceedings going forward. In response to Commissioner Hjaltman's December 17, 2025 memorandum, SJWTX and TAWC commented that it does not interpret the 30-day deadline prescribed by § 13.183(c-4) as a limit on OPUC's participation in SIC proceedings. SJWTX agreed with OPUC and noted that the statutory language is atypical as it permits OPUC to provide comments on the administrative completeness of an application. Specifically, SJWTX recommended the provision be revised to state that "OPUC may file comments addressing whether the SIC application is administratively complete no later than 30 days from the date the SIC application is filed." SJWTX remarked that regardless of the statutory deadline, OPUC has standing to intervene and participate in SIC proceedings per the procedural schedule established by the presiding officer in the same manner as all other parties. SJWTX further stated that the statutory deadline provides OPUC with an additional opportunity to comment that is not available to other intervenors. Similar to SJWTX, TAWC expressed support for the 30-day comment period following the filing of a SIC application "unless there is a procedural schedule adopted by the presiding officer that establishes a deadline or deadlines for filings by intervenors." TAWC emphasized that the proposed rule does not limit OPUC's participation rights provided by statute, but instead "balance[s] meaningful stakeholder engagement with predictable timelines and administratively workable procedures" to diminish the likelihood of procedural disputes and focus on substantive review. TAWC alternatively suggested that the commission leave "special circumstances to a case-by-case adjudication by the presiding officer if warranted" and noted that OPUC could file a motion for additional time if the applicant utility is provided an opportunity to respond. Specifically, those concerns regarding the lack of a uniform effective date for certain provisions in SB 740. Ricks noted that the 60-day procedural deadline for issuance of a commission final order ruling on a SIC after the application is deemed administratively complete "risks being rendered moot if the rule does not provide an efficient mechanism for resolving sufficiency disputes and discovery gamesmanship." Ricks cautioned, however, that the need for administrative expediency should not outweigh the statutory requirement for rates to be just and reasonable.

Commission response

The commission agrees with SJWTX and TAWC that Texas Water Code § 13.183(c-4), codified in the rule under §24.76(d)(3)(A)(ii), is not a limit on OPUC's right to participate in SIC proceedings. Rather, it is a requirement for the commission to allow OPUC to comment on a SIC application "no later than" 30 days from the date the application is filed. Stated differently, the commission may not infringe upon OPUC's statutory right to comment on a SIC application within 30 days of its filing even if OPUC is not a party to the case. Moreover, the statutory language does not otherwise limit or prevent OPUC from actively participating as a party in a SIC proceeding beyond the filing of its statutorily allowed comments. The commission makes a clarifying revision to the provision to more closely align the provision to statute. The commission also makes clarifying edits to §24.76(d)(3)(A)(viii) to more closely adhere to the statutory language.

Commissioner Hjaltman Memorandum- Discovery and procedural changes

Commissioner Hjaltman's memorandum also noted the risk of discovery gamesmanship and requested commission staff consider an expedited discovery process throughout the SIC proceeding (i.e., for both the administrative completeness portion and during merits review) and whether OPUC should be allowed a "limited-scope opportunity to file supplemental comments within a brief window if there are pending discover motions at the end of their comment period."

Commission response

Discovery is available during both stages of a SIC proceeding application review for completeness and merits review. Accordingly, the commission generally deletes the specific discovery requirements under §24.76(d)(2) and deletes §24.76(d)(3)(B)(ii)-(iv) entirely. The commission further revises §24.76(d)(2) to require discovery to comply with Chapter 22, Subchapter H (relating to Discovery Procedures), "except as otherwise determined by the presiding officer" and merges §24.76(d)(3)(B)(i) into §24.76(d)(2). The commission also revises the relevant provisions of the rule to clarify that the presiding officer will establish a procedural schedule for the SIC application and refrains from adding specific deadlines in either the application review phase or merits review phase.

Specific Comments on Discovery

OPUC explained that the proposed discovery limitations severely restrict the ability for the public to participate in SIC proceedings and do not actually reduce the burden on the applicant to respond to RFIs. Specifically, OPUC stated that it is foreseeable the proposed rule will result in utilities being "inundated with RFIs from intervenors the days following the presiding officer's sufficiency determination." OPUC noted that because commission staff often does not file RFIs prior to making a recommendation on administrative completeness, the burden of the provision primarily falls on intervenors. OPUC emphasized the benefit of intervenor RFIs in revealing deficiencies in a SIC application. In support of its conclusion, OPUC cited commission staff's recommendation in Docket No. 58682, which recommended a finding that the SIC application was administratively incomplete based on information obtained through OPUC's filed RFIs. OPUC maintained that restricting discovery as proposed would actually incite further delays in sufficiency determinations of SIC applications and that the commission's sufficiency review of a SIC application "is in no way delayed by intervenors maintaining the ability to file RFIs as necessary."

Commission response

The adopted rule makes discovery tools available to all parties on an equal basis. Moreover, the adopted rule does not impose specific deadlines on the administrative completeness portions of SIC applications and instead leaves discovery and the procedural schedule for both portions of the application to the discretion of the presiding officer, subject to the 60-75 day merits review deadline prescribed by statute. These changes are sufficient to ensure that the public and intervenors are afforded a meaningful opportunity to participate in SIC proceedings.

SJWTX noted that while technically a party is not prohibited from propounding discovery on the merits of an application immediately upon filing, the proposed rule should minimize the risk of a party utilizing discovery to delay a finding of administrative completeness. SJWTX cited Docket No. 46245 as support for the proposition that "[a] review of an application's administrative completeness is performed to determine whether the Commission has received sufficient documentation to allow Commission Staff to evaluate the merits of an application." SJWTX opposed OPUC's proposed revisions to §24.76(d)(3)(B), (d)(4)(A), and (d)(5)(B)(iii)-(iv) on the basis that limitations on discovery are consistent with the limited and expedited nature of a SIC. SJWTX noted that if a SIC application is found to be deficient, "the applicant will be required to provide the information needed to cure the deficiencies regardless of whether a party has propounded discovery requesting it." SJWTX recommended that if the commission adopts the discovery limitations included in the proposed rule, then the default timelines provided in §22.144(b) apply to pre-sufficiency RFIs. SJWTX endorsed the proposed rule limiting pre-sufficiency discovery to 20 RFIs and post-sufficiency discovery to 10 RFIs to all parties other than commission staff. SJWTX also supported proposed §24.76(d)(4)(D) which states that "a question that is withdrawn before the deadline to respond or for which an objection is sustained does not count against the 20-question limit."

Commission response

The commission declines to implement the recommended changes because they are moot. As stated previously, the commission deletes the specific discovery-related requirements in lieu of a general application of §22.144, unless otherwise ordered by the presiding officer.

Proposed §24.76- System Improvement Charge

Proposed §24.76(a)- Applicability

Proposed §24.76(a) establishes the requirements for a utility to establish or amend a system improvement charge to ensure timely recovery of infrastructure investment.

Ricks recommended that proposed §24.76(a) be revised to include the statutory mandate included under §13.183(c) for the commission to ensure that alternative ratemaking methodologies must result in "more affordable' service for consumers." Ricks further noted that Texas Water Code §13.182 establishes that the commission may authorize a utility to set reduced rates for a minimal level of service for elderly customers 65 years or older to ensure those customers receive more affordable rates. Ricks also stated that the commission's 2021 findings in Project No. 50322 where §24.76 was initially adopted state that the SIC is intended to facilitate "higher quality and more affordable service' through the acceleration of infrastructure replacement.". Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended change because it is unnecessary. Despite being included in the same statute, a SIC is not an alternative ratemaking methodology; it is an interim rate proceeding for recovery of infrastructure investment. The list of alternative ratemaking methodologies under Texas Water Code §13.183(c) is exclusive: "Appropriate alternative ratemaking methodologies are the introduction of new customer classes, the cash needs method, and phased and multi-step rate changes." Texas Water Code § 13.183(c) states that the commission may authorize a SIC for the express purpose of "[ensuring] timely recovery of infrastructure investment."

Proposed §24.76(b)- Definitions

Proposed §24.76(b) establishes the defined terms used in §24.76.

Proposed §24.76(b)(1)- Definition of "eligible plant"

Proposed §24.76(b)(1) defines the term "eligible plant" as plant properly recorded in the National Association of Regulatory Utility Commissioners (NARUC) System of Accounts, accounts 304 through 339 for water utility service or accounts 354 through 389 for sewer utility service.

OPUC recommended revising the definition of "eligible plant" to exclude replacements of existing infrastructure for purposes of a SIC for the reasons already stated. OPUC provided redlines consistent with its recommendation. TAWC, Houston, and TWU opposed OPUC's recommendation. TAWC and TWU commented that OPUC's proposed revision is contrary to statute and would be an unreasonable restriction on the assets a utility may include as eligible plant in a SIC application for the reasons already stated.

Commission response

The commission agrees with TAWC, Houston, and TWU and declines to implement OPUC's recommended change. The commission instead defines "existing plant" as new §24.76(b)(2) as "plant that is included in the utility's current rates established in the utility's most recent-base rate proceeding that is being retired and replaced. This definition is used in conjunction with the definition of "replacement asset" under new §24.76(b)(3) which is defined as "an asset placed into service to replace existing plant that is retired from service." Both new definitions are necessary to implement the replacement asset offset under §24.76(c)(3)(B)(i) and contain the minimum necessary elements for identifying what constitutes a replacement of retired plant.

Proposed §24.76(b)(2)- Definition of "system improvement charge"

Proposed §24.76(b)(1) defines the term "system improvement charge" as an additional charge to recover certain costs of service associated with the portion of the cost of a utility's eligible plant that is not already included in the utility's base rates.

OPUC recommended that the definition of "SIC" under proposed §24.76(b)(2) should be revised to identify replacement assets. Specifically, OPUC recommended that the definition should include all replacement assets, not just replacements of plant that are included in the utility's existing base rates. OPUC explained that this clarification would help commission staff and intervenors to effectively review SIC applications and disallow prohibited items. In turn, this would diminish the risk for over-recovery and therefore be beneficial for customers. OPUC stated that a utility will frequently acquire one or more systems since its last base rate proceeding, however, the utility still collects rates from the customers of the newly acquired systems. OPUC contended that if the return on investment, income tax, and depreciation expense are not incorporated into rates charged to those customers, then the utility should file a full base rate application rather than a SIC. OPUC further noted that, depending on the period of time between the SIC and the utility's previous base rate case, an asset could have been replaced several times. This could lead to instances where an asset is recently replaced and technically not included in the utility's last base rate case because the utility was replacing a replacement asset. Moreover, OPUC observed that the phrase "plant that is included in the utility's current rates" becomes a burden of proof issue in a SIC proceeding which becomes difficult to litigate given SB 740's expedited timeline for the review SIC applications. OPUC commented that to preserve the statutory timeline, the rule should clearly prohibit the inclusion of assets in SIC applications that are already included in the utility's existing base rates. Ricks recommended that the definition of "system improvement charge" under proposed §24.76(b)(2) be revised to include the "mandatory benchmark required to verify the acceleration of that recovery." Ricks explained that the commission must have a predictable baseline to ensure that that 60-day statutory timeline required by SB 740 is workable. Ricks also noted that if a LTIIP is included as the benchmark for all SIC applications, such a definition should be added in proposed §24.76(b). Ricks indicated that the LTIIP provides essential objective criteria by which a SIC may be evaluated for administrative completeness "within the statutory 30-day window." Ricks commented that additional discussion is necessary to synchronize the LTIIP with the SB 740 timeline for administrative completeness.

Commission response

The commission declines to implement OPUC's revisions to the definition of "system improvement charge" for the reasons already stated under the heading for Question 3 and "eligible plant." Specifically, it is unnecessary given the new provision addressing replacement of retired assets. The commission also declines to implement Ricks's recommendation regarding LTIIPs for the reasons already stated.

New §24.76(b)(3)- Definition of "replacement assets"

TAWC recommended a new definition of "replacement assets" be added to §24.76(b) to clarify the term where it is used in other parts of the proposed rule and prevent ambiguity. Specifically, TAWC recommended the term "replacement assets" be defined as "[n]ewly acquired assets that are identical in type, function, location, and specifications to retired assets currently included in the utility's approved base rates." TAWC provided draft language consistent with its recommendation. Houston opposed TAWC's proposed definition for the term "replacement assets" and instead supported "an approach that allows for the exercise of judgement based on whether an improvement to service has occurred" to ensure the commission retains flexibility to address consumer needs and the types of investment changes that may be required in the future. OPUC opposed TAWC's recommendation to add the definition of "replacement asset" as new §24.76(b)(3) as overly narrow. OPUC stated that, if the commission were to implement such a definition, the NARUC definition should be adopted instead. Specifically, "the construction or installation of utility plant in place of property of retired, together with the removal of the property retired." (Uniform System of Accounts for Class A Water Utilities, 1996, National Association of Regulatory Commissioners).

Commission response

The commission agrees with Houston and declines to implement TAWC's proposed new definition for "replacement assets" for the reasons already stated under the heading for Question 3 and "eligible plant." The commission also defines "replacement asset" as "an asset placed into service to replace existing plant that is retired from service" under new §24.76(b)(3).

Proposed §24.76(c)- System improvement charge

Proposed §24.76(c) authorizes a utility to apply or amend one or more SICs in accordance with the requirements of §24.76

Proposed §24.76(c)(1)- General requirements

Proposed §24.76(c) would establish the general requirements applicable to SIC applications.

Proposed §24.76(c)(1)(A)- Nondiscriminatory and uniform application of SIC

Proposed §24.76(c)(1)(A) would require that a SIC be nondiscriminatory and be applied uniformly to each meter size provided in the utility's tariff.

Commission response

The commission revises the provision to state that "[a] SIC must be nondiscriminatory and be applied uniformly to each meter size, if any, provided in the utility's tariff" to account for instances where an applicant charges a flat rate (i.e., for sewer) instead of including meter sizes in its tariff.

Proposed §24.76(c)(1)(B)- Application of SIC to meter size

Proposed §24.76(c)(1)(B) would establish that a SIC applies to each meter size provided in the utility's tariff based on the calculation and multiplier under §24.76(e).

Ricks recommended proposed §24.76(c)(1)(B) be revised to include language requiring a SIC to only be applied to distribution revenues and explicitly exclude certain fire protection surcharges to maintain cost causation. Ricks explained that such language is an essential customer protection found in Pennsylvania's counterpart statute (66 Pa. C.S. § 1358). Ricks further recommended new §24.76(c)(1)(F) be revised to include a percentage cap on the total cumulative revenue increase available for recovery through a SIC. Ricks noted that the omission of such a cap is a departure from industry best practices established by the founders of the SIC mechanism and violates the cost-causation and affordability principles of Texas Water Code §13.183(c). Ricks indicated that, without such a cap, a SIC allows for "mathematically-provable over-recovery" when combined with multi-step increases from previous comprehensive base rate proceedings. Ricks noted that Pennsylvania (PA Act 12) explicitly limits its SIC to 5% of the amount billed to customers to prevent rate shock. Similarly, Ohio (Ohio Revised Code § 4909.172) limits waterworks surcharges to 4.25%. Ricks stated that the commission decided in 2021 to forgo adding the 10% cap, which has "left Texas ratepayers with significantly fewer protections than those in the best practices' states the utilities claim to emulate." Ricks stated that to ensure the statutory objective of more affordable service, the commission should include a cap on SIC recovery as is found in SIC statutes or rules in Pennsylvania, New Jersey, North Carolina, Illinois, New York, and Ohio. Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement a cap or otherwise limit the scope of SIC recovery for the reasons already stated. There is no statutory support for implementing a recovery cap. The commission declines to implement any fire protection surcharge because it is unclear what that mechanism would entail. The commission also revises the provision to state that "[a] SIC applies to each meter size provided in the utility's tariff, if any, based on the calculation and multiplier…" for the reasons already stated under the heading for §24.76(c)(1)(A).

Proposed §24.76(c)(1)(C)- Native format and formula requirements

Proposed §24.76(c)(1)(C) would require a SIC application to include any relevant data, attachments, or supplementary materials filed in their native format and, if applicable, any formula intact.

SJWTX recommended revising proposed §24.76(c)(1)(C) to exempt the external and internal supporting documentation required under §24.76(d)(1)(J)(iii) and (iv) from the new confidential filing requirements adopted that amended §22.71, relating to Commission Filing Requirements and Procedures and §22.72, relating to Form Standards for Documents Filed with the Commission under Project No. 52059. SJWTX stated that such supporting documentation is likely to be voluminous and may contain competitively sensitive pricing information. SJWTX provided draft language consistent with its recommendation. OPUC opposed SJWTX's proposed exemption to §22.71 that would permit the filing of only unredacted information instead of filing both redacted and unredacted copies. OPUC stated that the proposed revision may potentially prevent intervenors that may not be eligible to review highly sensitive material and could result in the exclusion of "information that is not protected by proxy." Ricks recommended proposed §24.76(c)(1)(C) be revised to comply with Texas Water Code §13.183(c-2) and the disclosure requirements of the Public Information Act (PIA) under Texas Government Code Chapter 552. Ricks further recommended that SJWTX's request for a waiver of the commission's filing rules be rejected. Ricks additionally recommended that §24.76(c)(1)(C) be applied universally to all commission rate-related applications. Ricks opposed the utility practice of withholding voluminous documentation until requested by the commission. Ricks noted that the proposed rule omits a means to ensure the public record is complete upon the filing of a SIC application. Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement SJWTX's recommended change. There are only two exemptions to the redaction requirements for confidential filings under §22.71(j)(1)(C)(i) and (ii) for letters of credit and for documents in Excel format where redaction is impracticable. Any other exemptions should be listed explicitly in §22.71 itself, not separately in the applicable rule governing a specific application or proceeding. The limited exemptions under §22.71(j)(1)(C) are exhaustive and represent a commission decision to unilaterally apply the confidential redaction requirements to all filings except to the limited circumstances specifically enumerated in the filing rule. The commission also declines to implement Ricks's proposed language because it is redundant of the confidential filing requirements under §22.71(j). §22.71 applies to all commission filings and that compliance with the PIA under Texas Government Code § 552 is required regardless of whether a commission rule specifically states the requirement. Therefore, Ricks's proposed change is unnecessary.

OPUC recommended proposed §24.76(c)(1)(C) be revised to require a SIC application and any supporting documentation filed with the commission to be "in an easily readable, searchable format." OPUC stated imposing such a requirement would benefit both commission staff and intervenors in reviewing and facilitating expedited review. OPUC further recommended that the word-searchable requirement should also apply to information not listed in §13.183(c-2) (i.e., "other documentation," including internal documentation) because that provision is only effective as of September 1, 2026. Specifically, OPUC indicated that its recommended language would ensure that the proposed rule is applicable to SIC applications filed before September 1, 2026. TAWC opposed OPUC's recommended changes because the revisions are improper and contrary to statute. TAWC also opposed OPUC's proposed recommendation that both the application and any supporting documentation be filed in an easily readable and searchable format. TAWC stated that adding such requirements concerning the form and format of components of a SIC application, including subjective requirements such as "easily readable," are "unnecessary and could potentially lead to motion practice that could have been easily avoided." TAWC maintained that SIC application requirement should be unambiguous.

Commission response

The commission declines to implement OPUC's recommended changes because they are unnecessary. However, the commission does revise the rule to mandate that applications include word-searchable documents. Formatting standards applicable to all filings are already enumerated under §22.72. Specifically, §22.72(c)(1)(A) states that "[i]tems must be formatted in a manner that renders the information legible and generally accessible." Additionally, §24.76(d)(2)(J)(i)(III) specifies that external documentation must be word-searchable and organized by each NARUC account. To address OPUC's concerns, the commission revises §24.76(d)(2)(J)(i)(III) to state that: "External documentation and internal documentation, must be word-searchable. External documentation and internal documentation must be organized by each NARUC Account, grouped by capital project." The commission also revises §22.74(d)(1)(J)(ii) to specify that "all associated supporting documentation described by clauses (iii) and (iv) of this subparagraph with page number cross-references to each capital project and NARUC account included in the application." In conjunction with those additions, the commission also adds new §24.76(d)(1)(D) and renumbers the subsequent subparagraphs. New §24.76(d)(1)(D) requires each asset in a SIC application to be directly associated with at least one NARUC account, grouped by capital project. The above changes are reflected in revisions made to Workpaper Schedule C-2. The specific changes to Workpaper Schedule C-2 are discussed under the appropriate heading.

Proposed §24.76(c)(1)(D)- Test year limitation of SIC cost recovery

Proposed §24.76(c)(1)(D) would limit SIC cost recovery to eligible plant placed into service subsequent to the end of the future test year or combined historic and future test year if the applicant used a test year in a base rate proceeding after September 1, 2026, that includes either only future data or combined historic and future data.

Ricks expressed support for the date boundary applicable to future test years in proposed §24.76(c)(1)(D). However, Ricks recommended the provision be revised to include "forensic safeguards necessary to prevent a mathematically provable over-recovery when a utility uses a future or combined test year," and to comply with the affordability mandate under Texas Water Code §13.183(c) and the refund requirements of Texas Water Code §13.184(d). Ricks commented that additional review is needed to establish a specific account methodology for a base rate offset to ensure compliance with cost-causation principles. Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended changes for the reasons already stated under Question 4a. Ricks's comments concerning cost causation have been addressed under the relevant subheading.

Proposed §24.76(c)(1)(E)- Prohibition on SICs concurrent with base rate proceeding

Proposed §24.76(c)(1)(E) would prohibit a utility from establishing or amending a SIC while a comprehensive base rate proceeding for that utility is pending before the commission. The provision further establishes that a utility will be deemed to have withdrawn a pending SIC application if the utility files a base rate application and the presiding officer will dismiss the application.

Ricks recommended that proposed §24.76(c)(1)(E) be revised to prohibit a utility from establishing or amending a SIC until 12 months after the commission order establishing rates is final and appealable. Ricks noted that such language was included in the original 2021 draft but was not adopted. Ricks emphasized such a prohibition is necessary to prevent a "rolling rate case" environment that increases regulatory expenses. Ricks stated that additional review is necessary to clarify the definition of a "pending" case to ensure it includes the full period for motions for rehearing under Texas Government Code §2001.146 to prevent utilities from using a SIC to circumvent final commission orders.

Commission response

The commission declines to implement the recommended change. The provision referenced is §24.76(d)(3) of the proposed version published in Project No. 50322. The rationale in the adoption order for the removal of this provision was: "The commission does not agree with the commenters that the proposed rule creates a 45-month waiting period. However, the commission does agree that the 12-month waiting period creates an unnecessary delay in implementing a SIC and removes this requirement from the adopted rule." If a utility has a lengthy rate case, it is possible for a utility to file a SIC immediately after its base rate proceeding has concluded. There is no statutory basis to limit a utility's ability to file a SIC in that manner. If necessary, commission staff or intervenors can make recommendations, or parties can agree, in a base rate case to prohibit a utility from seeking SIC relief within a specified amount of time from the end of the base rate proceeding.

New §24.76(c)(1)(F)

Ricks recommended new §24.76(c)(1)(F) be added to the rule, which would include a percentage cap on the total cumulative revenue increase available for recovery through a SIC. Ricks noted that the omission of such a cap is a departure from industry best practices for SIC proceedings and violates the cost-causation and affordability principles of Texas Water Code §13.183(c). Ricks emphasized that a recovery cap is necessary to prevent rate shock and indicated other states with SIC mechanisms include such a cap. Ricks maintained that a SIC recovery cap is the "only objective tool the Commission has to enforce this affordability mandate" of Texas Water Code §13.183(c). Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement a cap on SIC recovery for the reasons already stated.

