Relating to test years used for ratemaking purposes by certain water and sewer utilities, the official text

H.B. No. 2712

AN ACT

relating to test years used for ratemaking purposes by certain

water and sewer utilities.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:

SECTION 1. Subchapter F, Chapter 13, Water Code, is amended

by adding Section 13.1831 to read as follows:

Sec. 13.1831. TEST YEAR. A regulatory authority shall fix

rates for water and sewer services for a Class A, B, C, or D utility

based on a test year the utility selects that:

(1) includes historic, future, or combined historic

and future data;

(2) begins on the first day of a calendar or fiscal

year quarter; and

(3) is a consecutive 12-month period that:

(A) begins not later than 18 months after the

date the utility files the statement of intent to change rates; and

(B) ends not earlier than 18 months before the

date the utility files the statement of intent to change rates.

SECTION 2. Section 13.183(a), Water Code, is amended to

read as follows:

(a) In fixing the rates for water and sewer services, the

regulatory authority shall fix its overall revenues at a level that

will:

(1) permit the utility a reasonable opportunity to

earn a reasonable return on its invested capital used and useful in

rendering service to the public, based on test year information,

over and above its reasonable and necessary operating expenses; and

(2) preserve the financial integrity of the utility.

SECTION 3. Section 13.184, Water Code, is amended by

amending Subsection (a) and adding Subsection (d) to read as

follows:

(a) Unless the utility commission establishes alternate

rate methodologies in accordance with Section 13.183(c), the

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 based on test year information. The

governing body of a municipality exercising its original

jurisdiction over rates and services may use alternate ratemaking

methodologies established by ordinance or by utility commission

rule in accordance with Section 13.183(c). Unless the municipal

regulatory authority uses alternate ratemaking methodologies

established by ordinance or by utility commission rule in

accordance with Section 13.183(c), it 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 based on test year

information.

(d) For a utility that uses a future or combined historic

and future test year in a rate proceeding, if the regulatory

authority determines in the next rate proceeding for that utility

that the test year information used for the utility resulted in the

utility's rates yielding more than a fair return on the utility's

invested capital used and useful in rendering service to the

public, the regulatory authority shall require the utility to

refund to customers money collected in excess of a rate that would

have yielded a fair return during the period in which the excessive

rate was collected.

SECTION 4. Section 13.185, Water Code, is amended by

amending Subsections (b), (d), and (j) and adding Subsections (k),

(l), and (m) to read as follows:

(b) Utility rates shall be based on the original cost of

property used by and useful to the utility during the test year in

providing service, including, if necessary to the financial

integrity of the utility, construction work in progress at cost as

recorded on the books of the utility. The inclusion of construction

work in progress is an exceptional form of rate relief to be granted

only on the demonstration by the utility by clear and convincing

evidence that the inclusion is in the ratepayers' best interest and

is necessary to the financial integrity of the utility.

Construction work in progress may not be included in the rate base

for major projects under construction to the extent that those

projects have been inefficiently or imprudently planned or managed.

Original cost is the actual money cost or the actual money value of

any consideration paid, other than money, of the property at the

time it shall have been dedicated to public use, whether by the

utility that is the present owner or by a predecessor, less

depreciation. Utility property funded by explicit customer

agreements or customer contributions in aid of construction such as

surcharges may not be included in invested capital.

(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; and

(2) determine expenses and revenues in a manner

consistent with Subsections (e) through (h) of this section.

(j) Depreciation expense included in the cost of service

includes depreciation on all [currently used,] depreciable utility

property owned by the utility except for property provided by

explicit customer agreements or funded by customer contributions in

aid of construction. Depreciation on all [currently used and

useful] developer or governmental entity contributed property

shall be allowed in the cost of service.

(k) Notwithstanding Subsection (b), the regulatory

authority shall allow inclusion in the rate base of facilities

projected to be in service through the end of the test year.

(l) A utility that selects a fully projected future test

year that meets the requirements of Section 13.1831(3)(A) shall:

(1) not later than the 30th day after the last day of

the last quarter of the test year, file with the regulatory

authority a statement that:

(A) describes the utility's actual results

experienced in the test year; and

(B) provides appropriate data to demonstrate the

accuracy of the estimates used for the test year; and

(2) serve a copy of the filing made under Subdivision

(1) on the parties of record in the rate proceeding in which the

final rate determination using the test year was entered.

(m) A utility that does not have the results or data

required to be filed under Subsection (l) before the required

filing date shall:

(1) file a written notice with the regulatory

authority stating the date on which the results or data will be

available;

(2) serve a copy of the filing made under Subdivision

(1) on the parties described by Subsection (l)(2); and

(3) make the filing required under Subsection (l) as

soon as possible after the results or data are available.

SECTION 5. Section 13.002(22), Water Code, is repealed.

SECTION 6. (a) Not later than September 1, 2026, the Public

Utility Commission of Texas shall adopt rules necessary to

implement the changes in law made by this Act.

(b) The changes in law made by this Act apply only to a rate

proceeding that commences on or after the effective date of the

rules described by Subsection (a) of this section. A rate

proceeding that commences before the effective date of the rules

described by Subsection (a) of this section is governed by the law

in effect on the date the proceeding commenced, and that law is

continued in effect for that purpose.

SECTION 7. This Act takes effect September 1, 2025.

______________________________
______________________________

President of the Senate
Speaker of the House

I certify that H.B. No. 2712 was passed by the House on May 6,

2025, by the following vote: Yeas 135, Nays 13, 1 present, not

voting; and that the House concurred in Senate amendments to H.B.

No. 2712 on May 28, 2025, by the following vote: Yeas 101, Nays 38,

1 present, not voting.

______________________________

Chief Clerk of the House

I certify that H.B. No. 2712 was passed by the Senate, with

amendments, on May 23, 2025, by the following vote: Yeas 26, Nays

5.

______________________________

Secretary of the Senate

APPROVED: __________________

Date

__________________

Governor