The Texas Commission on Environmental Quality (commission) proposes amendments to §§291.8, 291.15, 291.21, 291.22, 291.24, 291.26, 291.28, 291.29, 291.31, 291.34, and 291.81. The commission also proposes to add new §291.35.

BACKGROUND AND SUMMARY OF THE FACTUAL BASIS FOR THE PROPOSED RULES

During the 79th Legislature, 2005, the legislature passed House Bill (HB) 1358, HB 2301, and Senate Bill (SB) 1063. HB 1358 amended the Texas Water Code (TWC) by adding new §13.004. This new section of the TWC outlines the jurisdiction of the commission over certain water supply or sewer service corporations. HB 2301 amended TWC, §13.187(c), by clarifying that the regulatory authority may disallow nonsupported costs if the utility fails to timely provide documentation or other evidence to support the costs shown in a rate application.

SB 1063 amended §10.08(a), Chapter 966, Acts of the 77th Legislature, 2001, by deleting the exception that a public utility that provided utility service in only 24 counties on January 1, 2003, was exempt from specific requirements. SB 1063 also amended §10.08(a) by specifying that the changes in law made by this article to Chapter 13 apply to a proceeding in which the agency has not issued a final order before September 1, 2001. Additionally, SB 1063 amended TWC, §13.145, Multiple Systems Consolidated Under Tariff, by adding a new subsection (b) which states, "This section does not apply to a public utility that provided utility service in only 24 counties on January 1, 2003."

In addition to changes based on HB 1358, HB 2301, and SB 1063, the commission proposes to amend §291.28 based upon concerns expressed by utility customers about the recovery of rate case expenses. The amendment will specify under what circumstances a utility may recover rate case expenses. This section of Chapter 291 implements TWC, §13.185(h), and TWC, §13.382, which relate to when a utility may recover rate case expense including attorney fees and expert witness fees incurred as a result of a rate change application.

SECTION BY SECTION DISCUSSION

Subchapter A, General Provisions

The commission proposes to amend §291.8, Administrative Completeness, by deleting ". . . or 30 days for a utility that provided service in only 24 counties on January 1, 2003 . . ." in subsection (b). The commission proposes this amendment to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

The commission proposes to amend §291.15, Notice of Wholesale Water Supply Contract, by deleting ". . . except that this requirement does not apply to a utility that provided service in only 24 counties on January 1, 2003 . . ." in subsection (b)(9). The commission proposes this amendment to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

Subchapter B, Rates, Rate Making, and Rates/Tariff Changes

The commission proposes to amend §291.21, Form and Filing of Tariffs, by deleting the subsection (n) reference in subsection (o). Revised subsection (o) states: "Exception. Subsection (m) of this section does not apply to a utility that provided service in only 24 counties on January 1, 2003." The commission also proposes to amend subsection (n) to correspond with the amendment to subsection (o). The commission proposes this amendment to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

The commission proposes to amend §291.22, Notice of Intent To Change Rates, by deleting the language, "A utility that provided service in only 24 counties on January 1, 2003 is required to provide the statement of intent to changes rates at least 30 days prior to the proposed effective date" in subsections (a), (c), (d), and (e). Additionally, the commission proposes to delete "Paragraphs (3) and (4) of this subsection do not apply to a utility that provided service in only 24 counties on January 1, 2003" from subsection (a). These changes will remove the exemption for utilities that provided service in only 24 counties on January 1, 2003. The commission proposes these amendments to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

The commission proposes to amend §291.24, Jurisdiction over Affiliated Interests, by deleting, "Except for a utility that provided service in only 24 counties on January 1, 2003 . . ." in subsection (b). This change will remove the exemption for utilities that provided service in only 24 counties on January 1, 2003. The commission proposes this amendment to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

The commission proposes to amend, §291.26, Suspension of Rates, by deleting "This provision does not apply to a utility that provided service in only 24 counties on January 1, 2003" from subsection (c). The commission proposes this amendment to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

The commission proposes to amend §291.28, Action on Notice of Rate Change Pursuant to Texas Water Code, §13.187(b), by deleting ". . . or the 61st day for a utility serving in 24 counties on January 21, 2003 . . ." in paragraph (1). This change will remove the exemption for utilities that provided service in only 24 counties on January 1, 2003. The commission proposes this change to implement the amendment by SB 1063 to §10.08(a), Chapter 966, Acts of the 77th Legislature, 2001. The commission proposes to amend §291.28(4) by adding the words "cost or" before the word "expenses" at the end of the paragraph. The commission proposes this amendment to implement HB 2301. Additionally, the commission proposes to add §291.28(7) - (9) to establish criteria by which the commission can determine the amount of reasonable and just rate case expense recovery allowed to a utility based upon concerns about rate case expenses expressed by utility customers. Utility customers have expressed concern over the possibility that utilities may have an incentive to overreach in their rate applications if utilities believe that the customers ultimately will bear all rate case expenses. The purpose of this rule change is to set out clearly certain instances when, as a matter of law, rate case expenses will be considered unreasonable, unnecessary, and against the public interest. In particular, two rules are proposed where rate case expenses will be disallowed as a matter of law. The first (§291.28(8)) states that a utility may not recover any rate case expenses if the increase in revenue generated by the just and reasonable rate determined by the commission after a contested case hearing is less than 51% of the increase in revenue that would have been generated by a utility's proposed rate. The second (§291.28(9)) states that a utility may not recover any rate case expenses incurred after the date of a written settlement offer by all ratepayer parties if the revenue generated by the just and reasonable rate determined by the commission after a contested case hearing is less than or equal to the revenue that would have been generated by the rate contained in the written settlement offer by all ratepayer parties. Section 291.28(7) was also added to make it clear that all rate case expenses will be evaluated to see if they are reasonable, necessary, and in the public interest on a case-by-case basis. Therefore, even if the criteria outlined in the new §291.28(8) or (9) are not met, the commission may still disallow all or a portion of rate case expenses in its discretion if they are not found to be reasonable, necessary, and in the public interest.