Proposed §24.76(c)(2)- Eligibility for and timing of SIC application

Proposed §24.76(c)(2) would establish the requirements for a utility to be eligible to apply for a SIC and the timing requirements for filing SIC applications.

Proposed §24.76(c)(2)(D)- Quarterly filing requirements for SIC applications

Proposed §24.76(c)(2)(D) would limit SIC applications to be filed in a specific calendar year quarter based on the last two digits of the applicant utility's certificate of convenience and necessity (CCN) number, unless good cause is shown for filing in a different quarter. The provision also permits a utility holding multiple CCNs to file an application in any quarter for which any of its CCN numbers is eligible.

CSWR, TAWC, and SJWTX recommended deleting the filing schedule for SIC applications under proposed §24.76(c)(2)(D) on the basis that such a schedule is unnecessarily complex and burdensome on utilities. CSWR, TAWC, and SJWTX indicated that such a filing schedule is unnecessary for administrative efficiency purposes since utilities may only file one SIC per calendar year. Moreover, given the historically low volume of SIC applications, it is unlikely that utilities will file at the same time and substantially affect the workload of commission staff. CSWR indicated that filing limitations for SIC proceedings may impact the timing of adjudications in other commission proceedings. TAWC similarly remarked that the prohibition on filing a SIC while a comprehensive base rate proceeding is pending has previously caused timing issues that necessitate the filing of a good cause exception or otherwise delay filing of a SIC. CSWR commented that utilities should be authorized to file a SIC when necessary to timely recover investments, which will very likely not occur at the same time each year. Houston recommended that if the commission implements TAWC's proposal to strike the CCN-based filing schedule under proposed §24.76(c)(2)(D), the commission should include language in the rule limiting a utility to a single SIC filing within any 12-month period. Houston commented that this alternative would ensure utilities are provided sufficient flexibility when filing their SIC applications while simultaneously avoiding the potential for overlapping SIC applications that may strain commission resources. OPUC and Ricks opposed TAWC and SJWTX's recommendation to delete the CCN-based filing schedule. OPUC stated that, due to the streamlining changes to SIC proceedings made by SB 740, it is likely that more SIC applications will be filed with increasing frequency in the future. OPUC noted that, despite the newly abbreviated SIC timelines, the burden on commission staff and intervenors to review applications, conduct discovery, and litigate disputes remains the same. Ricks commented that the 60-day deadline imposed by SB 740 is a "hard deadline" which requires substantive review of the transaction ledger by commission staff, OPUC, and other intervenors. Ricks remarked that if the schedule is omitted, several large utilities could potentially filing large SIC applications contemporaneously. Ricks stated this could result in utilities strategically filing applications to exhaust OPUC and ratepayer intervenors and therefore prevent "the asset-by-asset forensic audit required by TWC § 13.183(c-2) within 60 days." Ricks also stated that the rule omits a definition of "good cause" for utility seeking to file a SIC application outside of its eligible calendar quarter. Ricks stated that this effectively create as loophole where "utilities can claim emergency capital needs' to bypass the queue." Ricks maintained that SB 740 only accelerated the processing of a complete application but did not "grant utilities the right to create an administrative bottleneck." Ricks stated that a SIC filing schedule is consistent with the requirement of Texas Water Code § 13.182 for the commission to ensure rates are just and reasonable by efficiently managing SIC applications and facilitating effective review within the statutory 60-day time period. Ricks noted that the utility commenters argument that SIC applications are currently infrequent fails to address that SB 740 was intended to incentivize more frequent applications.

Commission response

The commission declines to delete the provision as recommended by CSWR, TAWC, and SJWTX because of the possibility of numerous SIC applications arriving within a short period. The commission agrees with Ricks that the filing schedule should be preserved to mitigate the risk of overlapping SIC proceedings and minimize the human resource strain of multiple SIC proceedings occurring contemporaneously.

OPUC recommended proposed §24.76(c)(2)(D) be revised to use an alternative methodology for staggering SIC applications. Specifically, OPUC recommended the provision be revised such that the last digit of the utility's CCN corresponds with the quarter in which the utility is eligible to file (e.g., CCNs ending with 0, 1, and 2 would file in Q1 [January through March]; 3-4 in Q2; 5, 6, and 7 in Q3; and 8 and 9 in Q4). Ricks supported OPUC's proposal for a staggered filing schedule for SIC applications. OPUC stated that a staggered filing schedule would facilitate more efficient review of SIC applications as they will allow parties to administer resources more effectively. OPUC commented that this revised schedule would provide more time for applicants to prepare SIC applications as well as reduce commission and intervenor workload by ensuring utilities can only file in a single quarter. OPUC noted that currently, "larger utilities have numerous CCNs that allow them to file in the quarter of their choosing" whereas assigning a specific quarter would increase predictability and efficiency in SIC proceedings. OPUC remarked that this change is necessary because the commission noted in the initial adoption order for §24.76 in Project No. 50322 that there are "significantly more water utilities eligible for SIC than there are electric utilities eligible for GCRR and interim TCOS." OPUC provided draft language consistent with its recommendation. SJWTX and TAWC opposed OPUC's changes to the SIC filing schedule. SJWTX remarked that OPUC's claim that larger utilities have numerous CCNs is inaccurate. SJWTX stated that the majority of utilities have a single CCN for water and a single CCN for sewer. SJWTX contended that OPUC's proposed change would limit the timeframe in which a utility may file a SIC application and therefore increase regulatory lag contrary to legislative intent, particularly in conjunction with the prohibition on filing a SIC while a comprehensive base rate proceeding is pending. TAWC commented OPUC's proposed filing schedule is unnecessarily restrictive, particularly for utilities with multiple CCNs that were obtained at the same time. TAWC also commented that the meaning of "oldest [CCN]" in OPUC's proposal is also unclear. Ricks observed that the proposed filing schedule omits a necessary "Anchor CCN requirement" which would permit large utilities to "choose' a quarter and clump' filings to the detriment of ratepayer review." Ricks opposed the utility commenters' recommendation to delete the staggered filing schedule for SIC applications. Ricks encouraged further discussion of OPUC's proposed language for the SIC filing schedule and to establish that filing outside of the assigned quarter without a declared disaster under Tex. Gov't Code Chapter 418 shall result in a mandatory finding of administrative insufficiency."

Commission response

The commission declines to revise the provision as alternatively recommended by OPUC and Ricks as it would not necessarily mitigate overlapping or contemporaneous SIC applications. Nor would either proposal prevent any potential gamesmanship associated with selecting a CCN by a SIC applicant for scheduling purposes. Additionally, the commission agrees with SJWTX and TAWC that OPUC's proposal is ambiguous and therefore may arbitrarily and unnecessarily restrict when a utility may file a SIC.

Proposed §24.76(c)(3)- Eligible costs

Proposed §24.76(c)(3) would establish the qualifications associated with eligible costs that may be included, and ineligible that are prohibited, from including in a SIC application.

Proposed §24.76(c)(3)(A)- Eligible plant

Proposed §24.76(c)(3)(A) would limit SIC cost recovery to eligible plant that is not already included in the utility's rates and eligible plant that has been placed into service after the later of the ending date of the 2019 reporting period reflected in the utility's annual report filed with the commission as required by §24.129, relating to Water and Sewer Utilities Annual Report, or the end of the test year used in the utility's most recent base-rate proceeding.

OPUC recommended that §24.76(c)(3)(A) be revised to clarify that a SIC "is limited to recovering cost for eligible plant that is not a replacement of previously existing infrastructure.". OPUC remarked that its proposed language includes "assets which may have been owned by a previous predecessor and closes a loophole when a utility acquires an asset not in its own rate base." OPUC provided draft language consistent with its recommendation. TAWC opposed OPUC's recommended changes and maintained that the "full impact of any replacements, along with consideration of other cost of service changes, will be reconciled in the SIC applicant's next comprehensive rate case, but they must be allowed in SICs so return of and on those assets can start earlier" as intended by Texas Water Code § 13.183. TAWC recommended its proposal for a depreciation adjustment of retired plant be adopted if the commission wishes to address replacements. TAWC maintained that replacements must be permitted for inclusion in a SIC "so return of and on those assets can start earlier as the SIC statute intends." Ricks also commented that proposed §24.76(c)(3)(A) omits the requirement for assets to be non-revenue producing distribution improvements which is "the primary forensic boundary" of a SIC. Ricks indicated that, without such a distinction, existing ratepayers essentially subsidize "system expansions intended for new developers" which violates the cost causation principle. In support of her claim, Ricks referred to Docket No. 53428 as an example of a violation of the cost causation principle.

Commission response

The commission declines to implement OPUC's and Ricks's recommended changes. The addition of the retirement and replacement adjustment mechanism under §24.76(c)(3)(B) and §24.76(c)(3)(B)(i) substantially addresses the concerns of all stakeholders. Replacements and retirements as well as service extensions are discussed under the headings for Question 3b. Ricks's comments regarding non-revenue producing assets are addressed under the appropriate header.

OPUC recommended correcting the cross-reference in §24.76(c)(3)(A) to §24.129, relating to Water and Sewer Utilities Annual Reports.

Commission response

The commission implements the recommended change.

Proposed §24.76(c)(3)(B) and §24.76(c)(3)(B)(i)-(iii)- Ineligible plant (replacement of existing plant)

Proposed §24.76(c)(3)(B) would prohibit a utility from including any assets in a SIC application that have replaced existing plant to provide the same service or level of service. In describing the prohibition, the provision defines "existing plant" as including plant that is included in the utility's current rates established in the utility's most recent base-rate proceeding but excluding eligible plant that is included in the utility's current SIC for a proceeding in which the utility seeks to amend its SIC.

CSWR, TAWC, TWU, and SJWTX opposed including the prohibition on "including any assets in a SIC application that have replaced existing plant to provide the same service or level of service" in §24.76(c)(3)(B). TAWC, TWU and SJWTX further recommended deleting §24.76(c)(3)(B) in its entirety Houston, OPUC, and Ricks opposed the utility commenters proposed edits for the reasons already stated. Houston commented that allowing SIC recovery of replacement assets used for ordinary day-to-day operations or related to system expansion "renders any incentive to achieve…the intent of the legislation effectively moot." TWU emphasized the failure to replace aging infrastructure is essential to system reliability and the protection of public health. TWU stated that it is impossible to fully reconcile all cost-of-service impacts of replacement plant outside of a comprehensive base rate proceeding while still ensuring SIC proceedings are streamlined and efficient. TWU commented that the legislative intent for a SIC is to be a "narrow, forward-looking surcharge focused on infrastructure investment," and not a re-evaluation of "embedded plant determinations." SJWTX indicated that the removal of the prohibition is essential to ensure the timely recovery of capital investments necessary to provide safe and reliable service to customers through a SIC. SJWTX further noted that the prohibition implies that interim relief is inappropriate for the replacement of assets such as well pump components. SJWTX stated that it is impossible to provide continuous and adequate service without the replacement of certain asset components. Houston explained that the goal of SB 740 and the SIC mechanism as a whole is to promote "investment in improvements to historically underinvested systems that pose reliability and safety risks to Texas consumers." Houston maintained that eligibility for SIC recovery should be based on a commission determination that the asset for which recovery is sought results in tangible and material improvements to existing customers of the utility. OPUC endorsed adding rule language that would require utilities to offset costs for replacement assets and assets acquired since the utility's last comprehensive base rate proceeding. OPUC proposed quantifying the phrase "same service or level of service" by considering the "depreciation of the plant; the expected life of the plant; and additional measures that ensure the utility does not circumvent the intention of the Commission by allowing for double recovery."

Commission response

The commission declines to delete the provision as recommended by TAWC, TWU, and SJWTX. The addition of the replacement plant offset under §24.76(c)(3)(B) and §24.76(c)(3)(B)(i) substantially addresses the concerns of all stakeholders. Replacements and retirements as well as service extensions are discussed under the headings for Question 3b. The commission declines to quantify "same service or level of service" as the relevant factors will vary depending on the asset.

Ricks observed that opposition to §24.76(c)(3)(B) does not address the "the forensic reality of the McCloskey decision," which held that allowing a return on items no longer in service (the replaced items) while simultaneously collecting a surcharge on the replacement results in unreasonable rates. Ricks emphasized that further discussion is needed to require a mandatory "Credit for Retired Plant" in the SIC formula to ensure that net investment, not gross cost, is the basis for a surcharge.

Commission response

The ADIT deduction is discussed under the appropriate heading. The commission notes that the "Credit for Retired Plant" resembles the new adjustment mechanism for replaced assets of retired plant under §24.76(c)(3)(B)(i). The commission declines to make any revisions in response to Ricks's comments.

OPUC recommended that proposed §24.76(c)(3)(B) should require asset replacements that are included in the utility's base rate or owned by a predecessor utility to be identified in the SIC application and should be prohibited from inclusion in rate base. OPUC stated that such language is necessary to close a loophole in which a utility may include an asset in a SIC application as a system improvement on the sole basis that it was owned by an acquired utility. OPUC provided draft language consistent with its recommendation. OPUC further recommended defining same service or level of service using quantifiable metrics that distinguish between replacement assets from true improvements. TWU opposed OPUC's recommendation to revise the term "eligible plant" under §24.76(c)(3)(B). Ricks agreed with OPUC that the definition of "existing plant" must include assets installed by predecessor owners to prevent a "privatization premium" from being charged to customers without any new and tangible improvement to service.

Commission response

The commission declines to implement OPUC's recommended change. For purposes of a SIC, the fair market value of an acquisition will be taken into account and specific requests concerning the recovery of assets recently placed into service by an acquired entity will be performed on a case-by-case basis. Therefore, the commission declines to adopt an outright prohibition.

Proposed §24.76(d) and (d)(1)- SIC application

Proposed §24.76(d) would establish the form and content requirements for SIC applications or amendments.

Proposed §24.76(d)(1)- Commission-prescribed form and content requirements

Proposed §24.76(d)(1) would require a SIC application or amendment to be filed using the form prescribed by the commission and to include the information required by that subsection.

CSWR generally commented that the filing requirements under proposed §24.76(d)(1) should be abridged because they are overly complicated and exceed even the requirements for comprehensive base rate cases. CSWR noted that requiring such a level of documentation and detail is contrary to the general commission and legislative goal for utilities to acquire and invest in troubled water or sewer systems. CSWR further noted that many such systems do not have the information required by the proposed rule. Houston and OPUC opposed the utility commenter's recommendation to reduce the documentation requirements of initial SIC applications and maintained that utilities have the burden of proof in SIC applications. Houston noted that the time for a utility to prepare an application prior to filing is "effectively unlimited" therefore "the burden to ensure sufficient information for expedient processing is available should be placed on the applicant." OPUC further commented that no provision of SB 740 intends to lower the burden of proof surrounding a utility accurately accounting the eligible plant for which recovery is sought. OPUC asserted that utilities should maintain adequate recordkeeping to avail themselves of SIC recovery. In response to CSWR's comments about records of an acquired utility being incomplete or missing information the proposed rule requires, OPUC acknowledged the challenges associated with acquiring smaller utilities in varying conditions, but maintained that the commission should not "lower its standards across all water and sewer utilities." OPUC commented that such records should therefore be processed in a comprehensive rate case because they would not be appropriate for inclusion in a SIC application. OPUC maintained that the provision of incomplete and inaccurate records is inconsistent within the SIC statutory framework.

Commission response

The commission declines to implement CSWR's recommended change. The rule requirements for SIC applications reflect the minimum standards the commission has deemed necessary for SIC applications. This follows from SB 740's requirement that utilities "substantiate each claimed eligible cost" when seeking SIC recovery. These requirements are also directly reflected in the commission-prescribed forms, including the SIC filing packages. A SIC applicant can seek a good cause exception under §22.5 and §24.2, relating to Suspension of Rules and Commission-Prescribed Forms when it believes suspension of specific documentation requirements is justified- such as for acquired utilities with inadequate recordkeeping. The presiding officer can evaluate that rationale and issue a ruling on the good cause exception request on a case-by-case basis.

Proposed §24.76(d)(1)(D)- Comprehensive base rate proceeding information

Proposed §24.76(d)(1)(D) would require a SIC application to include specific information concerning the applicant's last comprehensive base rate proceeding.

Proposed §24.76(d)(1)(D)(i)- Year of initiation of applicant's last comprehensive base rate proceeding

Proposed §24.76(d)(1)(D)(i) would require a SIC application to include the year the applicant's last comprehensive base rate proceeding was initiated.

SJWTX recommended proposed §24.76(d)(1)(D)(i) be revised to require a SIC applicant to provide the test year used in the applicant's last base rate proceeding. SJWTX commented that this change would align the information provided with the definition of "reconcilable cost" under proposed §24.76(e)(3) which references the end of the test year used in the utility's most recent base rate proceeding. OPUC agreed with SJWTX's revisions to §24.76(d)(1)(D)(i) to require the applicant provide the test year used in the applicant's last comprehensive base rate proceeding. OPUC explained that it will help clarify when costs should be excluded because they are embedded in the future test year and is consistent with the future test year limitation contained in proposed §24.76(c)(1)(D). Ricks supported SJWTX's recommendation to amend proposed §24.76(d)(1)(D)(i) to include the test year end date but for different reasons than those provided by SJWTX. Specifically, SJWTX noted that "reconcilable cost" is defined in the proposed rule as the original cost of eligible plant installed after the "end of the test year used in the utility's most recent base-rate proceeding." In contrast, proposed §24.76(d)(1)(D)(i) only requires the year the base rate case was initiated. Ricks stated that in Texas, a base rate case initiated in 2024 might use a test year ending in 2023. Therefore, if the SIC application only includes the year the test year was initiated, the commission cannot verify whether the assets requested in the SIC were already "used and useful" and accordingly included in the rate base of the prior ate proceeding. Ricks explained this discrepancy omits evidence relevant to when a SIC should begin and without requiring disclosure of the specific test year end date, the 30-day sufficiency review may be functionally "blind to potential tail-end' double recovery" where assets from the end of a historic test year are included into a new SIC. Ricks concluded that the appropriate starting line required by the definition of the "reconcilable cost" is the test year end date. Ricks also encouraged further discussion on requiring a "Baseline Plant-in-Service-Ledger" from a prior rate proceeding to allow for a direct evidentiary reconciliation during the sufficiency review period of a SIC application. Ricks provided draft language consistent with her recommendation.

Commission response

The commission agrees with commenters and adds new §24.76(d)(1)(D)(i), which requires the SIC applicant to provide "the beginning and end dates of the test year used in the applicant's last base rate proceeding." The commission also adds new §24.76(d)(1)(D)(ii), which requires the SIC applicant to specify whether the test year is a historic, combined, or future test year to align with the implementation of House Bill 2712 (89R) in Project No. 59086. The commission renumbers the other clauses in that subparagraph accordingly and makes conforming revisions to the commission-prescribed form.

Proposed §24.76(d)(1)(D)(iii)- Copies of final orders issued by the Texas Commission on Environmental Quality (TCEQ) relevant to the SIC application

Proposed §24.76(d)(1)(D)(i) would require a SIC application to include copies of final orders issued by the TCEQ or any other predecessor agency that are relevant to the application, such as orders relating to rate proceedings.

TAWC recommended the removal of proposed §24.76(d)(1)(D)(iii), in its entirety. TAWC commented that SIC applicants should be authorized to reference such orders without including such copies, which may be lengthy. TAWC further indicated that since such orders are publicly available, such copies are not necessary. TAWC provided draft language consistent with its recommendation.

Commission response

The commission declines to implement the recommended change. Some utilities have not yet had a rate case with the commission, meaning that TCEQ orders may contain the information necessary to support their systems. As stated previously, the burden of proof is on the utility to provide these orders in their SIC application, not the commission.

Proposed §24.76(d)(1)(E)- General information relating to each CCN possessed by the applicant

Proposed §24.76(d)(1)(E) would require a SIC application to include general information concerning each CCN possessed by the applicant.

Proposed §24.76(d)(1)(E)(i)- Current applicant CCNs

Proposed §24.76(d)(1)(E)(i) would require a SIC application to include all of the CCN numbers currently issued to the applicant including a separate identification of which CCN numbers apply to the provision of water service and sewer service, as applicable.

Commission response

The commission deletes the requirement for a separate identification of which CCN numbers apply to water or sewer as CCNs for the provision of water service always begin with a "1" and CCNs for the provision of sewer service always begin with a "2," rendering the requirement unnecessary. As rewritten, the provision requires "all of the CCN numbers currently issued to the applicant for the provision of water service and sewer service." The commission also makes conforming revisions to the SIC Application Form.

Proposed §24.76(d)(1)(E)(iii)- Pending sale, transfer, or merger (STM)

Proposed §24.76(d)(1)(E)(iii) would require a SIC application to include general information concerning whether the applicant has, at the time the application is filed, a pending STM under §24.239, relating to Sale, Transfer, Merger, Consolidation, Acquisition, Lease, or Rental, or §24.243, relating to Purchase of Voting Stock or Acquisition of a Controlling Interest in a Utility, including the docket control number associated with the STM application.

TAWC recommended proposed §24.76(d)(1)(E)(iii) be deleted from the rule. TAWC commented that such information is irrelevant to SIC proceedings and noted that customers of acquired systems through an STM "will not ordinarily be subject to newly proposed SICs immediately upon acquisition and possibly not ever." Conversely, if the commission prefers to consider "pending SIC matters in STM matters where initial rates are part of the STM application and immediate extension of a pending SIC request upon acquisition is requested" then such instances should be reviewed in the corresponding STM, rather than the SIC application. TAWC provided draft language consistent with its recommendation. Ricks opposed TAC's recommended deletion and disagreed with TAWC's conclusion that information regarding a utilities' STM proceedings is irrelevant to its SIC application. Ricks commented that under Texas Water Code §13.244(d)(3), a CCN applicant must provide a "capital improvements plan" with a budget and estimated timeline. Ricks noted that if a utility is allowed to file a SIC for projects where it has a pending STM, "there is a substantial forensic risk that the utility is seeking a surcharge for infrastructure that was already committed as a condition of the acquisition or is being valued at a price significantly higher than its depreciated original cost." Ricks remarked that the proposed rule omits any link between the capital improvement plan included in an STM proceeding and the SIC application's list of eligible plant. Ricks commented that without such a disclosure, the commission cannot verify that the utility is double-recovering initially through the purchase price of the acquired system reflected in base rates and again through the SIC for the same improvements.

Commission response

The commission disagrees with TAWC and declines to implement the recommended change. STM-related information is beneficial for commission staff and intervenors to review in a SIC proceeding to give a wider view of the utility's system footprint, financial health, and goals. It is also necessary to include given the addition of the load growth adjustment previously discussed and incorporated into the rule. The commission also makes clarifying changes to the provision to indicate that a proceeding under §24.243 is not generally considered to be an STM proceeding and also adds a catch-all indicating that any other application that involves the acquisition of a CCN should be disclosed in the SIC application.

