Section 13.185 - Components of Invested Capital and Net Income(a) Unless alternate methodologies are adopted as provided in Sections 13.183(c) and 13.184(a), the components of invested capital and net income shall be determined according to the rules stated in this section.(b) Utility rates shall be based on the original cost of property used by and useful to the utility 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.(c) Cost of facilities, revenues, expenses, taxes, and reserves shall be separated or allocated as prescribed by the regulatory authority.(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.(e) Payment to affiliated interests for costs of any services, or any property, right or thing, or for interest expense may not be allowed either as capital cost or as expense except to the extent that the regulatory authority finds that payment to be reasonable and necessary. A finding of reasonableness and necessity must include specific statements setting forth the cost to the affiliate of each item or class of items in question and a finding that the price to the utility is no higher than prices charged by the supplying affiliate to its other affiliates or divisions for the same item or items, or to unaffiliated persons or corporations.(f) If an expense is allowed to be included in utility rates or an investment is included in the utility rate base, the related income tax benefit must be included in the computation of income tax expense to reduce the rates. If an expense is not allowed to be included in utility rates or an investment is not included in the utility rate base, the related income tax benefit may not be included in the computation of income tax expense to reduce the rates. The income tax expense shall be computed using the statutory income tax rates. The amount of income tax that a consolidated group of which a utility is a member saves, because the consolidated return eliminates the intercompany profit on purchases by the utility from an affiliate, shall be applied to reduce the cost of the property or service purchased from the affiliate. The investment tax credit allowed against federal income taxes to the extent retained by the utility shall be applied as a reduction in the rate-based contribution of the assets to which the credit applies to the extent and at the rate as allowed by the Internal Revenue Code. (g) The regulatory authority may promulgate reasonable rules and regulations with respect to the allowance or disallowance of certain expenses for ratemaking purposes.(h) The regulatory authority may not include for ratemaking purposes:(1) legislative advocacy expenses, whether made directly or indirectly, including legislative advocacy expenses included in trade association dues;(2) costs of processing a refund or credit under this subchapter; or(3) any expenditure found by the regulatory authority to be unreasonable, unnecessary, or not in the public interest, including executive salaries, advertising expenses, legal expenses, and civil penalties or fines.(i) Water and sewer utility property in service that was acquired from an affiliate or developer before September 1, 1976, and that is included by the utility in its rate base shall be included in all ratemaking formulas at the installed cost of the property rather than the price set between the entities. Unless the funds for this property are provided by explicit customer agreements, the property is considered invested capital and not contributions in aid of construction or customer-contributed capital.(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.Amended by Acts 2023, Texas Acts of the 88th Leg.- Regular Session, ch. 581,Sec. 1, eff. 9/1/2023, app. only to a rate proceeding under Chapter 13, Water Code, that begins on or after the effective date of this Act.Amended by Acts 2013, 83rd Leg. - Regular Session, ch. 171,Sec. 38, eff. 9/1/2013.Amended by Acts 2013, 83rd Leg. - Regular Session, ch. 170,Sec. 2.38, eff. 9/1/2013.Amended By Acts 1997, 75th Leg., ch. 1010, Sec. 6.06, eff. 9/1/1997.Amended By Acts 1989, 71st Leg., ch. 567, Sec. 18, eff. 9/1/1989Amended by Acts 1987, 70th Leg., ch. 539, Sec. 10, eff. 9/1/1987Added by Acts 1985, 69th Leg., ch. 795, Sec. 3.005, eff. 9/1/1985.