1. (a) Applicability. This section establishes the requirements for a utility under the commission's jurisdiction to establish or amend a system improvement charge to ensure timely recovery of infrastructure investment.

2. (b) Definitions. In this section, the following words and terms have the following meanings unless the context indicates otherwise.

   1. (1) Eligible plant--Plant properly recorded in the National Association of Regulatory Utility Commissioners (NARUC) System of Accounts, accounts 304 through 339 for water utility service or accounts 354 through 389 for sewer utility service.
   2. (2) Existing plant--Plant that is included in the utility's current rates established in the utility's most recent base-rate proceeding that is being retired and replaced.
   3. (3) Replacement asset--An asset placed into service to replace existing plant that is retired from service.
   4. (4) System improvement charge--An additional charge to recover certain costs of service associated with the portion of the cost of a utility's eligible plant that is not already included in the utility's base rates.

3. (c) System improvement charge (SIC). A utility under the commission's jurisdiction may apply to establish or amend one or more SICs in accordance with the requirements of this section.

   1. (1) General requirements.

      1. (A) A SIC must be nondiscriminatory and be applied uniformly to each meter size, if any, provided in the utility's tariff.
      2. (B) A SIC applies to each meter size provided in the utility's tariff, if any, based on the calculation and multiplier under subsection (e) of this section.
      3. (C) A SIC application must include any relevant data, attachments, or supplementary materials filed in their native format and, if applicable, any formula intact.
      4. (D) Each asset in a SIC application must be directly associated with at least one NARUC account, grouped by capital project.
      5. (E) If the applicant used a future test year or combined test year in a base rate proceeding initiated after September 1, 2026, a subsequent SIC application is limited to cost recovery of eligible plant placed into service subsequent to the end of the future test year or combined test year.
      6. (F) A utility is prohibited from establishing or amending a SIC while it has a comprehensive rate proceeding under TWC §§13.187, 13.1871, 13.18715, or 13.1872 pending before the commission. If a utility with a pending application to establish or amend a SIC files an application to change rates under TWC §§13.187, 13.1871, 13.18715, or 13.1872, or the commission initiates a rate change review under TWC §13.186, the utility will be deemed to have withdrawn its application to establish or amend a SIC and the presiding officer must dismiss the application.

   2. (2) Eligibility for and timing of SIC application.

      1. (A) A utility may have a SIC in effect for water service, sewer service, or both.
      2. (B) A utility that is applying to establish or amend multiple SICs in a calendar year must do so in a single application.

      3. (C) A utility is prohibited from:

         1. (i) having more than one SIC in effect at any given time for each type of service (i.e., water service or sewer service) unless the utility has multiple rate schedules for systems that have not yet been consolidated under a single rate; and
         2. (ii) adjusting its rates under this section more than once each calendar year.

      4. (D) The filing of SIC applications as allowed by this section is limited to a specific quarter of the calendar year, and is based on the last two digits of a utility's certificate of convenience and necessity (CCN) number as outlined below, unless good cause is shown for filing in a different quarter. For a utility holding multiple CCNs, the utility may file an application in any quarter for which any of its CCN numbers is eligible.

         1. (i) Quarter 1 (January-March): CCNs ending in 00 through 27;
         2. (ii) Quarter 2 (April-June): CCNs ending in 28 through 54;
         3. (iii) Quarter 3 (July-September): CCNs ending in 55 through 81; and
         4. (iv) Quarter 4 (October-December): CCNs ending in 82 through 99.

   3. (3) Eligible costs.

      1. (A) A SIC is limited to the cost recovery of eligible plant that is not already included in the utility's rates and eligible plant that has been placed into service after the later of the ending date of the 2019 reporting period reflected in the utility's annual report filed with the commission as required by §24.129 of this title (relating to Water and Sewer Utilities Annual Reports) or the end of the test year used in the utility's most recent base-rate proceeding.