Ricks recommended amending §24.76(d)(1)(E)(iii) by adding new sub-provisions that would require an applicant to provide a statement certifying that eligible costs included in the SIC were not included in any capital improvement commitments made in a pending or recently approved STM. The provision would also require disclosure of any acquisition adjustment or privatization premium associated with the assets in the pending STM to ensure over-recovery does not occur. Ricks commented that such a provision is necessary to ensure compliance with the cost causation principle and ensure rates are just and reasonable under Texas Water Code §13.182. Ricks also encouraged further commission evaluation of a standard for "Forensic Continuity" to ensure that when a system is acquired through an STM, the definition of "existing plant" under proposed §24.76(d)(3)(B) applies uniformly across predecessor and successor entities. Ricks proposed draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended change because it is unnecessary. The fair market valuation of an acquisition will be accounted for and specific requests concerning the recovery of assets recently placed into service by an acquired entity will be performed on a case-by-case basis. This evaluation includes a review of assets acquired through an STM. Commission staff will note any duplicative recovery in its recommendation and the presiding officer may address it in an order.

Proposed §24.76(d)(1)(F) and §24.76(d)(1)(F)(i)-(iii)- General information relating to currently effective SICs

Proposed §24.76(d)(1)(F) would require a SIC application to include general information concerning any currently effective SIC for water or sewer service, or both, as applicable. Proposed §24.76(d)(1)(F)(i) would require a SIC application to include whether the applicant has a SIC in effect as of the date the application is filed. Proposed §24.76(d)(1)(F)(ii) would require a SIC application to include each docket control number associated with the applicant's currently effective SIC for water service or sewer service. Proposed §24.76(d)(1)(F)(iii) would require a SIC application to include each CCN for which the currently effective SIC is applicable.

TAWC recommended proposed §24.76(d)(1)(F) be revised to delete the phrase "concerning currently effective SIC" because it is unnecessary. Specifically, the matters the provision references are explored under §24.76(d)(1)(F)(i)-(iii). TAWC provided draft language consistent with its recommendation. Ricks opposed TAWC's recommendation to revise proposed §24.76(d)(1)(F) to remove language regarding the applicant's currently effective SIC.

Commission response

The commission declines to implement the recommended change. It is necessary to clarify that the provision applies to any SICs the applicant currently has in effect as of the time of the application. This is to ensure compliance with §24.76(c)(2)(C)(i), which prohibits a utility from having more than one SIC in effect at any given time for each type of service unless the utility has multiple rate schedules for systems that have not yet been consolidated under a single rate. The commission also clarifies that the requirement applies to "any" SIC that is effective at the time of the application to reflect that a utility may have multiple SICs if the exception to the prohibition under §24.76(c)(2)(C)(i) is met. The commission also makes conforming revisions to the SIC Application Form.

Ricks recommended that new §24.76(d)(1)(F)(iv) require that a "Cumulative Impact Statement" be included in the application showing the total dollar amount recovered through all active SICs and the percentage that the total represents relative to the utility's revenue requirement approved in the utility's last comprehensive base rate proceeding. Ricks commented that the proposal attempts to minimize the disclosure requirements of the provision and that listing only a docket number is insufficient for an application to be complete under Texas Water Code §13.183(c-1). Ricks further commented that the provision omits "a numeric verification of the Cumulative Percentage Gap [i.e., a cap on the maximum amount of recovery through a SIC]." Ricks asserted that under Texas Water Code § 13.183(c), a SIC "may only be approved if the utility's annual total revenue increase including the proposed SIC-does not exceed 10 percent." Ricks commented that without requiring the application to include disclosure of the specific dollar amount and percentage of revenue that is being recovered through a currently effective SIC, both commission staff and intervenors are forced to manually reconstruct data from past dockets to determine whether the 10% cap is being violated. Ricks noted that this shifts the burden of proof from the utility to the ratepayer in violation of Texas Water Code §13.184(c). Ricks commented that such a provision is necessary to ensure the 10% cap required by Texas Water Code §13.183(c) and to comply with the expedited nature of SIC proceedings as required by SB 740. Ricks also encouraged further discussion of a standardized "Cap Calculation Worksheet" within the SIC Filing Package to prohibit utilities from masking surcharges that exceed the 10% statutory limit. Ricks proposed draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended change because it is unnecessary. A utility is already required to file its annual report with its SIC application under §24.76(d)(1)(N). The annual report includes a worksheet to provide SIC revenue information, therefore rendering the proposed addition unnecessary. The SIC legislation does not include any percentage cap and the commission declines to impose one in this rule. The SIC revenue cap proposal is discussed under the appropriate header.

Proposed §24.76(d)(1)(G)- Date of SIC application and confirmation of eligible filing quarter

Proposed §24.76(d)(1)(G) would require a SIC application to include the date the SIC application is being filed and a confirmation that the application is being filed in the appropriate filing quarter as specified by §24.76(c)(2)(D).

TAWC recommended proposed §24.76(d)(1)(G) be removed for the same reasons specified in its comments relating to proposed §24.76(c)(2)(D). Specifically, the assignment of specific filing quarters for SIC applications is unnecessary and presents issues for utilities. TAWC provided draft language consistent with its recommendation.

Commission response

The commission declines to implement the recommended change because the SIC filing schedule will remain in the rule to mitigate against numerous, overlapping SIC proceedings at the commission.

Proposed §24.76(d)(1)(H)- Description of eligible plant

Proposed §24.76(d)(1)(H) would require a SIC application to include a description of the eligible plant for which the utility seeks cost recovery.

Proposed §24.76(d)(1)(H)(i)- Eligible plant project information

Proposed §24.76(d)(1)(H)(i) would require a SIC application to include each project included in the request.

OPUC and Ricks recommended that proposed §24.76(d)(1)(H)(i) be revised to require each project included in the request to include a project or asset identification number that can be used to reference the project and reconcile supporting data. OPUC stated this change is necessary to ensure that the commission can efficiently review SIC applications. OPUC noted that SIC applications are frequently delayed by the disorganized records submitted by the applicant. OPUC provided draft language consistent with its recommendation. TAWC opposed the recommended changes on the basis that the revisions would "effectively require SIC applicants to restructure their internal recordkeeping practices solely for purposes of a SIC filing." TAWC stated that the proposed revisions would only increase the administrative burden associated with SIC applications, particularly for smaller utilities, without substantively improving commission oversight. TAWC characterized such an outcome as "unfair, unreasonable, and unjust" and that the recommended changes exceed the directive of Texas Water Code § 13.183(c-1)(1), which authorizes the commission to prescribe the necessary information by which a SIC application can be considered administratively complete. TAWC commented that if "the Commission determines that standardized recordkeeping is necessary, that should be addressed outside the SIC application process and this rule project" otherwise "the Commission should accept SIC applicant utilities' supporting records as kept in the usual course of business in whatever manner they are maintained."

Commission response

The commission declines to implement the recommended change because it is unnecessary. The addition of §24.76(c)(1)(D) requiring each asset in a SIC application to be directly associated with at least one NARUC account, grouped by capital project and the corresponding changes to §24.76(d)(1)(J)(i)(III) and §24.76(d)(1)(J)(ii) address OPUC and Ricks's concern. It is necessary for the commission to be able to identify claimed costs related to particular assets so it can determine whether those costs are suitable for SIC recovery. Accordingly, the rule changes include conforming revisions to Workpaper Schedule C-2, which require asset-level detail. Workpaper Schedule C-4 also requires asset names or identifiers if the applicant used group depreciation in its last comprehensive base rate proceeding.

Proposed §24.76(d)(1)(H)(ii) and §24.76(d)(1)(H)(ii)(II) and (III)- Costs, benefits, and transaction details of eligible plant

Proposed §24.76(d)(1)(H)(i) and §24.76(d)(1)(H)(ii) would require a SIC application to include a detailed explanation of the benefits of each project and project component, including how each project has improved or will improve service, and any reliability impacts and transaction details supporting eligible costs substantiated by the documents specified in §24.76(d)(1)(J), itemized by the applicable NARUC account number.

TAWC and SJWTX recommended proposed §24.76(d)(1)(H)(ii) be revised to remove the requirement to identify "each project component" because it is overly burdensome, ambiguous, and duplicative. SJWTX noted that the explanation of the benefits and reliability impact of a project would necessarily extend to each component of that project, therefore rendering the requirement to provide such explanation as duplicative. Houston and OPUC opposed TAWC's recommended changes. Houston indicated there may be instances where some components of a project may be eligible for recovery through a SIC and other components may be ineligible. However, Houston endorsed the elimination of component-level benefit "in cases where the entire project constitutes a system improvement." OPUC agreed that the term "project component" in proposed §24.76(d)(1)(H)(ii)(I)-(II) is ambiguous but recommended defining the term rather than removing it as proposed by TAWC and SJWTX. OPUC explained that providing a definition for "project component" would help "reduce the likelihood that an applicant unnecessarily excludes smaller costs" and provide clarity as to the totality of the costs associated with the eligible plant included in a project and avoid the inclusion of costs that are not part of the total cost of a specific project. OPUC noted that otherwise the commission would only possess information on the total costs of a project which risks an applicant "rounding up the total cost of the project." OPUC maintained that a definition would provide greater information to the commission as to projects included in SIC applications and therefore permit more efficient review of the merits of whether plant is eligible in accordance with commission rules and Texas Water Code § 13.183.

Commission response

The commission disagrees with TAWC and SJWTX and declines to implement the recommended change. The commission agrees with Houston that some parts of a project may be eligible for recovery while other portions may be ineligible. Understanding which portions of a project are eligible for inclusion in SIC recovery is critical to overall SIC rate approval. For clarity, the commission revises §24.76(d)(1)(H)(ii)(I) to indicate that "project component" refers each individual asset in a project. In a SIC application, each asset must be directly associated with at least one NARUC account, which in turn must be grouped by project. A utility must describe the benefit of each "project" under Workpaper Schedule C-1, which may consist of one or more NARUC accounts where assets are grouped. As such, the benefit narrative must be provided at the project level; not for each individual asset. However, the commission must be able to review each component (i.e., asset or asset group) of a project and the associated costs to determine whether the plant is eligible and substantiated. Accordingly, the commission revises §24.76(d)(1)(H)(ii)(II) to remove "project component" to align with Workpaper Schedule C-1 as the description of project benefits does not need to be provided for each individual asset. The commission also revises §24.76(d)(1)(H)(ii)(III) to specify that the transaction details must be "cross-referenced with the applicable external documentation or internal documentation."

TAWC recommended revising proposed §24.76(d)(1)(H)(ii)(II) to only require an explanation of the benefits of each project, for the same reasons specified in its comments on proposed §24.76(c)(3)(B). Specifically. TAWC commented that the requirement to explain how each project has improved or will improve service, including any reliability impacts, is inherently subjective and therefore prone to disputes. OPUC opposed TAWC's recommended revisions but agreed with TAWC that the phrase "any reliability impacts" is ambiguous. OPUC also disagreed that the proposed requirement for an applicant to provide a detailed explanation as to how each project has improved or will improve service is vague. OPUC recommended that the commission retain the proposed language and define the phrase "any reliability impacts." Ricks opposed the proposals of utility commenters to remove descriptions of reliability impacts and service improvements. Ricks explained that such information is essential to ensure the fulfillment of the statutory purpose of SICs to accelerate infrastructure replacement. Ricks noted that the proposed rule does not include a requirement for the utility "to certify that the described benefits do not result in increased revenue from new customer connections" and therefore becoming a developer subsidy.

Commission response

The commission agrees with TAWC and OPUC that the term "reliability impacts" is ambiguous and strikes it from the rule. However, the commission retains the word "reliability" in Workpaper Schedule C-1 as reliability enhancements be one way in which a project improves service.

TAWC recommended replacing the phrase "transaction details supporting eligible costs" with the phrase "support for eligible costs" under §24.76(d)(1)(H)(ii)(III). OPUC opposed TAWC's recommendation as the phrase "support for eligible costs" is more ambiguous than the proposed language. OPUC recommended the commission maintain the proposed language, define the term "transaction detail," and provide example transaction details. OPUC stated its alternative revisions would help set expectations for SIC applicants and therefore promote greater consistency among SIC applications. OPUC expressed support for the commission requiring transaction details regardless of whether a sample for audit methodology is implemented.

Commission response

The commission declines to implement the recommended change. A utility must provide specific asset-level information in Workpaper Schedule C-2 and, if applicable, Workpaper Schedule C-4. This is to ensure that each cost included in a SIC is eligible for recovery.

SJWTX recommended proposed §24.76(d)(1)(H)(ii)(III) be revised to only require a transaction ledger if the applicant elects to use a sample for audit. SJWTX noted that currently the optionality for a sample for audit under proposed §24.76(d)(1)(J)(ii) is inconsistent with the requirements under proposed §24.76(d)(1)(H)(ii)(III). OPUC agreed with SJWTX that the requirement of proposed §24.76(d)(1)(J) for an applicant to provide "information to substantiate each claimed eligible cost of the applicant's eligible plant that is not already included in the applicant's rates" is inconsistent with the authorization in proposed §24.76(d)(1)(J)(ii) permitting an applicant to provide transaction ledger to determine a sample for audit. Specifically, the two provisions "will not actually result in each claimed eligible cost being substantiated."

Commission response

The commission declines to implement the recommended change because it is moot as the sample for audit and transaction ledger have been removed from the rule. Therefore, there is no option between providing a transaction ledger or all substantiating documentation. To meet Texas Water Code § 13.183(c-2)'s requirement to "substantiate each claimed eligible cost" for which the utilities seek SIC recovery, utilities must file all substantiating documentation with their SIC applications.

OPUC recommended that proposed §24.76(d)(1)(H)(ii)(III) be revised to require the transaction details identify whether the cost originated from external, unaffiliated sources such as third-party vendors or internal sources such as the utility or its corporate affiliates. OPUC further recommended that if the cost originated internally, then the applicant should be required to specify the nature of such internal costs. OPUC stated this change would be beneficial for informing the review of SIC applications by the commission and intervenors. OPUC provided draft language consistent with its recommendation.

Commission response

The commission agrees with OPUC but implements the recommended change as part of Workpaper Schedule C-2. As stated previously, the commission adds three columns to Workpaper Schedule C-2 to identify the type of internal documentation, the origin of the "other cost,", and the internal document identifier. The commission also revises the existing columns covering the same subject matter to refer to the external document type (e.g., invoice, receipt, etc.), external document issuer, and external document identifier.

Proposed §24.76(d)(1)(J) and §24.76(d)(1)(J)(i)-(iv)- Information substantiating each claimed eligible costs

Proposed §24.76(d)(1)(J) would require a SIC application to include information to substantiate each claimed eligible cost of the applicant's eligible plant that is not already included in the applicant's rates. Proposed §24.76(d)(1)(J)(i) and (ii) specify the form and manner by which eligible costs must be substantiated, including descriptions of each capital project or addition that correlates with all capital expenditures, dependent on whether an applicant elects to provide a sample for audit based on a transaction ledger or provide all associated supporting documentation to the commission. Proposed §24.76(d)(1)(J)(iii) and (iv) would specify what categories of supporting documentation qualify as external documentation or internal documentation.

TAWC recommended the commission revise proposed §24.76(d)(1)(J) to replace the phrase "information to substantiate each claimed eligible cost" with "information to substantiate the total claimed eligible cost." TAWC commented that its recommended change would reduce the filing burden on SIC applicants and provided draft language consistent with its recommendation. OPUC opposed TAWC's recommended revision on the basis that it is contrary to the requirement of Texas Water Code § 13.183(c-2) for a utility to provide "information to substantiate each claimed eligible cost." (emphasis added).

Commission response

The commission declines to implement the recommended change. As stated previously, a utility must file all substantiating documentation for each claimed eligible cost included in the SIC application; not just the total cost.

OPUC opposed the sampling methodology included in proposed §24.76(d)(1)(J) on the basis that §24.76(d)(1)(J)(ii) permits SIC applicants to substantiate only a portion of the eligible costs claimed in a SIC application that are not already included in the applicant's rates. TWU and TAWC disagreed with OPUC on the basis that filing all documentation in a SIC proceeding is impracticable and inconsistent with SB 740.

Commission response

The removal of the sample for audit is addressed under the appropriate header and renders OPUC's recommendation moot.

TAWC recommended that proposed §24.76(d)(1)(J)(i)-(iv) be revised to provide additional flexibility in the provision of supporting documentation and the sample for audit process. By way of example, TAWC explained that some invoices might reflect materials used for multiple projects or multiple NARUC account. Accordingly, projects may be appropriately presented by NARUC account, but not the supporting cost information.

Commission response

The commission declines to implement the recommended change. As stated previously, a utility must file all substantiating documentation for each claimed eligible cost. The rule and Workpaper revisions reflect a policy determination that SIC applicants must provide specific cost information associated with each NARUC account and project, itemized by asset. If supporting cost information cannot be provided or meaningfully allocated between NARUC accounts and projects, it will be disallowed from recovery in the SIC proceeding.

Proposed §24.76(d)(1)(J)(i)(II)- External or internal documentation of direct and indirect costs

Proposed §24.76(d)(1)(J)(i)(II) would require eligible costs to be substantiated by evidence to support eligible plant placed into service as needed to support the eligible costs in the manner specified by 24.76(J)(ii).

OPUC recommended removing the phrase "as needed" from proposed §24.76(d)(1)(J)(i)(II) because the language is ambiguous as to what is necessary to support the claimed eligible costs included in the SIC application. OPUC remarked that the rule should clearly state what evidence supports the claimed eligible costs instead of providing a loophole in which SIC applicants can refrain from providing adequate supporting documentation. OPUC provided draft language consistent with its recommendation.

Commission response

The commission agrees with OPUC and implements the recommended change.

Proposed §24.76(d)(1)(J)(i)(III)- External or internal documentation of direct and indirect costs

Proposed §24.76(d)(1)(J)(i)(III) would require eligible costs to be substantiated by external or internal documentation of direct and indirect costs, respectively. The provision would also require external documentation to be word-searchable and organized by each NARUC Account.

TAWC recommended revising §24.76(d)(1)(J)(i)(III) to eliminate the requirement that external documentation be word-searchable and "as applicable" be organized by NARUC account. OPUC opposed TAWC's recommendation regarding word-searchability as it would impede efficient review of SIC applications OPUC further opposed TAWC's recommendation to add the term "as applicable" to the provision as it would increase ambiguity.

Commission response

The commission declines to implement the recommended changes. The commission agrees with OPUC that external documentation should be word-searchable. As stated previously, the commission revises §24.76(d)(2)(J)(i)(III) to also require internal documentation to be word-searchable and to require both external and internal documentation to be organized by each NARUC account, grouped by capital project.

SJWTX recommended revising proposed §24.76(d)(1)(J)(i)(III) to provide an applicant the option to categorize external and internal documentation that supports eligible costs by either NARUC account or project. SJWTX commented that organizing supporting documentation in this manner would provide a straightforward method to "identify the documents that correspond to the original cost of each item comprising the total original cost of a project" and harmonizes the provision with other portions of the proposed rule that require information on projects. OPUC supported SJWTX's recommendation and noted the change would promote efficiency.

Commission response

The commission declines to implement the recommended change because it is unnecessary. The revisions made to Workpaper Schedule C-2 substantively address this proposal. Substantiating documentation must be organized by project, NARUC account, and then asset in order of lowest to highest detail. All costs in a SIC application must at least be allocated to one or more NARUC accounts. A NARUC account may be associated with one or more "projects" in a SIC application. In turn, each NARUC account accordingly includes all of the assets in the SIC application that fall under the criteria for that account. This means that all assets must be grouped under at least a NARUC account if the improvement does not fall under a "project." For example, replacements of retired plant may not necessarily be attributable to any individual "project" but still must be allocated at the asset level to each NARUC account.

OPUC recommended that proposed §24.76(d)(1)(J)(i)(III) require an identification number associated with the related project or asset to be included in the file name. OPUC stated that this change would assist both the commission and intervenors to efficiently review the supporting documentation provided by the SIC applicant.

Commission response

The commission declines to implement the recommended change because it is unnecessary and would be overly burdensome for SIC applicants. Workpaper Schedule C-2, as revised, requires page-number cross references to external and internal documentation. This change addresses OPUC's concern.

Proposed §24.76(d)(1)(J)(ii), 24.76(d)(1)(J)(ii)(I) and 24.76(d)(1)(J)(ii)(II)- Transaction ledger or all supporting documentation

Proposed §24.76(d)(1)(J)(ii)(I) would require a SIC application to include either a transaction ledger in list format that includes a description of all associated supporting external documentation or internal documentation for each capital project included in the application for use in a sample for audit. Alternatively, §24.76(d)(1)(J)(ii)(II) would require all supporting external documentation or internal documentation for each capital project included in the application.

OPUC recommended proposed §24.76(d)(1)(J)(ii) be revised to require a SIC applicant to provide both the transaction ledger as well as all supporting documentation. OPUC remarked that providing SIC applicants the option between the two would result in SIC applicants never electing to provide all supporting documentation. OPUC emphasized that TWC § 13.183(c-2) requires SIC applicants to substantiate each claimed eligible cost with supporting documentation without exception. OPUC provided draft language consistent with its recommendation. SJWTX disagreed with OPUC that utilities would only ever provide a transaction ledger and sample for audit if given the option to do so and recommended the commission maintain §24.76(d)(1)(J)(ii) as proposed. SJWTX noted that a utility's decision to elect an auditable transaction ledger or provide all documentation will vary because the choice is dependent on several variables, such as the number of projects included in a SIC application and the number of documents supporting each project. SJWTX maintained that if the adopted rule "results in a process for conducting a sample audit that has the potential to delay a finding that an application is administratively complete, this could cause an applicant to elect to provide all supporting documentation up front."

Commission response

The removal of the sample for audit is addressed under the appropriate header and renders OPUC's recommendation moot.

Ricks encouraged commission review of a "Digital Audit Index" that would require utilities to "hyperlink every entry in the transaction ledger directly to the supporting invoice" to ensure the commission can audit all of a utility's supporting documentation within the 60-day statutory window. Ricks further proposed additional discussion of a "Digital Verification Ledger" where "every Excel entry for an asset-regardless of its dollar value-is hyperlinked to its corresponding invoice or contract as a condition of administrative completeness."

Commission response

The commission declines to implement the recommended change because it is unnecessary and would be overly burdensome for SIC applicants. Workpaper Schedule C-2, as revised, requires page-number cross references to external and internal documentation. This change addresses Ricks's concern.

Proposed §24.76(d)(1)(J)(iii) and §24.76(d)(1)(J)(iii)(I)-(IV)- Categories of external documentation

Proposed §24.76(d)(1)(J)(iii) would require a SIC application to include external documentation, such as cost information from unaffiliated third-parties such as contractors or vendors, including receipts, invoices, contracts, or other documentation of eligible costs. This provision could also include any other information that may be required by commission staff or the presiding officer.