The commission proposes to amend §291.29, Interim Rates, by deleting "This provision does not apply to a utility that provided service in only 24 counties on January 1, 2003" from subsections (c) and (k). This change will remove the exemption for utilities that provided service in only 24 counties on January 1, 2003. The commission proposes this amendment to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

The commission proposes to amend §291.31, Cost of Service, by deleting subsection (b)(2)(K) which reads, "subparagraph (J) of this paragraph does not apply to a utility that provided service in only 24 counties on January 1, 2003." This change will remove the exemption for utilities that provided service in only 24 counties on January 1, 2003. The commission proposes this amendment to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

The commission solicits comments on the specific criteria appropriate for ascertaining costs to be added to the historical test year expenses as known and measurable.

The commission proposes to amend §291.34, Alternative Rate Methods, by deleting "The commission may not utilize an alternate method of establishing rates based upon whether the rate is more affordable for a utility that provided utility service in only 24 counties on January 1, 2003" from subsection (a). This change will remove the exemption for utilities that provided service in only 24 counties on January 1, 2003. The commission proposes this amendment to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

The commission proposes to add new §291.35, Jurisdiction of Commission over Certain Water or Sewer Supply Corporations, to state that the commission has the same jurisdiction over certain water supply or sewer service corporations that it has over a water and sewer utility as specified in TWC, §13.004. The commission proposes this amendment to implement TWC, §13.004, as added by the 79th Legislature.

Subchapter E, Customer Service and Protection

The commission proposes to amend §291.81, Customer Relations, by deleting the first sentence of subsection (d)(4). This will remove the exemption for utilities that provided service in only 24 counties on January 1, 2003. The commission proposes this amendment to implement the change to §10.08, Chapter 966, Acts of the 77th Legislature, 2001.

FISCAL NOTE: COSTS TO STATE AND LOCAL GOVERNMENT

Jeff Horvath, Analyst, Strategic Planning and Assessment Section, has determined that, for the first five-year period the proposed rules are in effect, no significant fiscal implications are anticipated for the agency or any other unit of state or local government. The proposed rules in general would affect investor-owned water and sewer utilities and nonprofit water supply or sewer service corporations.

The proposed rules implement HB 1358, HB 2301, and SB 1063, 79th Legislature, 2005. The proposed rules also amend provisions relating to when a utility may recover rate case expenses, including attorney fees and expert witness fees, incurred as the result of a water utility rate change application.

HB 1358

The proposed rules provide that the commission has the same jurisdiction over a nonprofit water or sewer supply corporation that it has over investor-owned water and sewer utilities if the commission finds that the utility is failing to conduct annual or special meetings in compliance with state law or is operating in a manner that does not comply with the requirements for classification as a nonprofit water supply or sewer service corporation. If the water supply or sewer service corporation voluntarily converts to a special utility district, however, the commission's jurisdiction would end. These provisions are not expected to result in a significant increase in workload for the agency as it is assumed that utilities would generally be in compliance with state law and regulations.

HB 2301

The proposed rules clarify that the commission may disallow unsupported costs if a utility fails to timely provide documentation or other evidence to support the costs shown in a rate application. This clarification is not expected to result in any fiscal implications for the agency or affected utilities.

SB 1063

Any public utility that provided utility service in only 24 counties on January 1, 2003, is exempt from various business and rate provisions in the TWC. SB 1063 amended these provisions. The proposed rules would require all investor-owned utilities to operate under a single regulatory scheme with the exception of a single tariff system. One investor-owned utility would still be able to continue collecting a universal rate while all other utilities would be required to establish regional rates. As part of the proposed changes, the effective date for the proposed rate change for this utility would now be at least 60 days after the rate change application and notice are received and declared administratively complete by the commission instead of the current time frame of 30 days.

Rate Case Expenses

Finally, the proposed rules would provide that a utility may recover rate case expenses, including attorney and expert witness fees, incurred as a result of a rate change application if the expenses are reasonable and necessary, but under certain conditions, the amount of expenses collected by the utility may be reduced or eliminated.

Currently, utilities may recover rate case expenses if the commission determines that the expenses are reasonable and necessary. The proposed rules would reduce the amount of the rate case expenses paid to utilities by ratepayers if the increase in revenue generated by the determined rate is less than 51% of the increase in revenue that would have been generated by the proposed rate. In addition, utilities would not be able to recover rate case expenses incurred after the date of a written settlement offer by all ratepayer parties if the revenue generated by the determined rate is less than or equal to the revenue that would have been generated by the settlement offer. These provisions are intended to provide an incentive for settlement negotiations between the utilities and ratepayers, and may reduce the amount of rate case expenses paid to utilities if it is determined that the rate request was too high. Based upon previous years, the commission has two or three contested case rate hearings each year. The proposed rules may reduce the number of contested case hearings and if so, may reduce the costs associated with these hearings, though in general any cost savings are not expected to be significant.

PUBLIC BENEFITS AND COSTS

Mr. Horvath also determined that for each year of the first five years the proposed rules are in effect, the public benefit anticipated from the changes seen in the proposed rules will be compliance with state law and greater clarity in rules relating to rate cases.

In general, no significant fiscal implications are anticipated for affected water or sewer supply corporations, investor-owned utilities, or ratepayers as a result of the administration or enforcement of the proposed rules. There are approximately 700 investor-owned utilities and 800 water or sewer service corporations in Texas.