      2. (B) Notwithstanding subparagraph (A) of this paragraph, a SIC application must account for a replacement plant offset, a load growth adjustment, and any adjustments related to changes in accumulated deferred federal income taxes (ADIT) in the manner specified by this subparagraph and subsection (e) of this section.

         1. (i) Replacement plant offset. For each replacement asset for which recovery is sought, the SIC application must include the following as required by the commission-prescribed form:

            1. (I) the applicable NARUC account;
            2. (II) a description of the existing plant being retired;
            3. (III) the date the existing plant was placed into service (i.e., installed);
            4. (IV) the service life in years of the existing plant;
            5. (V) the original cost of the existing plant at the time it was placed into service;
            6. (VI) the annual depreciation expense for the existing plant;
            7. (VII) the accumulated depreciation, as of the end of the test year from the applicant's last comprehensive base rate proceeding;
            8. (VIII) the net plant for the existing plant, as of the end of the test year from the applicant's last comprehensive base rate proceeding
            9. (IX) the date the replacement asset was placed into service; and
            10. (X) a description of the replacement asset;

         2. (ii) Load growth adjustment. When the applicant's customer count exceeds the amount used to establish rates in the utility's most recent comprehensive rate proceeding, a load growth adjustment reflecting incremental revenues must be applied to offset the incremental costs included in the SIC application. The revenues associated with a load growth adjustment used to offset the gross SIC revenue required must be calculated as the product of:

            1. (I) the applicant's average revenue requirement per customer, calculated as the final revenue requirement approved in the applicant's most recent comprehensive rate proceeding, divided by the test year end number of connections in the applicant's most recently approved comprehensive rate proceeding; and
            2. (II) the increase in customer count from the amount used to establish rates in the applicant's last base rate case, including any new customer connections associated with a sale, transfer, or merger under §24.239 of this title (relating to Sale, Transfer, Merger, Consolidation, Acquisition, Lease, or Rental) or §24.243 of this title (relating to Purchase of Voting Stock or Acquisition of a Controlling Interest in a Utility).
         3. (iii) ADIT adjustments. The SIC application must include ADIT adjustments related to the effects of accelerated depreciation expense, including bonus depreciation, of eligible plant.

4. (d) SIC Application.

   1. (1) An application to establish or amend a SIC must be filed using the form prescribed by the commission. A SIC application must include the following:

      1. (A) the following contact information:

         1. (i) the applicant's primary contact name and title, street and mailing address, business telephone number, business e-mail address, and, if available, web address; and
         2. (ii) the authorized representative's name, title, street and mailing address, telephone number, e-mail address, and, if available, web address;

      2. (B) the following disclosures:

         1. (i) the applicant's legal business name, including any assumed names;
         2. (ii) the applicant's Texas Secretary of State registration number;
         3. (iii) the number of active water and sewer connections as of the date the SIC application is filed, itemized by type of service (i.e., water or sewer service) and the total number of connections (i.e., water connections plus sewer connections); and
         4. (iv) the applicant's classification based on the applicant's number of connections (i.e., Class A, B, C, or D utility);

      3. (C) the following general information regarding the SIC sought by the applicant:

         1. (i) whether the application is for a new SIC or is for an amendment to an existing SIC;
         2. (ii) if the application is for an amendment to an existing SIC, the docket number associated with the previous SIC application;
         3. (iii) whether the applicant is seeking a SIC for water service, sewer service, or both;
         4. (iv) identification of each water and sewer tariff or rate schedule currently in effect, as applicable, for which the applicant is seeking a SIC; and
         5. (v) a copy of each water and sewer tariff or rate schedule identified under clause (iv) of this subparagraph, including each docket number where each tariff or rate schedule was most recently approved;

      4. (D) the following general information concerning the applicant's last comprehensive base rate proceeding:

         1. (i) the beginning and end dates of the test year used in the applicant's last base rate proceeding;
         2. (ii) whether the test year was a historic, combined, or future test year;
         3. (iii) the year the applicant's last comprehensive base rate proceeding was initiated;
         4. (iv) the docket number of the applicant's last comprehensive base rate proceeding; and
         5. (v) if applicable, copies of any final orders issued by the Texas Commission on Environmental Quality (TCEQ) or any other predecessor agency that are relevant to the application (i.e., orders relating to rate proceedings held at the TCEQ or any other predecessor agency);