OPUC recommended proposed §24.76(d)(1)(J)(iii) be revised to require all external documentation for all costs associated with entities that are unaffiliated with applicant utility. OPUC further recommended that all categories of the external documentation listed under proposed §24.76(d)(1)(J)(iii) be required, rather than authorizing a permissive list. OPUC commented that, as proposed, the provision is "unreasonably lax in the way it describes the types of supporting documentation that an SIC applicant must provide" and require SIC applicants to provide receipt, invoices, contracts, and other documentation of eligible costs. OPUC remarked that, despite the wording of TWC § 13.183(c-2) using a permissive "or," the commission should require utilities to provide supporting documentation if it is in their possession. OPUC acknowledged that while the current SIC process may be burdensome for utilities, that is only because utilities frequently file applications "before they are prepared to proffer the evidentiary support for the application." OPUC emphasized that the SIC applicant is obligated to provide adequate supporting documentation by the time a SIC application is filed and, in turn, maintain adequate records. OPUC provided draft language consistent with its recommendation. TAWC opposed OPUC's recommended changes on the basis that OPUC's revisions are contrary to the legislative intent of Texas Water Code § 13.183(c-2) to provide "flexibility by listing categories of documentation, joined by the disjunctive or" in the list of required documentation. TAWC further argued that the OPUC revisions are contrary to the public interest by imposing unreasonable obstacles for utilities seeking to apply for a SIC. TAWC and SJWTX opposed OPUC's recommendations concerning §24.76(d)(1)(J)(iii) that would change the "or" to an "and" regarding the statutory list of required documentation on the basis that such a change is contrary to the plain language of the statute. TAWC indicated that OPUC's language would effectively require all of the information listed under Texas Water Code § 13.183(c-2) be provided as support for eligible costs despite the statute including a non-exhaustive list. TAWC stated the substantiating documentation provided in a SIC should be at the discretion of the applicant. SJWTX also generally opposed any recommendation that would seek to omit the option for an applicant to provide "other documentation" for the same reasons.

Commission response

The commission agrees with TAWC and SJWTX and declines to implement OPUC's recommended change because it is contrary to the plain language of the statute. Specifically, Texas Water Code §13.183(c-2) contains a non-exhaustive list that utilizes the permissive "or" linking each article of documentation. Moreover, the statute requires the substantiation of "each claimed eligible cost of a utility's eligible plant." Taken together, the statute indicates that there must be some documentation of an eligible cost at a minimum. For example, if a SIC applicant claims $100 of a cost for a specific improvement and substantiates that cost with a $100 receipt for that asset, then that is sufficient under the statute. Assuming the cost and plant has been deemed eligible by the presiding officer, a SIC applicant would not be required to provide additional invoices, receipts, contracts, or other documentation to substantiate that cost.

TAWC and SJWTX recommended deleting proposed §24.76(d)(1)(J)(iii)(III) and (IV), with conforming revisions to §24.76(d)(1)(J)(iii)(I)-(III), because it is ambiguous as to the type of information that may be used to support eligible costs. SJWTX further recommended similar language be removed from the proposed Instructions for System Improvement Charge Applications. OPUC opposed TAWC and SJWTX's revisions as they are overly permissive, contrary to statute, and would render the documentation requirements for SIC applications more ambiguous.

Commission response

The commission agrees with OPUC and declines to implement the recommended changes. Internal documentation is intended to address the indirect costs (i.e., allocated or capitalized overhead) incurred by a SIC applicant in making system improvements. Indirect costs and, by extension, internal documentation may be allocable among several projects or NARUC accounts included in a SIC application in varying proportions, meaning that indirect costs do not consistently apply to a specific infrastructure investment, project, or NARUC account. As such, to ensure such costs are eligible and substantiated, SIC applicants must provide a detailed breakdown of how indirect costs are allocated at the project and NARUC account level. The SIC applicants will make this showing through the development of internal documentation that substantiates each associated eligible cost. This ensures that a SIC applicant cannot recover for indirect costs that may not meet the definition of "eligible costs" or are already being recovered through base rates.

Proposed §24.76(d)(1)(J)(iv) and §24.76(d)(1)(J)(iv)(I)-(V)- Categories of external documentation

Proposed §24.76(d)(1)(J)(iv) would require a SIC application to include internal documentation, to support allocated overhead, which may include work orders, affiliate costs, capitalized overhead, timesheet for labor, and interest expenses. Proposed §24.76(d)(1)(J)(iv)(I) would require such internal documentation to be substantiated by external documentation, if available and applicable. Proposed §24.76(d)(1)(J)(iv)(II) would require a SIC application to include a categorized list of allocated overhead expenses with supporting documentation for each category. Proposed §24.76(d)(1)(J)(iv)(III) would require a SIC application to include work orders categorized by projects. Proposed §24.76(d)(1)(J)(iv)(IV) would require a SIC application to include timesheets for labor categorized by projects. Proposed §24.76(d)(1)(J)(iv)(V) would require a SIC applicant to provide any other information that may be required by commission staff or the presiding officer.

TAWC recommended deleting proposed §24.76(d)(1)(J)(iv) to omit reference to timesheets for labor and instead include "interest expense calculation descriptions and allocated overhead methodology descriptions." OPUC opposed TAWC's recommended revisions on the basis that the changes would continue current utility practice of providing disorganized applications with "data dumps" of information that challenge expeditious review, particularly in light of the new statutory timeline for SIC application review.

Commission response

The commission declines to implement the recommended change for the reasons already stated. Indirect costs must be substantiated to ensure a utility is not recovering for ineligible costs or for costs already being recovered for in base rates.

OPUC recommended that proposed §24.76(d)(1)(J)(iv) be revised to require that all costs originating from the SIC applicant and its affiliates be included as part of the internal documentation associated with the SIC application. OPUC commented that internal documentation should be in the applicant's possession and therefore easily producible. OPUC provided draft language consistent with its recommendation.

Commission response

The commission revises §24.76(d)(1)(J)(iv) to clarify that "internal documentation must be provided for all costs that originated from the applicant and its affiliates…." However, the commission declines to implement the clerical revisions from OPUC as they are unnecessary.

SJWTX recommended that proposed §24.76(d)(1)(J)(iv)(I) be deleted because the provision requires information from unaffiliated third parties. SJWTX commented that such information is not necessary for internal documentation. OPUC opposed SJWTX's recommendation to strike proposed §24.76(d)(1)(J)(iv)(I) from the adopted rule. OPUC stated that it understands the reference to external documentation in the portion of the rule relating to internal documentation as relating to "external documentation that may have become an internal document through the utility's normal course of business." However, OPUC recommended revising the provision to remove the phrase "if available and as applicable" as the language is permissive and therefore ambiguous. Specifically, OPUC stated the phrase permits SIC applicants to argue that "certain receipts, invoices, contracts, and other documentation are not applicable or available" and therefore avoid producing such information. OPUC contended that such as a result is an inadequate justification for poor recordkeeping and that such information should be required to be provided if it is in the possession of the adequate utility. OPUC provided draft language consistent with its recommendation. SJWTX opposed OPUC's recommendations as contrary to statute. Specifically, the statutory use of "other documentation" allows for the provision of internal documentation such as accounting entries. SJWTX maintained it is neither efficient nor cost-effective to require "require an applicant to create a document that corresponds to each individual line item." SJWTX further remarked that an applicant should be permitted to provide "a cost allocation manual or an explanation of its cost allocation policy to support capitalized payments to an affiliate rather than having to create some sort of invoice to document these payments."

Commission response

The commission declines to implement the recommended change because it is unnecessary. The intent of the phrase "if available and as applicable" is to account for the circumstance highlighted by OPUC. Additionally, there may be instances where a receipt, invoice, or contract may address an indirect cost in whole or in part. The requirement is conditional and if external documentation is not available for indirect costs, the other provisions control. The allowance for internal documentation in the rule recognizes that there generally are not receipts, invoices, contracts, etc. to account for certain eligible costs. The commission therefore agrees with SJWTX that the statutory term "other documentation" is a catch-all for any other substantiating documentation of eligible costs.

OPUC recommended that proposed §24.76(d)(1)(J)(iv)(II) be revised to require that "allocated overhead and capitalized interest expense must be supported by a categorized list of allocated overhead expenses with supporting documentation for each category." OPUC further recommended such information be required to be presented in an organized manner to facilitate efficient review. Specifically, OPUC recommended that the provision require "applicants to identify total allocated overhead for each project along with a detailed transaction listing for each allocation charged by the project and by date" and documentation to support the overhead as well as the applicant's calculations and analysis used to arrive at the allocation. OPUC provided draft language consistent with its recommendation.

Commission response

The commission agrees with OPUC, but does not make revisions to §24.76(d)(1)(J)(iv)(II). Instead, the commission adds requirements to Workpaper Schedule C-2, including the addition of a column for "Eligible Plant" which corresponds to each asset included in the NARUC account for which the applicant seeks recovery. Additionally, two columns are added to the workpaper to require page-number cross references to both the "Transaction Costs" substantiated by external documentation and the "Other Costs" substantiated by internal documentation. A final column has been added for "Total Cost" which is simply the combination of the "Transaction Costs" and "Total Costs" for a line item. The commission also adds Notes 3-6 which require that a utility must provide a separate workpaper that details how Total Costs and Other Costs are derived with all supporting documentation. The notes clarify that Transaction Costs and Other Costs correspond to external documentation and internal documentation, respectively. The commission also adds three columns to identify the type of internal documentation, the origin of the "other cost,", and the internal document identifier. The commission also revises the existing columns covering the same subject matter to refer to the external document type (e.g., invoice, receipt, etc.), external document issuer, and external document identifier.

TAWC and SJWTX recommended that proposed §24.76(d)(1)(J)(iv)(III) be revised to be less burdensome because it is "overly prescriptive as to the required content of work orders." Specifically, TAWC recommended §24.76(d)(1)(J)(iv)(III) be substantially reduced to only require work orders categorized by projects. TAWC provided draft language consistent with its recommendation. SJWTX stated that the specificity of the proposed requirement would necessitate changes to internal recordkeeping systems maintained by utilities to comply and therefore increase costs.

Commission response

The commission declines to implement the recommended change for the reasons already stated.

OPUC recommended that proposed §24.76(d)(1)(J)(iv)(III) and (IV) be revised to require direct charge labor to be supported by work orders categorized by projects. OPUC provided draft language consistent with its recommendation. SJWTX opposed OPUC's recommendation because is unnecessarily duplicative and "imposes a burden on the applicant that far outweighs the benefit."

Commission response

The commission declines to implement the recommended change because it is unnecessary. Direct charge is work that is not allocated it directly originates to the utility and is subsequently allocated among affiliates. The revisions made to §24.76(d)(1)(J)(iv), which were recommended by OPUC, clarify that internal documentation applies to costs originating from the applicant utility as well as its affiliates.

SJWTX recommended proposed §24.76(d)(1)(J)(iv)(IV) be deleted as physical time sheets are outdated and inefficient compared to a fully digitized system. SJWTX noted that for proposed §24.76(d)(1)(J)(iv)(III) and (IV), parties to a SIC proceeding will be authorized to review the eligible costs included in the application. Therefore, if an eligible cost appears to be either unreasonable or unnecessary, the inquiring party may ask for additional details. SJWTX endorsed such an approach, noting that it promotes regulatory efficiency rather than requiring "a data dump that is costly to prepare and cumbersome to review."

Commission response

The commission declines to implement the recommended change. The rule requirements apply to both physical and digitized timesheets. Both must conform to the rule requirements to be eligible for recovery.

SJWTX recommended that the list of information required under §24.76(d)(1)(J)(iv) be permissive, rather than mandatory. Specifically, the "and" in proposed §24.76(d)(1)(J)(iv)(IV) should be changed to an "or" to ensure that an applicant is authorized to provide the combination of internal documentation that is most appropriate for a project rather than every form of documentation listed in the provision. OPUC opposed SJWTX's recommended revisions to proposed §24.76(d)(1)(J)(iv)(IV) to change the "and" to an "or" in the list of required documentation.

Commission response

The commission agrees with SJWTX and implements the recommended change to allow an applicant to provide multiple sources of internal documentation when appropriate by adding an "or" to the end of §24.76(d)(1)(J)(iv)(IV). The commission also revises §24.76(d)(1)(J)(iv)(V) to specify "any other documentation."

TAWC recommended deleting §24.76(d)(1)(J)(iv)(IV) and (V) which provide requirements associated with timesheets for labor and any other information required by commission staff and the presiding officer, respectively. OPUC also opposed TAWC and SJWTX's alternative recommendation to remove the provision entirely.

Commission response

The commission declines to delete §24.76(d)(1)(J)(iv)(IV) because timesheets for labor are a form of internal documentation that must show specific time and labor activities to adequately substantiate eligible costs. The deletion of provisions throughout the rule regarding "additional information" or "other information" have been addressed under the appropriate header, which addresses TAWC's recommended deletion of §24.76(d)(1)(J)(iv)(V).

Proposed §24.76(d)(1)(K)- Exclusion of costs for explicit customer agreements or contributions in aid of construction

Proposed §24.76(d)(1)(K) would require a SIC application to include information that sufficiently addresses the exclusion of costs for plant provided by explicit customer agreements or funded by customer contributions in aid of construction (CIACs).

TAWC and SJWTX recommended that proposed §24.76(d)(1)(K) be revised to be more specific by replacing the requirement for "information" that sufficiently addresses the exclusion of costs" with "an affidavit" or otherwise be deleted entirely. TAWC provided draft language consistent with its recommendation. OPUC and Ricks opposed TAWC and SJWTX's recommended changes to proposed §24.76(d)(1)(K). OPUC supported requiring an affidavit in addition to the SIC applicant providing substantiating documentation concerning the exclusion of costs for plant provided by explicit customer agreements or funded by customer CIACs.

Commission response

The commission agrees with TAWC and SJWTX and implements the recommended change, but incorporates the attestation into the compliance affidavit (Attachment D-2). Specifically, the commission revises the provision to state "an attestation that sufficiently addresses the exclusion of costs for plant provided by explicit customer agreements or funded by customer contributions in aid of construction in the affidavit required under subparagraph (O) of this paragraph." The commission also revises the compliance affidavit in the SIC Application Form to reflect the revision.

Ricks recommended that the provision be revised to require the provision of a project-level "Funding Source Verification Ledger" that identifies the sources of funds for each asset; and also require the provision of the underlying contract or agreement for each project where a developer or government grant was involved to "prove that no ratepayer funded capital is being surcharged [i.e., used or included]." Ricks further requested additional discussion on the establishment of a "Forensic Audit Protocol" applicable to acquired water or sewer systems where an acquiring utility claims in a SIC application that the predecessor owner CIAC records are unavailable. Ricks stated that this new process would help ensure that no acquisition premiums are mischaracterized as a system improvement and charged through a SIC. Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement Ricks's recommended change. An affidavit is sufficient for customer contribution agreements and CIACs. Commission staff and intervenors can request the basis for the agreement or CIAC (i.e., request copies of the contract) and contest the veracity of the affidavit through discovery.

Proposed §24.76(d)(1)(L)- Proof of compliance with prohibitions on ineligible plant

Proposed §24.76(d)(1)(K) would require a SIC application to include information that sufficiently demonstrates compliance with §24.76(c)(3)(B), which concerns the prohibition on including assets in a SIC application that have replaced existing plant. This would include the presentation of a list of the "existing plant" included and approved in the applicant's most recent base-rate proceeding that has been retired or removed from service, as well as the assets that have replaced such existing plant.

TAWC, TWU, and SJWTX opposed the inclusion of §24.76(d)(1)(L) while OPUC and Ricks expressed strong support for the provision. TAWC recommended proposed §24.76(d)(1)(L) be revised to account for CSWR, TAWC, TWU, and SJWTX's proposal to delete the prohibition on including replacements to "existing plant" in a SIC application under proposed §24.76(c)(3)(B). TWU recommended the provision be deleted in its entirety for the same reasons. SJWTX recommended that proposed §24.76(d)(1)(L) and the associated Workpaper Schedule C-3 be deleted if proposed §24.76(c)(3)(B) is preserved in the rule. TAWC and SJWTX alternatively recommended that the provision be revised to more specifically require an "affidavit" rather than "information" that attests to the fact "existing plant" is not included in the SIC application. TAWC asserted that an affidavit requirement is consistent with its alternative recommendation for proposed §24.76(c)(3)(B) to account for depreciation of retired plant within a SIC proceeding through an adjustment. SJWTX explained that an application should not be required to provide a workpaper identifying assets that are not eligible for inclusion in the application. Instead, an application should be permitted to provide an affidavit attesting that the SIC application does not include assets that have replaced existing plant. OPUC and Ricks opposed TAWC, TWU, and SJWTX's recommended revisions to proposed §24.76(c)(3)(B), §24.76(d)(1)(L), and Workpaper Schedule C-3 to require an affidavit in lieu of providing substantiating documentation or to omit proposed §24.76(d)(1)(L) entirely. OPUC and Ricks emphasized that that a utility should be required to explicitly identify retired assets. OPUC commented that proposed §24.76(d)(1)(L) is necessary to ensure that utilities are not using a SIC to double recover for assets that were already included in the utilities' comprehensive base rate proceeding. OPUC cited the final order in Docket No. 56974 as support for its position, noting that while utilities have "conflated identification of retired and replaced assets with reconciliation to evade production of such crucial information," the commission is not prohibited by statute from requiring retired or replacement assets be identified in SIC proceedings. Ricks explained that an affidavit is an "evidentiary black box'" that prevents the commission from performing its statutorily required review of eligible costs included in a SIC application. Ricks commented that, consistent with cost causation principles, a ratepayer should not be obligated to pay "for two assets providing a single service." Specifically, if a utility replaces an asset that is still being depreciated in base rates, the original asset is no longer used and useful upon removal.

Commission response

The commission declines to implement any of the recommended changes for the reasons already stated. Replacements of retired plant will be accounted for in a replacement plant offset under §24.76(c)(3)(B)(i). The commission revises §24.76(d)(1)(L) to account for the replacement plant offset and load growth adjustment. Specifically, the provision is revised to require "information that sufficiently demonstrates compliance with subsection (c)(3)(B) of this section, including the necessary information to calculate the replacement plant offset and load growth adjustment."

As a condition of administrative completeness finding, Ricks recommended that proposed §24.76(d)(1)(L) be revised to require a schedule of all retirements for which a replacement is sought in a SIC that includes (1) the project ID, (2) the original cost of the retired asset the accumulated depreciation at the date of retirement, (3) the resulting net book value, and (4) the assets that have replaced the existing plant. Ricks stated that a list of asset names is useless without the provision of the dollar values for each asset. Ricks referenced Ohio Appendix A to Rule 4901:1-15-35 which requires a schedule of retirements itemized by month and NARUC accounts. Ricks noted that, without disclosure of the original cost and accumulation depreciation of a specific retirement, the commission cannot verify compliance with the statutory prohibition from recovering costs already included in the utility's rates under Texas Water Code § 13.183(c-2). Ricks explained that such a requirement is necessary "to prevent utility over-recovery of depreciation and return." Ricks encouraged additional discussion regarding the adoption of a required "Depreciation Offset" in the SIC formula that mirrors the Illinois standard under ILCS Title 83, Chapter I, Subchapter E § 656.50(b), which requires depreciation expense for a surcharge be reduced by the depreciation expense on the plant being replaced. Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended changes because they are unnecessary. The addition of the replacement plant offset and load growth adjustment under §24.76(c)(3)(B), the corresponding edits to Workpaper Schedule C-3 for retirements, and new Workpaper Schedule C-5 for the load growth adjustment address Ricks's concerns.

Proposed §24.76(d)(1)(M)- Group depreciation requirements

Proposed §24.76(d)(1)(M) would required a SIC application to include specific information for each asset within the group to which the group rate applies if the applicant used group depreciation in its last comprehensive base rate proceeding. Specifically, the provision would require the name or number of the asset a description of the asset; the in-service date of the asset; and all cost information that corresponds to that asset.

TAWC, TWU, and CSWR recommended that proposed §24.76(d)(1)(M) be deleted as it is ambiguous, unworkable, internally inconsistent with the proposed rule, and unsupported by statute. TAWC, TWU, and CSWR stated that, as proposed, the provision would require an applicant to present assets in an itemized depreciation format even though it previously used group depreciation in its base rate proceeding, which is typically based on a group depreciation study. Specifically, requiring an applicant to "disaggregate those same assets and present them on an individual basis contradicts the very premise of group depreciation" that the commission previously approved in a comprehensive base rate proceeding. Accordingly, depreciation determinations made in the utility's most recent base rate case should not be relitigated or reconstructed in a SIC proceeding. TAWC commented that depreciation should be either omitted from SIC proceedings or accounted for with an adjustment. TWU maintained that the provision is an unjustified departure from established industry and commission practice that would materially increase the complexity and cost of SIC proceedings. TWU emphasized that the provision would require utilities to reconstruct depreciation data that do not exist in asset-specific form and therefore produce information of limited value. TWU noted that such documentation would be "extensive, costly to prepare, and would invite disputes over depreciation group composition, service lives, and net book balances-issues that are properly addressed only in comprehensive rate proceedings, not in streamlined SIC applications." OPUC and Ricks disagreed with the rationale offered by TAWC, TWU, and SJWTX. OPUC and Ricks maintained that the requirement to file the utility annual report required by §24.129 with a SIC application should be maintained to ensure all information is readily available for review. OPUC emphasized that the commission should "require heightened standards of an applicant to support the recovery of investments that have not been evaluated for prudency."

Commission response

The commission declines to implement the recommended change. As stated previously, the commission has the burden of proof under Texas Water Code §13.184. Moreover, the commission has authority under Texas Water Code §13.131 and §13.132 to require utility books and records and reports to be presented in a specific format, such that a utility has no presumption that costs are eligible by simply opening its books and records to inspection. The commission also has general jurisdiction to regulate and supervise under § 13.041 to "do all things, whether specifically designated in this chapter or implied in this chapter, necessary and convenient to the exercise of these powers and jurisdiction." The commission also adds new §24.76(d)(1)(M)(i) which requires "the NARUC account number to which the asset applies" to be specified and renumbers the subsequent provisions. The commission also makes conforming changes to Workpaper Schedule C-3.

Proposed §24.76(d)(1)(N)- Applicant's most recent annual report

Proposed §24.76(d)(1)(N) would require a SIC application to include a copy of the applicant's most recent annual report filed with the commission as required by §24.129, which must be the annual report most recently due for filing.

OPUC, TAWC, and Ricks recommended correcting the reference to §24.129, relating to Water and Sewer Utilities Annual Report, in proposed §24.76(d)(1)(N). OPUC provided draft language consistent with its recommendation.

Commission response

The commission agrees with commenters and implements the recommended change.

Ricks recommended that the report be filed with an "Annual Report Bridge Worksheet" to prevent double recovery and ensure consistency with the cost-causation principle. Specifically, Ricks recommended additional language in §24.76(d)(1)(N) which would require the utility's annual report be accompanied by a reconciliation worksheet that links the reconcilable cost requested in the SIC to the specific NARUC account totals reported in the utility's annual report, with any variance between the request in the SIC application and the annual report plant totals include an explanation for each associated project ID. Ricks noted, however, that only requiring the re-filing of the SIC applicant's annual report would not address "the forensic mechanism needed to verify the 10% revenue cap and the earnings threshold." Ricks explained that, under Texas Water Code § 13.183(c), the commission must ensure that a SIC provides revenues that satisfy the requirements of Texas Water Code §13.183(a), including preservation of the financial integrity of the utility. Ricks commented that it is functionally impossible for OPUC and other intervenors to verify costs in a SIC application "within the 30-day sufficiency window without a preprepared bridge document" for a Class A utility that may have millions of dollars in net costs with thousands of individual assets under $1000. Ricks further commented that the proposed rule should require a utility to "prove that the assets in the SIC were not already depreciated or recovered as O&M expenses in the financial statements of that very same annual report." Ricks proposed further discussion to establish whether an application is incomplete under Texas Water Code §13.183(c-2) "if the requested costs cannot be traced directly to the utility's general ledger as reflected in the annual report." Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended change because the annual report has a dedicated worksheet for SIC revenues, rendering a bridge worksheet unnecessary. The SIC revenue cap proposal has already been addressed under the appropriate header. Additionally, the law does not set a 30-day period for administrative completeness. The presiding officer will set the appropriate procedural schedule for the entire proceeding.

