By Georgia N. Crump and Melissa A. Long
The 83rd Legislature has transferred the authority for the economic regulation of water and wastewater utilities back to the Public Utility Commission of Texas (PUC) from the Texas Commission on Environmental Quality (TCEQ). The PUC regulated water and wastewater utilities from its inception in 1975 until this authority was transferred in 1986 to what was then known as the Texas Water Commission. The most recent legislation, H.B. 1600 and S.B. 567, effective on September 1, 2013, mandates the completion of the transfer to the PUC by September 1, 2014, with final rules to be adopted by the next year.
Transferred to the PUC are: (1) the economic regulation of water and sewer service, including issuance and transfer of certificates of convenience and necessity (CCN), determination of rates, and administration of hearings and proceedings involving same under § 12.013 and Chapter 13, Water Code; (2) the obligations and contracts of the TCEQ directly related to implementing the powers and duties transferred; and (3) all property and records of TCEQ related to same.
H.B. 1600 also amends current law relating to the continuation and functions of the PUC, the transfer of certain functions from the TCEQ to the PUC, and the functions of the independent Office of Public Utility Counsel (OPUC). The OPUC will take a much more active role in water and wastewater ratemaking than parties are accustomed to seeing from the TCEQ Office of Public Interest Counsel. Beginning September 1, 2013, OPUC was charged with representing residential and small commercial interests relating to water and wastewater utilities. OPUC shall assess the effect of utility rate changes and other regulatory actions on residential consumers, advocate a position it determines most advantageous to a substantial number of residential consumers, and may appear or intervene as a matter of right on behalf of residential consumers (as a class) in any proceeding before the PUC, and on behalf of small commercial consumers (as a class) in any proceeding where OPUC determines the class is in need of representation. OPUC may also initiate or intervene in a judicial proceeding on the same basis. In addition, OPUC may represent an individual residential or small commercial consumer with respect to a disputed complaint concerning retail utility services.
Along with the transfer of economic regulation of these utilities, the legislation also revises water and wastewater utility ratemaking to accommodate the differing regulatory needs and capacities of water and wastewater utilities, and directs the TCEQ to adopt rules related to these changes by September 1, 2015. The new law establishes investor-owned utility (IOU) classifications based on connection count, ending the one-size-fits-all treatment for IOU rate setting currently in effect at the TCEQ. Henceforth, there are three classes of water utilities:
- Class A utilities (IOUs with 10,000 or more connections) will follow a ratemaking process similar to that in effect at the PUC for electric utilities. There are currently only four Class A utilities in Texas.
- A Class A utility will file detailed costs, rate schedules, and pre-filed testimony supporting the requested rate increase at the time the utility applies for the rate increase, and a final determination on the requested rates must be made within 185 days.
- The utility must send by mail or email, a statement of intent to the regulatory authority (i.e., a city and/or the PUC) and each ratepayer at least 35 days prior to the effective date, which must be the first day of a billing period. The notice must contain the same billing comparisons currently required under the TCEQ rules.
- A city or the PUC may suspend the effective date for not more than 150 days. Not later than 30 days after the effective date, the city or the PUC must begin a hearing on the rates.
- The PUC may implement bonded rates as well as interim rates.
- These utilities will also be required to file annual financial and earnings monitoring reports with the PUC.
- Class B utilities (IOUs with 500 to 10,000 connections) will file an abbreviated rate-filing package similar to what is currently required by TCEQ rules.
- The rate application will provide essential cost-of-service and rate base information, but pre-filed testimony would come later if the application became contested.
- Notice must be sent by mail or email to each ratepayer at least 35 days prior to the effective date, which must be the first day of a billing period. The notice must contain the same billing comparisons currently required under the TCEQ rules.
- A city may suspend the effective date of the rate change for not more than 90 days from the effective date. The PUC may suspend the effective date for not more than 205 days from the proposed effective date. In either case, if the regulatory authority (i.e., the city or the PUC) does not act within the suspension period, the rates are considered approved.