      5. (E) the following general information concerning each CCN possessed by the applicant:

         1. (i) all of the CCN numbers currently issued to the applicant for the provision of water service and sewer service;
         2. (ii) each CCN that would be affected by the SIC sought by the applicant; and
         3. (iii) whether the applicant has, at the time the SIC application is filed, a pending sale, transfer, or merger (STM) application under §24.239 of this title (relating to Sale, Transfer, Merger, Consolidation, Acquisition, Lease, or Rental) or a pending application under §24.243 of this title (relating to Purchase of Voting Stock or Acquisition of a Controlling Interest in a Utility), or other proceeding, including the docket number associated with the other application;

      6. (F) the following general information concerning any currently effective SIC for water or sewer service, or both, as applicable:

         1. (i) whether the applicant has a SIC in effect as of the date the application is filed;
         2. (ii) each docket number associated with the applicant's currently effective SIC for water service or sewer service;
         3. (iii) each CCN for which the currently effective SIC is applicable;
      7. (G) the date the SIC application is being filed and a confirmation that the application is being filed in the appropriate filing quarter as specified by subsection (c)(2)(D) of this section;

      8. (H) a description of the eligible plant for which cost recovery is sought through the SIC, including:

         1. (i) each project included in the request;

         2. (ii) the following information, itemized by the applicable NARUC account number:

            1. (I) the cost associated with each project and project component (i.e., asset within a project);
            2. (II) a detailed explanation of the benefits of each project, including how each project has improved or will improve service; and
            3. (III) transaction details supporting eligible costs substantiated by the documents specified in subparagraph (J) of this paragraph cross-referenced with the applicable external documentation or internal documentation;
      9. (I) a calculation of the SIC in accordance with subsection (e) of this section and all supporting calculations and assumptions for each component of the SIC;

      10. (J) information to substantiate each claimed eligible cost of the applicant's eligible plant that is not already included in the applicant's rates.

          1. (i) Eligible costs must be substantiated by:

             1. (I) a description of each capital project or addition that correlates with all capital expenditures associated with that project or addition;
             2. (II) evidence to support eligible plant placed into service to support the eligible costs in the manner specified by clause (ii) of this subparagraph; and
             3. (III) external or internal documentation of direct and indirect costs, as applicable. External documentation and internal documentation must be word-searchable. External documentation and internal documentation must be organized by each NARUC Account, grouped by capital project;
          2. (ii) A SIC application must include: all associated supporting documentation described by clauses (iii) and (iv) of this subparagraph with page number cross-references to each capital project and NARUC account included in the application.

          3. (iii) External documentation (i.e., cost information from unaffiliated third-parties such as contractors or vendors) includes:

             1. (I) receipts;
             2. (II) invoices;
             3. (III) contracts; or
             4. (IV) other documentation of eligible costs.

          4. (iv) Internal documentation (i.e. work orders, affiliate costs, capitalized overhead, timesheet for labor, and interest expenses, etc. (allocated overhead)) must be provided for all costs that originated from the applicant and its affiliates and substantiated by:

             1. (I) if available and as applicable, the information listed under clause (iii) of this subparagraph;

             2. (II) a categorized list of allocated overhead expenses with supporting documentation for each category. Such supporting documentation may include:

                (-a-) narrative explanations describing the billing methods;

                (-b-) expert testimony;

                (-c-) policies and procedures developed by the applicant for the recording, billing, or management of allocated overhead;

                (-d-) calculations, methodologies, or formulas for determining allocation factors used to apply allocated overhead associated with eligible costs; and

                (-e-) affiliate service agreements;

             3. (III) work orders categorized by projects. Each work order must:

                (-a-) clearly specify the nature and scope of the work performed;

