ADOPTED RULES An agency may take final action on a section 30 days after a proposal has been published in the Texas Register. The section becomes effective 20 days after the agency files the correct document with the Texas Register, unless a later date is specified or unless a federal statute or regulation requires implementation of the action on shorter notice. If an agency adopts the section without any changes to the proposed text, only the preamble of the notice and statement of legal authority will be published. If an agency adopts the section with changes to the proposed text, the proposal will be republished with the changes. TITLE 4. AGRICULTURE PART II. Texas Animal Health Commission CHAPTER 35.Brucellosis SUBCHAPTER A.Eradication of Brucellosis in Cattle 4 TAC sec.sec.35.1, 35.2, 35.4 The Texas Animal Health Commission adopts amendments to sec.sec.35.1, 35.2, and 35.4, concerning the redefining of accepted practices and procedure for the use of brucellosis vaccine without changes to the proposed text as published in December 6, 1996, issue of the Texas Register (21 TexReg 11684). The amendments are necessary to accommodate the use of a new and improved vaccine (Strain RB-51) recently recognized as "official" for use in the national cattle brucellosis eradication program. Additionally, the amendments modify a definition, standardize and clarify age ranges and identification requirements for the use of brucellosis vaccine, and eliminate a requirement for vaccination of females under 12 months, in herds adjacent to infected herds. These amendments allow an additional two months to administer official calfhood vaccination and to reduce and eventually eliminate the undesirable and sometimes costly side effects associated with brucellosis vaccination. Previous to the availability of brucellosis RB-51 vaccine in April of 1996, all vaccine was purchased and supplied to the Texas cattle industry by USDA. The federal government is no longer purchasing and supplying vaccine. As a result, veterinary practitioners will pass along that cost to producers at approximately .75 per head. It should be noted when vaccination is required, it is available at no cost to affected producers. The great majority of vaccination in Texas is now optional. The following public comment was received regarding these amendments. The Texas Farm Bureau concurs with the Texas Animal Health Commission in adopting an official vaccine for use in controlling brucellosis in Texas. Moving the age requirements up to ten months should help in avoiding problems at later dates. The amendments are adopted under the Texas Agriculture Code, Texas Civil Statutes, Chapters 161 and 163, which provides the Commission authority to act to eradicate brucellosis. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 27, 1997. TRD-9704247 Terry Beals, DVM Executive Director Texas Animal Health Commission Effective date: April 16, 1997 Proposal publication date: December 6, 1996 For further information, please call: (512) 719-0714 CHAPTER 59.General Practice and Procedures 4 TAC sec.59.2 The Texas Animal Health Commission adopts an amendment to sec.59.2(a) to clearly separate the policy-making responsibilities of the Commission; sec.59.2(b), to clearly separate the management responsibilities of the Executive Director and staff; sec.59.2(d), to establish a method for directing complaints to the Commission; and in sec.59.2(e), to set out how non-English speakers will be provided reasonable access to TAHC programs and services with changes to the proposed text as published in December 6, 1996, issue of the Texas Register (21 TexReg 11687). The amendments are necessary to clarify responsibilities of the Commission, Executive Director, and staff; set up complaint submission procedures, and guarantee reasonable access for non-English speakers. These amendments will clarify confusing terminology. The Management Review Team commented that the word "power" in sec.59.2(b)3) would more appropriately read "authority," and this change was made in the adoption. The amendment is adopted under the Texas Agriculture Code, Texas Civil Statutes, Chapter 161, which provides the Commission with the authority to act as governing body of the agency. sec.59.2.General Responsibilities. (a) Commission. The Texas Animal Health Commission shall have the following powers and duties: (1) The Commission shall formulate the policy objectives for the agency and shall appoint and supervise the agency's Executive Director. The Commission shall approve actions of the Executive Director where such approval is required by law, requested by the Executive Director, or desired by the Commission. (2) The Commission shall propose, adopt, and amend regulations as required by the Government Code, Chapter 2001. (3) The Commission shall determine the amount of the agency' requests for legislative appropriations, and approve the operating budget. (4) The Commission shall supervise the agency's Internal Auditor. (5) When allowed by law, the Commission may delegate any power or duty to a committee of its members or to the agency's Executive Director. The Chair may establish a committee and appoint committee members in an open meeting. The Chair may appoint committee members who are not members of the Commission, but a committee with such members will be advisory only and may not take final action on any issue. (6) The Commission shall issue final orders and assess administrative penalties as outlined in the Government Code, Chapter 2001 and Chapter 32 of this Title. (b) Executive Director. The Executive Director of the Texas Animal Health Commission shall have the following powers and duties: (1) The Executive Director shall administer the programs of the agency and has all powers necessary for such administration, as well as any specific duties assigned or functions delegated by the Commission. The Executive Director shall take those actions necessary to comply with and enforce federal and state laws applicable to the Texas Animal Health Commission. (2) The Executive Director shall adopt personnel policies and employ persons in accordance with personnel policies to perform the work of the agency. The Executive Director may prescribe these employees' duties and compensation, subject to Commission approval of the budget and in accordance with personnel policies. (3) The Executive Director may delegate any authority or duty to agency personnel. (4) The Executive Director shall issue orders and set administrative penalties as allowed by this Title and the Texas Agriculture Code. (c) Extenuating circumstances. In case of unusual circumstances or individual hardship, the executive director may vary or waive any provisions of commission rules provided such waiver is not in conflict with sound epidemiologic principles. Individual hardship will commonly mean unforeseen circumstances that affect the owner or the owner's operation and are beyond the owner's control. Any waiver or variance from agency rule will be documented and presented to the Commission at the next scheduled meeting. (d) Public Comment and Complaints. (1) At least twice a year, the public will be provided an opportunity to appear at Commission meetings to speak on any issue under the Commission's jurisdiction. The Chair may limit the time allotted to a speaker. (2) The public and those regulated by the Commission will be notified of the name, mailing address, and telephone number of the Commission for the purpose of directing complaints to the Commission. The information shall be included on: (A) orders and decisions directed to persons and entities regulated by the agency; (B) at least annually in a publication distributed by the agency. (e) Program and Facility Accessibility. Citizens who do not speak English or who have a physical, mental, or developmental disability will be provided reasonable access to the Commission itself and to the Commission's programs in that: (1) All Commission facilities are in compliance with statutes concerning architectural barriers; (2) If necessary, the agency will arrange for approved personnel status testing to be conducted orally, in sign language, or in a foreign language; (3) Upon prior reasonable notice to the commission, the agency will provide interpreters and/or sign language specialists to assist citizens in presenting their input to the Commission. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 27, 1997. TRD-9704249 Terry Beals, DVM Executive Director Texas Animal Health Commission Effective date: April 16, 1997 Proposal publication date: December 6, 1996 For further information, please call: (512) 719-0714 4 TAC sec.59.7 The Texas Animal Health Commission adopts new sec.59.7, to establish guidelines for determining if private real property rights are affected by government action taken by Texas Animal Health Commission without changes to the proposed text as published in December 6, 1996, issue of the Texas Register (21 TexReg 11688). The amendments are necessary to establish a Categorical Determination that specified agency actions do not affect private real property rights; and to establish guidelines for determining whether agency actions that are not covered by the Categorical Determination impact private real property rights. This new section will determine what agency actions impact private real property rights; and to require an agency analysis of agency actions that do not fall within the Categorical Determination. The following public comment was received regarding this section. The Texas Farm Bureau comments that Protection of Private Property Rights is one of Texas Farm Bureau's priority issues. They questioned whether being included in the Tick Quarantine Zone, these actions could possibly reduce the value of the property substantially because of the need to meet certain criteria before moving livestock. The Commission noted that this type of question would be considered at the time a regulation is considered. The new section is adopted under the Private Real Property Preservation Act, Government Code, Chapter 2007, which establishs the guidelines for governmental action with regard to private real property. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 27, 1997. TRD-9704250 Terry Beals, DVM Executive Director Texas Animal Health Commission Effective date: April 16, 1997 Proposal publication date: December 6, 1996 For further information, please call: (512) 719-0714 TITLE 7. BANKING AND SECURITIES PART II. Texas Department of Banking CHAPTER 15.Corporate Activities SUBCHAPTER G.Charter Amendments and Certain Changes in Outstanding Stock 7 TAC sec.15.121 The Finance Commission of Texas (the commission) adopts new sec.15.121, concerning acquisition by a state bank of its own shares to be held as treasury stock, without changes to the proposed text as published in the February 4, 1997, issue of the Texas Register (22 TexReg 1296). The text will not be republished. The section is adopted as part of new Subchapter G entitled Charter Amendments and Certain Changes in Outstanding Stock. Under Texas Civil Statutes, Article 342-5.102 (Banking Act, sec.5.102), a state bank may acquire its own shares to be held as treasury stock only (i) if necessary to avoid or minimize a loss on a loan or investment previously made in good faith, (ii) with the consent of the banking commissioner, or (iii) as permitted by rules adopted under the Banking Act. Further, treasury stock may not be held by the bank for more than one year except with the prior written approval of the banking commissioner. Historically, treasury stock has been permitted solely for the purpose of satisfying a state bank's obligations under employee benefit plans. National banks were recently granted the authority to acquire and hold treasury stock, see 12 Code of Federal Regulations (CFR), sec.7.2020, through a revised interpretation of the interaction between 12 United States Code (USC), sec.59 and sec.83, and may hold treasury stock indefinitely, so long as the business purpose underlying the original acquisition remains valid. However, under 12 USC, sec.59, a national bank must obtain the approval of the Office of the Comptroller of the Currency (OCC) and two-thirds of the outstanding shares of every class to acquire treasury stock, and the acquisition is accounted for under the par value method (see Accounting Research Bulletin Number 43) to simulate a constructive retirement of the stock. The commission does not believe these additional restrictions are necessary from a safety and soundness perspective and are driven solely by historic peculiarities in the National Bank Act. In determining that a state bank can acquire and hold treasury stock beyond the limitations in the Banking Act, the commission is mindful of considerations of competitive parity with national banks as well as limitations on state bank powers imposed by federal law, see 12 USC, sec.1831a, and 12 CFR, Part 362. The adopted section authorizes a state bank, with the prior approval of the banking commissioner, to acquire and hold treasury stock if the bank has adequate liquidity and equity capital both before and after the acquisition and if the acquisition is not made for speculation or as a means of evading a requirement or obligation under federal or state banking laws. Approval may be sought for an isolated transaction or for a continuing plan of acquisition. A bank must comply with federal and state securities law in consummating the transaction, including a disclosure of certain information regarding recent transactions to the person from whom shares are being acquired, although the commissioner's approval will not constitute a determination that the bank has complied with applicable securities law. In that a sale of shares to the bank by a shareholder in this context is a voluntary transaction, the banking commissioner will make no determination regarding the fairness of the price offered or accepted. Pricing information is required in the application solely for the purpose of evaluating the potential impact on a bank's liquidity and equity capital. The adopted section also permits treasury stock to be held indefinitely so long as regulatory concerns do not arise. Banks may use the par value method or the cost method of accounting for treasury stock, as permitted by generally accepted accounting principles (see Accounting Research Bulletin Number 43), although use of the cost method may avoid the reduction in capital and certified surplus that would be required under the par value method. Finally, banks are reminded that treasury stock may not be voted, directly or indirectly, at any meeting of shareholders, and may not be counted in determining the total number of outstanding shares at any given time. Treasury stock remains issued but not outstanding. No comments were received regarding the proposed new section. The new section is adopted under the Banking Act, sec.1.012(a)(1) and (2), which authorizes the commission to adopt rules necessary or reasonable to implement and clarify the Act and to preserve or protect the safety and soundness of state banks. As required by the Banking Act, sec.1.012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 27, 1997. TRD-9704632 Everette D. Jobe General LCounsel Texas Department of Banking Effective date: April 16, 1997 Proposal publication date: February 4, 1997 For further information, please call: (512) 475-1300 7 TAC sec.15.122 The Finance Commission of Texas (the commission) adopts new sec.15.122, concerning parameters and requirements for approval of a reverse stock split transaction by a state bank, to be administered by the banking commissioner and the department of banking (collectively, the agency), with changes to the proposed text as published in the February 4, 1997, issue of the Texas Register (22 TexReg 1298). The section is adopted as part of new Subchapter G entitled Charter Amendments and Certain Changes in Outstanding Stock. In a reverse stock split, some number of issued shares are amalgamated into a single share by means of an amendment to the articles of association, and a shareholder who holds fewer than the number designated to become one share will, after the revers e split, hold a fraction of a share. A common condition of such a transaction is that a fractional shareholder must accept cash for the fractional share at its fair value. Consequently, the device is favored by business corporations as a means of forcing minority shareholders to sell their shares to the corporation, thereby consolidating control in the hands of the majority shareholders. In some states, such transactions give rise to appraisal rights for dissenting shareholders in order to obtain a judicial determination of fair value, but not in Texas. If appraisal rights apply to a transaction, such remedies are generally exclusive in the absence of fraud, see Texas Business Corporation Act, Article 5.12(G). In the absence of appraisal rights, courts are generally more protective of the affected minority, and will require a business purpose independent of the mere desire to eliminate the minority in order to sanction the corporation's termination of the interest of minority shareholders, see Zauber v. Murray Savings Association, 591 S.W.2d 932, 937-938 (Texas Civil App.