BILL ANALYSIS H.B. 2712 By: Darby Natural Resources Committee Report (Unamended) BACKGROUND AND PURPOSE The bill author has informed the committee that a future test year is a 12-month period that regulated water and sewer utilities use to predict future costs and set rates and that, as utilities across Texas face rising operational costs, a future test year will help them more accurately set rates based on informed projections, better align rates with the true cost of service, and more accurately reflect investments at the time of implementation. The bill author has also informed the committee that a future test year will encourage further investment in water and sewer infrastructure by incentivizing utilities to upgrade infrastructure while mitigating concerns about recovering capital costs over a lengthy period, reducing the lag time to recover investment costs by factoring in inflation and other predictable cost increases, and decreasing the frequency of rate cases and the associated expenses passed on to customers. H.B. 2712 seeks to provide more flexibility and certainty for utilities by requiring a regulatory authority to 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 includes historic, future, or combined historic and future data and meets certain criteria with respect to the timing of the test year period. CRIMINAL JUSTICE IMPACT It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision. RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution. ANALYSIS H.B. 2712 amends the Water Code to require a regulatory authority to 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 includes historic, future, or combined historic and future data, that begins on the first day of a calendar or fiscal year quarter, and that is a consecutive 12-month period that: begins not later than 18 months after the date the utility files the statement of intent to change rates; and ends not earlier than 18 months before the date the utility files such statement. H.B. 2712 specifies the following: with respect to the requirement that a regulatory authority, in fixing the rates for water and sewer services, fix overall revenues at a level that will, in part, permit a utility a reasonable opportunity to earn a reasonable return on its invested capital used and useful in rendering service to the public over and above its reasonable and necessary operating expenses, that such reasonable return is based on test year information; with respect to the prohibition against the Public Utility Commission of Texas (PUC), unless it establishes applicable alternate rate methodologies, prescribing any rate that will yield more than a fair return on the invested capital used and useful in rendering service to the public, that such fair return is based on test year information; with respect to the prohibition against a municipal regulatory authority, unless it uses applicable alternate ratemaking methodologies established by ordinance or by PUC rule, prescribing any rate that will yield more than a fair return on the invested capital used and useful in rendering service to the public, that such fair return is based on test year information; and with respect to the requirement that utility rates be based on the original cost of property used by and useful to the utility in providing service, that such use and usefulness be during the test year. H.B. 2712 changes the information on which a regulatory authority is required to base a utility's expenses as determined by PUC rules from historic test year information adjusted for known and measurable changes, with test year in this context defined by a provision that the bill repeals as the most recent 12-month period, beginning on the first day of a calendar or fiscal year quarter, for which operating data for a retail public utility are available to test year information, with test year in this context being the test year as provided by the bill. The bill removes the following specifications: with respect to the provision establishing that depreciation expense included in the cost of service includes depreciation on all depreciable utility property owned by a utility except for property provided by explicit customer agreements or funded by customer contributions in aid of construction, that such depreciable utility property be property that is currently used; and with respect to the requirement that depreciation on all developer or governmental entity contributed property be allowed in the cost of service, that such contributed property be currently used and useful. The bill requires a regulatory authority to allow inclusion in the rate base of facilities projected to be in service through the end of the test year. H.B. 2712 applies only to a rate proceeding that commences on or after the bill's effective date. A rate proceeding that commenced before the bill's effective date is governed by the law in effect on the date the proceeding commenced, and that law is continued in effect for that purpose. H.B. 2712 repeals Section 13.002(22), Water Code. EFFECTIVE DATE September 1, 2025.
BILL ANALYSIS
# BILL ANALYSIS
H.B. 2712
By: Darby
Natural Resources
Committee Report (Unamended)
H.B. 2712
By: Darby
Natural Resources
Committee Report (Unamended)
BACKGROUND AND PURPOSE The bill author has informed the committee that a future test year is a 12-month period that regulated water and sewer utilities use to predict future costs and set rates and that, as utilities across Texas face rising operational costs, a future test year will help them more accurately set rates based on informed projections, better align rates with the true cost of service, and more accurately reflect investments at the time of implementation. The bill author has also informed the committee that a future test year will encourage further investment in water and sewer infrastructure by incentivizing utilities to upgrade infrastructure while mitigating concerns about recovering capital costs over a lengthy period, reducing the lag time to recover investment costs by factoring in inflation and other predictable cost increases, and decreasing the frequency of rate cases and the associated expenses passed on to customers. H.B. 2712 seeks to provide more flexibility and certainty for utilities by requiring a regulatory authority to 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 includes historic, future, or combined historic and future data and meets certain criteria with respect to the timing of the test year period.
CRIMINAL JUSTICE IMPACT It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.
RULEMAKING AUTHORITY It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution.
