TRWA/TWCA Water Law Seminar Waves of Change January 11–12, 2017 Rate Case & Rate Appeals Before the PUC: Regulatory & Litigation Developments TRWA/TWCA Water Law Seminar Waves of Change January 11–12, 2017

2016 Texas Water Law Institute 11/4/2016 Transfer to PUC 2011 - 82nd Legislature, the Sunset Advisory Commission: “the state could benefit from transferring regulatory functions related to water and wastewater utilities to PUC.” PUC Update

Transfer to PUC 2013 - 83rd Legislature: the Sunset Advisory Commission reaffirmed the recommendation that water and wastewater utility ratemaking functions be transferred to PUC.  Subcommittees of the Senate Natural Resources Committee and Business and Commerce Committee held hearings that established support for ending the one-size-fits-all treatment for IOU rate setting.

Proponents Stated Benefits* Ensure fairness by: “Modernizing” the rate setting process; Giving Office of Public Utility Counsel standing to intervene and represent residential and small commercial consumers in water rate cases; ending the current practice of allowing the utilities to charge proposed rates while the case proceeds through the hearing process; *Per House Research Organization

Proponents Stated Benefits* establishing three classes of IOUs and provide time lines to guide the ratemaking process; giving utilities more certainty on the time line for obtaining a final rate determination; and giving the smallest IOUs a mechanism to keep up with rising costs without going through a costly rate proceeding. *Per House Research Organization

Proponents Stated Benefits* Compare what is spent now on a case that can drag on indefinitely to a case that may require more paperwork but would be resolved in 150 days (Class A) and 185 days. NOW 265 days (Class B) The intent … can certainly not be to raise costs. If … bill resulted in higher costs for rate cases, those issues could be addressed in the future with the addition of streamlined mechanisms for all utility classes. *Per House Research Organization

Opposition Stated Concerns* Would not result in cost savings, better governance, or relief to ratepayers. Would complicate regulating water and sewage service in Texas. *Per House Research Organization

Opposition Stated Concerns* PUC rate application filing requirements are more extensive than at the TCEQ and would require a greater expenditure at the outset because the PUC requires expert written testimony submitted with the application. *Per House Research Organization

Opposition Stated Concerns* While the PUC offers a shorter timeframe for a final rate determination, the PUC discovery rules allow for unlimited levels of discovery, the costs of which would be significant. *Per House Research Organization

Rate cases & appeals

Water/Sewer Rate Proceedings Rates Original Applications Retail Appeals Wholesale Appeals

Rate Appeals Retail Water Code §13.043 (a) & (b) Cities (a), Districts (b), etc. De Novo Proceedings Several Active Proceedings Generally dealing with same issues as original applications

Rate Appeals Wholesale Water Code §13.043(f) Public Interest Test Petition Of The Cities Of Garland, Mesquite, Plano And Richardons Appealing The Decision By North Texas Municipal Water District Affecting Wholesale Water Rates, filed 12/14/16 (Docket 46662) Appeal Of M.E.N. Water Supply Corporation, Angus Water Supply Corporation, Chatfield Water Supply Corporation, Corbet Water Supply Corporation, And The City Of Kerens For Review Of A Decision By The City Of Corsicana To Set Wholesale Water Rates, filed 12/9/14 (Docket 43931) Currently Abated

Rate Appeals Wholesale Water Code §13.044 Specific circumstances No Public Interest Test Petition Of Shady Hollow Municipal Utility District From The Ratemaking Actions Of The City Of Austin And Request For Interim Rates In Travis County, filed 10/28/16 (Docket 46483) Petition Of The North Austin Municipal Utility District No. 1, Northtown Municipal Utility District, Travis County Water Control And Improvement District No. 10, And Wells Branch Municipal Utility District From The Ratemaking Actions Of The City Of Austin And Request For Interim Rates In Williamson And Travis Counties, filed 4/12/13 (Docket 42857) On Appeal

Rate Issues at PUC Rate Applications Abatement of Rate Confidentiality of Documents Unlimited Discovery Justification of Expenses Rate Base Rate of Return Rate Case Expenses

Water and Sewer Rate Cases Abatement of Rates Standard Practice to Abate Implementation of Rates Interim Rates Available if Staff and Other Parties Agree

Confidential Filings All documents filed with PUC on interchange All accessible to public Unless designated as confidential Standard Protective Order issued Addresses Public Information Act requirements Judges raising questions about need for confidential filings Confusion of “confidential” under PIA vs “privileged” for private companies under TRE

Discovery TWENTY rounds of RFIs from PUC Staff in large utility case (22,000 customers) Four rounds of RFIs (150+) from PUC Staff in small utility case (250 customers)

Expenses Water Code §13.185(d) Net income is the total revenues of the utility less all reasonable and necessary expenses as determined by the regulatory authority. The regulatory authority shall: (1) base a utility's expenses on historic test year information adjusted for known and measurable changes, as determined by utility commission rules; …

Expenses Invoices, Invoices, Invoices… Justification They want them; you need them. Justification Benchmarking of costs by PUC Staff based upon Staff experience.