- -Dallas 1979), writ ref'd n.r.e. per curiam , 601 S.W.2d 940 (Texas 1980). An unfairly low price or unfair dealing with the minority shareholders tends to indicate that a true corporate purpose is absent from a transaction primarily designed to benefit the majority shareholders. The law thus appears to encourage a fair price and fair dealing for the minority but to discourage interference with the valid business purposes of the corporation itself, viewed as an entity distinct from the majority. Fair price must be determined by assessing all relevant factors to the corporation's economic and financial prospects, including its assets, market value, earnings, future prospects, and other elements that could affect the intrinsic or inherent value of a corporation's stock, exclusive of any element of value arising from the accomplishment or expectation of the proposed transaction. Fair dealing embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and shareholders were obtained. The test for fairness is not that clearly bifurcated between fair dealing and fair price; a fair price as the predominant factor appears to often be sufficient for finding fairness, regardless of some technical or minor failures with regard to fair dealing. A Texas business corporation can engage in a reverse stock split. Texas Business Corporation Act (TBCA), Article 4.01, provides that a corporation can amend its articles of incorporation in any respect provided its articles of incorporation as amended contain only lawful provisions. If a change in shares is to be made, the articles should also contain provisions necessary to effect the change. A reverse stock split constitutes such a change. Subject to the equitable considerations discussed in previous paragraphs, TBCA, Article 2.20, allows the corporation considerable leeway in dealing with fractional shares once the reverse split has been accomplished. A corporation may, for example, pay the fair value of fractional shares in lieu of distributing fractional shares. It may also issue scrip entitling the holder to receive a full share when the holder tenders enough scrip to equal a full share. Scrip may also be issued subject to conditions, including (i) that the scrip will become void if not exchanged for a certificate representing a full share before a specified date; (ii) that the corporation may sell the shares for which the scrip is exchangeable and distribute the proceeds to the holders of the scrip; or (iii) any other conditions the board of directors determines advisable. Texas Civil Statutes, Article 342-3.007(a) (Banking Act, sec.3.007(a)), states that the TBCA applies to state banks to the extent not inconsistent with the Banking Act or with the proper business of a state bank. Under the Banking Act, sec.3.101(a), a state bank may amend its articles of association for any lawful purpose. TBCA, Article 4.01 and Article 2.20, when considered in light of judicially imposed, equitable restrictions, do not appear to be inconsistent with the Banking Act. However, the agency believes that questions of business purpose, fair pricing, and fair dealing must be addressed in the application context. Litigation arising out of perceived unfairness to the minority has the potential to adversely affect the safety and soundness of the bank. In determining that the proper business of a state bank could include the ability to engage in a reverse stock split, the agency is mindful of considerations of competitive parity with national banks as well as limitations on state bank powers imposed by federal law, see 12 United States Code (USC), sec.1831a. The ability of a national bank to engage in a reverse stock split appears to be comparable to general corporate law as discussed in the preceding paragraphs, see Bloomington National Bank v. Telfer, 916 F.2d 1305 (7th Cir. 1990) (12 USC, sec.83, prohibits a reverse stock split designed solely to merge out minority shareholders, notwithstanding availability of 12 USC, sec.59). The Office of the Comptroller of the Currency (OCC) approved many reverse stock splits for the sole purpose of eliminating the minority before the Bloomington National Bank decision and now appears to have a general policy prohibiting reverse stock splits, subject to exceptions. A national bank seeking to implement a reverse stock split must demonstrate to the OCC that the transaction is not for the purpose of forcing minority shareholders to relinquish their interests in the bank. If a national bank purchases fractional shares in connection with a reverse stock split, it is required to do so at the market (not book) value of the stock provided an established and active market in the bank's stock exists or, in the absence of such a market, on a reliable and disinterested determination as to the fair market value of the stock if such stock is available. According to the OCC, if an independent appraisal is required, it should form the exclusive basis for the amount of compensation paid for fractional interests, see 7 CFR, sec.7.2023. The adopted section requires a state bank to submit a detailed application with accompanying documents to the banking commissioner. Under subsection (d), the commissioner will require that the reverse stock split be for valid business purposes of the bank itself, viewed as an entity distinct from its affiliates, and be accomplished through fair dealing with and a fair price to unaffiliated shareholders. The banking commissioner may impose conditions on approval, including a condition that an independent appraisal report be obtained regarding the value of the unaffiliated shareholders' shares, exclusive of any element of value arising from the accomplishment or expectation of the proposed transaction, and without minority discount. Section 15.122(e) exempts from the scope of the rule any reverse stock split that will not result in fractional shares, that can reasonably be characterized as voluntary on the part of all shareholders, as specified in that subsection, or that is exempted by the banking commissioner on written application. The agency received one comment in opposition to adoption of the proposal from the Texas Bankers Association (TBA) and another comment from an individual suggesting minor clarification. TBA believes the agency is attempting to severely micromanage the process and that the section will add anywhere from 20% to 50% or even more to the cost of effecting a reverse stock split. TBA believes the section limits the flexibility that the agency will need to deal with the wide variety of transactions the section will govern, and these situations could be more appropriately addressed with a policy statement. Finally, if the section is adopted, TBA is concerned that subsection (c)(11) could be read to require the bank to pay legal fees and appraisal expenses of unaffiliated shareholders. The agency respectfully disagrees with the assumptions that appear to underlie TBA's comment. First, TBA assumes that the agency would permit a reverse stock split transaction in the absence of a rule. The agency's counterpart federal regulator, the OCC, generally prohibits reverse stock splits in recognition of the severe, adverse consequences that can result from inherent abuse of unaffiliated shareholders, see Bloomington National Bank. The agency has declined to adopt as restrictive a view, instead opting to prospectively address this potential abuse. The OCC effectively pursues the same policy when it permits exceptions to its general prohibition. Second, TBA assumes that the cost of a reverse stock split transaction would be less in the absence of the rule. The agency believes that the section merely collects applicable law and restates it succinctly for the benefit of the industry; a reverse stock split transaction, if properly structured in accordance with existing corporate law, will involve substantially the steps outlined in the proposal. TBA is of the opinion that the section adds requirements to the process that increase the cost. However, the agency disagrees and believes TBA is not considering additional contingent costs that the bank can subsequently incur in addressing the substance of shareholder lawsuits. On balance, the agency believes that the total cost of such a transaction is in fact minimized by compliance with the rule. The commissioner cannot approve a reverse stock split transaction unless a finding is made that the transaction "conforms to law" as required by Banking Act, sec.3.101(d). The law requires fair dealing with and a fair price to the unaffiliated shareholders. Further, a policy statement that restates the intent of the proposal would not reduce the cost of conforming to law. Finally, the agency does not believe subsection (c)(11) can be reasonably interpreted to require a bank to pay legal fees and appraisal expenses of unaffiliated shareholders. The subsection inquires whether the bank intends to pay these fees and expenses as an accommodation to involuntarily terminated shareholders. However, the agency has added the word "voluntary" in an attempt to address TBA's concern. The second commenter inquired whether a reverse stock split that is exempt under the provisions of subsection (e) would be permitted in light of the OCC's general prohibition on reverse stock splits. The agency intends to permit reverse stock splits that meet the requirements of subsection (e) because the potential for abuse is greatly reduced by those requirements. The agency has added a paragraph to subsection (e) to clarify that an exempt stock split is processed as an amendment to the articles of association under the Act, sec.3.101. This commenter also inquired whether a publicly traded price for bank shares could be used as the basis for fair value in lieu of an appraisal. While attributes such as trading volume and frequency and the amount of float could indicate that a publicly quoted price does not necessarily represent fair value for the shares, on balance, the agency agrees that a publicly traded price can negate the need for an appraisal. The agency has therefore modified the concluding sentence of paragraph (d)(1) to indicate that a price determined by an appraisal or by the market price of publicly traded shares will be presumed to be a fair value unless extenuating circumstances to the contrary are specifically noted. The new section is adopted under the Banking Act, sec.1.012(a)(1) and (2), which authorize the commission to adopt rules necessary or reasonable to implement and clarify the Act and to preserve or protect the safety and soundness of state banks. As required by the Banking Act, sec.1.012(b), the commission considered the need to promote a stable banking environment, provide the public with convenient, safe, and competitive banking services, preserve and promote the competitive parity of state banks with national banks and other depository institutions in this state consistent with the safety and soundness of state banks and the state bank system, and allow for economic development within this state. sec.15.122.Amendment of Articles to Effect a Reverse Stock Split. (a) Definitions. The following words and terms when used in this section shall have the following meanings, unless the context clearly indicates otherwise. (1) Act-The Texas Banking Act, Texas Civil Statutes, Articles 342-1.001 et seq. (2) Affiliate-For purposes of this section only, a person that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with a state bank seeking to effect a reverse stock split. A person who is not an affiliate of the state bank at the commencement of its reverse stock split will not be considered an affiliate of the bank prior to the completion of the reverse stock split. (3) Appraisal report-A report, opinion (other than an opinion of counsel), or appraisal from an outside party which is materially related to the reverse stock split, including a report, opinion, or appraisal relating to the consideration or the fairness of the consideration to be offered to shareholders in connection with the reverse stock split or the fairness of such transaction to the state bank or to unaffiliated shareholders. (4) Reverse stock split-An amendment to the articles of association of a state bank that achieves a reduction in the number of issued shares of such bank by requiring exchange of all issued shares in a particular class for a proportionately smaller number of shares, generally with a proportionately increased par or stated value. The equity capital of the state bank remains substantially the same. (5) Share-A unit representing ownership of at least part of the proprietary interests of a state bank, whether or not divided or subdivided by means of classes, series, relative rights, or preferences; and includes a stock or similar security; or a security convertible, with or without consideration, into such a security, or carrying a warrant or right to subscribe to or purchase such a security; or such warrant or right; or another security determined by the banking commissioner to be an equity security pursuant to the Act, sec.1.002(a)(9)(B). (6) Unaffiliated shareholder-A shareholder of a share subject to a reverse stock split who is not an affiliate of the state bank that issued the share. (b) Procedure. Pursuant to the Act, sec.3.101, to effectuate a reverse stock split in compliance with this section, a state bank shall: (1) obtain the approval of its shareholders as required by law; and (2) obtain the approval of the banking commissioner pursuant to subsection (d) of this section, by filing an application setting forth the information and documents required by subsection (c) of this section and the filing fee required by sec.15.2 of this title (relating to Filing Fees and Cost Deposits). (c) Application. A state bank proposing a reverse stock split transaction shall file with the banking commissioner a written application seeking approval of the proposed amendment to its articles of association, stating the results of the vote of shareholders regarding the proposed reverse stock split and stating the percentage of shares of unaffiliated shareholders that were voted in favor of the proposed reverse stock split, or undertaking to supplement the application after conditional approval is obtained to provide shareholder approval information, setting forth or including as exhibits the following: (1) the original and one copy of the proposed amendment to the articles of association, to be processed in the manner required by the Act, sec.3.101(d), and a description of the material terms of the proposed reverse stock split, including terms or arrangements relating to any shareholder of the state bank which are not identical to those relating to other shareholders of the same class; (2) any plan or proposal of the state bank, regarding activities or transactions which are to occur after the reverse stock split which relate to or would result in: (A) an extraordinary corporate transaction, such as a merger, reorganization, or liquidation, involving the state bank or any of its subsidiaries; (B) a sale or transfer of a material amount of assets of the state bank or any of its subsidiaries; (C) a change in the present board of directors or management of the state bank, including a plan or proposal to change the number or term of directors, to fill an existing vacancy on the board or to change a material term of the employment contract of an executive officer; (D) a material change in the present dividend rate or policy or indebtedness or capitalization of the state bank; (E) any other material change in the state bank's corporate structure or business; (3) the corporate purpose or purposes of the state bank for the reverse stock split, and alternative means, if any, considered by the state bank to accomplish such purposes and the reasons for their rejection, and the reason for choosing the structure of a reverse stock split and for undertaking such transaction at this time; (4) a certified resolution of the board of directors of the state bank approving the proposed amendment to the articles of association, accompanied by a statement whether or not the board of directors of the state bank reasonably believes that the reverse stock split is fair or unfair to unaffiliated shareholders that: (A) identifies each director, if any, that dissented to or abstained from voting on the merits of the reverse stock split, and describes, if known to the state bank after making reasonable inquiry, the reasons for each dissent or abstention, and (B) states the number and percentage of disinterested directors that voted in favor of the proposed reverse stock split; (5) whether or not the state bank obtained an appraisal report and, if an appraisal report was obtained, a copy of the appraisal report. To the extent not addressed in the appraisal report, the state bank shall disclose: (A) the identity, qualifications, and method of selection of the outside party that prepared the appraisal report, any material relationship between the outside party or its affiliates and the state bank or its affiliates which existed during the past two years or is mutually understood to be contemplated, and any compensation received or to be received as a result of such relationship; (B) a summary of the performance of such appraisal report, including the procedures followed, the findings and recommendations, the bases for and methods of arriving at such findings and recommendations, instructions received from the state bank, and any limitation imposed by the state bank on the scope of the investigation; and (C) whether such appraisal report will be made available for inspection and copying at the home office of the state bank during its regular business hours by any shareholder of the state bank or such shareholder's representative who has been so designated in writing; (6) with respect to the class of shares to which the reverse stock split relates, the aggregate amount and percentage of shares beneficially owned by any pension, profit sharing, or similar plan of the state bank, and by each officer, director, principal shareholder, and subsidiary of the state bank; (7) with respect to any purchases of such shares made by the state bank since the commencement of the bank's second full fiscal year preceding the date of the application, the amount of such shares purchased, the range of prices paid for such shares, and the average purchase price for each quarterly period of the bank during such period; (8) to the extent known to the state bank after reasonable inquiry, any transaction in the class of shares subject to the proposed reverse stock split that was effected during the past 60 days by the state bank or by an officer, director, principal shareholder, or subsidiary of the state bank, including the identity of the person who effected the transaction, the date of the transaction, the amount of shares involved, the price per share, and where and how the transaction was effected; (9) to the extent known to the state bank after reasonable inquiry, a description and/or a copy of any contract, arrangement, understanding, or relationship (whether or not legally enforceable) in connection with the reverse stock split between the state bank (or an officer, director, principal shareholder, or subsidiary of the state bank) and any person with respect to any shares of the