ANALYSIS H.B. 2712 amends the Water Code to require a regulatory authority to 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 includes historic, future, or combined historic and future data, that begins on the first day of a calendar or fiscal year quarter, and that is a consecutive 12-month period that: begins not later than 18 months after the date the utility files the statement of intent to change rates; and ends not earlier than 18 months before the date the utility files such statement. H.B. 2712 specifies the following: with respect to the requirement that a regulatory authority, in fixing the rates for water and sewer services, fix overall revenues at a level that will, in part, permit a utility a reasonable opportunity to earn a reasonable return on its invested capital used and useful in rendering service to the public over and above its reasonable and necessary operating expenses, that such reasonable return is based on test year information; with respect to the prohibition against the Public Utility Commission of Texas (PUC), unless it establishes applicable alternate rate methodologies, prescribing any rate that will yield more than a fair return on the invested capital used and useful in rendering service to the public, that such fair return is based on test year information; with respect to the prohibition against a municipal regulatory authority, unless it uses applicable alternate ratemaking methodologies established by ordinance or by PUC rule, prescribing any rate that will yield more than a fair return on the invested capital used and useful in rendering service to the public, that such fair return is based on test year information; and with respect to the requirement that utility rates be based on the original cost of property used by and useful to the utility in providing service, that such use and usefulness be during the test year. H.B. 2712 changes the information on which a regulatory authority is required to base a utility's expenses as determined by PUC rules from historic test year information adjusted for known and measurable changes, with test year in this context defined by a provision that the bill repeals as the most recent 12-month period, beginning on the first day of a calendar or fiscal year quarter, for which operating data for a retail public utility are available to test year information, with test year in this context being the test year as provided by the bill. The bill removes the following specifications: with respect to the provision establishing that depreciation expense included in the cost of service includes depreciation on all depreciable utility property owned by a utility except for property provided by explicit customer agreements or funded by customer contributions in aid of construction, that such depreciable utility property be property that is currently used; and with respect to the requirement that depreciation on all developer or governmental entity contributed property be allowed in the cost of service, that such contributed property be currently used and useful. The bill requires a regulatory authority to allow inclusion in the rate base of facilities projected to be in service through the end of the test year. H.B. 2712 applies only to a rate proceeding that commences on or after the bill's effective date. A rate proceeding that commenced before the bill's effective date is governed by the law in effect on the date the proceeding commenced, and that law is continued in effect for that purpose. H.B. 2712 repeals Section 13.002(22), Water Code.
EFFECTIVE DATE September 1, 2025.
BACKGROUND AND PURPOSE
The bill author has informed the committee that a future test year is a 12-month period that regulated water and sewer utilities use to predict future costs and set rates and that, as utilities across Texas face rising operational costs, a future test year will help them more accurately set rates based on informed projections, better align rates with the true cost of service, and more accurately reflect investments at the time of implementation. The bill author has also informed the committee that a future test year will encourage further investment in water and sewer infrastructure by incentivizing utilities to upgrade infrastructure while mitigating concerns about recovering capital costs over a lengthy period, reducing the lag time to recover investment costs by factoring in inflation and other predictable cost increases, and decreasing the frequency of rate cases and the associated expenses passed on to customers. H.B. 2712 seeks to provide more flexibility and certainty for utilities by requiring a regulatory authority to 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 includes historic, future, or combined historic and future data and meets certain criteria with respect to the timing of the test year period.
CRIMINAL JUSTICE IMPACT
It is the committee's opinion that this bill does not expressly create a criminal offense, increase the punishment for an existing criminal offense or category of offenses, or change the eligibility of a person for community supervision, parole, or mandatory supervision.
RULEMAKING AUTHORITY
It is the committee's opinion that this bill does not expressly grant any additional rulemaking authority to a state officer, department, agency, or institution.
ANALYSIS
H.B. 2712 amends the Water Code to require a regulatory authority to 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 includes historic, future, or combined historic and future data, that begins on the first day of a calendar or fiscal year quarter, and that is a consecutive 12-month period that:
begins not later than 18 months after the date the utility files the statement of intent to change rates; and
ends not earlier than 18 months before the date the utility files such statement.
H.B. 2712 specifies the following:
with respect to the requirement that a regulatory authority, in fixing the rates for water and sewer services, fix overall revenues at a level that will, in part, permit a utility a reasonable opportunity to earn a reasonable return on its invested capital used and useful in rendering service to the public over and above its reasonable and necessary operating expenses, that such reasonable return is based on test year information;
with respect to the prohibition against the Public Utility Commission of Texas (PUC), unless it establishes applicable alternate rate methodologies, prescribing any rate that will yield more than a fair return on the invested capital used and useful in rendering service to the public, that such fair return is based on test year information;
with respect to the prohibition against a municipal regulatory authority, unless it uses applicable alternate ratemaking methodologies established by ordinance or by PUC rule, prescribing any rate that will yield more than a fair return on the invested capital used and useful in rendering service to the public, that such fair return is based on test year information; and
with respect to the requirement that utility rates be based on the original cost of property used by and useful to the utility in providing service, that such use and usefulness be during the test year.
H.B. 2712 changes the information on which a regulatory authority is required to base a utility's expenses as determined by PUC rules from historic test year information adjusted for known and measurable changes, with test year in this context defined by a provision that the bill repeals as the most recent 12-month period, beginning on the first day of a calendar or fiscal year quarter, for which operating data for a retail public utility are available to test year information, with test year in this context being the test year as provided by the bill. The bill removes the following specifications:
with respect to the provision establishing that depreciation expense included in the cost of service includes depreciation on all depreciable utility property owned by a utility except for property provided by explicit customer agreements or funded by customer contributions in aid of construction, that such depreciable utility property be property that is currently used; and
with respect to the requirement that depreciation on all developer or governmental entity contributed property be allowed in the cost of service, that such contributed property be currently used and useful.
The bill requires a regulatory authority to allow inclusion in the rate base of facilities projected to be in service through the end of the test year.
H.B. 2712 applies only to a rate proceeding that commences on or after the bill's effective date. A rate proceeding that commenced before the bill's effective date is governed by the law in effect on the date the proceeding commenced, and that law is continued in effect for that purpose.
H.B. 2712 repeals Section 13.002(22), Water Code.
EFFECTIVE DATE
September 1, 2025.