HB 1358

The proposed rules provide that the commission has the same jurisdiction over nonprofit water or sewer supply corporations that it has over investor-owned water and sewer utilities if the commission finds that the water or sewer supply corporation is failing to operate or conduct business in a manner inconsistent with state laws or rules. It is assumed that water or sewer supply corporations will comply with state law and all other requirements and therefore no significant fiscal implications are anticipated. However, if the commission finds otherwise, and a water or sewer supply corporation does fall under the commission's jurisdiction, then any such utility wishing to file an application to change rates may be subject to additional legal costs if their application is protested. In addition, their rate change request may be denied.

SB 1063

The proposed rules would require all investor-owned utilities to operate under a single regulatory scheme with the exception of a single tariff system. This proposed change is expected to affect one investor-owned utility and would provide that for cases involving rate changes, the effective date for the proposed rate change must be at least 60 days after the application and notice are received and declared administratively complete by the commission or the date the notice is delivered to each ratepayer, whichever is later. Currently, the time frame is 30 days for the one utility. The proposed changes would lengthen the effective date of any rate change by 30 days thereby delaying any increase in revenues obtained from the rate change. The proposed rules also allow the same utility to continue collecting a universal rate while other utilities would be required to establish regional rates. These changes are not expected to result in significant fiscal implications for the utility.

Rate Case Expenses

The proposed rules would allow for the reduction or elimination of expenses paid to utilities for contested case hearing rate cases under certain conditions. Based upon previous years, the commission has two or three contested case rate hearings each year. Rate case expenses, including attorney and expert witness fees, are estimated to be between $30,000 and $70,000 for each case. Any future rate hearing expenses for utilities or cost savings for ratepayers would depend upon the outcome of the contested case rate hearings.

SMALL BUSINESS AND MICRO-BUSINESS ASSESSMENT

No adverse fiscal implications are anticipated for investor-owned utilities or water or sewer supply corporations that are small or micro-businesses as a result of the proposed rulemaking.

LOCAL EMPLOYMENT IMPACT STATEMENT

The commission has reviewed this proposed rulemaking and determined that a local employment impact statement is not required because the proposed rules do not adversely affect a local economy in a material way for the first five years that the proposed rules are in effect.

DRAFT REGULATORY IMPACT ANALYSIS DETERMINATION

The commission reviewed the proposed rulemaking in light of the regulatory analysis requirements of Texas Government Code, §2001.0225 and determined that the rulemaking is not subject to §2001.0225 because it does not meet the definition of a "major environmental rule" as defined in the Texas Administrative Procedure Act. According to Texas Government Code, §2001.0225(g)(3), a major environmental rule means "a rule the specific intent of which is to protect the environment or reduce risks to human health from environmental exposure and that may adversely affect in a material way the economy, productivity, competition, jobs, the environment, or the public health and safety of the state or a sector of the state." Here, the primary specific intent of the proposed rulemaking is to implement HB 1358, HB 2301, and SB 1063, of the 79th Legislature, 2005, and to draft rules regarding rate case expense in utility rate cases. In relevant part, HB 2301 deals with disallowance of unsupported costs in a rate application. HB 1358 deals with the commission's jurisdiction over certain water supply corporations (WSC) or sewer supply corporations. SB 1063 removes the exemption from certain requirements for rate change procedures for a public utility that provided service in only 24 counties on January 1, 2003.

These proposed changes are intended to impact only the economic and administrative regulation of water and sewer utilities. The proposed rules are not intended to have any impact on environmental regulation. Furthermore, the proposed rulemaking does not meet any of the four applicability requirements listed in Texas Government Code, §2001.0225(a). The proposed rules: 1) are specifically required by state law, namely TWC, Chapter 13; 2) do not exceed the express requirements of the TWC; 3) do not exceed a requirement of a delegation agreement or contract between the state and an agency or representative of the federal government to implement a state and federal program. There is no federal delegation regarding water and sewer rates or regarding the state's ability to regulate WSCs; and 4) the proposed rules will not be adopted solely under the general powers of the commission.

Based on the foregoing, the proposed rulemaking does not constitute a major environmental rule, and thus is not subject to the regulatory analysis provisions of Texas Government Code, 2001.0225. The commission invites public comment on this draft regulatory impact analysis determination.

TAKINGS IMPACT ASSESSMENT

The commission evaluated these proposed rules and performed an assessment of whether these proposed rules constitute a takings pursuant to Texas Government Code, Chapter 2007. The intent of the proposed rulemaking is to implement HB 1358, HB 2301, and SB 1063, of the 79th Legislature, 2005, and to draft rules regarding rate case expense in utility rate cases. In relevant part, HB 2301 deals with disallowance of unsupported costs in a rate application. HB 1358 deals with the commission's jurisdiction over certain WSCs. SB 1063 removes the exemption from certain requirements for rate change procedures for a public utility that provided service in only 24 counties on January 1, 2003.

Promulgation and enforcement of these proposed rules will constitute neither a statutory nor a constitutional taking of private real property. The proposed procedures and regulations deal with the rate-making process, the recovery of rate case expense, and the regulation of WSCs. They do not adversely affect a landowner's rights in private real property, in whole or in part, temporarily or permanently, because this rulemaking does not burden nor restrict or limit the owner's right to property and reduce its value by 25% or more beyond that which would otherwise exist in the absence of the regulations. There are no burdens imposed on private real property by the enactment of these rules. Therefore, the proposed amendments do not constitute a taking under Texas Government Code, Chapter 2007.