                (-b-) provide a detailed breakdown of the total project cost; and

                (-c-) identify the sources of those costs, including specific materials used, labor hours incurred, and equipment installed;

             4. (IV) timesheets for labor categorized by projects. Each timesheet must:

                (-a-) accurately reflect the time employees dedicate to capital projects and must exclude time associated with routine operations and maintenance activities;

                (-b-) distinctly categorize direct labor and indirect labor, and all recorded hours must be attributed to individual employees; and

                (-c-) apply a consistent methodology for capitalizing labor costs over time; or

             5. (V) any other documentation;
      11. (K) an attestation that sufficiently addresses the exclusion of costs for plant provided by explicit customer agreements or funded by customer contributions in aid of construction in the affidavit required under subparagraph (O) of this paragraph;
      12. (L) information that sufficiently demonstrates compliance with subsection (c)(3)(B) of this section, including the necessary information to calculate the replacement plant offset and load growth adjustment

      13. (M) If the applicant used group depreciation in its last comprehensive base rate proceeding, the applicant must provide, for each asset within the group to which the group rate applies:

          1. (i) the NARUC account number to which the asset applies;
          2. (ii) the name or number of the asset;
          3. (iii) a description of the asset;
          4. (iv) the in-service date of the asset; and
          5. (v) all cost information that corresponds to that asset;
      14. (N) a copy of the applicant's most recent annual report filed with the commission as required by §24.129 of this title, which must be the annual report most recently due for filing;
      15. (O) an affidavit confirming that the application meets the requirements of this section and any other applicable statutes or commission rules;
      16. (P) notice and proof of notice, provided in the form and manner specified by subsection (f) of this section; and
   2. (2) Discovery. Except as otherwise determined by the presiding officer, discovery will be conducted in accordance with Chapter 22, Subchapter H (relating to Discovery Procedures).

   3. (3) Commission processing of application.

      1. (A) Determination that a complete application has been filed.

         1. (i) To constitute a complete application, an application must include: all information required by paragraph (1) of this subsection;

         2. (ii) OPUC may file comments on the SIC application within 30 days from the date the SIC application is filed.

            1. (I) The commission will electronically provide to OPUC any data related to the application in the commission's possession, at no cost.
            2. (II) Information provided to OPUC under this section that is confidential and not subject to disclosure by the commission under Chapter 552, Texas Government Code, or other law is confidential and not subject to disclosure by OPUC.
         3. (iii) The presiding officer will establish a procedural schedule for commission staff to file a recommendation as to whether a complete application has been filed under this section.
         4. (iv) If commission staff recommends the application be found deficient, commission staff must identify each application deficiency in its recommendation.

         5. (v) If the presiding officer determines the application is deficient, the presiding officer will file a notice of deficiency. The notice of deficiency will:

            1. (I) cite the particular requirements with which the application does not comply; and
            2. (II) require the applicant to cure the deficiencies in the application within five working days.
         6. (vi) In the event an application is amended, commission staff must file a recommendation on administrative completeness of an amended application within a time period prescribed by the presiding officer.

         7. (vii) An applicant is limited to a single opportunity to cure deficiencies in a SIC application related to eligible costs. The presiding officer may authorize additional opportunities to cure other deficiencies unrelated to eligible costs.

            1. (I) Any claimed eligible cost included in the application that is found deficient after the cure period will be excluded from the application and disallowed from recovery in the current SIC proceeding.
            2. (II) The disallowance of a cost from a SIC application does not preclude or otherwise restrict an applicant from seeking recovery for that cost in a subsequent rate proceeding.
            3. (III) Notwithstanding subclauses (I) or (II) of this clause, the presiding officer may impose specific requirements for a disallowed cost to be presented by the applicant in a subsequent rate proceeding.
         8. (viii) The presiding officer will not make a determination that a complete application has been filed sooner than 30 days from the date the initial application is filed.
      2. (B) Commission evaluation and final determination. Upon determining that a complete application has been filed under subparagraph (A) of this paragraph, the presiding officer will set a procedural schedule that will enable the commission to issue a final order in the proceeding within 60 days from the date the determination is made. The presiding officer may extend the deadline for not more than 15 days for good cause. The procedural schedule must include a deadline for commission staff to file its final recommendation on the application.