state bank (including a contract, arrangement, understanding, or relationship concerning the transfer or the voting of any such shares, joint ventures, loan, or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies, consents, or authorizations), naming the persons with whom such contracts, arrangements, understandings, or relationships have been entered into and giving the material provisions thereof, including such information for any of such shares that are pledged or otherwise subject to a contingency, the occurrence of which would give another person the power to direct the voting or disposition of such shares, except that disclosure of standard default and similar provisions contained in loan agreements need not be included; (10) to the extent known to the state bank after reasonable inquiry, whether or not any officer, director, principal shareholder, or subsidiary of the state bank has made a recommendation in support of or opposed to the reverse stock split and, if so, the reasons for such recommendation; (11) whether or not appraisal rights are being voluntarily accorded by the state bank to shareholders in connection with the reverse stock split and whether or not any provision has been or will be made to allow unaffiliated shareholders to obtain counsel or appraisal services at the voluntary expense of the state bank and, if so, a detailed description of such appraisal rights or counsel or appraisal services; (12) a reasonably itemized statement of all expenses incurred or estimated to be incurred in connection with the reverse stock split, including filing fees, legal, accounting, and appraisal fees, solicitation expenses, and printing costs, and disclosure of the person who has paid or will be responsible for paying such expenses; (13) the proxy statement furnished to shareholders of the state bank in connection with obtaining shareholder approval for the reverse stock split, or a draft of the proxy statement to be furnished to shareholders in the event approval of the banking commissioner is sought prior to a shareholder vote; and (14) such other information that the banking commissioner requires to be included in the particular application as considered necessary to an informed decision to approve or reject the proposed amendment effectuating a reverse stock split. (d) Standards for approval. (1) The banking commissioner shall process the proposed reverse stock split in accordance with the Act, sec.3.101(d). The banking commissioner shall require that the reverse stock split be for valid business purposes of the bank itself, viewed as an entity distinct from its affiliates, and be accomplished through fair dealing with and a fair price to unaffiliated shareholders. The banking commissioner may impose conditions on approval, including a condition that an independent appraisal report be obtained regarding the value of the unaffiliated shareholders' shares, exclusive of any element of value arising from the accomplishment or expectation of the proposed transaction, and without minority discount. Share value determined by an independent and properly prepared appraisal report that is fully disclosed to bank shareholders or by the market price of publicly traded shares will be presumed to be a fair value unless extenuating circumstances to the contrary are specifically noted. (2) In the event approval of the banking commissioner is obtained prior to approval by shareholders, the state bank shall file a statement with the banking commissioner certifying that any future event or condition upon which the approval of the transaction was conditioned has been satisfied and the date that each such condition was satisfied. Upon receipt of such statement, the banking commissioner shall file the approved amendment to the articles of association in accordance with the Act, sec.3.101(d). (3) An issuer's purchase of its own shares is a transaction subject to the antifraud provisions of federal securities law, see 15 United States Code, sec.78j, 17 Code of Federal Regulations (CFR), sec.240.10b-5, and Spector v. L Q Motor Inns, Inc., 517 F.2d 278 (5th Cir. 1975), cert. denied, 423 U.S. 1055 (1976). Such a transaction is also subject to the antifraud provisions of state securities law, see Texas Civil Statutes, Article 581-33(B). Potential liability of the state bank to the selling shareholder can therefore arise if the state bank withholds or misrepresents material facts that the seller would have considered important in making the decision to sell. Consequently, a state bank must disclose to the shareholders in writing, prior to or simultaneously with the written notice of the shareholders meeting, all material information necessary to an informed decision regarding the proposed reverse stock split. If the reverse stock split involves publicly traded shares and is subject to 15 CFR, sec.240.13e-3, the registration statement required by federal law is considered to satisfy this disclosure obligation. Approval of an application under this section by the banking commissioner does not constitute a determination that t he bank has complied with applicable securities law. (e) Exemptions. (1) This section does not apply to a reverse stock split that: (A) will not result in fractional shares; (B) permits each shareholder to choose to cash in the resulting fractional share by selling it to the state bank or to round up to the next highest whole share by purchasing fractional interests, provided that: (i) the specified sale and purchase prices are equivalent and reasonable; and (ii) no fractional share resulting from the reverse stock split is less than 10% of a full share; (C) is adopted by means of a unanimous written consent of shareholders; or (D) the banking commissioner expressly exempts after written application as not within the purposes of this section. (2) An amendment to the articles of association that implements a reverse stock split exempt from this section is filed and processed in accordance with the Act, sec.3.101. (3) The availability of an exemption from the requirements of this section does not relieve a state bank from its obligation to comply with applicable securities law. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 1, 1997. TRD-9704239 Everette D. Jobe General Counsel Texas Department of Banking Effective date: April 16, 1997 Proposal publication date: February 4, 1997 For further information, please call: (512) 475-1300 CHAPTER 29.Sale of Checks Act 7 TAC sec.29.2 The Finance Commission of Texas (the commission) adopts an amendment to sec.29.2 concerning fees and assessments under the Sale of Checks Act, Texas Civil Statutes, Article 489d (the Act), without changes to the proposed text as published in the February 4, 1997, issue of the Texas Register (22 TexReg 1302). The text will not be republished. Section 29.2 as amended establishes fees and assessments in amounts sufficient for administering the Act and provides for recovery of the full cost of the financial audit from the sale-of-checks licensee. Under the Act, sec.9B(b), financial audits are funded at the sole cost and expense of the licensee. Section 29.2 prior to this amendment was adopted and published in the September 3, 1996, issue of the Texas Register (21 TexReg 8457). The agency at the time rejected numerous comments to the effect that large licensees were being forced to overly subsidize smaller licensees. After further review, the agency believed an adjustment was necessary to diminish the disproportionate impact of the fee structure. In assessing the fiscal impact of the original proposal, ultimately adopted, the agency concluded that the cost of compliance would not increase for a small licensee but would increase approximately $4,600 per year for a large licensee. In assessing the impact of the current amendment, the agency concluded that the average cost of compliance will increase by $500 per year for a small business over the cost under existing sec.29.2, and decrease by $2,000 per year for a large business. An overall increase in aggregate fees was required to fully fund the cost of administering the Act. As originally adopted, sec.29.2 permitted the department to collect an annual financial audit fee from each licensee, with limited exception, in an amount not less than $2,000 or more than $10,000 in a fiscal year, assessed at a rate not greater than $0.018 per $1,000 of money orders, travelers checks and other payment instruments sold and transmission money received by the licensee within Texas. The adopted amendment will permit the department to collect an annual financial audit fee from each licensee, with limited exception, in an amount not less than $2,500 or more than $8,000 in a fiscal year, assessed at a rate not greater than $0.02 per $1,000 of money orders, travelers checks and other payment instruments sold and transmission money received by the licensee within Texas. No comments were received regarding the proposed amendment. The amendment is adopted under Texas Civil Statutes, Article 489d, sec.9E, which authorizes the commission to adopt rules necessary for the enforcement and orderly administration of the Act. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 27, 1997. TRD-9704631 Everette D. Jobe General Counsel Texas Department of Banking Effective date: April 16, 1997 Proposal publication date: February 4, 1997 For further information, please call: (512) 475-1300 TITLE 16. ECONOMIC REGULATION PART I. Railroad Commission of Texas CHAPTER 3.Oil and Gas Division LConservation Rules and Regulations 16 TAC sec.3.38 The Railroad Commission of Texas adopts amendments to sec.3.38 regarding well densities without changes to the proposed text as published in the January 31, 1997, issue of the Texas Register (22 TexReg 1026). The amendment is adopted to relieve an unnecessary regulatory burden and delay by allowing administrative approval of exceptions to sec.3.38 when, after notice and opportunity for a hearing, there is no opposition to the exception. The following groups or individuals filed comments supporting the amendments: Texas Mid-Continent Oil & Gas Association, ARCO Permian, Mueller Engineering Corporation, North Texas Oil & Gas Association, West Central Texas Oil & Gas Association, and the Permian Basin Petroleum Association. No comments opposing the amendments were filed with the Commission. The amendment is adopted pursuant to the Texas Natural Resources Code sec.sec.81.051, 81.052, 85.201-85.202, 86.041, and 86.042 which provide the Railroad Commission of Texas with the authority to adopt rules for the following purposes: to govern and regulate persons and their operations under the jurisdiction of the Railroad Commission; to issue permits for oil and gas wells and to prevent waste and prevent injury to adjoining property. The Texas Natural Resources Code, sec.sec.81.051, 81.052, 85.201-85.202, 86.041, and 86.042 are affected by the amendments. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 1, 1997. TRD-9704371 Paula Mueller Secretary of the Commission Public Utility Commission of Texas Effective date: April 21, 1997 Proposal publication date: January 31, 1997 For further information, please call: (512) 463-7008 PART II. Public Utility Commission of Texas CHAPTER 23.Substantive Rules Telephone 16 TAC sec.23.104 The Public Utility Commission of Texas adopts new Substantive Rule sec.23.104, relating to Telecommunications Pricing, with changes to the proposed text as published in the January 31, 1997, issue of the Texas Register (22 TexReg 1030). The proposed rule is necessary to comply with the Public Utility Regulatory Act of 1995 (PURA95) sec.3.457, which requires the commission to adopt a pricing rule by April 1, 1997. A public hearing on the proposed rule was held at the commission's offices on March 6, 1997, at 10:00 a.m. Representatives from AT&T Communications of the Southwest, Inc. (AT&T), GTE Southwest (GTESW), MCI Telecommunications Corporation (MCI), Office of Public Utility Counsel (OPC), Southwestern Bell Telephone Company (SWBT), Texas Statewide Telephone Cooperative, Inc. (TSTCI), Time Warner Communications (TW Comm) and Tipton Ross Co. attended the hearing. The parties' statements largely reflect their written comments and are summarized herein. The commission received written comments on the proposed rule from: AT&T GTESW; OPC; SWBT; Sprint Communications Co., United Telephone Company of Texas and Central Telephone of Texas (joint comments) (Sprint); Sugar Land Telephone Co. and Texas Alltel (joint comments) (Alltel); Texas Payphone Association (TPA); TSTCI; Texas Telephone Association (TTA); and TW Comm. Cost and benefits of the proposed rule. The public was invited to comment on the costs associated with, and benefits that will be gained from, the proposed rule. AT&T expressed general support for the policy choices and concepts which are expressed in the proposed rule and commented that there is a need for the proposed pricing rule, in addition to the fact that its adoption is statutorily required. AT&T cited opposition to the rule by dominant certified telecommunications utilities (DCTUs) as evidence of the need for a pricing rule. SWBT observed that the costing project and the pricing project were initiated prior to PURA95 when SWBT was still under rate-of-return regulation, and commented that the adoption of the proposed rule would create a replacement for rate-of-return regulation, which is not consistent with the intent of PURA95, Title III, Subtitle J (Competitive Safeguards). SWBT went on to state that the "pricing rule comes at a time that it is no longer needed, if it ever was.... Competition is here." MCI disagreed with SWBT's assertions that the pricing rule is not needed and that competition is here, commenting, "Despite the fact that the Legislature opened the telecommunications marketplace to competition..., it nonetheless saw a need for the commission's pricing rule." TW Comm generally supported adoption of sec.23.104, but expressed concern that the staff and interested parties have focused on the individual examination of cost, imputation and pricing issues and that less attention has been given to forging these elements into a cohesive structure. TPA expressed support for regulations which ensure subsidy-free, nondiscriminatory and cost- based rates in accordance with controlling federal law. Purpose (sec.23.104(a)). SWBT commented that "the Rule is not economically efficient," although its purpose is to foster economic efficiency, because it fails to mention "consumer perceived value," which SWBT argues is the principal "pricing factor in the world of competitive services and products." The commission notes that in its initial comments in this project in 1994, SWBT commented as follows: Principles that should guide the Commission's pricing policies are, first, that prices, aside from the possible pursuit of various public policies, should be subsidy-free and non-predatory. (SWBT comments in Project Number 12771, April 18, 1994, page 2) SWBT went on in its 1994 comments to list other pricing principles, but that list did not include "consumer perceived value." SWBT did note in those comments that "value-of-service pricing, in a strict economic sense, may not be efficient...." (SWBT comments in Project Number 12771, April 18, 1994, page 27). MCI disagreed with SWBT's comment that the rule is not economically efficient, commenting that sec.23.104(a) establishes appropriate purposes for the rule and generally achieves its goal. Application (sec.23.104(b)). SWBT commented that the proposed pricing rule does not distinguish between DCTUs that are subject to rate-of-return regulation and DCTUs electing incentive regulationunder PURA95, Title III, Subtitle H (electing LECs). The commission disagrees with SWBT's comments. In the operational subsections of sec.23.104 explicit provisions are included to clarify and streamline the pricing latitude provided for in PURA95, Title III, Subtitle H. AT&T commented that the effect of the proposed rule is to grant Subtitle H-type pricing flexibility to other DCTUs in violation of PURA95, Title III, Subtitle H and suggested that a new rulemaking project should be opened to address the pricing of services by DCTUs that are not electing local exchange companies (LECs). Alltel commented that it is unclear which companies are afforded the pricing flexibility contained in sec.23.104. Alltel went on to express confusion about the meaning of the term "electing company." Sprint commented that, in order to achieve competitive viability, companies electing regulation under PURA95, Title III, Subtitle I must also have the same degree of pricing flexibility, subject to the caps established when a company elects. The commission agrees with these commenters that the application of the rule to DCTUs other than electing LECs was not clear, and offers the following clarification: The rule contains no references to "electing company." The definition of the term "electing LEC" has been moved to subsection (c), and subsections (e), (f) and (g) have been revised to clearly state that the rule provides pricing flexibility only for a DCTU that has elected incentive regulation under PURA95, Title III, Subtitle H or for a service that has been determined to be subject to significant competitive challenge. The commission will entertain company-specific proposals for pricing flexibility that do not ignore the distinction the legislature created between Subtitles H and I of Title III, PURA95. SWBT commented that sec.23.104 should not apply to electing LECs. AT&T disagreed, commenting that "the concept that the way to encourage the entry of new competitors is to remove all restrictions on the monopoly provider ... is ludicrous." The commission disagrees with SWBT's comment and believes that the rule will assist electing LECs in exercising the pricing flexibility they enjoy under PURA95, Title III, Subtitle H. GTESW commented that the rule should be applicable to all suppliers in the market, not just to DCTUs. SWBT complained that the rule appeared to remove subsidy flows from certain services prior to the establishment of universal service funding, creating a timing mismatch that would be highly discriminatory to the ILECs; SWBT stated that if implemented, these requirements should apply to all telecommunications