CONSISTENCY WITH THE COASTAL MANAGEMENT PROGRAM

The commission reviewed the proposed rules and found that they are neither identified in Coastal Coordination Act Implementation Rules, 31 TAC §505.11(b)(2) or (4), nor will they affect any action/authorization identified in Coastal Coordination Act Implementation Rules, 31 TAC §505.11(a)(6). Therefore, the proposed rules are not subject to the Texas Coastal Management Program.

ANNOUNCEMENT OF HEARING

A public hearing on this proposal will be held in Austin on May 4, 2006, at 10:00 a.m. in Building F, Room 2210, at the commission's central office located at 12100 Park 35 Circle. The hearing will be structured for the receipt of oral or written comments by interested persons. Individuals may present oral statements when called upon in order of registration. There will be no open discussion during the hearing; however, an agency staff member will be available to discuss the proposal 30 minutes prior to the hearing and will answer questions before and after the hearing.

Persons with disabilities who have special communication or other accommodation needs who are planning to attend the hearing should contact Lola Brown at (512) 239-0348. Requests should be made as far in advance as possible.

SUBMITTAL OF COMMENTS

Comments may be submitted to Lola Brown, MC 205, Texas Register Team, Office of Legal Services, P.O. Box 13087, Austin, Texas 78711-3087 or faxed to (512) 239-4808. All comments should reference Rule Project Number 2005-061-291-PR. Comments must be received by 5:00 p.m. on May 15, 2006. Copies of the proposed rules can be obtained from the commission's Web site at http://www.tceq.state.tx.us/nav/rules/propose_adopt.html . For further information, please contact Doug Holcomb, Utilities and Districts Section, at (512) 239-4691.

Subchapter A. GENERAL PROVISIONS

The Texas Commission on Environmental Quality (TCEQ or commission) proposes amendments to §§293.1, 293.11, 293.12, 293.20, 293.22, 293.23, 293.32, 293.41, 293.44, 293.51, 293.54, 293.69, 293.111 - 293.113, 293.201, and 293.202.

BACKGROUND AND SUMMARY OF THE FACTUAL BASIS FOR THE PROPOSED RULES

The commission has the statutory responsibility and authority to create, supervise, and dissolve certain water and water-related districts and to review the sale and issuance of bonds for district improvements in accordance with Texas Water Code (TWC), Chapters 12, 36, and 49 - 67. The commission oversees approximately 1,100 active water districts in Texas. Chapter 293 of the commission's rules governs the creation, supervision, and dissolution of all general and special law districts and the conversion of certain districts. Chapter 293 also governs the commission's review of bond applications by districts relating to engineering standards and economic feasibility of district construction project design and completion.

The proposed rulemaking would establish new or revise existing requirements relating to the administration of water districts and the commission's supervision over districts' actions under TWC, Chapters 36, 49, 51, 54, and 65. House Bill (HB) 828, 79th Legislature, 2005, amends TWC, §49.181 to exempt certain refunding bonds from having to obtain commission approval. HB 1208, 79th Legislature, 2005, amends provisions in TWC, Chapter 54 concerning a municipal utility district's (MUDs) eminent domain authority outside its boundaries. HB 1644, 79th Legislature, 2005, amends provisions in TWC, Chapter 51 (Water Control and Improvement Districts - WCIDs) and Chapter 54 (MUDs) to allow more flexibility in contracting and funding, and to place limitations on a municipality annexing such districts. HB 1673, 79th Legislature, 2005, amends provisions in TWC, Chapter 65, to allow specific purposes to be requested upon conversion to a special utility district (SUD). HB 1763, 79th Legislature, 2005, amends provisions in TWC, Chapter 36, concerning notice, hearing, rulemaking, and permitting procedures for groundwater conservation districts (GCD), and to management planning and joint management planning requirements for GCDs. Senate Bill (SB) 693, 79th Legislature, 2005, amends provisions in TWC, Chapter 54, to place limitations on the filling of a vacancy on a district board. The proposed revisions amend and clarify commission rule language to conform with the statutory changes made to TWC, Chapters 36, 49, 51, 54, and 65, and to reflect staff-initiated changes for effective and consistent oversight of districts.

Specifically, the proposed rules would modify requirements that establish when a district is to obtain commission approval of refunding bonds; clarify allowable land costs to reflect limitations on a MUD's eminent domain authority outside its boundaries; add provisions allowing MUDs and WCIDs to contract with third parties for ownership and operation of facilities; add provisions allowing MUDs and WCIDs to fund certain certificate of convenience and necessity (CCN) costs; allow a water supply corporation to request only certain powers upon conversion to a SUD and require the commission to only grant powers requested; clarify GCD management plan adoption, submittal, and implementation requirements; modify joint GCD management planning requirements in groundwater management areas (GMAs) and compliance with joint planning provisions; clarify review panel recommendations and commission actions regarding GCDs; and clarify qualifications for directors of a MUD.

SECTION BY SECTION DISCUSSION

§293.1, Objective and Scope of Rules; Meaning of Certain Words

An amendment to §293.1(a) is proposed to correct an outdated rule reference to the TWC. This proposed rule change is consistent with TWC, §5.103.

§293.11, Information Required to Accompany Applications for Creation of Districts

An amendment to §293.11(h) is proposed to reflect that a water supply corporation's (WSCs) resolution requesting conversion to a SUD can reflect each purpose that a WSC wants the commission to grant upon conversion to a SUD. This proposed rule change is consistent with TWC, §65.021, as amended by HB 1673 and with TWC, §5.103.