5. (e) Calculation of the SIC. The revenue requirement for the SIC must be calculated using the following formula: SIC RR = (Reconcilable Cost * ROR) + Federal Income Taxes + Depreciation + ad valorem taxes + other revenue related taxes- replacement plant offset- load growth adjustment. Where:

   1. (1) SIC = the system improvement charge.
   2. (2) SIC RR = system improvement charge revenue requirement.

   3. (3) Reconcilable Cost = the original costs of eligible plant placed into service after the later of the ending date of the 2019 reporting period reflected in the utility's annual report filed with the commission as required by §24.129 of this chapter or the end of the test year used in the utility's most recent base-rate proceeding, less:

      1. (A) accumulated depreciation;
      2. (B) ADIT associated with eligible plant in service; and
      3. (C) any costs for plant provided by explicit customer agreements or funded by customer contributions in aid of construction.
   4. (4) Accumulated depreciation = depreciation accumulated for eligible plant after the date the eligible plant was placed in service.
   5. (5) ROR = overall rate of return as defined in paragraph (12) of this subsection.
   6. (6) Federal Income Taxes = current annual federal income tax, as related to eligible costs.
   7. (7) Depreciation = current annual depreciation expense for the eligible plant.
   8. (8) Ad Valorem Taxes = current annual amount of taxes based on the assessed value of the eligible cost.
   9. (9) Other Revenue Related Taxes = current annual amount of any additional taxes resulting from the utility's increased revenues related to the SIC.
   10. (10) Replacement Plant Offset = the total annual depreciation expense for existing plant plus the product of the rate of return approved by the commission and the total net plant for existing plant as of the end of the test year from last comprehensive base rate proceeding.
   11. (11) Load Growth Adjustment = the product of the applicant's average revenue requirement per customer as calculated under subsection (c)(3)(B)(ii)(I) of this section, and the increase in the customer count since the utility's last base rate case as calculated under subsection (c)(3)(B)(ii)(II) of this section.

   12. (12) The overall rate of return is one of the following:

       1. (A) if the final order approving the utility's overall rate of return (i.e., the company's weighted-average cost of capital) was filed less than three years before the date that the utility files an application for a SIC, the overall rate of return is the one approved by the commission in the utility's last base-rate case; or
       2. (B) if the final order approving the utility's overall rate of return (i.e., the company's weighted-average cost of capital) was filed three years or more before the date that the utility files an application for a SIC, the overall rate of return is the average of the commission's approved rates of return for water and sewer utilities in settled and fully litigated cases over the three years immediately preceding the filing of the SIC.
   13. (13) The SIC must be calculated based on annualized meter equivalents, derived using the most recent month's total customer meter equivalents multiplied by 12. The base SIC must be calculated as the SIC RR divided by annual meter equivalents. Unless an alternative meter ratio or equivalent is specified by the commission in the applicant's most recent comprehensive rate proceeding, the SIC for each meter size must be calculated as the base SIC multiplied by the multiplier for that meter size. The standard meter ratios are as follows:
       Attached Graphic
       

6. (f) Notice.

   1. (1) General notice requirements.

      1. (A) On the same day an applicant files a SIC application with the commission, the applicant must also electronically provide a copy of its application to OPUC.

      2. (B) On or before the first working day after it files its application, the applicant must:

         1. (i) issue notice of its SIC application to all affected ratepayers by first class mail or, if the customer has agreed to receive communications electronically, by e-mail; and
         2. (ii) if the applicant has a website, also post a copy of the notice on its website in a manner that is accessible to the general public.