service providers. MCI disagreed with GTESW and SWBT that the proposed rule should apply to all telecommunications carriers, commenting that application to all carriers would violate PURA95. MCI stated that it would be greatly disadvantaged by both the absence of competitively neutral universal service support and the payment to ILECs of "exorbitant" switched access rates. The commission agrees with MCI that the broad application suggested by GTESW and SWBT is not permitted by PURA95 sec.3.105(c). TSTCI urged that the application of the rule be limited to exclude small DCTUs (those with fewer than 31,000 access lines). TSTCI contended that the rule violated the legislative intent behind PURA95 sec.sec.3.457(c), 3.213(j)(1)(E) and 3.354(d). TSTCI and TTA pointed out that PURA95 permits a small company to adopt the cost studies of a large LEC. PURA95 sec.3.457(c) and sec.3.354(d). MCI commented that the rule should apply to small DCTUs after September 1, 1998, upon the granting of a competitor's certificate in exchanges of such DCTUs. TSTCI pointed out that several of the comments indicated a need to clarify the application of the rule to small DCTUs. The commission is sensitive to the concerns of the small LECs that PURA95 contemplates special regulatory treatment for such companies. The commission believes it is appropriate to apply sec.23.104 to small DCTUs because it can use its discretion in how to apply the rule to a small DCTU in the context of a specific rate case. Such application does not place an obligation on a small DCTU to conduct cost studies pursuant to sec.23.91 of this chapter, relating to long run incremental cost methodology for dominant certified telecommunications utility (DCTU) services. Alltel and TTA commented that the rule does not clearly specify what events will follow a bona fide request for application of sec.23.104 to a company, especially if that company is not an electing LEC. MCI also urged that the pricing rule should specify what would constitute a bona fide request. The commission believes that these issues are beyond the scope of this rulemaking. Definitions (sec.23.104(c)). OPC urged that, for reasons of administrative efficiency, this section should be revised by adding a provision linking sec.23.91 of this chapter and sec.23.104. In support of this revision, OPC notes that PURA95 sec.3.002(7) defines long- run incremental cost (LRIC) consistently with sec.23.91. Also, PURA95 sec.3.457 contemplates that the pricing and cost rules should be linked. The commission agrees that the meaning of LRIC in the rule should be consistent with PURA95 and sec.23.91. In the interest of clarity, a definition of LRIC has been added, as requested by OPC. SWBT argued that there are no standards for stand-alone cost studies, and disagreement about what constitute stand-alone costs will result in unnecessary and protracted proceedings. Nevertheless, SWBT commented that it could agree with the use of stand-alone costs for determining price ceilings "if actual stand-alone costs are used" rather than "some estimate of hypothetical or theoretical costs." SWBT strongly urged against using the Hatfield Cost model, "a hypothetical incremental cost model." The commission notes that for most (and perhaps all) discretionary services offered by SWBT, there is not an actual efficient entrant whose costs can be measured to determine stand-alone costs; therefore the estimation of stand-alone costs is inherently a theoretical exercise. AT&T recommended that the definition of stand-alone costs be revised to refer to the costs incurred by an efficient "firm" rather than an efficient "entrant," commenting that the effect of this revision would be to eliminate start-up costs from the measurement of stand-alone cost. GTESW disagreed that stand-alone costs of an efficient firm would exclude start-up costs, but GTESW did not object to AT&T's suggestion as long as the commission recognizes that efficiency will depend on the product and service mix that is being offered. MCI commented that the definition of stand-alone costs does not, and should not, permit the inclusion of all the elements, e.g., the loop, that are necessary in order to permit use of the service. MCI disagreed with SWBT that reference in the rule to stand-alone cost would impose a bureaucratic burden on DCTUs. The commission believes that stand-alone cost is the appropriate standard for a price ceiling for discretionary services and that the determination of what costs should be included in stand- alone costs and what methods or models are appropriate for measuring such costs should be made in the context of a contested case where evidence can be presented. Sprint and TW Comm requested the addition of language to clarify that stand- alone costs are the costs incurred by a firm that produces no other services or elements. The commission agrees that the additional phrase further clarifies the meaning of the term. The definition is revised to include costs incurred "in providing only that element or service." General principles: Subsidy-free pricing (sec.23.104(d)(1)). TSTCI and OPC objected to the term "subsidy-free" and suggested that "support- free" would be less controversial. The commission believes that "subsidy-free" is both more clear and universally understood. OPC expressed concern about promotion of subsidy-free pricing at the expense of the statutory requirement that monopoly services remain affordable. OPC requested the addition of a sentence to sec.23.104(d)(1)(A), as follows: "This language is not meant to preclude the use of universal service support mechanisms in order to maintain affordable rates." The commission agrees that the addition clarifies the meaning of the general principle, and has made the suggested addition with minor revision. OPC and AT&T commented that pricing above LRIC does not prevent a carrier from putting a competitor in a price squeeze. TW Comm and MCI commented that requiring wholesale services to be priced on the basis of total element long run incremental cost (TELRIC), while retail prices are based on LRIC, sets the stage for a price squeeze. OPC and AT&T urged that the statement "Pricing above LRIC will ensure that prices are not predatory or anticompetitive" should be deleted to prevent an ILEC from claiming that it is immune to complaints of anticompetitive pricing. AT&T pointed out that the Texas Antitrust Act provides that predatory pricing involves other variables besides whether the price charged is above LRIC. According to AT&T, ensuring that prices are not predatory does not ensure that those prices are not anti- competitive. Referring to sec.23.104(d)(1)(B), GTESW and SWBT recommended that, rather than removing the last sentence entirely, the words "or anti-competitive" be deleted and the remainder of the text be retained. GTESW commented that protection against an anticompetitive price squeeze is provided by sec.23.102 of this chapter, relating to imputation, and the mandate of the Federal Communications Commission (FCC) regarding resale of telecommunications services. SWBT commented that it has no opportunity to price services "to itself" that are not available to others at or below the same rates. MCI recommended that the addition of the words "Pricing all services produced by a DCTU above long-run incremental cost (LRIC), including imputation as required pursuant to PUC Substantive Rule 23.102" will remedy OPC's concern that a price squeeze does not violate the rule as drafted. SWBT commented that the "above cost" criterion must apply to all retail and wholesale services and include joint and common costs. The commission agrees with the comments of AT&T and OPC and has deleted the second sentence in subparagraph (d)(1)(B). SWBT disagreed with AT&T's suggestion that access charges should be reduced in this rulemaking, stating that AT&T wants SWBT to provide deep discounts on services that help subsidize below-cost services, and AT&T also wants the rates for the non-discounted services (i.e., access) to be priced on a "subsidy-free" basis. SWBT commented that AT&T cannot have it both ways. SWBT further commented that the proposed rule appears to remove subsidy flows from certain services prior to the establishment of universal service funding. SWBT complained that this timing mismatch is highly discriminatory to the ILECs, and if implemented it should apply to all telecommunications service providers. The commission agrees with SWBT that the issue of subsidy-free pricing is closely linked to universal service funding, and intends to reexamine this issue after it has completed Texas' universal service rulemaking later this year. The commission notes that coordination of subsidy-free pricing and universal service support is addressed in subparagraph (d)(1)(D). As noted previously, the commission believes that application of sec.23.104 to nondominant carriers would violate PURA95 sec.3.051(c). Alltel commented that any adopted Universal Service Fund (USF) rule should clearly and explicitly address transitional support for a DCTU that experiences revenue loss as a result of compliance with this pricing rule. TTA commented that the timing of reductions in tariffed rates must coincide directly with the DCTU's ability to recover its subsidy reduction from the USF. TSTCI commented that it is working with the commission staff to ensure that the state universal service mechanisms and access charge reform are implemented simultaneously. GTESW expressed support for the comments of TSTCI and Alltel, commenting that it is important that price reform, universal service reform and access charge reform be timed so that no one reform disrupts the overall process. In response to the timing concern expressed by SWBT, Alltel and TTA, subparagraph (d)(1)(D) has been revised to state that the transition to subsidy-free pricing should be undertaken in stages. Provisions of the Universal Service Fund are beyond the scope of this rulemaking and are being addressed in Project Number 14929. General principles: Customer-specific pricing (sec.23.104(d)(2)). AT&T and MCI commented that customer-specific prices should always be set above LRIC. The commission acknowledges the acceptance of LRIC as a pricing standard in both PURA95 and the substantive rules, but believes there may be cases where short- term pricing based on short-run incremental cost may serve the public interest. The appropriateness of such pricing should be determined after an evidentiary hearing and based on the facts of a specific case. SWBT commented that the goal of maintaining affordable rates for basic network service should be accomplished through market forces and not through regulation. AT&T disagreed with SWBT's suggestion that the rule should allow the marketplace to determine pricing for DCTU services. MCI commented that any regulatory burden claimed by SWBT in this regard is mandated by PURA95, as the proposed rule generally mirrors the requirements of the law. The commission agrees conceptually with SWBT, but observes that the cost structure of basic network service may not permit market forces to drive prices down to affordable levels for all customers throughout the state. General principles: Inefficient or uneconomic costs (sec.23.104(d)(3)). GTESW, SWBT, and TSTCI commented that sec.23.104(d)(3) should not attempt to limit a DCTU's ability to fully recover all its costs. GTESW stated that the rule violates PURA95 sec.3.457(b)(3) and results in the taking of property without just compensation, which is in violation of the Fifth and Fourteenth Amendments of the United States Constitution and the Texas Constitution, Article I, sec.17. In addition, according to GTESW, the proposed rule is contrary to the Supreme Court's decision in Brooks-Scanlon Co. v. Railroad Commission of Louisiana, 251 U.S. 396 (1920), which established the proposition that the commission may not force a regulated entity to provide a regulated service below cost without providing compensation. OPC countered that PURA95 sec.3.457(b)(3) does not support GTESW's point; that subsection requires the commission to determine "appropriate costs" for purposes of pricing, but does not mandate the use of historical costs, as GTESW appears to suggest. Furthermore, OPC argued that GTESW inappropriately relied on Brooks-Scanlon. OPC went on to argue that GTESW has not demonstrated that an unconstitutional taking would occur under traditional takings analysis; a forward-looking economic cost methodology satisfies the Constitution's just compensation standard. TSTCI commented that the provision conflicts with PURA95 sec.3.206 on invested capital, which mandates that rates be set to recover actual book values. OPC responded that TSTCI's reliance on PURA95 sec.3.206 is misplaced as a limitation on setting rates pursuant to a sec.3.457 price rule; even if sec.3.206 were applicable it does not require that rates be set to recover book values. OPC further commented that the commission is still bound to apply a "used and useful" test before it recognizes historical costs (PURA95 sec.3.203(a)). OPC concluded that the commission is entirely within its authority in recognizing that it has no obligation to permit the recovery of inefficient or uneconomic costs. SWBT commented that the meaning of "inefficient or uneconomic costs" is absent from the rule and predicted that this provision will likely be cited as authority for arbitrary adjustments to SWBT's costs on the basis that the costs failed to meet some non-defined criteria for prudent investment. SWBT saw this provision as an indirect attempt to continue with out-dated rate case principles to disallow investment and expenses and set SWBT's rates. SWBT stated that the commission cannot now ignore SWBT's years of investments, which were made in compliance with the commission's rules and requirements, to now promote new commission policies. OPC thought this provision of the rule was not worded strongly enough, commenting that it is unclear whether it would be sufficient to prevent a DCTU from abusing the pricing flexibility process to recover inefficient or uneconomic costs. OPC suggested that the provision be strengthened to prevent a DCTU from recovering any of its inefficient or uneconomic costs through changing the price for a basic, discretionary, or competitive service. AT&T commented that "there simply is no constitutional right to earn a guaranteed level of revenues or profits.... While the ILECs' desire to obtain revenue neutrality is understandable, it is not sound policy (and) not required by law.... There is nothing ... in PURA95 that indicates a legislative intent to replace any revenue lost by an ILEC due to the Commission's implementation of the competitive safeguards contained in Subtitle J.... Unnecessary and imprudent expenses, even if actually incurred and recorded on the utility's books, may be disregarded by the Commission in setting the utility's rates and its overall revenue." MCI commented that the pricing rule appropriately eliminates inefficient and uneconomic costs from service prices. The commission believes that paragraph (d)(3) is consistent with PURA95 and allows DCTUs to recover their reasonable costs. The commission disagrees with OPC that pricing flexibility for electing LECs should be limited in order to forbid the recovery of uneconomic costs. Such a limitation would violate the provisions of PURA95, Title III, Subtitle H. Compliance tariffs (General comments). AT&T and MCI commented that the rule fails to include a timetable for submission of ILEC tariffs implementing the new pricing requirements. OPC responded that it is not clear how the dates proposed by AT&T coordinate with implementation of universal service and access reform. MCI recommended that, alternatively, the rule should require that SWBT and GTESW provide subsidy-free pricing for all services, including switched access, four years after the date of election to PURA95, Title III, Subtitle H. The commission notes that the application of the rule to an electing LEC is clearly spelled out. For other DCTUs, the pricing principles enunciated in sec.23.104(d) may be applied by the commission in the context of a general rate case. Subsections (e), (f) and (g) have been revised to clarify the operation of the rule with respect to electing LECs and other DCTUs. Access charges (General comments). AT&T commented that the rule fails to require immediate reductions in access rates which, AT&T asserted, "are grossly in excess of the stand-alone cost standard proposed in sec.23.104(c)(2)." SWBT disagreed with this assertion, commenting that SWBT's costs of providing switched access would be greatly increased if SWBT were a one-service company. AT&T commented that in adopting amendments to sec.23.23 of this chapter, relating to rate design, the commission in 1995 declined to link elimination of the residual interconnection charge (RIC) for access transport services to adoption of the pricing rule. GTESW responded that AT&T appears to be opposed to subsidy-free pricing and that AT&T's suggestion that the commission use this rulemaking process as an opportunity to reduce switched access is not allowable under law. GTESW stated that in the event the commission does want to address access charge reductions in the present rulemaking, it has the opportunity to tie such efforts into the creation/modification of a universal service funding mechanism. SWBT and GTESW commented that access rate reductions are not an issue that can be addressed in this rulemaking; pursuant to PURA95, sec.3.352(d), the commission is prohibited from forcing reductions to SWBT's access service rates until a cap on basic services expires. The commission notes that sec.23.104(d) calls for a gradual transition to subsidy-free pricing in coordination with reform of universal service support and pricing of access services. Furthermore, the commission notes that the deferral of access charge pricing to other proceedings is consistent with its 1995 decision in Project Number 13604 to not link elimination of the RIC to adoption of the pricing rule. Classification of Services (General comments applicable to sec.23.104(e)-(g)). SWBT commented that paragraphs (e)(1), (f)(1) and (g)(1) should be eliminated or, at a minimum, replaced with a reference to PURA95, Title III, Subtitle