§293.12, Creation Notice Actions and Requirements

An amendment to §293.12(c) is proposed to reflect that if the commission determines that a hearing is necessary it may only consider the purposes a WSC requests in its resolution requesting conversion to a SUD. This proposed rule change is consistent with TWC, §65.020 and §65.021, as amended by HB 1673.

§293.20, Records and Reporting

An amendment to §293.20(c) is proposed to provide the conforming three-year time frame for new GCDs to adopt and submit a management plan for consideration and approval by the executive administrator of the Texas Water Development Board (TWDB), and for GCDs to readopt and resubmit their readopted management plans to the executive administrator of the TWDB at least once every five years thereafter. The commission proposes to remove language referring to a "certified" management plan and replace it with "approved" management plan to conform with the new statutory language. No changes are proposed for subsections (a), (b), (d), or (e). This proposed rule change is consistent with TWC, §§36.1071 - 36.1073, and 36.302, as amended by HB 1763.

§293.22, Noncompliance Review and Commission Action

An amendment to §293.22 is proposed to make the conforming clarifications for instances when commission noncompliance review and action is required related to GCD management planning and joint GCD management planning in a GMA. In subsection (a), the proposed changes set out that the section is applicable if a GCD fails to: 1) submit a groundwater management plan to the executive administrator of the TWDB within three years of the date the GCD was created or the date the GCD was confirmed by election if an election was required; 2) achieve approval of a groundwater management plan, an amended plan, or a readopted plan from the executive administrator or the TWDB; 3) readopt and resubmit the management plan to the executive administrator of the TWDB at least once every five years after the date of management plan approval; 4) forward a copy of its approved groundwater management plan to the other GCDs included in a common GMA; 5) be actively engaged and operational in achieving the objectives of its groundwater management plan based on the State Auditor's Office review of the GCD's performance under its plan; or 6) adopt, implement, or enforce rules to protect groundwater as evidenced in a report prepared by peer review panel. No changes are proposed for subsections (b) - (e). In subsection (f), language is removed to conform with a statutory change clarifying GCD dissolution by the commission. No changes are proposed for subsections (g) - (i). This proposed rule change is consistent with TWC, §36.108 and §36.3011, as amended by HB 1763.

§293.23, Groundwater Conservation District Petition Requesting Inquiry in Groundwater Management Area

An amendment to §293.23 is proposed to rename the section and to make conforming clarifications. The commission proposes to rename the section "Petition Requesting Inquiry in Groundwater Management Area" and to make changes in subsection (a) to conform with the statutory change that authorizes both a person with a legally defined interest in groundwater in a GMA, and a GCD to petition the commission for an inquiry related to joint groundwater management planning. In subsection (b), the proposed changes clarify that an interested person or a GCD may file a petition to request a commission inquiry; that after September 1, 2010, a petitioner may request a commission inquiry if the petitioner believes the GMA process has not established the future desired conditions for the aquifers in the GMA; and documentation needed to support the petition. In subsection (c), the proposed changes add the word "groundwater" to references to the term "management area." No changes are proposed for subsections (d) or (e). This proposed rule change is consistent with TWC, §36.3011 and §36.304, as amended by HB 1763.

§293.32, Qualifications of Directors

An amendment to §293.32(a) is proposed to reflect additional qualifications to be a director of a MUD. This proposed rule change is consistent with TWC, §54.103, as added by SB 693.

§293.41, Approval of Projects and Issuance of Bonds

An amendment to §293.41(a) is proposed to reflect that refunding bonds issued to refund bonds originally approved by certain federal or state agencies no longer require commission approval. This proposed rule change is consistent with TWC, §49.181, as amended by HB 828.

§293.44, Special Considerations

An amendment to §293.44(b) is proposed to reflect that a district operating under TWC, Chapter 51 or Chapter 54, may contract with a third party for operation and maintenance of district facilities, obtain capacity or acquire facilities from another entity, and issue bonds or other obligations to fund CCN costs. This proposed rule change is consistent with TWC, §§49.218(a), 51.150, 51.402, 54.2351, 54.501, and 49.181, as amended by HB 1644.

§293.51, Land and Easement Acquisition

An amendment to §293.51(e) is proposed to reduce potential confusion by reflecting a MUD's restriction in the use of eminent domain powers outside of its boundaries. This proposed rule change is consistent with TWC, §54.209, as amended by HB 1208.

§293.54, Bond Anticipation Notes (BAN)

An amendment to §293.54(2), (9), (12), and (13), and adding §293.54(14) are proposed to tie the BAN rules under §293.54 in with the feasibility rules under §293.59. The proposed changes do not add new requirements to the bond application process; they require, when a bond application is filed and a BAN is issued, that construction and improvements be far enough along that a bond application can reasonably be processed within commission time frames. Experience in the last few years has shown that some districts file bond applications with the intent of issuing BANs; however, they are filed too soon and can't meet feasibility rules within commission processing times. This proposed rule change is consistent with TWC, §5.103.

§293.69, Purchase of Facilities

An amendment to §293.69 is proposed to reflect that a pre-purchase inspection is required even if facilities are conveyed to a third party, and that a pre-purchase inspection may not be required if a district's facilities are conveyed to a municipality and the municipality assumes all costs of operation and maintenance. This proposed rule change is consistent with TWC, §51.150 and §54.2351, as amended by HB 1644, and TWC, §5.103.

§293.111, Water and Wastewater Service Lines and Connections

An amendment to §293.111 is proposed by adding subsection (b) to clarify that §293.111 is applicable whether a district intends on operating facilities itself or intends on conveying facilities to a third party. This proposed rule change is consistent with TWC, §51.150 and §54.2351, as amended by HB 1644, and TWC, §5.103.