   2. (2) Contents of notice. The notice must include, at a minimum, the following:

      1. (A) the docket number for the utility's SIC proceeding;

      2. (B) information regarding the proposed SIC itemized for each type of service (i.e., water or sewer service, or both), as applicable, including:

         1. (i) a brief description of the investments and costs the utility is seeking recovery for through the proposed SIC;
         2. (ii) the time period for which the utility is seeking the proposed SIC to recover costs;
         3. (iii) the proposed total SIC revenues sought by the utility;
         4. (iv) a description of the proposed SIC as a monthly minimum bill charge for each meter size;
         5. (v) for each customer meter size for which the applicant has customers, an estimated total monthly bill at 5,000 gallons and 10,000 gallons; and
         6. (vi) a statement that substantially conforms to the following: "The effective date of the proposed rate change will be the date specified by the commission final order adopting the proposed SIC;
      3. (C) the intervention deadline, including both the date and time using Central Prevailing Time;
      4. (D) a brief explanation of how an affected ratepayer can intervene in the SIC proceeding or submit comments as a protestor; and
      5. (E) an explanation of how intervention differs from protesting a rate increase.

   3. (3) Completion of notice and intervention deadline.

      1. (A) Notice is complete on the later of:

         1. (i) the date the applicant has notified OPUC of the application under paragraph (1)(A) of this subsection;
         2. (ii) the date that notice is physically or electronically mailed to all customers by the applicant under paragraph (1)(B)(i) of this subsection; or
         3. (iii) the date that the applicant posts the notice to its website under paragraph (1)(B)(i) of this subsection;
      2. (B) If notice is mailed over multiple days, notice is complete on the last day of mailing.
      3. (C) The intervention deadline is 25 days from the date service of notice is complete.

   4. (4) Proof of notice. Within 15 days from the date notice was complete, the applicant must file a proof of notice affidavit with the commission. The affidavit must:

      1. (A) be sworn;
      2. (B) be completed and signed by an officer or managerial employee of the applicant that is qualified and authorized to verify and file notice on behalf of the utility;
      3. (C) attest and verify that notice was issued to all affected ratepayers of the applicant and to OPUC;
      4. (D) attest and verify that each notice was posted to the applicant's website in a manner accessible to the general public and include a hyperlink to the webpages where each notice is posted; and
      5. (E) include a sample copy of the notice issued by the applicant as an attachment.
7. (g) Scope of proceeding. The issue of whether eligible costs included in an application for a SIC or an amendment to a SIC are prudent, reasonable, or necessary, will not be addressed in a proceeding under this section.

8. (h) SIC reconciliation. Costs recovered through a SIC are subject to reconciliation in the utility's next comprehensive rate case.

   1. (1) Any amounts recovered through the SIC that are found to have been unreasonable, unnecessary, or imprudent, plus the corresponding return and taxes, must be refunded with carrying costs.
   2. (2) The utility must pay to its customers carrying costs on these amounts calculated using the same rate of return that was applied to the recovered costs in establishing the SIC until the date the rates approved in the utility's next comprehensive rate case are effective. Thereafter, carrying costs must be calculated using the utility's rate of return authorized in the comprehensive rate case.
   3. (3) A utility that uses group depreciation must perform a new depreciation study in its next comprehensive base rate proceeding.
9. (i) SIC application expenses. Recovery of expenses associated with a SIC application may be requested and must be reviewed in the utility's next comprehensive base rate case and in accordance with §24.44 of this chapter (relating to Rate-case Expenses Pursuant to Texas Water Code §13.187 and §13.1871).

10. (j) Requirement to file a rate case. A utility must file a comprehensive rate case under TWC §13.187, 13.1871, 13.18715, or 13.1872 within the following times from the date the commission files an order approving the SIC.

    1. (1) Four years for a utility that was a Class A utility at the time of filing the SIC application.
    2. (2) Six years for a utility that was a Class B utility at the time of filing the SIC application.
    3. (3) Eight years for a utility that was a Class C or Class D utility at the time of filing the SIC application.

Source Note:The provisions of this §24.76 adopted to be effective May 7, 2026, 51 TexReg 2900.