- If before the 91st day after the effective date, the regulatory authority receives a complaint from any city or from the lesser of 1,000 or 10% of the ratepayers over whose rates the regulatory authority has jurisdiction, the regulatory authority shall set the matter for hearing. The regulatory authority also has the power to set the matter for hearing within 120 days after the effective date on its own motion. However, the hearing may be informal.
- The PUC may implement bonded rates in addition to setting interim rates.
- Class C utilities (IOUs with 500 or less connections) will have the option to request an annual rate adjustment based on a predetermined index, not to exceed more than a 5% increase.
- Class C utilities have the option to follow the process for a Class B utility (as outlined above) or to receive an automatic annual adjustment based on changes in the price index.
- Adjustments may go into effect 30 days after notice to customers if the adjustment is equal to, or lower than, the PUC’s established water utility index for that year.
- The rate adjustment cannot result in an increase to any class or category of ratepayer of more than the lesser of 5% or the percentage increase in the price index from the prior year.
- The utility is allowed only one automatic adjustment every 12 months, with no more than four total adjustments prior to the Class C utility filing a rate application under the rules for a Class B utility.
Timeline for Implementation
The legislation requires the transfer to the PUC to be complete by September 1, 2015. As one might imagine, it’s a long journey to Mordor and back, with numerous obstacles and challenges along the way:
September 1, 2013: Effective date of both bills.
On or after September 1, 2013: OPUC may initiate or intervene in a contested case before TCEQ on the same basis that it could do so if a case were before PUC, as per Chapter 13, Water Code, as amended.
On or after September 1, 2013: TCEQ and PUC shall appoint a transition team, and may consult with OPUC, to establish guidelines on how to cooperate regarding: (1) meeting federal drinking water standards; (2) maintaining adequate supplies of water; (3) meeting established design criteria for wastewater plants; (4) demonstrating economic feasibility of regionalization; and (5) serving the needs of economically distressed areas. The team shall provide monthly updates to the executive directors of both agencies.
Beginning September 1, 2013: The PUC may propose rules, forms, policies, and procedures related to functions to be transferred.
After September 1, 2013: An affiliate of a Class A utility may not file for a rate change unless the affiliated Class A utility has filed on or after this date.
August 1, 2014: Date by which TCEQ and PUC shall enter into a Memorandum of Understanding (MOU) that: (1) identifies in detail the powers and duties being transferred; (2) establishes a plan for identification and transfer of records, personnel, property, and unspent appropriations of TCEQ used for purpose of powers and duties being transferred; and (3) establishes a plan for transfer of pending applications, hearings, rulemakings, and orders. The MOU is not required to be adopted by rule.
September 1, 2014: Date by which the joint transition team must provide its final report to executive directors of both agencies on the implementation of statute.
September 1, 2014: Transfer date from TCEQ to PUC of: (1) economic regulation of water and sewer service, including issuance and transfer of CCN, determination of rates, and administration of hearings and proceedings involving same, under § 12.013 and Chapter 13, Water Code; (2) obligations and contracts of TCEQ directly related to implementing powers and duties transferred; and (3) all property and records of TCEQ related to same.
September 1, 2014: Until this date, TCEQ continues to carry out its duties regarding economic regulation of water and sewer service, and former law is continued in effect for that purpose.
For 84th Legislature: PUC to conduct a comparative analysis of its ratemaking authority before September 1, 2013, and after the transition, to identify potential for procedural standardization. The report, with recommendations, is to be provided for consideration by 84th Legislature.
For 2016-2017 budget: PUC and OPUC to prepare report describing staffing changes related to the transition, to be submitted to the Legislative Budget Board and governor with the legislative appropriations request for the 2016-2017 biennium.
September 1, 2015: Date by which PUC and TCEQ shall adopt rules to implement changes required by statute.
*Georgia Crump and Melissa Long are with Lloyd Gosselink Rochelle & Townsend in Austin, practicing in the fields of energy, utilities, and municipal law. Georgia and Melissa have extensive experience in rates and other regulatory proceedings at the PUC and the TCEQ. If you have questions or would like additional information, you may reach Georgia at (512) 322-5832 or firstname.lastname@example.org, and Melissa may be reached at (512) 322-5889 or email@example.com.