H to avoid possible discrepancies. MCI disagreed with this suggestion, commenting that such a revision would make the rule less user-friendly by requiring reference to PURA95. The commission appreciates SWBT's concern that movement of a service from one basket to another in Subtitle H may call for revision of sec.23.104. However, the rule states that the listing of services in each group is "initial," and clearly indicates in subsection (h) that a service may be reclassified from one group to another. OPC asked the commission to modify the phrase "interconnection to competitive providers" to read "interconnection offered to competitive providers." The commission notes that the language of the rule is consistent with Subtitle H of PURA95, Title III, and declines to make the requested change. TW Comm pointed out that the rule does not address the pricing of 1+ interLATA toll service. The commission notes that this service is not a tariffed service of any DCTU within its jurisdiction. Sprint commented that a stand-alone cost ceiling for 1+ intraLATA toll service is not appropriate since competition in the intraLATA market is significant and growing rapidly. Sprint urged that, upon the implementation of intraLATA dialing parity, this service should be reclassified as competitive. The commission notes that subsection 23.104(h) provides for reclassification of a service under such circumstances. The commission has revised subsection (g) to incorporate references to sec.23.27 of this chapter, relating to rate-setting flexibility for services subject to significant competitive challenge, which also provides pricing flexibility for competitive services. The revision, while having no substantive effect on the rule, clarifies the relationship between sec.23.27 and sec.23.104 and states that a commission determination that a service is competitive may be limited to the DCTU requesting the determination. Pricing flexibility for electing LECs (General comments applicable to sec.23.104(f)). AT&T and MCI commented that a DCTU should be required to provide at least 30 days notice before changing its prices for discretionary services. OPC recommended that the provisions in this subsection be modified slightly to address the need for notice, noting that the rule says nothing about whether prior notice is required, whether notice after-the-fact would be sufficient, or about the ability of an affected party to suspend application of the proposed change in the event a question is raised regarding the reasonableness of the proposal. SWBT objected to the suggestion that advance notice of a price change should be required, commenting that there is no statutory support for such a requirement and the effect would be anticompetitive. GTESW commented that such an advance notice requirement would give a competitor "at least a month-long marketing advantage in which it can potentially take advantage by delaying the response or even initiatives of the incumbent LECs subject to such a rule while it is not." The commission notes that rate revisions by electing LECs are reported in the PUC Update and recorded in the companies' tariffs. If an affected party believes a rate revision violates Title III, Subtitle H or other provisions of PURA95, a complaint may be filed and, as GTESW commented, "it can make its case to the commission for review of the facts." Basic network services (sec.23.104(e)). AT&T and MCI commented that PURA95, Title III, Subtitle H does not permit an electing LEC to offer promotional rates for a Basket I service. OPC commented that electing LECs have authority to conduct Basket I price promotions, but this authority should extend only to rate reductions without geographic deaveraging. AT&T and MCI urged that subsection (e) be clarified to state that the only pricing flexibility available for basic network services is that specified in paragraph (e)(2). The commission agrees with AT&T and MCI and, as discussed below, has added the requested language. MCI asserted that promotional rates are not permanent decreases and that PURA95 does not permit an electing LEC to return a Basket I rate to its previous level after a promotion. AT&T and MCI argued that since PURA95 authorizes pricing flexibility and promotional pricing for discretionary and competitive services but not for basic network services, electing LECs have no authority to offer promotional rates or engage in any of the other forms of pricing flexibility for basic network services that are available for discretionary and competitive services. The commission will address these issues in Docket Number 16542, Application of SWBT for a New Intrastate Flexibility Plan Tariff. AT&T, TW Comm, MCI, OPC and SWBT commented that the rule fails to specify the "appropriate cost of service" or price floor for basic network services. AT&T and MCI urged that the appropriate cost floor should be determined by LRIC cost studies. OPC submitted that its proposal to require a joint-and-common-costs allocator helps address this problem. AT&T commented that "for those companies that have previously elected into Subtitle H regulation (SWBT and GTE), the statute requires the use of LRIC as the price floor for all services. The question of a different 'appropriate' price floor arises only if additional companies elect into Subtitle H regulation or the Commission attempts to apply Subtitle H pricing flexibility to non- Subtitle H companies." TW Comm commented that because 1+ intraLATA toll service is a basic network service, it is exempt from the LRIC floor pricing requirement. OPC stated that provisions contained in this subsection are not needed at this time because the DCTU only has flexibility to lower rates and has no flexibility under sec.23.104(e) to raise rates. The commission has revised paragraph (e)(2) to clarify the price floor applicable to electing LECs, as well as to clarify that electing LECs that may not be required to perform LRIC studies nevertheless have price floors for their basic local telecommunications services. The commission agrees with AT&T that the "appropriate cost" price floor would apply only to an electing LEC that is not required to perform LRIC studies. As AT&T pointed out, no company is in this category today. TW Comm commented on an apparent inconsistent use of the terms "basic network service" and "basic local telecommunications service" in paragraph (e)(2). The commission notes that the term "basic local telecommunications service" is defined in PURA95 sec.3.002(1). "Basic network services" are enumerated in paragraph (e)(1) of the present rule, and include "basic local telecommunications service." Discretionary services (sec.23.104(f)). AT&T and MCI commented that the price ceiling for discretionary services should not be raised until the DCTU implements subsidy-free pricing for all its services. Sprint does not believe price ceilings should be dictated in a competitive market. OPC disagreed, commenting that the price ceilings contemplated in the rule continue to have relevance for discretionary services; if competitive pressures make the ceilings irrelevant, then the proper course of action is to seek to have those services reclassified as competitive services. Sprint pointed out that prices in excess of a customer's willingness to pay will simply create market opportunity for new entrants which, in turn, will put additional downward pressure on rates. Sprint urged a conditional sunset on the use of price ceilings, which will become increasingly unnecessary as new entrants gain market share. The commission believes that the establishment of price ceilings for discretionary services should not be arbitrarily limited in time. The commission further believes that as competition for discretionary services develops, DCTUs should petition the commission to have such services reclassified as competitive services, which are not subject to price ceilings. SWBT and Sprint commented that establishment of stand-alone cost as a price ceiling places on DCTUs the burden of producing stand-alone cost studies for all discretionary services, leading to unnecessary expenses which must ultimately be recovered from customers. SWBT commented that under most conditions, the stand-alone cost test cannot improve upon the incremental cost test in determining whether cross-subsidies exist. According to SWBT, the stand-alone costs of such services are likely quite high, and therefore any reasonable price will pass the test. Rather than attempting to identify stand-alone costs as the price ceiling, SWBT proposed that any requested ceiling price that is no more than 50% above the initial price be presumed reasonable. AT&T supported stand-alone cost as the appropriate price ceiling for discretionary services, commenting that there is a need for the commission, acting as substitute for competition, to establish a price ceiling for these services. AT&T commented that the stand-alone standard performed this function and that at a price above stand-alone cost, market entry would put downward pressure on the price of a service. For this reason, a DCTU would be unable, in the absence of barriers to entry, to sustain a price above the stand- alone cost of a service. TW Comm commented that there is no reason a DCTU would request a price floor higher than LRIC except to establish an apparent regulatory barrier to price reductions. TW Comm went on to speculate that the only reason a DCTU would request a price ceiling less than its stand-alone cost would be to restrict the commission's subsequent ability to raise the ceiling by reducing the base to which the 10% limit (prescribed in subsection (f)(4)) would apply. The commission does not concur with this speculation on TW Comm's part. The rule grants an electing LEC the opportunity to request a price floor and ceiling within the allowed limits of pricing flexibility in order to streamline the process of administering pricing flexibility permitted by PURA95, Title III, Subtitle H. Discretionary and competitive services (General comments applicable to 23.104(f)&(g)). OPC commented that sec.23.104 should be revised to recognize that Basket II and III services continue to have an obligation to provide support to the DCTU's joint and common costs; even under the pricing flexibility provided by subsections (f) and (g) for discretionary and competitive services, respectively, the floor may not be set any lower than the sum of LRIC and a reasonable allocation of joint and common costs. SWBT objected to this suggestion, characterizing it as "a move towards formula-based pricing for ILEC services." GTESW applauded OPC's recognition that an efficient DCTU has substantial common and shared costs, but commented that it is efficient "to recover them in such a way which as close as possible resembles the first best pricing solution of price equal to marginal cost." GTESW went on to comment that "the price floor for a particular rate element is indeed LRIC, not LRIC plus an appropriate share of joint and common costs." MCI advocated LRIC as a price floor. Alltel commented that LRIC is correctly identified in proposed sec.23.104 as being used for nothing more than setting price floors to prevent cross- subsidization and predatory prices. The commission agrees with GTESW, MCI and Alltel: PURA95, Title III, Subtitle H clearly establishes LRIC as the price floor for both competitive and discretionary services. LRIC is defined in sec.23.91 of this chapter, and does not include an allocation of joint and common costs. Packaging of services (sec.23.104(e)(2)&(g)(4)). AT&T and MCI commented that PURA95, Title III, Subtitle H does not permit packaging services from different baskets in a single offering, and that it prohibits an electing LEC from promoting a Basket I service. GTESW, SWBT and Sprint all objected to restrictions on the packaging of services in different groups. GTESW commented that such restrictions would prohibit carriers from meeting customers' demand and must be removed. GTESW acknowledged that the packaging of services makes determination of cross-subsidization more difficult; however, prohibition of such packaging is anticompetitive and not required. SWBT argued that in Dockets Number 14650, 14665 and 14666, regarding applications by various Metropolitan Fiber Systems subsidiaries (the MFS cases), the commission took the position that "if state law does not prohibit it, then it must be permitted." AT&T disagreed with SWBT's characterization of the MFS cases, arguing that the MFS cases established that the commission will attempt to determine legislative intent from the words of the statute and will attempt to harmonize the various statutory provisions in order to arrive at the proper statutory construction: Application of "the statutory construction principles utilized by the Commission in Docket Number 14665 establishes that promotional pricing for Basket I services and the cross- basket packaging of services proposed by the ILECs is prohibited by PURA95." AT&T and MCI argued that authorizing promotional rates for a combination of services from different baskets would nullify the pricing distinctions delineated in the three basket provisions of PURA95, Title III, Subtitle H. AT&T argued that "PURA95 denies an electing company any authority to offer promotional rates for Basket I services and prohibits a combination of services from the various Baskets." AT&T argued that "By trying to group services from different baskets into one package of services, the ILECs are trying to avoid the explicit restrictions on pricing flexibility applicable under PURA95." MCI commented that PURA95 establishes very different pricing and notice standards for the three baskets, and it would be difficult, perhaps impossible, to ensure compliance with price floors and ceilings if combinations were permitted. Citing Cobra Oil & Gas Corp. v. Sadler, 447 S.W.2d 887, 892 (Tex. 1968), AT&T argued, "Since the Legislature has provided a method for changing the level of pricing flexibility applicable to a service (by changing the basket designation of the service), that is the only method by which such changes can be made." SWBT commented that the commission's concern that there will be cross-subsidies between the various service baskets is unfounded. GTESW proposed adoption of a two-pronged rule that allows for packaging of basic services but that also (1) requires all services in the package to be available on a stand-alone basis, and (2) requires all services to be priced above LRIC to ensure subsidy-free pricing. SWBT and Sprint both commented that if the price of a package of services is at least as great as the sum of the relevant costs, then there is no concern of cross- subsidy. GTESW pointed out that it is possible that the price of the package of services can be less than the sum of the individual stand- alone prices with no cross-subsidization taking place. The commission disagrees with SWBT and Sprint. If competitive and monopoly (basic network or discretionary) services are packaged together and offered at a single price, cross subsidization of competitive services with revenues from monopoly ratepayers is possible. To protect against such anticompetitive and possibly predatory pricing of competitive services, the rule has been revised to require that a package of services that includes a competitive service must be priced to recover the LRIC of the competitive service plus the tariffed rates of the other services in the package. The commission believes that a rate for a package of services that does not meet this test would unlawfully result in pricing of a competitive service below LRIC. PURA95 sec.3.356 establishes LRIC as the price floor for a competitive service provided by an electing LEC. Sprint characterized the rule's prohibition of the packaging of basic network services as unnecessary and stifling to competition. Provided that the DCTUs satisfy the appropriate LRIC costing requirements, they should have the flexibility to package services creatively to meet "market demands." SWBT objected to the restriction, pointing out that "there will be no similar restriction on the LSPs." SWBT pointed out that new competitors are protected by the ability to file a complaint or a lawsuit. Also, they may purchase for resale the same packages of retail services at a discount. The commission notes that application of the pricing rule to nondominant carriers is prohibited by PURA95, as discussed above. Sprint commented that the requirement that a package of services affected by a price change recover its LRIC within one year of the price change is not reasonable, and urged that an electing LEC be allowed to recover costs over a longer period which corresponds to product life cycle. TW Comm argues that the one-year time frame in sec.23.104(f)(5) is too long. Allowing SWBT and GTESW to lower rates beyond LRIC for up to one year, TW Comm argues, would sanction predatory pricing and in some cases create a barrier to entry. SWBT disagrees with TW Comm's assertion that establishment of a one-year recovery period allows an electing LEC to price a package of services below LRIC. The commission notes that the one-year recovery period is intended to serve as a test for the LRIC standard, not an exception to it. Furthermore, it is the commission's experience with promotions under sec.23.28 of this chapter, relating to promotional rates for LEC services, which also contains a one-year break-even requirement, that the one-year period is reasonable and affords DCTUs a reasonable opportunity to promote their services while protecting against cross-subsidization from other services. After consideration of all these comments, the commission has determined that packaging of competitive services with discretionary services by an electing LEC is permitted by PURA95, Title III, Subtitle H so long as the commission determines that each competitive service is priced above its LRIC. Such a determination requires that the package of services recover the LRIC of the competitive service plus the tariffed rates of the non-competitive services in the basket. This restriction has been added to subsection (g) in lieu of the broad prohibition against packaging of competitive services with services from other groups. This rule as adopted prohibits packaging of basic network