§293.112, Water, Wastewater and Drainage Facilities

An amendment to §293.112 is proposed by adding subsection (b) to clarify that §293.112 is applicable whether a district intends on operating facilities itself or intends on conveying facilities to a third party. This proposed rule change is consistent with TWC, §51.150 and §54.2351, as amended by HB 1644, and TWC, §5.103.

§293.113, District and Water Supply Corporations' Authority Over Wastewater Facilities

An amendment to §293.113 is proposed by adding subsection (c) to clarify that §293.113 is applicable whether a district intends on operating facilities itself or intends on conveying facilities to a third party. This proposed rule change is consistent with TWC, §51.150 and §54.2351, as amended by HB 1644, and TWC, §5.103.

§293.201, District Acquisition of Road Utility District Powers

An amendment to §293.201, including placing requirements under existing §293.202 in §293.201, is proposed to clarify application requirements for a district that wants to obtain road utility district powers. Staff have received calls from interested parties in the past two years requesting clarification on application requirements to obtain road utility district powers. This proposed rule change is consistent with TWC, §5.103.

§293.202, Application Requirements for Commission Approval

An amendment to §293.202 is proposed by adding requirements for a district that wants to issue bonds for road projects and would delete the existing language. The commission considers that it has the obligation to review and the authority to approve bonds for road projects when it has the authority to review utility bonds for a district. The primary intent of the proposed changes is to ensure consistency of review whether a district is issuing bonds for utilities or for road projects, and to ensure that bonds issued for roads are financially feasible. To a secondary degree, an engineering review of road projects is necessary to ensure that the road benefits the district and to insure consistency of review since utilities and roads are often included in a single project. This proposed rule change is consistent with TWC, §5.103.

FISCAL NOTE: COSTS TO STATE AND LOCAL GOVERNMENT

Jeff Horvath, Analyst, Strategic Planning and Assessment Section, has determined that, for the first five-year period the proposed amendments are in effect, no significant fiscal implications are anticipated for the agency or any other unit of state or local government.

The proposed rules implement HBs 828, 1208, 1644, 1673, and 1763 and SB 693, 79th Legislature. The proposed rulemaking would revise or establish new requirements concerning the administration of water districts and the commission's supervision over districts' actions under TWC, Chapters 36, 49, 51, 54, and 65. The proposed rules also include staff-initiated changes regarding bond anticipation notes (BANs) and road utility districts (RUDs). These changes are proposed by staff to provide consistency with other rules and to reduce the number of deficient applications, clarify application requirements, and provide consistency in the financial review of district bond issues for roads, as well as provide consistency when a project includes road and utility costs.

The rulemaking applies mainly to general law districts established under TWC, Chapter 49. These districts are political subdivisions with an elected board of directors. There are approximately 1,000 active water districts throughout the State of Texas. The developers in those districts may also be subject to Chapter 293, which governs commission administration and oversight of districts. The rulemaking deals with the administration, management, operation, and authority of water districts, including requirements and/or exemptions from commission review of financial instruments such as bonds.

HB 828

In implementing HB 828, the proposed rulemaking amends §293.41 to provide that districts who issue refunding bonds to governmental entities such as the Texas Water Development Board, the Farmers Home Administration, the United States Department of Agriculture, or the North American Development Bank in order to refund bonds originally issued to that entity, no longer need to obtain commission approval of such a refunding issue.

HB 1541, 78th Legislature, 2003, required TCEQ approval for refunding bonds if the agency did not approve the original bonds. Under the proposed rules, it is anticipated that there will be one to two less bond issues per year reviewed by the Districts Review Team, which is less than 1% of the current workload. Districts are required to submit 0.25% of the bond proceeds and an application fee under §5.701(f) if a bond application is to be approved by TCEQ. There have been approximately two bond issues processed since the passage of HB 1541 generating $1,000 in application fees and an estimated $85,487 for the 0.25% bond proceeds fee. Any future loss of revenue is not expected to be significant.

HB 1208

The proposed rulemaking amends §293.51 to limit the circumstances under which a district may exercise its authority to exercise the power of eminent domain outside the district's boundaries. Before the passage of HB 1208, a municipal utility district was allowed to exercise the power of eminent domain to condemn private property outside of its boundaries. The proposed rules would prohibit a municipal utility district from exercising the power of eminent domain outside the district boundaries to: 1) acquire a site for certain water and recreational facilities; 2) build a trail on real property designated as a homestead; or 3) construct an exclusive easement through a county regional park. In general, the proposed amendments are not anticipated to result in fiscal implications for municipal utility districts, but would depend upon circumstances pertaining to each individual district.

HB 1644

The proposed rules implement HB 1644 by amending §293.44(b) to reflect that a district operating under TWC, Chapter 51 or Chapter 54, may: 1) contract with a third party for the operation and maintenance of district facilities; 2) obtain capacity or acquire facilities from another entity; and 3) issue bonds or other obligations to fund CCN costs. These proposed changes would provide Water Control and Improvement Districts and Municipal Utility Districts the authority to convey facilities to any other retail public utility and otherwise finance costs incurred by another retail public utility for the purpose of making service available in the districts. Authorization for districts to enter into contracts with other districts or to use bonds for any necessary purposes would provide greater flexibility in its use of resources, which could assist in reducing some costs.