Determining Rate Base PUC practice to fix rate base if not already set Water Code § 13.183 … the regulatory authority shall fix its overall revenues at a level that will . . . permit the utility a reasonable opportunity to earn a reasonable return on its invested capital used and useful in rendering service to the public . . . . Water Code § 13.184 [T]he utility commission may not prescribe any rate that will yield more than a fair return on the invested capital used and useful in rendering service to the public.

Determining Rate Base What is sufficient to prove rate base? TWC § 13.185 Utility rates shall be based on the original cost of property used by and useful to the utility in providing service ….

Rate of Return Application Formula? Expert Testimony Only if not contested per PUC Staff Expert Testimony Adjustments in Return on Equity Reasonable Debt Rate Capital structure (D/E Ratio)

Rate Case Expenses Docket 45570 (Monarch) Docket 44809 (Quadvest) $ Unknown Severed to Docket 46216 22,000 customers Docket 44809 (Quadvest) $220,000 (through prefiled case) ~8800 customers Recommended Reductions of $34,000+ Docket 45418 (Corix) $340,000 (through prefiled case) ~4000 customers Recommended Approval and Currently Abated Docket 43076 (Consumers Water) $16,000 (through direct filing) ~2000 customers Recommended Denial (51% rule) Docket 43242 (Wiedenfeld) $147,000 est. (through end of case) ~715 customers Settled. Docket 45720 (Rio Concho) $105,000 (through end of hearing) ~240 customers

Rule changes

Chapter 22 Rulemaking Proceedings New Procedural Rules -16 TAC Chapter 22 Docket No. 46199 – Adopted Rulemaking related to Motions to Dismiss Docket No. 45116 – Adopted 11/15/16 Chapter 22 Procedural Rules - Phase II - Water and Sewer Utilities

Chapter 22 Rulemaking Proceedings Docket No. 45116 – Highlights Still Have to File Hard Copies in Person Commissioners’ staff Have access to ALL confidential filings Must include Email Address with all Pleading signatures WSC Tariffs must comply with PUC formatting and citation requirements

Chapter 22 Rulemaking Proceedings Docket No. 45116 – Highlights Can request email service by motion ALJ Discretion Mandatory if all parties request If a party has no access to the internet or email, must file statement as part of FIRST pleading

Chapter 24 Rulemaking Proceedings Docket No. 45112 – Adopted 11/14/16 Rulemaking Proceeding to Amend 16 Tex. Admin. Code § 24.21 (TAC) Relating to Water/Sewer Pass Through Clauses and Surcharge Rules Docket No. 45113 – Adopted 12/02/16 Rulemaking Project to Amend Chapter 24 for Water/Sewer Rules for Rate Appeals Implements SB 1148 (2015) regarding information about customers outside city limits

Chapter 24 Rulemaking Proceedings Docket No. 45115 – Adopted 06/09/16 Rulemaking to Amend Chapters 22 and 24 ‒ Implementation of Senate Bill 1148 Relating to Emergency Orders/Rates and Notice of Applications

Chapter 24 Rulemaking Proceedings Docket No. 45757 Project to Simplify Class B Water and Sewer Rate Filing Package Form, Notice and Instructions for 1,200 or Less Connections No Action yet Docket No. 45758 Minor Amendments to the Class B Water & Sewer Rate Filing Package Form, Instructions & Notice No Action Yet

Chapter 24 Rulemaking Proceedings Docket No. 45759 – Adopted 11/14/16 Minor Amendments to the Class C Water & Sewer Rate Filing Package Form, Instructions & Notice

2016 Texas Water Law Institute 11/4/2016 Helpful Websites Public Utility Commission www.puc.texas.gov PUC Interchange interchange.puc.texas.gov Texas Legislature http://www.legis.state.tx.us Texas Water Code, Chapter 13 (Utilities) http://www.statutes.legis.state.tx.us/Docs/WA/htm/WA.13.htm PUC Update

2016 Texas Water Law Institute 11/4/2016 QUESTIONS? John Carlton (512) 614-0901 john@carltonlawaustin.com PUC Update