Proposed §24.76(d)(1)(O)- Compliance affidavit

Proposed §24.76(d)(1)(O) requires a SIC application to include an affidavit confirming that the application meets the requirements of proposed §24.76.

OPUC and Ricks recommended that proposed §24.76(d)(1)(O) be revised to require the affidavit affirm compliance with the provision as a whole and also require an application that fails to comply with the requirements of Texas Water Code §13.183 and §24.76 to be denied and prohibit the applicant from recovering rate case expenses for the application. OPUC and Ricks noted that utilities have historically signed such affidavits only for the commission to later reveal that the application omitted critical information and supporting documentation required by law. OPUC stated that including such a sanction is necessary to improve the standards and expectations for SIC applications. OPUC maintained that failed SIC applications should be ineligible for recovery of rate case expenses to ensure the cost of failed applications does not burden ratepayers. OPUC provided draft language consistent with its recommendation. Ricks emphasized such a provision is necessary to ensure the 60-day statutory window for merits review of a SIC application is not abused and to protect the public interest. Ricks stated that "the filing of an un-auditable ledger constitutes a bad-faith delay of the 60-day merits window." Ricks proposed further discussion on establishing a requirement for the affiant to "specifically certify that the requested costs do not include ghost assets' or revenue-producing expansions" and therefore link the affidavit to the evidentiary requirements of proposed §24.76(c)(3) and §24.76(d)(1)(H). Ricks provided draft language consistent with her recommendation. SJWTX and TAWC opposed OPUC and Ricks's recommendation to sanction SIC applicants if the commission finds a SIC application deficient. SJWTX and TAWC noted that no other commission rule imposes sanctions for an applicant failing to meet its burden of proof and maintained that denial of a SIC application is a sufficient consequence. SJWTX disagreed with OPUC and Ricks that a utility "would intentionally file a legally deficient application such that it was inappropriate to execute the affidavit required by 16 TAC §24.76(d)(1)(O)." TAWC commented that automatic sanctions of this nature would be excessive as it would turn the commission's sufficiency review into a punitive mechanism rather than an administrative evaluation. TAWC noted that there may be instances where a SIC applicant files an application in good faith believing that all the rule criteria are met but may be found deficient. TAWC indicated that if OPUC believes sanctions are warranted, then OPUC itself should seek sanctions through §22.161 rather than having such a provision built into the rule.

Commission response

The commission declines to implement OPUC and Ricks's recommended changes because they are unnecessary and overly punitive. The compliance affidavit (Attachment D-2) already requires compliance with §24.76 as a whole. Moreover, requiring dismissal of a SIC application for uncured deficiencies and denying rate-case expenses is overly punitive and would be contrary of the legislative goal of incentivizing infrastructure investment. The commission revises the provision to also require compliance with "and any other applicable statutes or commission rules" and makes conforming revisions to the compliance affidavit.

Proposed §24.76(d)(1)(Q)- Other information required by the presiding officer

Proposed §24.76(d)(1)(O) would require a SIC application to include, as applicable, any other information required by the presiding officer in accordance with a sample for audit of eligible plant under proposed §24.76(d)(2).

In accordance with its proposed deletion of §24.76(d)(3) regarding additional information required by commission staff, TAWC recommended proposed §24.76(d)(1)(Q) be deleted from the rule. OPUC opposed TAWC's recommendation to omit §24.76(d)(1)(Q) to ensure the commission has sufficient flexibility to request relevant information on a case-by-case basis.

Commission response

The commission declines TAWC's recommended change. TAWC's position regarding removal of the authorization for the presiding officer and commission staff to request additional information is addressed under the appropriate header.

Proposed §24.76(d)(2)- Sample for audit of eligible plant

Proposed §24.76(d)(2) would specify the requirements associated with commission review of a sample for audit of eligible plant, if elected by the applicant under proposed §24.76(d)(1)(J)(ii)(I).

TWU and OPUC commented that requiring commission staff and the presiding officer to determine an appropriate sample for audit prior to sufficiency review "invites delay, uncertainty, and inconsistent application across proceedings, while providing no clear standards to guide the exercise of discretion." TWU opposed the structure of §24.76(d)(2) on the basis that it inappropriately inserts a "discretionary, quasi-adjudicative audit process into the administrative sufficiency stage of a SIC proceeding" that is contrary to the streamlined process defined by SB 740. TWU commented that investor-owned utilities already maintain commission-regulated accounting systems and transaction ledgers that conform with the NARUC systems of accounts. TWU noted these systems and ledgers are routinely subject to commission audits in comprehensive base rate cases and other proceedings. TWU maintained that allowing commission staff to require samples for audit prior to the statutory review period undermines regulatory certainty and frustrates legislative intent by turning SIC proceedings into "preliminary audit proceedings rather than threshold administrative reviews."

Commission response

The removal of the sample for audit mechanism renders TWU and OPUC's recommendations moot. The authorization for the presiding officer and commission staff to request additional information is addressed under the appropriate header.

TAWC recommended that proposed §24.76(d)(2) and §24.76(d)(2)(A)-(E) be revised to reduce regulatory burdens on utilities and streamline SIC proceedings. TAWC further recommended a specific sampling process be enumerated in proposed §24.76(d)(2). Specifically, TAWC recommended §24.76(d)(2) be revised to clarify the provision only applies if the utility elects to use the sampling process.

Commission response

The removal of the sample for audit is addressed under the appropriate header and renders TAWC's recommendations moot.

OPUC recommended proposed §24.76(d)(2) be deleted in its entirety because it is contrary to statute. Specifically, OPUC commented that Texas Water Code §13.183 requires a SIC applicant to provide documentation to support "each and every eligible cost." OPUC noted that, in contrast, the commission rule permits SIC applicants to only partially support their requested expenses. OPUC provided draft language consistent with its recommendation. TAWC opposed OPUC's recommendation to omit the provision and also opposed OPUC's alternative revisions to §24.76(d)(2) and its subparagraphs. TAWC maintained that sampling is an appropriate methodology and that OPUC's proposed alternative revisions are ambiguous or should otherwise be left to the presiding officer's discretion. TAWC noted that the commission could hold a meeting or workshop "to develop the best sampling method to use in the rule with interested stakeholders."

Commission response

The removal of the sample for audit is addressed under the appropriate header and renders OPUC's recommendation moot.

Proposed §24.76(d)(2)(A)- Commission staff recommendation on sample for audit

Proposed §24.76(d)(2)(A) would require commission staff to file a recommendation on an appropriate sample for audit of eligible plant derived from the information included in the transaction ledger within a time period prescribed by the presiding officer.

TAWC recommended §24.76(d)(2)(A) be revised to limit the sample for audit of eligible plant be "limited to the eligible plant with an original cost greater than 10% of the applicant's total eligible plant" and omit the discretion of the presiding officer to establish the time period for commission staff to review the transaction ledger. Houston noted that materiality thresholds for a sample for audit may differ on a case-by-case basis.

Commission response

The removal of the sample for audit, including alternative recommendations such as a hybrid sample or sampling thresholds, is addressed under the appropriate header and renders TAWC's recommendation moot.

Proposed §24.76(d)(2)(B)- Sample for audit for presiding officer

Proposed §24.76(d)(2)(B) would establish that the presiding officer will determine an appropriate sample for audit after considering commission staff's recommendation and any other factor that is in the public interest. The provision further establishes that staff will request a sample for audit based on the determination of the presiding officer.

TAWC recommended the deletion of §24.76(d)(2)(B) to remove the presiding officer's consideration of commission staff's recommendation and "any other factor that is in the public interest." TAWC also recommended the addition of a seven working day deadline for the presiding officer to determine the appropriate sample for audit. OPUC opposed TAWC's recommended revisions to proposed §24.76(d)(2)(B), other than the recommendation to require a deadline for the presiding officer to order the sample for audit.

Commission response

The removal of the sample for audit and the revisions to the procedural schedule are addressed under the appropriate header and renders TAWC's recommendation moot.

Proposed §24.76(d)(2)(C)- Intervenor comments on sample for audit

Proposed §24.76(d)(2)(C) would authorize intervenors to file comments in response to commission staff's request for a sample for audit. Proposed §24.76(d)(2)(C) would also provide that the presiding officer is not required to consider the comments of OPUC or other intervenors when determining an appropriate sample for audit.

TAWC recommended revisions to §24.76(d)(2)(C) to reduce the time period before intervenors may comment on the sample for audit from five working day to three working days. OPUC opposed TAWC's recommended revisions and stated that both TAWC's recommended change and the proposed change represent undue restriction on OPUC and other intervenor's participation in SIC proceedings. However, OPUC supported TAWC's recommended revisions to proposed §24.76(d)(2)(C) to strike the phrase "within a reasonable timeframe," but instead recommended that it be replaced to require d a ten-day deadline to file supporting documentation. OPUC commented that a SIC applicant should be capable of providing the necessary documentation once the presiding officer designates a sample for audit if the utility follows proper bookkeeping practices. OPUC asserted that ten days should be sufficient for the applicant to produce the requested additional documentation.

Commission response

The removal of the sample for audit is addressed under the appropriate header and renders TAWC's recommendation moot.

OPUC opposed the inclusion of language in proposed §24.76(d)(2)(C) that the presiding officer is not required to consider the comments of OPUC or other intervenors when determining an appropriate sample for audit. OPUC contended that the proposed language is tantamount to the commission's intentional and significant restriction of the participation rights of OPUC and other intervenors in SIC proceedings and, by extension, is detrimental to the residential and small commercial customers OPUC represents. OPUC noted that the inclusion of such language is likely to lead to an increase in discovery disputes that will ultimately lead to an overall increase in the cost and duration of litigation. Specifically, OPUC remarked that it is foreseeable that SIC applicants will object "to intervenor RFIs that request information outside the scope of the sample audit ordered by the presiding officer." OPUC further commented that it is also foreseeable that the commission may disregard OPUC's comments on the sample for audit even when OPUC identifies issues with the sample for audit or supporting documentation that have not been detected by the presiding officer. OPUC provided draft language consistent with its recommendation.

Commission response

The removal of the sample for audit and the revisions to discovery are addressed under the appropriate header. These modifications render OPUC's recommendation moot.

Proposed §24.76(d)(2)(D)- Transaction ledger supporting documentation

Proposed §24.76(d)(2)(D) would require an applicant that elects to use a sample for audit to file the supporting documentation described by the transaction ledger that is associated with the sample for audit of eligible plant designated by the presiding officer within a reasonable timeframe.

TAWC recommended that proposed §24.76(d)(2)(D) to delete the phrase "within a reasonable timeframe" from the requirement for the applicant to file the supporting documentation responsive to the sample for audit. OPUC opposed TAWC's recommended revisions because no explanation was provided and the provision is essential to ensuring that supporting documentation substantiates the costs included in the transaction ledger.

Commission response

The removal of the sample for audit and the transaction ledger is addressed under the appropriate header and renders TAWC's recommendation moot.

OPUC recommended that, if the commission proceeds with allowing samples for audits, proposed §24.76(d)(2)(D) should be revised to establish a ten-day deadline by which an applicant must provide a sample for audit of eligible plant determined by the presiding officer. OPUC emphasized that a SIC applicant should have all necessary supporting documentation prepared prior to the filing of a SIC application. OPUC noted that the failure to provide all supporting documentation in response to a sample for audit within the ten-day deadline should "indicate to the Commission that that applicant has poor recordkeeping practices and that additional sampling is required."

Commission response

The removal of the sample for audit and the revisions to discovery are addressed under the appropriate header. These modifications and render OPUC's recommendation moot.

Proposed §24.76(d)(2)(D)- Commission staff review of supporting documentation

Proposed §24.76(d)(2)(D) would require commission staff to review the supporting documentation provided by the applicant and include in its sufficiency recommendation as to whether the supporting documentation sufficiently accounts for all transaction details described by the transaction ledger.

TAWC recommended proposed §24.76(d)(2)(D) be deleted in its entirety because it is overly burdensome. TAWC provided draft language consistent with its recommendation.

Commission response

The removal of the sample for audit and the transaction ledger is addressed under the appropriate header and renders TAWC's recommendation moot.

Proposed §24.76(d)(3)- Additional information

Proposed §24.76(d)(3) would specify the reasons for which the presiding officer or commission staff may require additional information from the SIC applicant.

TAWC, TWU, CSWR and SJWTX recommended that proposed §24.76(d)(3) be removed from the rule because it is unduly burdensome. OPUC opposed the recommendation and stated that the provision should be retained if the commission proceeds with a sample for audit methodology. OPUC maintained that the presiding officer should be authorized to request additional information if issues are discovered with a SIC applicant's supporting documentation.

Commission response

The removal of the authorization for the presiding officer and commission staff to request additional information is addressed under the appropriate header and renders TAWC, TWU, CSWR and SJWTX's recommendation moot.

Proposed §24.76(d)(3)(A) and §24.76(d)(3)(A)(i)-(iii)- Additional information required by presiding officer of commission staff

Proposed §24.76(d)(3)(A) and §24.76(d)(3)(A)(i)-(iii) would authorize the presiding officer or commission staff to require additional information from the SIC applicant to supplement the information or disclosures required under §24.76(d)(1), provide additional supporting documentation responsive to a sample for audit of eligible plant if the applicant made such an election, or to address additional issues specific to the application or are in the public interest to do so.

Consistent with its opposition to the sample for audit methodology rather than the presentation of all supporting documentation related to eligible costs, OPUC recommended proposed §24.76(d)(3)(A)(ii) be deleted in its entirety. OPUC provided draft language consistent with its recommendation. TAWC opposed OPUC's proposed deletion of §24.76(d)(3)(A)(ii).

Commission response

The removal of the sample for audit and the authorization for the presiding officer and commission staff to request additional information are addressed under the appropriate header. These modifications render OPUC's recommendation moot.

Proposed §24.76(d)(3)(B)- Discovery limitations prior to sufficiency determination

Proposed §24.76(d)(3)(B) would limit each party to a SIC proceeding, other than commission staff, to serve no more than 20 requests for information and requests for admission of fact prior to the presiding officer determining an application to be sufficient.

OPUC and Ricks recommended that proposed §24.76(d)(3)(B) be deleted in its entirety because limiting the amount of RFIs that a party may request prior to an application being deemed sufficient by the presiding officer is neither beneficial nor in the public interest. OPUC commented that, in conjunction with the 30-day prohibition on a sufficiency ruling provided by Texas Water Code § 13.183(c-3), the provision severely limits intervenors from fully participating in SIC proceedings. OPUC emphasized that Texas Water Code § 13.183(c-4) affords OPUC "the opportunity to comment on the sufficiency of an SIC application within the first 30 days." As such, the provision significantly impedes OPUC's ability to propound discovery and therefore provide meaningful comments on the sufficiency of a SIC application. This would invite gamesmanship from utilities seeking to evade OPUC's review of sufficiency "by filing an incomplete application and objections to RFIs." Additionally, due to the general length of SIC applications, the proposed language would effectively prevent intervenors from receiving clarification from the applicant on supporting documentation "for several weeks or months," likely resulting in duplicate RFIs. OPUC provided draft language consistent with its recommendation. TWU and TAWC opposed OPUC's recommended revisions on the basis that the proposed discovery limitations are appropriate and consistent with the expedited 60-day timeline required for substantive review under SB 740. TWU maintained that "[u]nlimited discovery is incompatible with a streamlined, time-certain process" and that OPUC's concerns over discovery are overstated because "[w]ell-organized SIC applications, supported by transaction ledgers and appropriate documentation, facilitate efficient review." TWU further remarked that utilities maintain accounting systems that conform to NARUC accounting requirements and are subject to commission regulation and audit in comprehensive base rate proceedings. Therefore, the "combination of thorough application materials, structured RFI processes, and subsequent rate case reconciliation provides more than adequate oversight" in SIC proceedings.

Commission response

The revisions to discovery and the procedural schedule are addressed under the appropriate header. These modifications address OPUC's concerns by adopting discovery procedures common to most contested case types at the commission. The commission also revises the provision for clarity to state that: Upon determining that a complete application has been filed… the presiding officer will set a procedural schedule that will enable the commission to issue a final order in the proceeding within 60 days from the date the determination is made. The presiding officer may extend the deadline for not more than 15 days for good cause."

New §24.76(d)(3)(C)

Ricks recommended new §24.76(d)(3)(C) be added that would toll the 60-day merits review period if the presiding officer requires additional information to supplement a deficient SIC application. Ricks further advocated for resetting OPUC's 30-day comment window in this circumstance. Ricks commented that such a provision is necessary to protect the public interest and ensure compliance with Texas Water Code §13.183(c-4).

Commission response

The revisions to discovery and the procedural schedule are addressed under the appropriate header. These modifications address Ricks's concerns without adopting her recommendation. The commission also notes the 60-day merits review period begins upon a finding of administrative completeness, meaning that a deficient application will not begin this period. Finally, the commission does not construe OPUC's ability to file comments as a restriction on OPUC's participation in the SIC proceeding.

Proposed §24.76(d)(4)- Requests for information

Proposed §24.76(d)(4) would specify that requests for information will be conducted in accordance with §22.144 of this title, relating to Requests for Information and Requests for Admission of Facts, except as otherwise provided by §24.76 or as determined by the presiding officer.

TAWC recommended that any limitations on RFIs should be merged into proposed §24.76(d)(4).

Commission response

All provisions on discovery have been consolidated under §24.76(d)(2)(B), which addresses TAWC's recommendation.

Proposed §24.76(d)(4)(A)- Subparts and multiple questions prohibited

Proposed §24.76(d)(4)(A) would prohibit a request from including subparts or multiple questions, except for a request by commission staff.

OPUC and Ricks recommended proposed §24.76(d)(4)(A) be deleted because, in conjunction with proposed §24.76(d)(3), it severely limits the number of RFIs an intervenor can propound to the SIC applicant. OPUC commented that it is both administratively expedient and customary in other commission applications to allow parties to file RFIs with subparts that are related to the initial RFI question. OPUC provided draft language consistent with its recommendation. TAWC agreed with OPUC's recommendation to remove proposed §24.76(d)(4)(A) because it "aligns with the limited scope of the SIC calculation prescribed by rule.

Commission response

The revisions to discovery are addressed under the appropriate header. These modifications address OPUC's and Ricks's recommendations.

Proposed §24.76(d)(4)(C)- Deadline to respond to requests for information

Proposed §24.76(d)(4)(C) would require a response to a request to be served no later than ten working days after receipt of the discovery request unless otherwise specified by the presiding officer or other applicable law.

OPUC and Ricks recommended that proposed §24.76(d)(4)(C) be revised to require responses to discovery requests be served within five days of the receipt of the request, rather than ten. OPUC also recommended removing the language providing discretion to the presiding officer to establish a different response deadline or otherwise deferring to "other applicable law" for such a deadline. OPUC commented that under the proposed rule the 20-day deadline specified §22.144(c)(1) does not apply to SIC proceedings. OPUC noted that, given the expedited nature of SIC applications, it opposes using the standard 20-day deadline specified by §22.144(c)(1). OPUC provided draft language consistent with its recommendation. TWU and TAWC opposed OPUC's recommendation and urged that the commission preserve the proposed discovery limits to be consistent with the expedited nature of SIC proceedings. TWU emphasized that some form of discovery deadline is necessary to prevent multiple RFIs being issued immediately after a SIC application is determined to be sufficient, rendering the 60-day statutory deadline impracticable.

Commission response

The revisions to discovery are addressed under the appropriate header. These modifications address OPUC's and Ricks's recommendations.

Proposed §24.76(d)(4)(D)- Deadline and requirements for objections to discovery

Proposed §24.76(d)(4)(D) would require an objection to a request to be filed no later than five working days from receipt of the request. Proposed §24.76(d)(4)(D) would also establish that a request for which an objection is sustained or is withdrawn in response to an objection does not count towards a party's request limit.

TAWC recommended deleting language in proposed §24.76(d)(4)(D) that would prevent requests for which an objection is sustained or withdrawn in response to an objection from counting towards a party's discovery request limit. TAWC provided draft language consistent with its recommendation. OPUC opposed TAWC's recommendation to revise proposed §24.76(d)(4)(D) as it would represent an additional limitation on meaningful participation in SIC proceedings by intervenors, particularly in conjunction with the limitations on discovery included in the proposed rule which are unnecessarily restrictive.

Commission response

The revisions to discovery are addressed under the appropriate header. These modifications address TAWC's recommendation.

Proposed §24.76(d)(5)- Commission processing of application

Proposed §24.76(d)(5) would specify the form and manner by which the commission will process a SIC application.

Proposed §24.76(d)(5)(A)- Sufficiency determination

Proposed §24.76(d)(5)(A) would specify the form and manner by which the commission will review a SIC application for sufficiency.

CSWR commented that the timelines for sufficiency review under §24.76(d)(5)(A) and its subparts are overly complicated and contrary to the timelines prescribed by statute. CSWR recommended that the provision be simplified by allowing the administrative law judge to have discretion to set deadlines that comply with statutory deadlines, including those that relate to discovery. CSWR stated that parties that fail to file discovery within the statutory deadlines should be prohibited from seeking extensions of the sufficiency comment period to account for the delay. CSWR indicated that additional procedures to the sufficiency review period of SIC applications are "unlikely to expedite review and more likely to create procedural complications that result in confusion and delays."

Commission response

The simplification of the discovery and procedural schedules that were previously discussed substantively address CSWR's concerns. Specifically, Chapter 22, Subchapter H will control discovery unless otherwise ordered and the presiding officer will set the procedural schedule for both the administrative completeness stage and merits review stage to ensure the statutory deadline for merits review is met.

Proposed §24.76(d)(5)(A)(i) and §24.76(d)(5)(A)(i)(II) and (III)- Requirements for sufficiency of SIC application

Proposed §24.76(d)(5)(A)(i) would specify the requirements for a SIC application to be deemed sufficient. Proposed §24.76(d)(5)(A)(i)(II) would require supporting documentation responsive to a sample for audit determined by the presiding officer under §24.76(d)(2), if the applicant has made the election under §24.76(d)(1)(J)(ii)(I). Proposed §24.76(d)(5)(A)(i)(III) would require any additional information requested by the presiding officer or commission staff under §24.76(d)(3).

Consistent with its opposition to the proposed rule authorizing applicant utilities to elect to provide a sample for audit rather than all supporting documentation related eligible costs, OPUC recommended proposed §24.76(d)(5)(A)(i)(II) be deleted in its entirety. OPUC provided draft language consistent with its recommendation. TAWC opposed OPUC's recommendation to revise proposed §24.76(d)(5)(A).

Commission response

The removal of the sample for audit is addressed under the appropriate header and renders OPUC's recommendation moot.

TAWC recommended proposed §24.76(d)(5)(A)(i)(III) be deleted in its entirety to ensure SIC applications are reviewed for sufficiency and processed in accordance with the timelines prescribed by SB 740. Specifically, TAWC commented that the commission should not rule that a SIC application is insufficient without limiting the requirements for sufficiency and a timeline for commission review of sufficiency. OPUC opposed TAWC's recommended revision because it represents an unreasonable limitation in light of the proposed rules requiring commission staff to file a recommendation on an appropriate sample for audit of eligible plant prior to commission staff filing its recommendation on the sufficiency of the SIC application.