HB 1673

In implementing HB 1673, an amendment is proposed to §293.12 to reflect that if a water supply corporation (WSC) applies for conversion to a special utility district (SUD), the commission may only consider the purposes a WSC requests in its resolution in determining whether a hearing is necessary. SUDs are created by converting an existing, non-profit water supply or sewer service corporation into a political subdivision under TWC, Chapter 65. WSCs must apply to the agency for authorization to convert to SUDs. The proposed amendment provides that if a water supply corporation applies for conversion to a special utility district, only those powers specified in its resolution may be considered in any contested hearing called by the state agency, and only those powers specified in that same resolution and application may be included in the agency's order creating the district. In general, these applications do not require contested case hearings under the Texas Administrative Procedure Act because protests have not been filed by customers or neighboring utilities. The proposed change may reduce any future contested case hearings by limiting the scope of a contested case hearing to only those powers specified in the resolution and application, but in general, the proposed changes are not anticipated to result in significant fiscal implications.

HB 1763

The implementation of HB 1763 is reflected in the proposed changes to §§293.20, 293.22, and 293.23. The proposed amendments make conforming changes related to deadlines for adoption of GCD management plans, make conforming clarifications for instances when commission noncompliance review and action is required related to GCD management planning, and make the conforming change to authorize both a person with a legally defined interest in groundwater in a GMA, and a GCD to petition the commission for an inquiry related to joint groundwater management planning. No fiscal implications are anticipated for the TCEQ or any other unit of state or local government due to the implementation of the proposed rules.

SB 693

An amendment to §293.32 is proposed to implement SB 693. The proposed change will reflect additional qualifications required in order to be director of a MUD. No fiscal implications are anticipated for the agency or any other unit of state or local government to implement the proposed change.

Staff Recommended Changes

The proposed rulemaking implements staff recommended changes in §§293.54, 293.201, and 293.202. Part of the proposed changes require that when a bond application is filed and Bond Application Notes are issued, construction and improvements must be far enough along that a bond application can reasonably be processed within established time frames. No additional costs are anticipated for applicants. Agency staff will be able to process applications under the feasibility rules more efficiently.

The proposed rules also clarify application requirements for districts that want to obtain road utility district powers. In response to this change, applicants may have to spend more time providing information, but this change is not expected to result in significant costs.

Lastly, the proposed amendments would require commission review and approval for districts that want to issue bonds for road projects. Districts are required to submit 0.25% of the bond proceeds and an application fee under §5.701(f), Texas Water Code if a bond application is to be approved by TCEQ. At this time, it is estimated that there will be approximately two bond applications each year. No significant increase in agency revenue or workload is anticipated at this time.

PUBLIC BENEFITS AND COSTS

Mr. Horvath also determined that for each year of the first five years the proposed rules are in effect, the public benefit anticipated from the changes seen in the proposed rules will be compliance with state law and increased flexibility for some utilities and water and road utility districts.

No significant fiscal implications are anticipated for businesses or individuals as a result of the proposed rulemaking. The rulemaking applies mainly to general law districts established under TWC, Chapter 49. These districts are political subdivisions with an elected board of directors. There are approximately 1,000 active water districts throughout the State of Texas. The developers in those districts may also be subject to Chapter 293, which governs commission administration and oversight of districts. The rulemaking deals with administration, management, operation, and authority of water districts, including requirements and/or exemptions from commission review of financial instruments such as bonds.

SMALL BUSINESS AND MICRO-BUSINESS ASSESSMENT

No adverse fiscal implications are anticipated for small or micro-businesses as a result of the proposed rulemaking. The proposed rulemaking would revise or establish new requirements concerning the administration of water districts and the commission's supervision over districts' actions under TWC, Chapters 36, 49, 51, 54, and 65. The rulemaking applies mainly to general law districts established under TWC, Chapter 49, which are political subdivisions with an elected board of directors.

LOCAL EMPLOYMENT IMPACT STATEMENT

The commission has reviewed this proposed rulemaking and determined that a local employment impact statement is not required because the proposed rules do not adversely affect a local economy in a material way for the first five years that the proposed rules are in effect.

REGULATORY IMPACT ANALYSIS

The commission has reviewed these proposed amendments to Chapter 293 in light of the regulatory analysis requirements of Texas Government Code, §2001.0225, and determined that this rulemaking project is not a "major environmental rule" as defined in the Texas Administrative Procedure Act and thus is not subject to the other provisions of §2001.0225. A "major environmental rule" is a rule that is specifically intended to protect the environment or reduce risks to human health from environmental exposure, and that may adversely affect in a material way the economy, productivity, competition, jobs, the environment, or the public health and safety of the state or a sector of the state. See Texas Government Code, §2001.0225(g)(3). Here, the proposed amendments do not meet those qualifications where the primary purposes of this rulemaking initiative are to clarify commission rule language in §§293.1 et seq . to conform with the statutory changes made to Texas Water Code, Chapter 5; to clarify rules regarding issuance of Bond Anticipation Notes associated with bond issuance applications and requirements to obtain road utility district powers from the commission; and to create and amend other rules in Chapter 293 to remain consistent with the statutory changes set forth in HBs 828, 1208, 1644, 1673, and 1763 and SB 693 of the 79th Legislature, 2005. As to these six enacted bills, this rulemaking initiative proposes to modify rules within Chapter 293 to accomplish the following: 1) exempting districts from obtaining commission approval to issue refunding bonds to refund bonds issued to and approved by the Farmer's Home Administration, the United States Department of Agriculture, the North American Development Bank, or the Texas Water Development Board; 2) prohibiting a MUD other than one created by Chapter 1029, Acts of the 76th Legislature, 1999, from exercising eminent domain authority outside its boundary if the land is to be used for: a) a water treatment plant, water storage facility, wastewater treatment plant, or wastewater disposal plant; b) a site for a park, swimming pool, or other recreational facility except a trail; c) a site for a trail on real property designated as a homestead as defined by §41.002; or d) an exclusive easement through a county regional park; 3) providing more flexibility to a WCID and MUD regarding contracting and funding, and placing limitations on a municipality that may annex these types of districts; 4) requiring applicants who seek to convert into a SUD to include a resolution specifying the purposes for the proposed conversion, if only specific purposes are desired, and then limiting the scope of the commission's review, including any hearings, of that application to those purposes contained in the resolution; 5) establishing the process for a GWD to adopt a management plan, which requires approval by the Texas Water Development Board, and outlining the procedures for how a GCD or a person with an interest in groundwater in a groundwater management area petitions the commission to inquire whether a GCD's management plan establishes reasonable future desired conditions for the aquifers in the groundwater management area; and 6) placing limitations on when a resigned board member can fill a vacancy on that same district board. While the commission has general jurisdiction over districts and authority to draft rules impacting districts, these changes to the operating processes of districts are not specifically intended to protect the environment or reduce risks to human health from environmental exposure. Therefore, the proposed rulemaking project does not constitute a major environmental rule and is not subject to the regulatory analysis provisions of Texas Government Code, §2001.0225. The commission invites public comment on the draft regulatory impact analysis determination.