services with services from other groups. PURA95 sec.3.353(b) states that the price of a basic network service may not be reduced below its LRIC. It is clear from the plain language of this subsection of PURA95 that the determination of whether a service is priced above its LRIC must be made on a service-by-service basis. The commission has determined that the conditions, if any, under which basic network services may be packaged with discretionary or competitive services should be determined after implementation of the commission's forthcoming universal service rule. Application of PURA95 sec.3.2571 to electing LECs (General comments). AT&T pointed out that the commission, in its Order on Certified Issues in Docket Number 16542, did not address the question of whether sec.3.2571 applies to electing LECs. Furthermore, AT&T argued that the present rulemaking is not the appropriate proceeding to address sec.3.2571. The commission agrees with AT&T that this issue is beyond the scope of the present rulemaking. Unreasonably preferential, prejudicial, or discriminatory rates (sec.23.104(g)(5)). AT&T and MCI asserted that part of the commission's obligation to ensure that prices not be "unreasonably preferential, prejudicial, or discriminatory" is a DCTU's obligation to offer services for resale at wholesale rates. AT&T urged the commission to revise this subsection to specifically allow resale and to provide that the wholesale rate for resale shall be determined based upon each discounted price available. The commission notes that because resale is required by federal law such an addition to sec.23.104 is neither necessary nor appropriate. OPC commented that PURA95 requires that no form of pricing flexibility may be preferential, prejudicial, or discriminatory. Thus, it is necessary to have a procedure for review of price changes. The commission notes that it does review all rate changes by electing LECs for compliance with PURA95. Affected parties who object to a price change have an opportunity to file a complaint. Services vested in the public interest (Proposed sec.23.104(h), deleted upon adoption). Alltel and GTESW commented that adoption of this subsection should be tied to explicit cost recovery from a support fund. GTESW commented that this subsection "essentially nullifies all other sections of the pricing rule." TW Comm and SWBT objected to the subsection, commenting that it provides no guidance as to what services may be included. OPC responded that "vested in the public interest" is popularly understood to mean that below-LRIC pricing is justifiable due to offsetting, non-quantifiable benefits that flow from the promotion of the service. SWBT commented that the subsection is not clear, is vague and non-specific, and inappropriate. At the public hearing, several parties commented that there was not a clear purpose for the designation of a service as "vested in the public interest." MCI commented that the rule should contain a procedure for identifying such services and should list the standards to be used when such services should be priced below LRIC. After consideration of these remarks, the commission has deleted from the rule the subsection on "services vested in the public interest." Reclassification of a service (Proposed sec.23.104(i), Adopted sec.23.104(h)). Alltel, SWBT and MCI commented that there is no provision in PURA95 to move a service to Basket I from Baskets II or III, or to Basket II from Basket III. Thus, they conclude the commission does not have this discretion. OPC disagreed with these comments, pointing out that even Alltel acknowledges the possibility of reclassifying a service to a regulated basket. OPC went on to comment that PURA95 provides the commission with the authority to transfer services in either direction. Although the commission agrees with OPC that PURA95 does not prohibit it, the commission believes that reclassification of a service from competitive to discretionary or basic network, or from discretionary to basic network, is not likely, and need not be addressed by the rule. Therefore, the rule is revised to address only those transfers provided for in PURA95 sec.3.357(a). GTESW commented that the rule as proposed will require a DCTU to be in a position to obtain information from rival carriers in order to achieve reclassification, and that such competitors will not willingly provide such information. GTESW suggested modifying the rule to clarify the information- gathering process so that if an estimate of market share is challenged by a rival, then such rival must be prepared to furnish its information to the commission. GTESW urged that information on the effect of a transfer on subscribers of the service should be considered proprietary and confidential by the commission. MCI disagreed with GTESW's suggested revisions, commenting that the four elements to which GTESW suggested changes must be included in the petition that initiates the reclassification process. The commission believes that these issues raised by GTESW are beyond the scope of the present rulemaking; they may be addressed in Project Number 17068, relating to Basket I, II and III Service Transfers. Definition of competitive service (Proposed sec.23.104(i)(2), Adopted sec.23.104(h)(2)). GTESW and Sprint commented that the relevant market as specified in the rule is too large. GTESW proposed that the words "in the state" should be replaced by "in the relevant market area." Sprint commented that the 60% test should be applied at the census block group level rather than on a statewide basis. In response to these comments, the commission has deleted the phrase "in the state" from paragraph (h)(2) of the rule. GTESW commented that it is not clear what will be considered "sufficient to discipline the price." It was also unclear to GTESW what is meant by a service being "available from a competitor." GTESW urged removal of the qualification that a competitor must be "other than a pure reseller"; PURA95 recognizes resale as a viable form of competition. SWBT commented that the use of "other than resellers" as competitors will create a tremendous incentive for LSPs to defer any form of facilities-based competition. GTESW and SWBT commented that the 60% requirement is too high. SWBT commented that the standard is impossible to meet, in part because competitors choose to limit the number of access lines they serve to only lucrative, high-revenue customers. MCI disagreed, commenting that "use of the 60% rebuttable standard of market power sufficient to discipline prices is appropriate.... The proposed rule uses language that is generally the anti-trust definition of market power." The commission notes that the 60% standard is a rebuttable presumption, not a requirement of the rule. The application of the standard to a service and the size of the relevant market may be reviewed in the context of a contested case based on evidence presented in the case. The commission agrees with MCI and believes the 60% standard is reasonable and workable. Consistency with Federal Payphone regulation (General comments). TPA pointed out that under sec.276(c) of the Federal Telecommunications Act of 1996, any commission rule inconsistent with the FCC's Order in CC Docket Number 96-128 (Federal Payphone Order) is preempted. TPA went on to say that "specific consideration of the effect of the FCC's Order on the proposed provisions is required prior to adoption." TPA did not provide any specific observations about the rule, nor did it argue that any particular provision of the proposed rule is inconsistent with the Federal Payphone Order. OPC disagreed with TPA, noting that the FCC's actions are subject to judicial review and are now the subject of a consolidated appeal before the United States Court of Appeal for the District of Columbia Circuit. OPC recommended that no changes be made to the pricing rule based on the Federal Payphone Order until after a decision has been reached in the District of Columbia Circuit. The commission agrees that this rule, like all commission orders, must be consistent with federal authority, but does not believe the Federal Payphone Order must be explicitly addressed in the pricing rule. The commission has reviewed this rule and finds it to be consistent with the provisions of the Federal Payphone Order. The new section is adopted under the Public Utility Regulatory Act of 1995, Texas Revised Civil Statutes Annotated Article 1146c-O, (Vernon Supplement 1997), sec.1.101, which provide the Public Utility Commission of Texas with the authority to make and enforce rules reasonably required in the exercise of its powers and jurisdiction, including rules of practice and procedure; and specifically sec.3.457, which requires the commission to adopt a pricing rule by April 1, 1997. Cross Index to Statutes: Public Utility Regulatory Act of 1995, Texas Revised Civil Statutes Annotated Article 1146c-O, sec.sec.1.101, 3.457 (Vernon Supplement 1997) (PURA95). sec.23.104.Telecommunications Pricing. (a) Purpose. The purpose of this section is to establish principles to foster economic efficiency and the public welfare in the pricing of telecommunications services. (b) Application. Except as otherwise provided herein, the provisions of this section shall apply to dominant certified telecommunications utilities (DCTUs). Unless the DCTU has elected to be regulated under the terms of the Public Utility Regulatory Act of 1995 (PURA95), Title III, Subtitle H, the provisions of this section may be applied to a DCTU serving 31,000 or more but fewer than one million access lines only on a bona fide request by a holder of a Certificate of Operating Authority or Service Provider Certificate of Operating Authority. (c) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (1) Electing LEC- A DCTU electing to be regulated under the terms of PURA95, Title III, Subtitle H may be referred to as an electing LEC. (2) Long-run incremental cost (LRIC)-Long-run incremental cost or LRIC has the meaning assigned by the commission in sec.23.91 of this chapter. (3) Service-For purposes of this section, each tariffed or contract offering which a customer may purchase to the exclusion of other offerings shall be considered a service. For example: the various mileage bands for standard toll services are rate elements, not services; individual optional calling plans that can be purchased individually and which are offered as alternatives to each other are services, not rate elements. (4) Stand-alone costs-The stand-alone costs of an element or service are defined as the forward-looking costs that an efficient entrant would incur in providing only that element or service. (d) General principles. (1) Subsidy-free pricing. (A) Telecommunications prices should be subsidy-free. Subsidy-free prices prevent one service or group of services from subsidizing or being subsidized by another. This language is not meant to preclude the use of explicit universal service support mechanisms to maintain affordable rates. (B) Pricing all services produced by a DCTU above LRIC will ensure subsidy- free pricing. (C) In a subsidy-free pricing environment, support for universal basic telecommunications service must come from an explicit subsidy, such as a Universal Service Fund. (D) The transition to subsidy-free pricing should be undertaken in stages, in coordination with implementation of state and federal universal service support mechanisms and initiatives to reform pricing of access services. (2) Customer-specific pricing. When set above incremental cost and not used in an anticompetitive manner, customer-specific pricing can benefit the general body of ratepayers and foster economic efficiency by encouraging utilization of under- utilized facilities. (3) Inefficient or uneconomic costs. The commission has no obligation to ensure that a DCTU recovers inefficient or uneconomic costs. (e) Basic network services. Except as provided by paragraph (2) of this subsection, a DCTU may not exercise pricing flexibility for a basic network service. (1) The following services are initially classified as basic network services: (A) flat-rate residential and business local exchange telephone service, including primary directory listings and the receipt of a directory and any applicable mileage or zone charges; (B) tone dialing service; (C) lifeline and tel-assistance services; (D) service connection charges for basic services; (E) direct inward dialing service for basic services; (F) private pay telephone access service; (G) call trap and trace service; (H) access to 911 service, where provided by a local authority, and access to dual party relay service; (I) switched access service; (J) interconnection to competitive providers; (K) mandatory extended area service arrangements; (L) mandatory extended metropolitan service or other mandatory toll-free calling arrangements; (M) interconnection for commercial mobile service providers; (N) directory assistance; and (O) 1+ intraLATA message toll service. (2) An electing LEC may lower the rate for a basic network service to the service's price floor. For an electing LEC that is required by the commission to perform long run incremental cost studies or elects to perform those studies, the price floor for switched access service or for any basic local telecommunications service shall be LRIC. For any other electing LEC, the price floor for basic local telecommunications service shall be the appropriate cost of the service. Packaging basic network services with discretionary or competitive services is not permitted. (3) In setting the price of a basic network service, the commission shall pursue the goal of maintaining basic services at affordable rates for customers. (f) Discretionary services. Except as provided by paragraph (5) of this subsection, a DCTU may not exercise pricing flexibility for a discretionary service. (1) The following services shall initially be classified as discretionary services. (A) 1+ intraLATA message toll services, where intraLATA equal access is available; (B) 0+, 0- operator services; (C) call waiting, call forwarding, and custom calling features not classified as competitive services; (D) call return, caller ID, and call control options not classified as competitive services; (E) central office-based PBX-type services; (F) billing and collection services; (G) integrated services digital network (ISDN) services; and (H) new services. (2) The price for a discretionary service shall not be set below LRIC or the price floor prescribed by sec.23.102 of this chapter, whichever is higher. An electing LEC may request the establishment of a price floor for a discretionary service that is above LRIC. (3) The price of a discretionary service shall not be set above the service's stand-alone cost. An electing LEC may request the establishment of a ceiling for a discretionary service that is below stand-alone cost. (4) The price ceiling for a discretionary service provided by an electing LEC may not be set below or above the rate in effect on September 1, 1995, without regard to proceedings pending under sec.1.301 or sec.3.210 of PURA95 or under Subchapter G, Chapter 2001, Government Code. The ceiling may be raised only after the proceedings required under PURA95, Title III, Subtitle J. Thereafter, on application by the DCTU or on the commission's own motion, the commission may change the price ceiling but may not increase the ceiling more than 10% annually. (5) Within the range of the floor and the ceiling established pursuant to this subsection, an electing LEC may change the price of a discretionary service but shall notify the commission of each change. Such price changes may include volume and term discounts, zone density pricing, packaging of services, customer specific pricing, and other promotional pricing flexibility. Packaging of services may include packaging of an installation service or charge with provision of the corresponding service. An electing LEC lowering the price of any component of a package of services, including an installation charge, shall demonstrate that the package of services affected by the price change recovers its LRIC within one year of the price change. (6) Discounts and other forms of pricing flexibility for discretionary services may not be preferential, prejudicial, or discriminatory. (g) Competitive services. Except as provided by paragraphs (2) and (4) of this subsection, a DCTU may not exercise pricing flexibility for a competitive service. (1) The following services shall initially be classified as competitive services: (A) services described in the WATS tariff as of January 1, 1995; (B) 800 and foreign exchange services; (C) private line service; (D) special access service; (E) services from public pay telephones; (F) paging services and mobile services (IMTS); (G) 911 premises equipment; (H) speed dialing; and (I) three-way calling. (2) If the commission has determined, pursuant to sec.23.27 of this chapter, that a service provided by a DCTU is subject to significant competitive challenge, then that service, with respect to that DCTU, is classified as a competitive service and the DCTU shall have the pricing flexibility provided by sec.23.27 of this chapter. (3) The price for a competitive service shall not be set below LRIC or the price floor prescribed by sec.23.102 of this chapter, whichever is higher. An electing LEC may request the establishment of a price floor for a competitive service that is above the floor prescribed by this paragraph. (4) An electing LEC may set the price for a competitive service at any level above the floor prescribed in this subsection. Permissible pricing flexibility includes volume and term discounts, zone density pricing, packaging of services, customer specific contracts, and other promotional pricing flexibility, subject to the requirements of sec.3.451 of PURA95. However, an electing LEC may not increase the price of a service in a geographic area in which that service or a functionally equivalent service is not readily available from another provider. The pricing flexibility allowed by this subsection permits the packaging of a competitive service with one or more discretionary services only if the DCTU demonstrates that the rate for the package of services is greater than the sum of the LRIC of the competitive service and the tariffed rates of the discretionary services included in the package. (5) Prices for competitive services may not be unreasonably preferential, prejudicial, or discriminatory. (h) Reclassification of a service. The commission, acting on a petition from an interested party or on its own motion, may reclassify a basic network service as a discretionary service or a competitive service or may reclassify a discretionary service as a competitive service. (1) A petition for reclassification of a service shall include information regarding: (A) availability of the service from providers other than DCTUs; (B) the proportion of the market that currently receives the service; (C) the effect of the transfer on subscribers of the service; and (D) the nature of the service. (2) A service may be classified as a competitive service upon a determination by the commission that the service may be obtained from at least one source other than the DCTU to an extent sufficient to discipline the price charged by the DCTU. For purposes of classifying a service as competitive pursuant to this subsection, there shall be a rebuttable presumption that a service is competitive if the service is available from one or more competitors, none of whom is a pure reseller, to 60% of the access lines to which the service is available. (3) For purposes of defining pricing flexibility for an electing LEC, a service may not be reclassified as a discretionary or competitive service until full implementation of all competitive safeguards required by sec.sec.3.452, 3.453, 3.454, 3.455, 3.456, 3.457 and 3.458 of PURA95. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 1, 1997. TRD-9704357 Paula Mueller Secretary of the Commission Public Utility Commission of Texas Effective date: April 21, 1997 Proposal publication date: January 31, 1997 For further information, please call: (512) 936-7152 16 TAC sec.23.105 The Public Utility Commission of Texas adopts new Substantive Rule sec.23.105, relating to interconnection agreements between a telecommunications utility and a dominant certificated utility (DCTU), with changes to the proposed text as published in the January 31, 1997, issue of the Texas Register (22 TexReg 1030). Section 3.457 of the Public Utility Regulatory Act of 1995 (PURA95) requires that the commission promulgate and adopt a pricing rule by April 1, 1997. The Federal Telecommunications Act of 1996 (FTA96) requires that upon receipt of a petition from a carrier, a state commission is to arbitrate unresolved interconnection issues for interconnection services requested from an incumbent local exchange company (ILEC). In connection with a request for arbitration, the commission is also required to determine just and reasonable rates for interconnection and any associated network elements. A public hearing on the proposed rule was held at the commission's offices on March 6, 1997, at 10:00 a.m. Representatives from AT&T Communications of the Southwest, Inc. (AT&T), GTE Southwest (GTESW), MCI Telecommunications Corporation (MCI), Office of Public Utility Counsel (OPC), Southwestern Bell Telephone Company (SWBT), Texas Statewide Telephone Cooperative, Inc. (TSTCI), Time Warner Communications (TW Comm) and Tipton Ross Co. attended the hearing. The parties' statements largely reflect their written comments and are summarized herein. The commission received written comments on the proposed rule from: AT&T GTESW; OPC; SWBT; Sprint Communications Co., United Telephone Company of Texas and Central Telephone of Texas (joint comments) (Sprint); Sugar Land Telephone Co. and Texas Alltel (joint comments) (Alltel); Texas Payphone Association (TPA); TSTCI; Texas Telephone Association (TTA); and TW Comm. Cost and benefits of the proposed rule (General Comments). GTESW, SWBT, TTA and TSTCI contend that sec.23.105 circumvents the negotiation and arbitration processes mandated by FTA96. Moreover, these parties raise concerns about the legality of sec.23.105 under FTA96 and PURA95. The portion of the FCC's Order in CC Docket Number 96-98, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996 (the Implementation Order) that contains the total element long run incremental cost (TELRIC) standard has been stayed by the United States Court of Appeals for the Eighth Circuit. These parties assert that sec.23.105 as proposed does not afford them the opportunity to recover their costs, thus constituting an unconstitutional taking. They argue that a significant problem with the proposed rule is its reliance on theoretical costing and pricing principles without regard to the actual costs incurred to build and maintain the existing networks. TSTCI is concerned with the potential application to the small companies of several provisions in sec.23.105. TSTCI believes that any rule on arbitration proceeding should address the particular needs and concerns of the small companies. For example, sec.23.105 could be used to invalidate existing extended area service (EAS) agreements that have served the rural companies and their customers well. Alltel believes that the pricing rules proposed by the commission represent a small step forward in the retail markets and a step back in the wholesale markets. Alltel asserts that the commission erred in proposing that forward- looking economic costs be used as the price for unbundled network elements and interconnection. Alltel states that there is a distinction between the pricing standard of forward-looking economic costs and the actual costs of a network employed by an efficient ILEC complying with current and past regulatory demands and obligations. To further the objectives of competition in the local telecommunication market, the commission believes that it is in the public interest to set out the pricing principles that should govern negotiation or arbitration proceedings. The pricing principles set forth in this section are the same principles that the commission has adopted in recent arbitration proceedings before the commission. The costing principles referred to in this section are largely based on the long run incremental cost (LRIC) concept described in sec.23.91 of this chapter, relating to long run incremental cost methodology for dominant certificated telecommunications utility (DCTU) services. The pricing principle adopted by the commission for the purpose of interconnection is based on the concept of forward- looking economic costs, which incorporates LRIC and a reasonable contribution of forward-looking joint and common costs. Contrary to the comments of several parties, costing and pricing principles that are specified in this section provide guidelines for the determination of appropriate rates, and do not obviate the need for arbitration hearings. The particulars of a method, specific terms and conditions, and ultimate prices can be determined in negotiations or in an arbitration hearing. In response to TSTCI's comments and similar concerns raised by Alltel, the commission determines that this section does not apply to DCTUs with fewer than 31,000 access lines. Transport and termination (sec.23.105(d)). AT&T takes issue with subsection (d)(3)(D) of sec.23.105, which establishes reciprocal compensation rates for instances in which neither party is a DCTU. AT&T asserts the commission's jurisdiction over nondominant carriers is limited by PURA95 sec.3.051 and does not include the authority to establish rates for services provided by such carriers. TW Comm suggests that the commission delete the requirement that a larger carrier must perform a cost study and revise subsection (d)(3)(D) to permit non- DCTUs to negotiate a rate or ask the commission for a determination. TW Comm requests that subsection (d)(4)(C) be revised so that if interconnecting carriers are unable to agree upon a measurement and billing method, the commission will determine a method for measurement and billing if requested to do so. The commission believes that rates for transport and termination should be based on the forward-looking cost of an efficient local exchange company. The rates that would be determined for a larger DCTU are consistent with the principles of forward-looking economic cost and should therefore adequately serve as the rates for the other carrier. The commission also believes that the principle of reciprocal compensation should be extended to non-DCTUs in the event that non-DCTUs request an arbitration hearing. With respect to bill and keep arrangements, the commission concurs with TW Comm, and has accordingly amended subsection (d)(4)(C). Unbundled network elements and interconnection services (sec.23.105(c)). OPC opposes language in sec.23.105(c)(1)(B) that allows the DCTU's existing rate structure to be the deciding factor for how the DCTU should recover its costs for interconnection and unbundled network elements. The commission agrees that the economic principle of cost causation should determine whether costs are recovered from rates on a flat or usage basis, and that prices of an element should recover costs in a manner that reflects the ways cost are incurred. Therefore subsections (c)(1)(A) and (c)(1)(B) of the rule are amended to reflect OPC's requested changes. Consistency with Federal Payphone regulation (General comments). TPA pointed out that under sec.276(c) of the Federal Telecommunications Act of 1996, any commission rule inconsistent with the FCC's Order in CC Docket Number 96-128 (Federal Payphone Order) is preempted. TPA went on to say that "specific consideration of the effect of the FCC's Order on the proposed provisions is required prior to adoption." TPA did not provide any specific observations about the rule, nor did it argue that any particular provision of the proposed rule is inconsistent with the Federal Payphone Order. OPC disagreed with TPA, noting that the FCC's actions are subject to judicial review and are now the subject of a consolidated appeal before the United States Court of Appeal for the District of Columbia Circuit. OPC recommended that no changes be made to the pricing rule based on the Federal Payphone Order until after a decision has been reached in the District of Columbia Circuit. The commission agrees that these rules, like all commission orders, must be consistent with federal authority, but does not believe the Federal Payphone Order must be explicitly addressed in the pricing rule. The commission has reviewed these rules and finds them to be consistent with the provisions of the Federal Payphone Order. General comments of Sprint. Sprint suggests several modifications and clarifications to the rule. The TELRIC definition should make clear that TELRIC is an economic cost that reflects depreciation and risk-adjusted cost of money to distinguish it from an embedded cost. Sprint believes that extended area service (EAS) should be considered as a local service and priced on a TELRIC basis. Sprint argues that switching and transport should be separate elements with separate prices. Furthermore, transport and tandem switching elements should not be combined as implied by the rule. Sprint believes that the commission's definition of termination of local communication traffic may result in an interconnected carrier bearing a portion of non-traffic sensitive loop costs. Sprint urges the commission not to preclude a DCTU from developing usage- sensitive port charges for traffic originating on the DCTU's network. Sprint also objects to transport and termination rates based upon forward-looking reciprocal compensation. The commission observes that the TELRIC methodology is consistent with established costing principles in sec.23.91 of this chapter, relating to long run incremental cost methodology for dominant certificated telecommunications utility (DCTU) services. The commission believes that forward-looking economic cost with a reasonable allocation of forward-looking joint and common costs is an appropriate pricing standard for services provided to other telecommunications utilities. The commission agrees with Sprint that tandem and switching functions should be available on a bundled and unbundled basis. Therefore subsection (b)(10) of the rule is amended to reflect Sprint's requested change. The commission rejects the suggestion that EAS should be considered as a local service and priced on a TELRIC basis. The issue of EAS will be addressed in the investigation contemplated under sec.23.97(d)(4)(A)(ii) of this chapter, relating to interconnection. The commission disagrees with Sprint's request to allow DCTUs to have the option of using prices based on access tariffs. The commission concludes that there is no evidence that access tariffs are compatible with TELRIC. Therefore, the commission denies DCTUs the use of access tariffs that do not meet the forward- looking economic cost test standard. Bona fide request (sec.23.105(a)(2)). At the public hearing held by the commission, parties requested clarification of a bona-fide request, and the steps that would follow such a request. The commission is amending the rule to define a bona-fide request but declines to detail the negotiation process in order to leave some latitude to the parties to decide how negotiations should proceed. The commission expects that for bona-fide requests, the DCTU would negotiate with the party that made a bona-fide request. If the parties fail to reach an agreement, they can request an arbitration hearing to resolve their disputed issues. The new section is adopted under the Public Utility Regulatory Act of 1995, Texas Revised Civil Statute Annotated Article 1146c-O, (Vernon Supplement 1997), sec.1.101, which provide the Public Utility Commission of Texas with the authority to make and enforce rules reasonably required in the exercise of its powers and jurisdiction, including rules of practice and procedure; and specifically sec.3.457, which requires the commission to adopt a pricing rule by April 1, 1997. Cross Index to Statutes: Public Utility Regulatory Act of 1995, Texas Revised Civil Statutes Annotated article 1146c-O, sec.sec.1.101, 3.457 (Vernon Supplement 1997) (PURA95). sec.23.105.Services Provided to Other Telecommunications Utilities. (a) Application. The provisions of this section shall be applied in a proceeding to arbitrate an interconnection agreement between a telecommunications utility and a dominant certificated telecommunications utility (DCTU). (1) The provisions of this section apply to each DCTU that serves one million or more access lines. (2) The provisions of this section apply upon a bona-fide request to each incumbent local exchange company (ILEC) that serves 31,000 or more access lines but fewer than one million access lines. (3) The provisions of this section do not apply to a DCTU that serves fewer than 31,000 access lines. (b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise. (1) Bona fide request-Has the meaning assigned by the commission in sec.23.99 of this title, (relating to unbundling.) (2) Element-As used in this section, includes unbundled network elements, interconnection, physical collocation and virtual collocation. (3) Forward-looking common costs-Economic costs efficiently incurred in providing a group of elements or services that cannot be attributed directly to individual elements or services. (4) Forward-looking economic cost-The sum of the total element long-run incremental cost of the element, and a reasonable allocation of forward- looking common costs. (5) Forward-looking economic cost per unit-The forward-looking economic cost of the element as defined in this subsection, divided by a reasonable projection of the sum of the total number of units of the element that the DCTU is likely to provide to requesting telecommunications carriers and the total number of units of the element the DCTU is likely to use in offering its own services, during a reasonable time period. (6) Local telecommunications traffic: (A) Telecommunications traffic between a DCTU and a telecommunications carrier other than a commercial mobile radio service (CMRS) provider that originates and terminates within the mandatory single or multi-exchange local calling area of a DCTU including the mandatory extended area service (EAS) areas served by the DCTU; or (B) Telecommunications traffic between a DCTU and a CMRS provider that, at the beginning of the call, originates and terminates within the same major trading area. (7) Reciprocal compensation-An arrangement between two carriers in which each of the two carriers receives compensation from the other carrier for the transport and termination on each carrier's network facilities of local telecommunications traffic that originates on the network facilities of the other carrier. (8) Termination-The switching of local telecommunications traffic at the terminating carrier's end office switch, or equivalent facility and delivery of such traffic to the called party's premises. The cost of local loop facilities shall not be included in the cost of termination. (9) Total element long-run incremental cost (TELRIC)-The forward-looking cost over the long run of the total quantity of the facilities and functions that are directly attributable to, or reasonably identifiable as incremental to, such element, calculated taking as a given the DCTU's provision of other elements. (10) Transport-The transmission and/or any necessary tandem and/or switching of local telecommunications traffic from the interconnection point between the two carriers to the terminating carrier's end office switch that directly serves the called party, or equivalent facility provided by a carrier other than a DCTU. (c) Unbundled network elements and interconnection services. (1) Pricing standard. (A) The basis for pricing an element shall be the forward-looking economic cost, and the price of an element shall recover costs in a manner that reflects the way costs are incurred. (B) For elements that are priced on a flat-rated basis the number of units is defined as the discrete number of elements (e.g., local loops or local switch per switch ports) that the DCTU uses or provides. (C) For elements that are priced on a usage-sensitive basis, the number of units is defined as the unit of measurement of the usage (e.g., minutes of use or call-related database queries) of the element. (D) The sum of a reasonable allocation of