Commission response

The removal of the authorization for the presiding officer and commission staff to request additional information is addressed under the appropriate header. These modifications address and TAWC's recommendation.

Proposed §24.76(d)(5)(A)(ii)- Procedural schedule

Proposed §24.76(d)(5)(A)(ii) would establish that the presiding officer will establish a procedural schedule for commission staff to file a recommendation on the sufficiency of a SIC application.

TAWC recommended that proposed §24.76(d)(5)(A)(ii) be revised to require the presiding officer to establish a 20-day deadline for commission staff to file a recommendation on the sufficiency of a SIC application except for good cause. TAWC provided draft language consistent with its recommendation. Houston and OPUC opposed TAWC's recommendation to revise proposed §24.76(d)(5)(A)(ii) on the basis that to ensure diligent review of SIC applications, the commission, commission staff, and intervenors should not have deadlines for review of application sufficiency.

Commission response

The simplification of the discovery and procedural schedules is discussed under the relevant header addresses TAWC's recommendation by applying Chapter 22, Subchapter H as the default for discovery in SIC proceedings, unless modified by the presiding officer, and authorizing the presiding officer to set the procedural schedule. However, the commission makes clarifying revisions to the provision.

Proposed §24.76(d)(5)(A)(iii) and §24.76(d)(5)(A)(iii)(II)- OPUC statutory comment period

Proposed §24.76(d)(5)(A)(iii) would authorize OPUC to file comments on the SIC application 30 days from the date the SIC application is filed. Proposed §24.76(d)(5)(A)(iii)(II) would establish that any confidential material provided to OPUC by the applicant or the commission that has been designated as confidential by the applicant under commission rules, a commission protective order, under Chapter 552 of the Texas Government Code, or other applicable law must remain confidential and is not subject to disclosure by OPUC without the express written consent of the applicant.

OPUC recommended proposed §24.76(d)(5)(A)(iii) be revised to authorize OPUC to comment on the sufficiency of the SIC application no later than 30 days from the date the SIC application is filed. OPUC further recommended the provision be revised to authorize OPUC to "continue to fully participate as a party to the proceeding beyond the 30th day" for the reasons already stated.

SJWTX agreed with OPUC while TAWC commented that OPUC's recommended revisions are unnecessary.

Commission response

The commission declines to implement the recommended change because it is unnecessary. As stated previously, the statutory language does not limit OPUC's participation in a SIC proceeding. Specifically, the relevant sentence in Texas Water Code §13.183(c-4) specifies that "[t]he utility commission shall allow the office to comment on the application not later than the 30th day after the date the application is filed." The commission interprets this provision to means that the commission cannot prohibit OPUC from commenting on a SIC application later than 30 days from the date the application is filed. It does not limit OPUC to only commenting on the SIC application during the administrative completeness phase, conducting discovery, or otherwise participating as a party in the SIC proceeding as a whole. To address OPUC's concern, the commission moves the provision to be new §24.76(d)(3)(A)(ii) to make clear that OPUC's opportunity to comment on an application is not limited to just the administrative completeness review of a SIC application. The commission makes clarifying revisions to §24.76(d)(3)(A)(ii) and §24.76(d)(3)(A)(ii)(I) to conform more closely to statute.

TAWC recommended that the reference to confidential material under proposed §24.76(d)(5)(A)(iii)(II) include reference to "protected material, highly confidential material, or highly sensitive protected material."

Commission response

The commission declines to implement the recommended change. The commission uses the standard reference to "confidential" as that is the relevant term used under §22.71. The protective order issued in a SIC proceeding, if any, will specify the criteria for protected material, highly confidential protected material, and other categories of confidential material.

Proposed §24.76(d)(5)(A)(iv) and §24.76(d)(5)(A)(iv)(I)- Requirements for recommendation to find a SIC application deficient and citation of noncompliance

Proposed §24.76(d)(5)(A)(iv) would specify the requirements associated with commission staff finding a SIC application deficient, and a SIC applicant to cure such deficiencies. Proposed §24.76(d)(5)(A)(iv)(I) would require commission staff to identify each application deficiency in its recommendation.

TAWC recommended that proposed §24.76(d)(5)(A)(iv)(I) be revised to require commission staff to "cite to the requirement in statute or rule with which the application is noncompliant" if a SIC application is found to be insufficient. TAWC provided redline language consistent with its recommendation.

Commission response

The commission declines to implement the recommended change because it is unnecessary. As revised, §24.76(d)(3)(A)(iv) requires commission staff to "identify each application deficiency in its recommendation" if commission staff recommends the application to be found deficient. The presiding officer is authorized to reject commission staff's recommendation if it lacks specificity. Moreover, the official notice of deficiency has the obligation to "cite the particular requirements with which the application does not comply" under §24.76(d)(3)(A)(v)(I). The commission makes conforming revisions to the provision to align with new §24.76(d)(3)(A)(vi) and §24.76(d)(3)(A)(vi)(vii).

Proposed §24.76(d)(5)(A)(v)- Notice of deficiency

Proposed §24.76(d)(5)(A)(v) would establish that if the presiding officer determines a SIC application is deficient, the presiding officer will file a notice of deficiency. The provision also specifies the requirements for the notice of deficiency.

OPUC reiterated its recommendation to revise proposed §24.76(d)(5)(A)(v) to require a SIC applicant cure deficiencies in its SIC application within five days and require the presiding officer to dismiss the application if further deficiencies are found in the amended application. Ricks supported OPUC's recommendation while TWU, SJWTX, and TAWC opposed OPUC's recommended revisions on the basis that dismissal for insufficient applications and the limited time to cure is "overly restrictive, punitive, and contrary to the goal of facilitating complete applications."

Commission response

The commission declines to implement the recommended change because it is addressed by the revisions made to an applicant's opportunity to cure under §24.76(d)(3)(A)(vii). As stated previously, a utility will have a single opportunity to cure eligible cost-related deficiencies in a SIC application with a five-day cure period under §24.76(d)(3)(A)(vii). Any claimed eligible cost included in the application that is found deficient after the cure period will be excluded from the application and disallowed from recovery in the current SIC proceeding, except that a SIC applicant may otherwise appeal an order finding there to be eligible cost-related deficiencies or argue on the merits that such eligible costs were supported in the application and should not be disallowed. Any claimed eligible costs that are ultimately disallowed may be recovered in a subsequent SIC or comprehensive base rate case upon a showing of sufficient substantiating documentation. However, to ensure administrative efficiency, the presiding officer may authorize additional opportunities to cure application deficiencies unrelated to eligible costs. The commission makes conforming revisions to the provision to align with new §24.76(d)(3)(A)(vi) and §24.76(d)(3)(A)(vi)(vii). The commission deletes the authorization for the presiding officer or commission staff to provide additional documentation.

Ricks commented that the proposed procedural timeline omits a "High Volume Audit Trigger" that is necessary to ensure the 60-day statutory window for substantive commission review "is not wasted on unverified data." Ricks noted that in recent SIC applications utilities regularly seek millions of dollars in recovery through numerous low-dollar assets of $1,000 or less. Ricks also recommended the adoption of "Pre-merits Intervention" standards included in Indiana 170 IAC 6-1.1-6 that require utilities to prove their charges are properly calculated as a precondition for sufficiency. Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended changes. The revisions providing a single opportunity to cure eligible cost-related deficiencies within five days address Ricks's concerns about eligible cost recovery for items of any dollar value. Moreover, the revisions to discovery and the procedural schedule substantively addresses Ricks's concern. It is not clear what a "High Volume Audit Trigger" would entail and it appears that Indiana 170 IAC 6-1.1-6 is roughly equivalent to the discovery provisions of §24.76(d)(2) as well as commission staff filing its recommendation under the relevant provisions of §24.76(d)(3). Commission staff and intervenors will have the opportunity during the administrative completeness phase to conduct discovery and ensure that the SIC applicant provides substantiating information that supports its claimed eligible costs.

Proposed §24.76(d)(5)(A)(vi) and (vii)- Sufficiency recommendation for amended application and minimum timeline for ruling on sufficiency

Proposed §24.76(d)(5)(A)(vi) would require commission staff to file a recommendation on sufficiency of any amended application within a time period prescribed by the presiding officer. Proposed §24.76(d)(5)(A)(vii) would prohibit a SIC application from being deemed sufficient by the presiding officer until at least 30 days from the date the initial application is filed.

TAWC recommended proposed §24.76(d)(5)(A)(vi) be revised to require commission staff to file a recommendation on the sufficiency of an amended application within seven working days after the applicant has filed the amended application. TAWC alternatively recommended deleting proposed §24.76(d)(5)(A)(vi) and provided draft language consistent with its recommendation. OPUC opposed TAWC's recommendations because the recommendation is inconsistent with Texas Water Code §13.183(c-3), which prohibits the presiding officer from filing a determination on application sufficiency until 30 days after the date the application is filed. As such, OPUC recommended the provision be retained as proposed.

Commission response

The commission declines to implement the recommended change because it is unnecessary. Any deadline for commission staff's recommendation on an application or on an amended application will be set by the presiding officer under §24.76(d)(3)(A)(iii) or (vi), respectively. This is appropriate given that application amendments will vary in scope and complexity.

OPUC recommended proposed §24.76(d)(5)(A)(vi) be revised to require a SIC application that requires amendments to be denied. OPUC remarked that dismissal of an application is fair "given the strict limitations the Commission is considering imposing on intervenors, including OPUC." OPUC noted that it is statutorily afforded the opportunity to comment on the sufficiency of a SIC application. Therefore, if an application is deemed insufficient and the applicant is not required to re-file, then OPUC "will be provided additional time to comment on the sufficiency of the amended application." OPUC expressed that a streamlined process should not permit applicants to file incomplete applications that require amendments. OPUC provided draft language consistent with its recommendation. TWU and TAWC opposed OPUC's revisions to proposed §24.76(d)(5)(A)(iv)-(v) for the reasons already stated.

Commission response

The commission declines to implement the recommended change. The revisions providing a single opportunity to cure eligible cost-related deficiencies within five days and disallowance of any deficient costs addresses OPUC's concerns regarding insufficient applications.

OPUC alternatively recommended that proposed §24.76(d)(5)(A)(vi) be revised (1) to require commission staff to file a recommendation on the sufficiency of an amended application and (2) to authorize OPUC and other intervenors to provide additional comments on sufficiency within five days. OPUC commented that commission review of a SIC application for sufficiency would not be impeded by OPUC being permitted to comment within the same amount of time as commission staff has to review the amended application. OPUC provided draft language consistent with its recommendation. TWU and TAWC opposed OPUC's revisions to proposed §24.76(d)(5)(A)(iv)-(v) for the reasons already stated.

Commission response

The commission declines to implement the recommended change because it is unnecessary. As stated previously, the presiding officer will set the deadline for commission staff to file a recommendation on an amended application under §24.76(d)(3)(A)(vi). Intervenors are not prohibited from filing motions addressing the administrative completeness of an amended application, which may be considered by the presiding officer.

Proposed §24.76(d)(5)(B)- Commission evaluation and final determination

Proposed §24.76(d)(5)(B) would establish that the presiding officer will set a procedural schedule that will enable the commission to issue a final order within 60 days from the date the SIC application is determined to be sufficient, unless otherwise extended in the manner provided by §24.76(d). The provision would also authorize the commission to extend the deadline for not more than 15 days for good cause.

TAWC recommended proposed §24.76(d)(5)(B) be revised to omit reference to the SIC sufficiency period being extended as otherwise provided for by §24.76(d). TAWC also recommended omitting the fifteen-day good-cause extension for issuance of a final order after an application is deemed sufficient. OPUC opposed TAWC's recommendation because the provision conforms to the requirements of §13.183(c) which, permits the commission to extend substantive SIC application review for 15 days for good cause shown. As such, OPUC recommended the provision be retained as proposed.

Commission response

The commission declines to implement the recommended change because it is contrary to statute. As noted by OPUC, Texas Water Code §13.183(c) specifies a 60-day statutory deadline that may be extended for 15 days for good cause.

Proposed §24.76(d)(5)(B)(ii)- Discovery limitations prior to final determination

Proposed §24.76(d)(5)(B)(ii) would limit each party, other than commission staff, to serve no more than 10 requests for information and requests for admission of fact prior to the presiding officer issuing a final proposed order on the application.

SJWTX stated that if proposed §24.76(d)(3)(B) concerning pre-sufficiency RFIs is deleted, then it does not oppose "applying the 10-day turnaround for discovery responses to the period before the application is found administratively complete" under proposed §24.76(d)(5)(B)(ii). Alternatively, if proposed §24.76(d)(3)(B) is preserved, then SJWTX recommended the 10-day turnaround for discovery responses to be effective only after an application is found to be administratively complete. SJWTX provided draft language consistent with its recommendation. OPUC opposed SJWTX's recommendation to revise §24.76(d)(5)(B)(ii) for the reasons already stated reiterated its original recommendations for the provision.

Commission response

The commission declines to implement the recommended change. The revisions simplifying discovery to apply the default standards of Chapter 22, Subchapter H unless otherwise determined by the presiding officer address the discovery procedures applicable to SIC proceedings.

OPUC recommended proposed §24.76(d)(5)(B)(ii) be deleted in its entirety because it severely limits the right of intervenors to participate in a SIC proceeding. OPUC provided draft language consistent with its recommendation. TAWC opposed OPUC's recommendation to delete proposed §24.76(d)(5)(ii) because it is moot. Specifically, TAWC disagreed with OPUC's contention that the provision severely limits intervenor's participatory rights, particularly when an incomplete application is filed because the provision only applies to post-sufficiency RFIs.

Commission response

The commission declines to implement the recommended change. The revisions simplifying discovery to apply the default standards of Chapter 22, Subchapter H unless otherwise determined by the presiding officer.

Proposed §24.76(d)(5)(B)(iii)- Deadline for requests for information

Proposed §24.76(d)(5)(B)(iii) would require post-sufficiency requests for information to be issued no later than ten working days from the date the application is determined to be sufficient by the presiding officer.

OPUC recommended proposed §24.76(d)(5)(B)(iii) be deleted in its entirety because it severely limits the right of intervenors to participate in a SIC proceeding. OPUC stated that, in conjunction with the pre-sufficiency discovery limitation under proposed §24.76(d)(3)(B), the provision unduly burdens intervenors rights to participate in a SIC proceeding. OPUC provided draft language consistent with its recommendation. TAWC opposed OPUC's recommendation to delete proposed §24.76(d)(5)(iii) because it does not provide a detailed justification as to why the provision is "unreasonably burdensome" and the change is inconsistent with the streamlined nature of SIC proceedings.

Commission response

The commission declines to implement the recommended change. The revisions simplifying discovery to apply the default standards of Chapter 22, Subchapter H unless otherwise determined by the presiding officer address OPUC's concern.

Proposed §24.76(d)(5)(B)(iv)- Recommendation concerning supporting documentation of sample for audit

Proposed §24.76(d)(5)(B)(iv) would require commission staff to include in its final recommendation whether the supporting documentation provided with the application adequately substantiates each claimed eligible cost of the applicant utility's eligible plant for each project included in the audit or sample, regardless of whether the applicant elects to use a sample for audit or provide all supporting documentation.

Consistent with its opposition to the proposed rule authorizing applicant utilities elect to provide a sample for audit rather than all supporting documentation related eligible costs, OPUC recommended proposed §24.76(d)(5)(B)(iv) to be revised to omit reference to samples for audit. OPUC provided draft language consistent with its recommendation. TAWC opposed OPUC's recommended revisions for the reasons already stated.

Commission response

The removal of the sample for audit and the provision renders OPUC's recommendation moot.

Proposed §24.76(e)- Calculation of the SIC

Proposed §24.76(e) would establish the formula for calculating the revenue requirement of the SIC.

Ricks opposed the rate of return methodology included in §24.76(e). Ricks explained that while the rule correctly identifies a rate of return component but omits an "Interest Rate Floor." Ricks recommended adding new §24.76(e)(10)(C) to prevent utilities from "earning an unreasonable windfall through interest rate arbitrage." Ricks advocated for the utility to use its actual cost of debt for the debt-portion of the SIC calculation if the utility's actual weighted average cost of debt for the specific capital used to fund the eligible plant is lower than the calculated rate of return. Ricks also recommended the commission review and adopt the "Pre-tax Return" standards from Pennsylvania 66 Pa. C.S. § 1357(b)(1) which "requires the use of the utility's actual capital structure and actual cost rates for long-term debt' as of the last day of the three-month period ending one month prior to the effective date of the charge." Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended change because it is unnecessary. Comments concerning interest rates and carrying costs have been addressed under the appropriate header. The SIC is a proceeding to allow the addition of capital investments to rate base, but it does address the utility's rate of return or rate design. Additionally, to reflect the replacement plant offset and load growth adjustment discussed previously, the commission modifies §24.76(e) and its sub-provisions accordingly. The commission also strikes the term "after-tax" from §24.76(e)(5) and §24.76(e)(12)(A) and (B) for clarity, renumbers the provision consistent with the additional paragraphs, and corrects the cross reference to §24.129 in §24.76(e)(3) for clarity. The commission also makes conforming changes to the SIC Filing Package Instructions.

Proposed §24.76(e)(11)- Base SIC calculation methodology and meter multipliers

Proposed §24.76(e)(11) would require the SIC to be calculated based on annualized meter equivalents, derived using the most recent month's total customer meter equivalents multiplied by 12. The provision also requires the base SIC to be calculated as the SIC RR divided by annual meter equivalents and the SIC for each meter size to be calculated as the base SIC multiplied by the multiplier for that meter size.

Commission response

The commission revises §24.76(e)(13) (previously §24.76(e)(11)) to clarify the SIC calculation methodology. Specifically, the commission revises the provision to state that: "The SIC must be calculated based on annualized meter equivalents, derived using the most recent month's total customer meter equivalents multiplied by 12. The base SIC must be calculated as the SIC RR divided by annual meter equivalents. Unless an alternative meter ratio or equivalent is specified by the commission in the applicant's most recent comprehensive rate proceeding, the SIC for each meter size must be calculated as the base SIC multiplied by the multiplier for that meter size. The standard meter ratios are as follows:" The revision accounts for instances where approximating to one of the standard meter sizes prescribed in the table is necessary if a utility uses a non-standard meter size.

Proposed §24.76(f)- Notice

Proposed §24.76(f) would specify the notice requirements applicable to SIC proceedings.

Proposed §24.76(f)(1)- General notice requirements

Proposed §24.76(f)(1) would specify the general notice requirements applicable upon or prior to filing a SIC application.

Proposed §24.76(f)(1)(A)- Provision of copy of SIC application to OPUC

Proposed §24.76(f)(1)(A) would require a SIC applicant to electronically provide an electronic copy of the application to OPUC upon filing.

OPUC and Ricks recommended that proposed §24.76(f)(1)(A) be revised to require SIC applicants to file notice of intent to submit a SIC application with the commission and OPUC five days before application filing. OPUC stated such a requirement would significantly benefit the expeditious processing of SIC applications. OPUC explained that filing a notice of intent would not be burdensome on applicants and would provide both agencies additional time to prepare their staff to participate in the SIC proceeding. OPUC stated that assigning staff to SIC applications is a significant administrative undertaking. OPUC noted that PURA requires applicants, in certain instances such as the Uniform Tracking Mechanism under PURA §36.216(c), to file a notice of intent prior to the filing of an application. OPUC provided draft language consistent with its recommendation. TAWC and TWU opposed OPUC's recommended revision because it is unnecessary, unsupported by statute, and would not provide any corresponding benefit. TAWC noted that it is unclear that five additional days would result in the benefits described by OPUC. TAWC noted that its members may not know the precise timing of SIC applications, but should "be able to file as soon as the application is ready without having to wait an additional five days." TWU disagreed with OPUC that such a requirement is analogous to the requirement for the Electric Uniform Tracking Mechanism because that rule "involves different statutory provisions and serves different regulatory purposes."

Proposed §24.76(f)(1)(B)- Provision of copy of SIC application to OPUC

Proposed §24.76(f)(1)(B) would require a SIC applicant to, on or before the first working day after its files its application to issue notice of its SIC application to all affected ratepayers by first class mail or, if the customer has agreed to receive communications electronically, by e-mail. If the applicant has a website, the applicant must also post a copy of the notice on its website accessible to the general public.

Commission response

The commission revises the provision to reflect that the requirements to issue notice of its SIC application to all affected ratepayers and to post a copy of the notice on its website are contemporaneous with one another. Specifically, the commission divides the provision into new §24.76(f)(1)(B)(i) and (ii), joined with "and" to indicate that both notice requirements must be fulfilled at the same time. The commission also makes conforming revisions to the notice affidavit (Attachment E-1) in the SIC Application Form.

Commission response

The commission declines to implement the recommended change because it is unnecessary and unsupported by statute. Requiring the filing of such a notice would only further complicate SIC proceedings. The commission also revises the provision to more closely adhere to the statutory requirement by specifying that a SIC application must be provided to OPUC electronically on the same day an applicant files its SIC application with the commission.

Ricks recommended adding new §24.76(f)(2)(B)(v), which would require a bill comparison table for each meter size identifying the current monthly bill at 5,000 and 10,000 gallons; the proposed monthly bill including the new SIC; and the percentage and dollar change attributable solely to the new surcharge. Ricks contended that the proposed addition is necessary to ensure that rates are just and reasonable in accordance with Texas Water Code § 13.182. Ricks also recommended requiring utilities host a "Redacted Transaction Ledger" on their websites to "allow for the 30-day sufficiency review mandated by TWC § 13.183(c-4)." Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended changes because they are unnecessary. The template notice published with the rule requires the SIC applicant to provide an estimated total monthly bill at 5,000 and 10,000 gallons by customer meter size. Additionally, Workpaper Schedule C-2, which requires transaction details, will be filed with the utilities SIC application. Publication on the utilities' websites would be redundant.

New §24.76(f)(1)(C)- Insufficient notice procedures

OPUC recommended adding new §24.76(f)(1)(C), which would specify the procedures that the applicant must follow if the presiding officer determines notice of an application is insufficient. OPUC maintained that because SIC applications are expedited proceedings, the recommended change would promote administrative efficiency by avoiding needless Commission action and motions from parties contesting how to address notice deficiencies. OPUC provided draft language consistent with its recommendation. TAWC opposed OPUC's recommended new provision as it is unworkable. Specifically, TAWC noted that, on its own, reproducing a notice to send to customers can take more a week, not including the time necessary to prepare the re-notice. TAWC commented that any re-issuance of notice should be left to the discretion of the presiding officer.

Commission response

The commission declines to implement the recommended change because it is unnecessary. As noted by TAWC, the deficiency and re-issuance of notice will be determined by the presiding officer. If notice is determined to be deficient and requires re-issuance, commission staff can confer with the SIC applicant to address deficiencies. Moreover, the adoption of the template notice should minimize the risk of deficient notice being issued.

Proposed §24.76(f)(2)- Contents of notice

Proposed §24.76(f)(2) would specify the minimum content requirements for notices issued to affected ratepayers regarding the pending SIC application.

Proposed §24.76(f)(2)(A)- Docket control number of SIC proceeding

Proposed §24.76(f)(2)(A) would require notice of a SIC proceeding to include the docket control number for the utility's SIC proceeding.