TAKINGS IMPACT ASSESSMENT

The commission evaluated these proposed rules and performed an assessment of whether these proposed rules constitute a takings under Texas Government Code, Chapter 2007. The purposes of this proposed district rulemaking action are to keep the commission's rules consistent with the changes in Texas Water Code, Chapters 12, 36, and 49 - 67 made by the legislature in HBs 828, 1208, 1644, 1673, and 1763, and SB 693 of the 79th Legislature, 2005; clarify rules regarding the issuance of bond anticipation notes associated with bond issue applications and requirements to obtain road utility district powers; and amend a district rule to reflect a statutory change in Texas Water Code, Chapter 5. The proposed rules would substantially advance these stated purposes because these changes impact a district's ability to issue refunding bonds, issue bond anticipation notes, obtain road utility district powers, exercise its eminent domain powers, operate with a properly appointed board of directors, convert into a SUD, and enter into a contract for the sale and purchase of capacity in or facilities for water, sewer, drainage, or other services for a municipality, district, other political subdivision, or other utility provider. These proposed rules also substantially advance the creation of a procedure for a GCD to adopt management plans and a review process for the commission thereto.

Promulgation and enforcement of these proposed rules regarding the operations of districts would be neither a statutory nor a constitutional taking of private real property. The proposed regulations do not affect a landowner's rights in private real property, in whole or in part, temporarily or permanently, because this rulemaking does not burden, restrict, or limit the owner's right to property or reduce its value by 25% or more beyond that which would otherwise exist in the absence of the regulations. Updating commission rules to remain consistent with statutory changes to Texas Water Code, Chapter 5, and clarifying rules regarding bond anticipation notes and road utility district powers do not involve private real property rights. The statutory changes set forth in HBs 828, 1208, 1644, 1673, and 1763 and SB 693 of the 79th Legislature, 2005, also do not impact private real property rights. Specifically, private real property rights do not pertain to a district's ability to issue refunding bonds, appoint individuals to the board of directors, convert into a SUD, enter into a contract of sale with a municipality, district, other political subdivision, or other utility provider, or adopt groundwater management plans. In addition, while the issue of eminent domain may pertain to private real property rights, the proposed rule changes implementing HB 1208 do not impact these property rights where the rules reduce the circumstances when a district can exercise this power. Thus, these proposed rules do not impose a burden on private real property, but instead benefit society by providing by improving the process for districts to operate and for the commission to supervise, which should ultimately improve the quality of service that is provided to their customers. Therefore, the proposed amendments do not constitute a taking under Texas Government Code, Chapter 2007.

CONSISTENCY WITH THE COASTAL MANAGEMENT PROGRAM

The commission reviewed the proposed rulemaking and found the proposal is a rulemaking identified in the Coastal Coordination Act Implementation Rules, 31 TAC §505.11(b)(4), concerning rules subject to the Coastal Management Program, and will, therefore, require that goals and policies of the Texas Coastal Management Program (CMP) be considered during the rulemaking process.

The commission reviewed this rulemaking for consistency with the CMP goals and policies in accordance with the regulations of the Coastal Coordination Council and determined that the rulemaking is procedural in nature and will have no substantive effect on commission actions subject to the CMP and is, therefore, consistent with CMP goals and policies.

Written comments on the consistency of this rulemaking may be submitted to the contact person at the address listed under the SUBMITTAL OF COMMENTS section of this preamble.

ANNOUNCEMENT OF HEARING

A public hearing on this proposal will be held in Austin on May 11, 2006, at 10:00 a.m. at the Texas Commission on Environmental Quality in Building B, Room 201A, located at 12100 Park 35 Circle. The hearing will be structured for the receipt of oral or written comments by interested persons. Individuals may present oral statements when called upon in order of registration. There will be no open discussion during the hearing; however, an agency staff member will be available to discuss the proposal 30 minutes prior to the hearing.

Persons who have special communication or other accommodation needs who are planning to attend the hearing should contact Patricia Durón, Office of Legal Services, at (512) 239-6087. Requests should be made as far in advance as possible.

SUBMITTAL OF COMMENTS

Comments may be submitted to Patricia Durón, MC 205, Texas Register Team, Office of Legal Services, Texas Commission on Environmental Quality, P.O. Box 13087, Austin, Texas 78711-3087, or faxed to (512) 239-4808. All comments should reference Rule Project Number 2005-058-293-PR. Comments must be received no later than 5:00 p.m., May 15, 2006. For further information, please contact Randy Nelson, Utilities and Districts Section, at (512) 239-6160.

Subchapter A. GENERAL PROVISIONS