OPUC recommended that proposed §24.76(f)(2)(A) be revised to clarify that if the presiding officer determines notice to be deficient by the presiding officer, then the intervention deadline is "extended to 25 days from the date service of the supplemental notice is physically or electronically mailed to all customers." OPUC provided draft language consistent with its recommendation. TAWC commented OPUC's recommended revision is unnecessary but did not necessarily oppose it.

Commission response

The commission declines to implement the recommended change for the reasons already stated. If notice is found deficient, the presiding officer will adjust the intervention and discovery timelines in the order requiring the re-issuance of notice or in a subsequent order.

Proposed §24.76(f)(2)(B)- Contents of notice

Proposed §24.76(f)(2)(B) specifies the minimum content requirements for notices of SIC applications that must be issued or posted by the applicant.

Proposed §24.76(f)(2)(B)(v) and (vi)- Estimated total monthly bill and statement of effective date

Proposed §24.76(f)(2)(B)(v) requires a notice of SIC application to state, for each customer meter size, an estimated total monthly bill at 5,000 gallons and 10,000 gallons. Proposed §24.76(f)(2)(B)(vi) requires a notice of SIC application to include a statement that substantially conforms to the following: "The effective date of the proposed rate change will be the date the

commission issues a final order adopting the proposed SIC."

Commission response

The commission revises §24.76(f)(2)(B)(v) to only require an estimated total monthly bill "for which the applicant has customers" so that a utility is not required to provide an estimated monthly bill for each meter size, even if the applicant does not have customers for that meter size. The commission also revises §24.76(f)(2)(B)(v) to revise the effective date statement as follows: The effective date of the proposed rate change will be the date specified by the commission final order adopting the proposed SIC." This reflects that the effective date of the SIC is generally specified by the commission final order and is not always the date the commission final order is issued. The commission also makes conforming revisions to the template notice form.

Proposed §24.76(f)(2)(C)- Intervention deadline

Proposed §24.76(f)(2)(C) would require notice of a SIC proceeding to include the intervention deadline.

OPUC recommended that proposed §24.76(f)(2)(C) be revised to require notice of SIC applications include both the date and time using Central Prevailing Time to ensure ratepayers are sufficiently informed that the commission considered 5:00 P.M. Central Prevailing Time to be the end of the day. OPUC provided draft language consistent with its recommendation. TAWC commented OPUC's recommended revision is unnecessary but did not necessarily oppose it.

Commission response

The commission agrees with OPUC and implements the recommended change. The commission also makes conforming revisions to the template notice commission-prescribed form.

Proposed §24.76(f)(2)(E)- Intervention and comment instructions

Proposed §24.76(f)(2)(E) would require notice of a SIC proceeding to include instructions on how an affected ratepayer can intervene in a SIC proceeding or comment as a protestor.

OPUC recommended that proposed §24.76(f)(2)(E) cross reference the commission filing rules and §22.74, relating to Service of Pleadings and Documents, to provide additional information to potential intervenors on how to participate in a SIC proceeding. OPUC explained that a notice for a SIC application should "be required to explain the rights of intervenors given the expedited process, which limits the amount of time a ratepayer has to intervene in an SIC proceeding." OPUC provided draft language consistent with its recommendation. SJWTX opposed OPUC's recommended revisions as they exceed the typical notice information required under commission rules. SJWTX stated that it is also improper for an applicant to provide "the type of information that is typically provided in an order issued by the presiding officer," such as information concerning filing and service requirements. Similarly, TAWC commented that while it does not oppose OPUC's recommended revision to proposed §24.76(f)(2)(F), some of the information is more appropriately included in an order issued by the presiding officer.

Commission response

The commission declines to implement the recommended change because it is unnecessary. If deficient notice adversely affects the intervention deadline, the presiding officer can take appropriate action in revising the procedural schedule.

Proposed §24.76(f)(3) and §24.76(f)(3)(A)- Completion of Notice and intervention deadline

Proposed §24.76(f)(3) and proposed §24.76(f)(3)(A) indicate that notice is complete on the date that notice is physically or electronically mailed to all customers by the utility and if notice is mailed over multiple days, notice is complete on the last day of mailing.

Commission response

The commission revises §24.76(f)(3)(A) to indicate that notice is completed once all requirements for notice are satisfied. Specifically, the commission revises the provision into three subparts. Specifically, new §24.6(f)(3)(A)(i)-(iii) provide that notice is complete on the later of the date the applicant has notified OPUC of the application under paragraph (1)(A) of this subsection; the date that notice is physically or electronically mailed to all customers by the applicant under paragraph (1)(B)(i) of this subsection; or the date that the applicant posts the notice to its website under paragraph (1)(B)(i) of this subsection. The commission also moves the multiple-day notice requirement to new §24.76(f)(3)(B) and renumbers the subsequent provision.

Proposed §24.76(f)(4) and §24.76(f)(4)(C) and (E)- Completion of notice and intervention deadline

Proposed §24.76(f)(4) would require the filing of a proof of notice affidavit with the commission within 15 days from the date notice was complete. Proposed §24.76(f)(4)(C) would require the affidavit to attest and verify that notice was issued to all affected ratepayers of the utility. Proposed §24.76(f)(4)(E) would require the affidavit to contain a copy of each notice issued by the utility.

Commission response

The commission clarifies §24.76(f)(4)(C) to require that the attestation and verification requirement for notice extends to the notice issued to OPUC. The commission further clarifies §24.76(f)(4)(E) to specify that the affidavit must "include a sample copy of the notice issued by the applicant as an attachment" to clarify that only one copy of the issued notice is required. The commission makes conforming revisions to the notice affidavit (Attachment E-1) in the SIC Application Form.

Proposed §24.76(g)- Scope of proceeding

Proposed §24.76(g) would prohibit a SIC proceeding from addressing whether eligible costs included in a SIC application or amendment are prudent, reasonable, or necessary.

OPUC recommended proposed §24.76(g) be revised to include, at a minimum, a requirement that the commission initiate a comprehensive base rate proceeding for an applicant if the applicant includes in its SIC application any plant assets or replacements that were included in its last comprehensive rate proceeding. OPUC stated that such a provision is necessary to avoid overburdening ratepayers.

Commission response

The commission declines to implement the recommended change because it is unnecessary and overly punitive. The addition of a replacement plant offset substantially addresses this concern. Moreover, if commission staff determines that a utility is over-earning in after review of its annual report then commission staff may recommend to the presiding officer that the applicant be required to initiate a base rate proceeding.

OPUC and Ricks recommended language in existing §24.76(g) regarding the potential for a prudence review in a SIC proceeding for good cause be retained. OPUC stated that while the presiding officer has not yet granted a good cause exception for prudence review in the eight SIC proceedings completed thus far, the language should be retained and expanded with a list of factors the presiding officer may consider when determining whether good cause exists. Ricks stated that, while the proposed rule "identifies the risk of imprudent recovery," the rule omits criteria for good cause intervention. Ricks commented that the provision should account for a good cause exception to address prudence, reasonableness, or necessity in the event an intervenor provides evidence that an application includes prohibited revenue-producing assets or the utility has failed to disaggregate retirements in the application and that, in accordance with Texas Water Code § 13.184(c), the full evidentiary burden of total production of all documentation would immediately apply to those assets.

Commission response

The commission declines to implement the recommended change. Prudence review is not appropriate for an interim rate proceeding such as a SIC. The statutory intent for a SIC is to promote infrastructure investment by providing an expedited proceeding through which a utility can recover costs incurred between rate cases that improve service to customers. Prudence determination of such investments is a time-intensive process that is more appropriate for a review in a comprehensive base rate proceeding.

Ricks encouraged further commission review to adopt the "Pre-merits Intervention" standards from Indiana 170 IAC 6.1.1-6 which require "a utility to prove its charges are properly calculated' as a condition of maintaining a streamlined scope." Ricks commented that such a provision is necessary to ensure that rates are just and reasonable in accordance with Texas Water Code § 13.182. Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement the recommended change because it is unnecessary. The cited provision from Indiana appears to be roughly equivalent to the discovery provisions of §24.76(d)(2) and commission staff filing its recommendation under the relevant provisions of §24.76(d)(3).

Ricks emphasized that reconciliation under §24.76(h) is retrospective and that allowing a utility to collect a SIC that has not been appropriately offset for four to eight years before a refund is ordered is, by definition, regulatory lag working against ratepayers. Ricks argues that this is contrary to the statutory goal of making water and sewer service more affordable. Ricks commented that further discussion is necessary to establish a specific accounting methodology for a base rate offset to ensure consistency with the cost-causation principle.

Commission response

The commission maintains that the adopted rule contains sufficient measures to mitigate over-earning to the detriment of ratepayers. Carrying costs for over-earning and the cost-causation principle are addressed under the appropriate header.

Ricks opposed the refund calculations included under proposed §24.76(h) as it omits a "Gamesmanship Penalty Interest Rate." Specifically, Ricks recommended §24.76(h) be revised to require any refund to include carrying costs calculated at the utility's authorized rate of return plus a 200-basis point penalty to compensate ratepayers for the lost time value of their capital in the event the commission finds that SIC revenues were collected for assets that (1) were not used and useful; (2) were revenue-producing expansions; or (3) were replacement assets already included in base rates. Ricks stated that such a provision is necessary to protect the public interest and comply with Texas Water Code §13.182. Ricks provided draft language consistent with her recommendation.

Commission response

The commission maintains that the adopted rule contains sufficient measures to mitigate over-earning to the determinant of ratepayers. Carrying costs for over-earning and the cost-causation principle are addressed under the appropriate header.

Proposed §24.76(j)- Requirement to file a rate case

Proposed §24.76(j) requires a utility to file a comprehensive base rate proceeding within a specific timeframe depending on the respective class of the utility. Specifically, a Class A utility must file a base rate proceeding within four years from the date the commission files an order approving the SIC, six years for a Class B utility, and eight years for a Class C or D utility.

OPUC recommended proposed §24.76(j) to reflect shorted rate case cycles for utilities that apply and receive a SIC. Specifically, OPUC recommended the timelines to file a rate proceeding should be halved for each class of utility from the date the commission files an order approving the SIC. Therefore, a Class A utility should be required to file a rate case in two years rather than four, a Class B three years rather than six, and Class C or D utilities be required to file in four rather than eight. OPUC explained the shorter cycle would ensure reconciliation occurs more quickly and therefore render comprehensive base rate proceedings to be faster and less complicated. OPUC noted that this change would also reduce the risk that utilities over recover through a SIC, "the likelihood of intergenerational inequity," and avoid excessive SICs from being included in rate base. TWU, SJWTX, and TAWC opposed OPUC's proposed revisions to the comprehensive base rate proceeding filing schedule under proposed §24.76(j) as the changes are unsupported by statute and would increase both the regulatory burden and costs without any commensurate benefit. TWU, SJWTX, and TAWC maintained that the proposed schedule appropriately balances the need for periodic reconciliation with the goal of minimizing the frequency of expensive and lengthy comprehensive base rate proceedings. TWU emphasized that SIC costs are fully reconciled in the next comprehensive rate case regardless of when it occurs. Therefore, shortening the rate case cycle does not improve the quality of reconciliation; only increases the frequency of costly proceedings. SJWTX noted that the proposed schedule is consistent with the framework for electric Distribution Cost Recovery Factor proceedings under PURA § 36.210(d). SJWTX also stated that OPUC's recommendation is premature because no SIC applications have been processed under the post-SB 740 framework. As such, SJWTX recommended the commission revise the comprehensive base rate proceeding schedule only after it has more experience with the new process and can therefore make an informed decision based on its experience with applications under the new rule. SJWTX emphasized that if the commission adopts OPUC's recommended changes to proposed §24.76(j), it is even more critical that the commission omit the SIC filing schedule under proposed §24.76(c)(2)(D) to avoid regulatory lag. Specifically, if a utility misses its opportunity to file a SIC under proposed §24.76(c)(2)(D) "because it has a general rate case that has taken longer to process than the statutory deadlines set forth in TWC § 13.187(e) and 13.1871(g)." TAWC commented that the rationale for the comprehensive rate filing schedule under proposed §24.76(j) were deemed appropriate for each utility class size when the commission originally adopted §24.76. TAWC noted that OPUC's concerns of utility over-recovery and intergenerational inequity to not account for the commission's authority to require a utility file a comprehensive base rate proceeding if the commission finds a utility's annual report earnings warrant it. Ricks expressed support for OPUC's recommendation for shorter rate case timelines but noted that the rule does not include a "critical growth-based trigger." Specifically, Ricks recommended new §24.76(j)(4) be added which would require a utility to file a comprehensive rate case within 18 months if the utility's connections increase by more than 20% since the last rate proceeding or the total annual SIC revenue exceeds 10% of the utility's total annual service revenues approved in its last general rate case. Ricks explained such a provision is necessary to "prevent utilities from using the SIC to evade regulatory oversight during periods of rapid acquisition." Ricks provided draft language consistent with her recommendation.

Commission response

The commission declines to implement OPUC and Ricks's recommended changes because they are unnecessary. The timelines for a base rate proceeding are adequate and appropriately balance the need to address the potential of over-earning with the time and resource burden associated with conducting a base rate proceeding. In response to Ricks's comments concerning new §24.76(j)(4), the earnings cap proposal is discussed under the relevant header.

Commission-Prescribed Forms and Minor and Conforming Changes

The SIC Application Form is the commission-prescribed form that must be filed to initiate a new SIC proceeding and generally reflects the requirements of §24.76. The Water and Sewer SIC Filing Packages are the Excel spreadsheets for cost and revenue related information necessary for SIC Applications. The SIC Filing Package Instructions provide information and guidance on filling out the SIC Filing Packages. The SIC Application Notice is a template notice form for usage by SIC applicants when applying for a SIC to issue to their customers.

TAWC generally commented that any commission-prescribed forms should conform to the revisions made to §24.76 on adoption.

Commission response

The commission agrees with TAWC and makes appropriate changes to the commission-prescribed forms, including the Excel filing packages, to align with rule text changes where appropriate. In addition to the aforementioned conforming changes to the SIC Application Form to reflect amendments to specific provisions, the commission also revises Section D-2 and the compliance affidavit (Attachment D-2) to and specifically attest to compliance with §24.76(c)(1)(A)-(D). The commission also revises the instructions to reflect the single opportunity to cure eligible cost-related deficiencies in an application and deletes all references to the presiding officer or commission staff requesting additional information. The commission also makes other minor and conforming changes to the rule text and commission-prescribed forms.

Instructions for Filing Schedules and Workpapers

The proposed instructions provide general guidance and information for the water and sewer SIC filing schedules and workpapers based on the requirements of §24.76.

OPUC recommended that the instructions for testimony be revised to require supporting documentation be filed in its native format, which is the same requirement applicable to direct testimony.

Commission response

The commission agrees with OPUC and implements the recommended change.

Consistent with its recommendations concerning eligible plant owned by a predecessor utility acquired by the SIC applicant, OPUC recommended the instructions relating to the General Requirements for SIC applications be revised to reflect that existing plant includes plant currently in the utility's base rates as well as plant owned by previous owners. OPUC emphasized that replacement plant is prohibited from being included in a SIC. OPUC provided draft language consistent with its recommendation.

Commission response

The commission revises the SIC Filing Package Instructions to conform with the new definitions of "existing plant" and "replacement asset" under §24.76(b)(2) and (3).

Consistent with its recommendations concerning the prohibition of retirements and replacements being included in a SIC, OPUC recommended that proposed Schedule C: Eligible Plant be revised to clarify that replacement assets for previously existing infrastructure are prohibited from being included in a SIC. OPUC provided draft language consistent with its recommendation.

Commission response

The commission declines to implement the recommended change because of the addition of new definitions for "existing plant" and "replacement asset" under new §24.76(b)(2) and (3) address the replacement plant offset. The commission revises the SIC Filing Package Instructions to address the replacement plant offset under Workpaper Schedule C-3 and omits language concerning the prohibition on including replacements of retired plant in a SIC application.

Consistent with its recommendations on the adequacy of supporting documentation provided by a SIC applicant, OPUC recommended the instructions for Schedule F: Depreciation Schedule be revised to include an asset identifier. OPUC provided draft language consistent with its recommendation.

Commission response

The commission declines to implement the recommended change because the addition of new §24.76(c)(1)(D) and revisions to §24.76(d)(1)(H)(ii)(I)-(III) render the proposal moot. The commission revises the SIC Filing Package Instructions to address the asset-level information required in Workpaper Schedule C-2.

Workpaper Schedule C-2- Transaction Details by NARUC Account

Proposed Workpaper Schedule C-2 would require a SIC applicant to provide transaction details by NARUC account for water or sewer service, as applicable.

Consistent with its recommendations concerning internal and external documentation, OPUC recommended Workpaper Schedule C-2: Transaction Details by NARUC Account be revised to clarify the definitions of both forms of documentation and what is specifically included in each category. OPUC further recommended the definitions be expanded to include affiliates of the applicant.

Commission response

The commission agrees with OPUC and implements the recommended changes to Workpaper Schedule C-2 with some modifications. The specific changes to Workpaper Schedule C-2 are detailed under the header for §24.76(d)(1)(J)(iv) and §24.76(d)(1)(J)(iv)(I)-(V).

As an alternative to revising proposed §24.76(d)(1)(H)(ii)(III), SJWTX recommended "narrowing the required elements of Workpaper Schedule C-2 for an applicant that does not elect to use a sample audit under 16 TAC §24.76(d)(1)(J)(ii)(I)." Specifically, SJWTX recommended both the rule and Instructions for Workpaper Schedule C-2 to limit "the requirement to provide transaction details supporting eligible costs to only those transaction details corresponding to the costs addressed in 16 TAC §24.76(d)(1)(J)(iv)." SJWTX explained that the proposed workpaper would require an applicant that includes third-party invoices in its application to support all eligible costs to both "manually input the information from each invoice" as well as provided the invoices themselves. SJWTX remarked that this would take time and resources that are additional to the work necessary to gather and organize the invoices that correspond to each project. OPUC opposed SJWTX's alternative recommendation to modify Workpaper Schedule C-2 if proposed §24.76(d)(1)(H)(ii)(III) is not revised for applicants that do not elect to use a sample for audit. OPUC explained that the transaction ledger will "lend itself to greater organization and transparency in addition to a more expeditious review by the Commission and intervenors."

Commission response

The removal of the sample for audit is addressed under the appropriate header and renders SJWTX's recommendations moot. A utility must include with its application all substantiating documentation of eligible costs for which it seeks recovery.

Workpaper Schedule C-3- Retired and Replaced Plant

Proposed Workpaper Schedule C-3 would require a SIC applicant to provide details relating to retired and replaced plant in its SIC application.

Consistent with its recommendations concerning eligible plant owned by a predecessor utility acquired by the SIC applicant, OPUC recommended Workpaper Schedule C-3: Retired and Replaced Plant be revised to reflect that existing plant includes plant currently in the utility's base rates as well as plant owned by previous owners. OPUC emphasized that replacement plant is prohibited from being included in a SIC. OPUC provided draft language consistent with its recommendation.

Commission response

The commission declines to implement the recommended change because it is moot. As stated previously, the commission revises the SIC Filing Package Instructions to address the replacement plant offset under Workpaper Schedule C-3 and omits language concerning the prohibition on including replacements of retired plant in a SIC application.

Workpaper Schedule C-4- Asset Identification, In-Service Date, and Cost Information

Proposed Workpaper Schedule C-4 would require a SIC applicant to provide asset-level information such as an asset name or number, description, in-service date, and the corresponding cost information.

Consistent with its recommendations on the adequacy of supporting documentation provided by a SIC applicant, OPUC recommended the instructions for Workpaper Schedule C-4: Asset Identification, In-Service Date, and Cost Information be revised to include an asset identifier. OPUC provided draft language consistent with its recommendation.

Commission response

The commission declines to implement the recommended change because it is unnecessary. Workpaper Schedule C-4 already requires the SIC applicant to specify the asset name or number under Column A. The commission also revises Workpaper Schedule C-4 to specify the NARUC Account number applicable to the asset.

New Workpaper Schedule C-5- Load Growth Adjustment

The commission adds new Workpaper Schedule C-5 which requires a SIC applicant to provide information for the load growth adjustment under §24.76(c)(3)(B)(ii). Specifically, the workpaper would require the SIC applicant to provide the revenue requirement approved in the utility's most recent rate case (RR); the test year end customer count from the utility's most recent rate case (CC); the average revenue requirement per customer from the utility's most recent rate case (AVGRR), and the increase in customer count from the amount (generally the test year end connection count) used to establish rates in the applicant's most recent rate case (CCINC). From that, the load growth is adjustment is calculated as follows: AVGRR * CCINC, with (RR/CC) = AVGRR. The calculation in the workpaper ties into the SIC Revenue Requirement under Schedule A.

This repeal is adopted under the following provisions of Texas Water Code: §13.041(a), which provides the commission the general power to regulate and supervise the business of each water and sewer utility within its jurisdiction and to do anything specifically designated or implied by Chapter 13 of the Texas Water Code that is necessary and convenient to the exercise of that power and jurisdiction; and §13.041(b), which provides the commission with the authority to make adopt and enforce rules reasonably required in the exercise of its powers and jurisdiction including rules governing practice and procedure before the commission and the utility commission. The new rule is also adopted under Texas Water Code §13.131, which authorizes the commission to prescribe forms of books, accounts, records, and memoranda to be kept by utilities, including fixing proper and adequate rates and methods of depreciation, amortization, or depletion, and requiring every water and sewer utility to keep and render to the regulatory authority the uniform accounts of all business transacted in the manner and form prescribed by the commission; Texas Water Code §13.132(a)(1), which authorizes the commission to require that water and sewer utilities report to it any information relating to themselves and affiliated interests both inside and outside this state that it considers useful in the administration of Chapter 13; Texas Water Code §13.183(a), which authorizes the commission toto fix overall revenues at a level that permits a utility a reasonable opportunity to earn a reasonable return on its invested capital used and useful in rendering service to the public and preserves the financial integrity of the utility; Texas Water Code §13.183(c), which specifies certain timelines and requirements applicable to system improvement charges and authorizes the commission to utilize alternative ratemaking methodologies, such as system improvement charges, for the benefit of both ratepayers and utilities; Texas Water Code §13.183(c-1)-(c-4) which specify procedural and substantive requirements applicable to system improvement charge applications; and Texas Water Code §13.184(c), which, in any proceeding involving any proposed change of rates, places the burden of proof on the utility to show that the proposed change, if proposed by the utility, or that the existing rate, if it is proposed to reduce the rate, is just and reasonable.

Cross reference to statutes: Texas Water Code §§13.041(a) and (b), 13.131, 13.132(a)(1), 13.183(a), (c), (c-1)-(c-4), and 13.184(c).

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on April 17, 2026.

TRD-202601673

Seaver Myers

Rules Coordinator

Public Utility Commission of Texas

Effective date: May 7, 2026

Proposal publication date: November 28, 2025

For further information, please call: (512) 936-7433

The new rule is adopted under the following provisions of Texas Water Code: §13.041(a), which provides the commission the general power to regulate and supervise the business of each water and sewer utility within its jurisdiction and to do anything specifically designated or implied by Chapter 13 of the Texas Water Code that is necessary and convenient to the exercise of that power and jurisdiction; and §13.041(b), which provides the commission with the authority to make adopt and enforce rules reasonably required in the exercise of its powers and jurisdiction including rules governing practice and procedure before the commission and the utility commission. The new rule is also adopted under Texas Water Code §13.131, which authorizes the commission to prescribe forms of books, accounts, records, and memoranda to be kept by utilities, including fixing proper and adequate rates and methods of depreciation, amortization, or depletion, and requiring every water and sewer utility to keep and render to the regulatory authority the uniform accounts of all business transacted in the manner and form prescribed by the commission; Texas Water Code §13.132(a)(1), which authorizes the commission to require that water and sewer utilities report to it any information relating to themselves and affiliated interests both inside and outside this state that it considers useful in the administration of Chapter 13; Texas Water Code §13.183(a), which authorizes the commission toto fix overall revenues at a level that permits a utility a reasonable opportunity to earn a reasonable return on its invested capital used and useful in rendering service to the public and preserves the financial integrity of the utility; Texas Water Code §13.183(c), which specifies certain timelines and requirements applicable to system improvement charges and authorizes the commission to utilize alternative ratemaking methodologies, such as system improvement charges, for the benefit of both ratepayers and utilities; Texas Water Code §13.183(c-1)-(c-4) which specify procedural and substantive requirements applicable to system improvement charge applications; and Texas Water Code §13.184(c), which, in any proceeding involving any proposed change of rates, places the burden of proof on the utility to show that the proposed change, if proposed by the utility, or that the existing rate, if it is proposed to reduce the rate, is just and reasonable.

Cross reference to statutes: Texas Water Code §§13.041(a) and (b), 13.131, 13.132(a)(1), 13.183(a), (c), (c-1)-(c-4), and 13.184(c).

§24.76. System Improvement Charge.

(a) Applicability. This section establishes the requirements for a utility under the commission's jurisdiction to establish or amend a system improvement charge to ensure timely recovery of infrastructure investment.

(b) Definitions. In this section, the following words and terms have the following meanings unless the context indicates otherwise.

(1) Eligible plant--Plant properly recorded in the National Association of Regulatory Utility Commissioners (NARUC) System of Accounts, accounts 304 through 339 for water utility service or accounts 354 through 389 for sewer utility service.

(2) Existing plant--Plant that is included in the utility's current rates established in the utility's most recent base-rate proceeding that is being retired and replaced.

(3) Replacement asset--An asset placed into service to replace existing plant that is retired from service.

(4) System improvement charge--An additional charge to recover certain costs of service associated with the portion of the cost of a utility's eligible plant that is not already included in the utility's base rates.

(c) System improvement charge (SIC). A utility under the commission's jurisdiction may apply to establish or amend one or more SICs in accordance with the requirements of this section.

(1) General requirements.

(A) A SIC must be nondiscriminatory and be applied uniformly to each meter size, if any, provided in the utility's tariff.

(B) A SIC applies to each meter size provided in the utility's tariff, if any, based on the calculation and multiplier under subsection (e) of this section.

(C) A SIC application must include any relevant data, attachments, or supplementary materials filed in their native format and, if applicable, any formula intact.

(D) Each asset in a SIC application must be directly associated with at least one NARUC account, grouped by capital project.

(E) If the applicant used a future test year or combined test year in a base rate proceeding initiated after September 1, 2026, a subsequent SIC application is limited to cost recovery of eligible plant placed into service subsequent to the end of the future test year or combined test year.

(F) A utility is prohibited from establishing or amending a SIC while it has a comprehensive rate proceeding under TWC §§13.187, 13.1871, 13.18715, or 13.1872 pending before the commission. If a utility with a pending application to establish or amend a SIC files an application to change rates under TWC §§13.187, 13.1871, 13.18715, or 13.1872, or the commission initiates a rate change review under TWC §13.186, the utility will be deemed to have withdrawn its application to establish or amend a SIC and the presiding officer must dismiss the application.

(2) Eligibility for and timing of SIC application.

(A) A utility may have a SIC in effect for water service, sewer service, or both.

(B) A utility that is applying to establish or amend multiple SICs in a calendar year must do so in a single application.

(C) A utility is prohibited from:

(i) having more than one SIC in effect at any given time for each type of service (i.e., water service or sewer service) unless the utility has multiple rate schedules for systems that have not yet been consolidated under a single rate; and

(ii) adjusting its rates under this section more than once each calendar year.

(D) The filing of SIC applications as allowed by this section is limited to a specific quarter of the calendar year, and is based on the last two digits of a utility's certificate of convenience and necessity (CCN) number as outlined below, unless good cause is shown for filing in a different quarter. For a utility holding multiple CCNs, the utility may file an application in any quarter for which any of its CCN numbers is eligible.

(i) Quarter 1 (January-March): CCNs ending in 00 through 27;

(ii) Quarter 2 (April-June): CCNs ending in 28 through 54;

(iii) Quarter 3 (July-September): CCNs ending in 55 through 81; and

(iv) Quarter 4 (October-December): CCNs ending in 82 through 99.

(3) Eligible costs.

(A) A SIC is limited to the cost recovery of eligible plant that is not already included in the utility's rates and eligible plant that has been placed into service after the later of the ending date of the 2019 reporting period reflected in the utility's annual report filed with the commission as required by §24.129 of this title (relating to Water and Sewer Utilities Annual Reports) or the end of the test year used in the utility's most recent base-rate proceeding.

(B) Notwithstanding subparagraph (A) of this paragraph, a SIC application must account for a replacement plant offset, a load growth adjustment, and any adjustments related to changes in accumulated deferred federal income taxes (ADIT) in the manner specified by this subparagraph and subsection (e) of this section.

(i) Replacement plant offset. For each replacement asset for which recovery is sought, the SIC application must include the following as required by the commission-prescribed form:

(I) the applicable NARUC account;

(II) a description of the existing plant being retired;

(III) the date the existing plant was placed into service (i.e., installed);

(IV) the service life in years of the existing plant;

(V) the original cost of the existing plant at the time it was placed into service;

(VI) the annual depreciation expense for the existing plant;

(VII) the accumulated depreciation, as of the end of the test year from the applicant's last comprehensive base rate proceeding;

(VIII) the net plant for the existing plant, as of the end of the test year from the applicant's last comprehensive base rate proceeding

(IX) the date the replacement asset was placed into service; and

(X) a description of the replacement asset;

(ii) Load growth adjustment. When the applicant's customer count exceeds the amount used to establish rates in the utility's most recent comprehensive rate proceeding, a load growth adjustment reflecting incremental revenues must be applied to offset the incremental costs included in the SIC application. The revenues associated with a load growth adjustment used to offset the gross SIC revenue required must be calculated as the product of:

(I) the applicant's average revenue requirement per customer, calculated as the final revenue requirement approved in the applicant's most recent comprehensive rate proceeding, divided by the test year end number of connections in the applicant's most recently approved comprehensive rate proceeding; and

(II) the increase in customer count from the amount used to establish rates in the applicant's last base rate case, including any new customer connections associated with a sale, transfer, or merger under §24.239 of this title (relating to Sale, Transfer, Merger, Consolidation, Acquisition, Lease, or Rental) or §24.243 of this title (relating to Purchase of Voting Stock or Acquisition of a Controlling Interest in a Utility).

(iii) ADIT adjustments. The SIC application must include ADIT adjustments related to the effects of accelerated depreciation expense, including bonus depreciation, of eligible plant.

(d) SIC Application.

(1) An application to establish or amend a SIC must be filed using the form prescribed by the commission. A SIC application must include the following:

(A) the following contact information:

(i) the applicant's primary contact name and title, street and mailing address, business telephone number, business e-mail address, and, if available, web address; and

(ii) the authorized representative's name, title, street and mailing address, telephone number, e-mail address, and, if available, web address;

(B) the following disclosures:

(i) the applicant's legal business name, including any assumed names;

(ii) the applicant's Texas Secretary of State registration number;

(iii) the number of active water and sewer connections as of the date the SIC application is filed, itemized by type of service (i.e., water or sewer service) and the total number of connections (i.e., water connections plus sewer connections); and

(iv) the applicant's classification based on the applicant's number of connections (i.e., Class A, B, C, or D utility);

(C) the following general information regarding the SIC sought by the applicant:

(i) whether the application is for a new SIC or is for an amendment to an existing SIC;

(ii) if the application is for an amendment to an existing SIC, the docket number associated with the previous SIC application;

(iii) whether the applicant is seeking a SIC for water service, sewer service, or both;

(iv) identification of each water and sewer tariff or rate schedule currently in effect, as applicable, for which the applicant is seeking a SIC; and

(v) a copy of each water and sewer tariff or rate schedule identified under clause (iv) of this subparagraph, including each docket number where each tariff or rate schedule was most recently approved;

(D) the following general information concerning the applicant's last comprehensive base rate proceeding:

(i) the beginning and end dates of the test year used in the applicant's last base rate proceeding;

(ii) whether the test year was a historic, combined, or future test year;

(iii) the year the applicant's last comprehensive base rate proceeding was initiated;

(iv) the docket number of the applicant's last comprehensive base rate proceeding; and

(v) if applicable, copies of any final orders issued by the Texas Commission on Environmental Quality (TCEQ) or any other predecessor agency that are relevant to the application (i.e., orders relating to rate proceedings held at the TCEQ or any other predecessor agency);

(E) the following general information concerning each CCN possessed by the applicant:

(i) all of the CCN numbers currently issued to the applicant for the provision of water service and sewer service;

(ii) each CCN that would be affected by the SIC sought by the applicant; and

(iii) whether the applicant has, at the time the SIC application is filed, a pending sale, transfer, or merger (STM) application under §24.239 of this title (relating to Sale, Transfer, Merger, Consolidation, Acquisition, Lease, or Rental) or a pending application under §24.243 of this title (relating to Purchase of Voting Stock or Acquisition of a Controlling Interest in a Utility), or other proceeding, including the docket number associated with the other application;

(F) the following general information concerning any currently effective SIC for water or sewer service, or both, as applicable:

(i) whether the applicant has a SIC in effect as of the date the application is filed;

(ii) each docket number associated with the applicant's currently effective SIC for water service or sewer service;

(iii) each CCN for which the currently effective SIC is applicable;

(G) the date the SIC application is being filed and a confirmation that the application is being filed in the appropriate filing quarter as specified by subsection (c)(2)(D) of this section;

(H) a description of the eligible plant for which cost recovery is sought through the SIC, including:

(i) each project included in the request;

(ii) the following information, itemized by the applicable NARUC account number:

(I) the cost associated with each project and project component (i.e., asset within a project);

(II) a detailed explanation of the benefits of each project, including how each project has improved or will improve service; and

(III) transaction details supporting eligible costs substantiated by the documents specified in subparagraph (J) of this paragraph cross-referenced with the applicable external documentation or internal documentation;

(I) a calculation of the SIC in accordance with subsection (e) of this section and all supporting calculations and assumptions for each component of the SIC;

(J) information to substantiate each claimed eligible cost of the applicant's eligible plant that is not already included in the applicant's rates.

(i) Eligible costs must be substantiated by:

(I) a description of each capital project or addition that correlates with all capital expenditures associated with that project or addition;

(II) evidence to support eligible plant placed into service to support the eligible costs in the manner specified by clause (ii) of this subparagraph; and

(III) external or internal documentation of direct and indirect costs, as applicable. External documentation and internal documentation must be word-searchable. External documentation and internal documentation must be organized by each NARUC Account, grouped by capital project;

(ii) A SIC application must include: all associated supporting documentation described by clauses (iii) and (iv) of this subparagraph with page number cross-references to each capital project and NARUC account included in the application.

(iii) External documentation (i.e., cost information from unaffiliated third-parties such as contractors or vendors) includes:

(I) receipts;

(II) invoices;

(III) contracts; or

(IV) other documentation of eligible costs.

(iv) Internal documentation (i.e. work orders, affiliate costs, capitalized overhead, timesheet for labor, and interest expenses, etc. (allocated overhead)) must be provided for all costs that originated from the applicant and its affiliates and substantiated by:

(I) if available and as applicable, the information listed under clause (iii) of this subparagraph;

(II) a categorized list of allocated overhead expenses with supporting documentation for each category. Such supporting documentation may include:

(-a-) narrative explanations describing the billing methods;

(-b-) expert testimony;

(-c-) policies and procedures developed by the applicant for the recording, billing, or management of allocated overhead;

(-d-) calculations, methodologies, or formulas for determining allocation factors used to apply allocated overhead associated with eligible costs; and

(-e-) affiliate service agreements;

(III) work orders categorized by projects. Each work order must:

(-a-) clearly specify the nature and scope of the work performed;

(-b-) provide a detailed breakdown of the total project cost; and

(-c-) identify the sources of those costs, including specific materials used, labor hours incurred, and equipment installed;

(IV) timesheets for labor categorized by projects. Each timesheet must:

(-a-) accurately reflect the time employees dedicate to capital projects and must exclude time associated with routine operations and maintenance activities;

(-b-) distinctly categorize direct labor and indirect labor, and all recorded hours must be attributed to individual employees; and

(-c-) apply a consistent methodology for capitalizing labor costs over time; or

(V) any other documentation;

(K) an attestation that sufficiently addresses the exclusion of costs for plant provided by explicit customer agreements or funded by customer contributions in aid of construction in the affidavit required under subparagraph (O) of this paragraph;

(L) information that sufficiently demonstrates compliance with subsection (c)(3)(B) of this section, including the necessary information to calculate the replacement plant offset and load growth adjustment

(M) If the applicant used group depreciation in its last comprehensive base rate proceeding, the applicant must provide, for each asset within the group to which the group rate applies:

(i) the NARUC account number to which the asset applies;

(ii) the name or number of the asset;

(iii) a description of the asset;

(iv) the in-service date of the asset; and

(v) all cost information that corresponds to that asset;

(N) a copy of the applicant's most recent annual report filed with the commission as required by §24.129 of this title, which must be the annual report most recently due for filing;

(O) an affidavit confirming that the application meets the requirements of this section and any other applicable statutes or commission rules;

(P) notice and proof of notice, provided in the form and manner specified by subsection (f) of this section; and

(2) Discovery. Except as otherwise determined by the presiding officer, discovery will be conducted in accordance with Chapter 22, Subchapter H (relating to Discovery Procedures).

(3) Commission processing of application.

(A) Determination that a complete application has been filed.

(i) To constitute a complete application, an application must include: all information required by paragraph (1) of this subsection;

(ii) OPUC may file comments on the SIC application within 30 days from the date the SIC application is filed.

(I) The commission will electronically provide to OPUC any data related to the application in the commission's possession, at no cost.

(II) Information provided to OPUC under this section that is confidential and not subject to disclosure by the commission under Chapter 552, Texas Government Code, or other law is confidential and not subject to disclosure by OPUC.

(iii) The presiding officer will establish a procedural schedule for commission staff to file a recommendation as to whether a complete application has been filed under this section.

(iv) If commission staff recommends the application be found deficient, commission staff must identify each application deficiency in its recommendation.

(v) If the presiding officer determines the application is deficient, the presiding officer will file a notice of deficiency. The notice of deficiency will:

(I) cite the particular requirements with which the application does not comply; and

(II) require the applicant to cure the deficiencies in the application within five working days.

(vi) In the event an application is amended, commission staff must file a recommendation on administrative completeness of an amended application within a time period prescribed by the presiding officer.

(vii) An applicant is limited to a single opportunity to cure deficiencies in a SIC application related to eligible costs. The presiding officer may authorize additional opportunities to cure other deficiencies unrelated to eligible costs.

(I) Any claimed eligible cost included in the application that is found deficient after the cure period will be excluded from the application and disallowed from recovery in the current SIC proceeding.

(II) The disallowance of a cost from a SIC application does not preclude or otherwise restrict an applicant from seeking recovery for that cost in a subsequent rate proceeding.

(III) Notwithstanding subclauses (I) or (II) of this clause, the presiding officer may impose specific requirements for a disallowed cost to be presented by the applicant in a subsequent rate proceeding.

(viii) The presiding officer will not make a determination that a complete application has been filed sooner than 30 days from the date the initial application is filed.

(B) Commission evaluation and final determination. Upon determining that a complete application has been filed under subparagraph (A) of this paragraph, the presiding officer will set a procedural schedule that will enable the commission to issue a final order in the proceeding within 60 days from the date the determination is made. The presiding officer may extend the deadline for not more than 15 days for good cause. The procedural schedule must include a deadline for commission staff to file its final recommendation on the application.

(e) Calculation of the SIC. The revenue requirement for the SIC must be calculated using the following formula: SIC RR = (Reconcilable Cost * ROR) + Federal Income Taxes + Depreciation + ad valorem taxes + other revenue related taxes- replacement plant offset- load growth adjustment. Where:

(1) SIC = the system improvement charge.

(2) SIC RR = system improvement charge revenue requirement.

(3) Reconcilable Cost = the original costs of eligible plant placed into service after the later of the ending date of the 2019 reporting period reflected in the utility's annual report filed with the commission as required by §24.129 of this chapter or the end of the test year used in the utility's most recent base-rate proceeding, less:

(A) accumulated depreciation;

(B) ADIT associated with eligible plant in service; and

(C) any costs for plant provided by explicit customer agreements or funded by customer contributions in aid of construction.

(4) Accumulated depreciation = depreciation accumulated for eligible plant after the date the eligible plant was placed in service.

(5) ROR = overall rate of return as defined in paragraph (12) of this subsection.

(6) Federal Income Taxes = current annual federal income tax, as related to eligible costs.

(7) Depreciation = current annual depreciation expense for the eligible plant.

(8) Ad Valorem Taxes = current annual amount of taxes based on the assessed value of the eligible cost.

(9) Other Revenue Related Taxes = current annual amount of any additional taxes resulting from the utility's increased revenues related to the SIC.

(10) Replacement Plant Offset = the total annual depreciation expense for existing plant plus the product of the rate of return approved by the commission and the total net plant for existing plant as of the end of the test year from last comprehensive base rate proceeding.

(11) Load Growth Adjustment = the product of the applicant's average revenue requirement per customer as calculated under subsection (c)(3)(B)(ii)(I) of this section, and the increase in the customer count since the utility's last base rate case as calculated under subsection (c)(3)(B)(ii)(II) of this section.

(12) The overall rate of return is one of the following:

(A) if the final order approving the utility's overall rate of return (i.e., the company's weighted-average cost of capital) was filed less than three years before the date that the utility files an application for a SIC, the overall rate of return is the one approved by the commission in the utility's last base-rate case; or

(B) if the final order approving the utility's overall rate of return (i.e., the company's weighted-average cost of capital) was filed three years or more before the date that the utility files an application for a SIC, the overall rate of return is the average of the commission's approved rates of return for water and sewer utilities in settled and fully litigated cases over the three years immediately preceding the filing of the SIC.

(13) The SIC must be calculated based on annualized meter equivalents, derived using the most recent month's total customer meter equivalents multiplied by 12. The base SIC must be calculated as the SIC RR divided by annual meter equivalents. Unless an alternative meter ratio or equivalent is specified by the commission in the applicant's most recent comprehensive rate proceeding, the SIC for each meter size must be calculated as the base SIC multiplied by the multiplier for that meter size. The standard meter ratios are as follows:

Figure: 16 TAC §24.76(e)(13) (.pdf)

(f) Notice.

(1) General notice requirements.

(A) On the same day an applicant files a SIC application with the commission, the applicant must also electronically provide a copy of its application to OPUC.

(B) On or before the first working day after it files its application, the applicant must:

(i) issue notice of its SIC application to all affected ratepayers by first class mail or, if the customer has agreed to receive communications electronically, by e-mail; and

(ii) if the applicant has a website, also post a copy of the notice on its website in a manner that is accessible to the general public.

(2) Contents of notice. The notice must include, at a minimum, the following:

(A) the docket number for the utility's SIC proceeding;

(B) information regarding the proposed SIC itemized for each type of service (i.e., water or sewer service, or both), as applicable, including:

(i) a brief description of the investments and costs the utility is seeking recovery for through the proposed SIC;

(ii) the time period for which the utility is seeking the proposed SIC to recover costs;

(iii) the proposed total SIC revenues sought by the utility;

(iv) a description of the proposed SIC as a monthly minimum bill charge for each meter size;

(v) for each customer meter size for which the applicant has customers, an estimated total monthly bill at 5,000 gallons and 10,000 gallons; and

(vi) a statement that substantially conforms to the following: "The effective date of the proposed rate change will be the date specified by the commission final order adopting the proposed SIC;

(C) the intervention deadline, including both the date and time using Central Prevailing Time;

(D) a brief explanation of how an affected ratepayer can intervene in the SIC proceeding or submit comments as a protestor; and

(E) an explanation of how intervention differs from protesting a rate increase.

(3) Completion of notice and intervention deadline.

(A) Notice is complete on the later of:

(i) the date the applicant has notified OPUC of the application under paragraph (1)(A) of this subsection;

(ii) the date that notice is physically or electronically mailed to all customers by the applicant under paragraph (1)(B)(i) of this subsection; or

(iii) the date that the applicant posts the notice to its website under paragraph (1)(B)(i) of this subsection;

(B) If notice is mailed over multiple days, notice is complete on the last day of mailing.

(C) The intervention deadline is 25 days from the date service of notice is complete.

(4) Proof of notice. Within 15 days from the date notice was complete, the applicant must file a proof of notice affidavit with the commission. The affidavit must:

(A) be sworn;

(B) be completed and signed by an officer or managerial employee of the applicant that is qualified and authorized to verify and file notice on behalf of the utility;

(C) attest and verify that notice was issued to all affected ratepayers of the applicant and to OPUC;

(D) attest and verify that each notice was posted to the applicant's website in a manner accessible to the general public and include a hyperlink to the webpages where each notice is posted; and

(E) include a sample copy of the notice issued by the applicant as an attachment.

(g) Scope of proceeding. The issue of whether eligible costs included in an application for a SIC or an amendment to a SIC are prudent, reasonable, or necessary, will not be addressed in a proceeding under this section.

(h) SIC reconciliation. Costs recovered through a SIC are subject to reconciliation in the utility's next comprehensive rate case.

(1) Any amounts recovered through the SIC that are found to have been unreasonable, unnecessary, or imprudent, plus the corresponding return and taxes, must be refunded with carrying costs.

(2) The utility must pay to its customers carrying costs on these amounts calculated using the same rate of return that was applied to the recovered costs in establishing the SIC until the date the rates approved in the utility's next comprehensive rate case are effective. Thereafter, carrying costs must be calculated using the utility's rate of return authorized in the comprehensive rate case.

(3) A utility that uses group depreciation must perform a new depreciation study in its next comprehensive base rate proceeding.

(i) SIC application expenses. Recovery of expenses associated with a SIC application may be requested and must be reviewed in the utility's next comprehensive base rate case and in accordance with §24.44 of this chapter (relating to Rate-case Expenses Pursuant to Texas Water Code §13.187 and §13.1871).

(j) Requirement to file a rate case. A utility must file a comprehensive rate case under TWC §13.187, 13.1871, 13.18715, or 13.1872 within the following times from the date the commission files an order approving the SIC.

(1) Four years for a utility that was a Class A utility at the time of filing the SIC application.

(2) Six years for a utility that was a Class B utility at the time of filing the SIC application.

(3) Eight years for a utility that was a Class C or Class D utility at the time of filing the SIC application.

The agency certifies that legal counsel has reviewed the adoption and found it to be a valid exercise of the agency's legal authority.

Filed with the Office of the Secretary of State on April 17, 2026.

TRD-202601674

Seaver Myers

Rules Coordinator

Public Utility Commission of Texas

Effective date: May 7, 2026

Proposal publication date: November 28, 2025

For further information, please call: (512) 936-7433