forward-looking common costs and the TELRIC of an element shall not exceed the stand- alone costs associated with the element. (E) The sum of the allocation of forward-looking common costs for all elements and services shall equal the total forward-looking common costs, exclusive of retail costs, attributable to operating the DCTU's total network, so as to provide all the elements and services offered. (F) A DCTU must prove to the commission that the rate for each element it offers does not exceed the forward-looking economic cost per unit of providing the element. (G) The TELRIC of an element should be measured based on the use of the most efficient telecommunications technology currently available and the lowest cost network configuration, given the existing location of the DCTU's wire centers. (H) The depreciation rates used in calculating forward-looking economic costs of elements shall be economic life depreciation rates. (2) Rate structure for specific elements. In addition to the general principles set forth in subsection (c)(1) of this section, rates for specific elements shall comply with the following rate structure rules. (A) With the exception of loop facilities offered under a tariff approved pursuant to the Public Utility Regulatory Act of 1995 (PURA95) sec.3.453(a), local loop costs shall be recovered through flat-rated charges. (B) Local switching costs shall be recovered through a combination of a flat- rated charge for line ports and one or more flat-rated or per-minute usage charges for the switching matrix and for trunk ports. (C) Dedicated transmission link costs shall be recovered through a flat- rated charge. (D) The costs of shared transmission facilities between tandem switches and end offices may be recovered through usage- sensitive charges, or in another manner consistent with the manner that the DCTU incurs those costs. (E) Tandem switching costs may be recovered through usage-sensitive charges, or in another manner consistent with the manner that the DCTU incurs those costs. (F) Signaling and call-related database services costs shall be usage- sensitive, based on either the number of queries or the number of messages, with the exception of the dedicated circuits known as signaling links, the cost of which shall be recovered through flat- rated charges. (d) Transport and termination. (1) Scope. This subsection applies to reciprocal compensation for transport and termination of local telecommunications traffic between a DCTU and another telecommunications carrier. (2) Rates for transport and termination. (A) In setting rates for transport and termination a DCTU shall use the pricing standard outlined in subsection (c)(1) of this section. (B) The rate of a carrier providing transmission facilities dedicated to the transmission of traffic between two carriers' networks shall recover only the costs of the proportion of that trunk capacity used by an interconnecting carrier to send traffic that will terminate on the providing carrier's network. (3) Symmetrical reciprocal compensation and obligation. Symmetrical rates are rates that a carrier other than a DCTU assesses upon a DCTU for transport and termination of local telecommunications traffic equal to those that the DCTU assesses upon the first carrier for the same services. (A) Each DCTU shall establish reciprocal compensation arrangements for transport and termination of local telecommunications traffic with any requesting telecommunications carrier. (B) A DCTU may not assess charges on any other telecommunications carrier for local telecommunications traffic that originates on the DCTU's network. (C) A DCTU's rates for transport and termination of local telecommunications traffic shall be established on the basis of: (i) the forward-looking economic costs of such offerings supported by a commission-approved cost study; or (ii) a bill-and-keep arrangement. (D) In cases where both carriers in a reciprocal compensation arrangement are DCTUs, or neither party is a DCTU, the symmetrical rate for transportation and termination shall be based on the larger carrier's forward-looking economic costs. (E) In cases where one carrier in a reciprocal compensation arrangement is a DCTU, and the other carrier is not a DCTU, the symmetrical rate for transportation and termination shall be based on the DCTU's forward-looking economic costs. (F) Where the switch of a non-DCTU carrier serves a geographic area comparable to the area served by the DCTU's tandem switch, the appropriate rate for the non-DCTU carrier is the DCTU's tandem interconnection rate. (G) The commission may establish asymmetrical rates between carriers for transport and termination of local telecommunications traffic if a carrier proves to the commission, on the basis of a cost study using the forward-looking economic cost pricing methodology outlined in subsection (c)(1) of this section, that the forward- looking costs for a network efficiently configured and operated by the carrier justify a higher rate. (4) Bill-and-keep arrangements for reciprocal compensation. Bill-and-keep arrangements are those in which neither of two interconnecting carriers charges the other for the termination of local telecommunications traffic that originates on the other carrier's network. (A) Bill-and-keep shall be the reciprocal arrangement for the first nine months after the date upon which the first commercial call is terminated between carriers. (B) At the completion of the nine-month period, if the difference between the traffic volumes flowing between two networks exceeds 10% of the larger volume of traffic, the carriers shall assess each other symmetrical transport and termination rates established pursuant to paragraph (3)(C)(i) of this subsection. The 10% threshold should be calculated on a per-minute basis. When traffic exceeds the 10% threshold, the carriers shall compensate each other for all calls unless the parties agree to apply the compensation rates only to the volume of traffic that exceeds 10%. (C) If interconnecting carriers are unable to agree upon a measurement and billing method, the commission will determine a method for measurement and billing if requested to do so. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 1, 1997. TRD-9704358 Paula Mueller Secretary of the Commission Public Utility Commission of Texas Effective date: April 21, 1997 Proposal publication date: January 31, 1997 For further information, please call: (512) 936-7152 TITLE 22. EXAMINING BOARDS PART XXV. Structural Pest Control Board CHAPTER 593. Licenses 22 TAC sec.593.24 The Structural Pest Control Board adopts an amendment to sec.593.24, without changes to the proposed text as published in the January 14, 1997, issue of the Texas Register (22 TexReg 706). The justification for the rule is the amendment will result in reduced recordkeeping and paper work for continuing education provider. The rule functions in that the amendment changes the attendance recordkeeping requirement from three years to two years and eliminates the participant evaluation form. No comments were received regarding adoption of the amendment. There were no groups and/or associations making comments for or against the rule. The amendment is adopted under Texas Civil Statutes, Article 135b-6, which provide the Structural Pest Control Board with the authority to license and regulate persons who perform structural pest control services. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 26, 1997. TRD-9704254 Benny M. Mathis, Jr. Executive Director Structural Pest Control Board Effective date: April 16, 1997 Proposal publication date: January 14, 1997 For further information, please call: (512) 451-7200 CHAPTER 595. Compliance and Enforcement 22 TAC sec.595.11 The Structural Pest Control Board adopts an amendment to sec.595.11, without changes to the proposed text as published in the January 14, 1997, issue of the Texas Register (22 TexReg 707). The justification for the rule is the amendments will result in better compliance with the regulations through simplification of the classification of products and increased use of green and yellow list products. The rule will function in that the amendment alters the component products of the green, yellow and red lists, extend the numbers of applications allowed for yellow list products and requires prior approval for use of red list products. The amendment also narrows the use of green list products indoors. Comments were received from an individual regarding the lack of control by districts of after hours use and the cost of signs. There were no comments received from groups or associations for or against this proposal. Reasons why the agency disagrees with the comments are the regulations only contemplate regulating with respect to organized extra curricular activity, not public use. Signs are not mandated by the amendment. The amendment is adopted under Texas Civil Statutes, Article 135b-6, which provide the Structural Pest Control Board with the authority to license and regulate persons who perform structural pest control services. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 26, 1997. TRD-9704255 Benny M. Mathis, jr. Executive Director Structural Pest Control Board Effective date: April 16, 1997 Proposal publication date: January 14, 1997 For further information, please call: (512) 451-7200 TITLE 25. HEALTH SERVICES PART I. Texas Department of Health CHAPTER 31. Nutrition Services 25 TAC sec.31.1 The Texas Department of Health (department) adopts under federal mandate an amendment to sec.31.1, concerning the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). Section 31.1(b) adopts by reference the Fiscal Year 1997 WIC State Plan of Operations. Section 31.1(c) adopts by reference the WIC Policy and Procedure Manual. Federal regulations at 7 CFR, Part 246, require the United States Department of Agriculture (USDA) to approve an annual update of the WIC State Plan of Operations. The amendment to sec.31.1(b) covers the annual update for the fiscal year 1997, which was approved by the USDA effective October 1, 1996. The 1997 update covers the state agency's goals and objectives for improving program operations; the affirmative action plan; and local agency identification - WIC project information. The amendments to the WIC Policy and Procedure Manual cover new and revised (which includes deleted polices replaced with revisions) USDA policies, which became effective when the federal regulations and federal circulars became effective, and are incorporated into policies that were approved by USDA. The latest federal requirements which are being incorporated into the WIC Policy and Procedure Manual by the amendments to sec.31.1(c) cover advance cash payments; breast-feeding promotion expenditures as an allowable cost; waiting list for WIC; identification of WIC applicant; residency as a certification requirement; income screening as a certification requirement; definition of economic unit; completion of the family certification form/release list; procedures for weighing and measuring; weighing equipment; determination of hematocrit/hemoglobin; equipment for determination of hemoglobin and hematocrit; calibration of hematocrit/hemoglobin equipment; assessment of dietary pattern; assessment of medical history; frequency of issuance of WIC food vouchers; transfer of Texas WIN inventory; issuance of non-contract formulas and medical nutritional products; agreement with farmers' market associations; farmers' market monitoring; immunization policies; and required local agency and clinic staff training. The amendment is adopted under federal mandate for the following reasons. Under federal and state law (the Child Nutrition Act of 1966, as amended, 42 U.S.C.A. sec.1786, and the Omnibus Hunger Act of 1985, Acts 1985, 69th Legislature, Chapter 150, Title II), the WIC Program is 99% federally funded and governed by federal regulations. Funds are made available to the department by a federal grant. The federal statute (42 U.S.C.A. sec.1786), federal regulations (7 CFR, Part 246), and the federal grant (Federal-State Special Supplemental Food Program Agreement) authorize the USDA to make the funds available to the department to administer the WIC Program in the State of Texas, provided that the department administers the program in accordance with the federal regulations. The amendment is adopted under Health and Safety Code, sec.12.001(b), which provides the Texas Board of Health (board) with authority to adopt rules for the performance of every duty imposed by law upon the board, the department, and the commissioner of health. sec.31.1. Special Supplemental Food Program for Women, Infants, and Children (WIC). (a) (No change.) (b) WIC State Plan of Operations. (1) The department adopts by reference the publication titled "WIC State Plan of Operations", as amended effective October 1, 1996. This plan has been developed by the department's WIC Program and approved by the United States Department of Agriculture. (2) (No change.) (c) WIC Policy and Procedure Manual. (1) The department adopts by reference the publication titled "WIC Policy and Procedure Manual," which the department developed, as amended effective October 1, 1996. This policy and procedure manual has been developed by the department's WIC Program and approved by the United States Department of Agriculture. (2) (No change.) This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 1, 1997. TRD-9704374 Susan K. Steeg General Counsel Texas Department of Health Effective date: October 1, 1996 Proposal publication date: NA For further information, please call: (512) 458-7236 CHAPTER 37. Maternal and Child Health Services Special Senses and Communication Disorders 25 TAC sec.37.47 The Texas Department of Health (department) adopts the repeal of sec.37.47, concerning operating procedures for the Children's Speech-Language and Hearing Advisory Committee, without changes to the proposed text as published in the December 13, 1996, issue of the Texas Register (21 TexReg 11935). Specifically, the section covers the committee name, applicable law, its purpose, tasks, abolishment, composition, terms of office, officers, meetings, attendance, staff, procedures, subcommittees, statements by members, reports to the board, reimbursement of members' expenses, and the section's effective date. The section is being repealed because the department has determined that the committee no longer serves a useful purpose, its functions can be more efficiently accomplished by department personnel, and the department will be able to use other methods such as informal meetings and public hearings to obtain input on issues relating to children's speech-language and hearing. Evaluation of the committee was conducted in accordance with Texas Civil Statutes, Article 6252-33. No comments were received concerning the proposed repeal. The repeal is adopted under Texas Civil Statutes, Article 6252-33, which sets standards for the evaluation of advisory committees by the agencies for which they function, and under Health and Safety Code, sec.12.001(b), which provides the Texas Board of Health (board) with authority to adopt rules for the performance of every duty imposed by law on the board, the department, and the commissioner of health. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 28, 1997. TRD-9704289 Susan K. Steeg General Counsel Texas Department of Health Effective date: April 17, 1997 Proposal publication date: December 13, 1996 For further information, please call: (512) 458-7236 CHAPTER 221. Meat Safety Assurance Meat And Poultry Inspection 25 TAC sec.sec.221.11, 221.12, 221.14 The Texas Department of Health (department) adopts amendments to sec.221.11 and sec.221.12 and new sec.221.14, concerning meat and poultry inspection. Section 221.14 is adopted with changes to the proposed text as published in the December 20, 1996, issue of the Texas Register (21 TexReg 12275). A correction of error was published in the January 14, 1997, issue of the Texas Register (22 TexReg 799) to correct minor errors. Section 221.11 and sec.221.12 are adopted without change, and therefore will not be republished. The amendment to sec.221.11 adopts by reference federal regulations for meat and poultry inspection contained in Title 9 Code of Federal Regulations (CFR), Parts 301, 303 - 381, 416 and 417. 9CFR, Part 303.1(a) and (b) are not being adopted by reference, but are being included in new sec.221.14 relating to Custom Slaughter and Processing. The amendments to sec.221.12 add new definitions and increase fees collected for overtime and special services to recover costs associated with overtime and special inspections. New sec.221.14 establishes rules for individuals and businesses that custom slaughter and custom process livestock for the owner's personal use. Under the current rules regulating custom operators, any carcass or part delivered by the owner to be processed and returned to the owner must be processed in a facility where the owner has obtained a grant of custom exemption. New sec.221.14 applies to the slaughtering of livestock and to processing uninspected carcasses and parts delivered by or for the owner of those animals, carcasses, or parts. Custom prepared products are to be returned to the owner for the personal use in the household of the owner. The use of custom prepared products as salary or employee benefits in lieu of other remuneration or other purposes such as "donating" to children's homes or the poor is prohibited. Animals that are slaughtered for other than personal use, such as for donation, should be slaughtered under inspection. New sec.221.14 also prohibits heads from animals slaughtered by gunshot to the head to be used for food. The processing of hunter killed feral swine is exempt from regulation under new sec.221.14. However, custom exempt operators are required to separate products of hunter killed feral swine from other products and to either process hunter killed feral swine, after processing all other meat products for that day, or to completely clean and sanitize the equipment and facilities before processing other meat products. Uninspected facilities that currently process hunter killed deer will be allowed to process hunter killed feral swine without any regulation under the Texas Meat and Poultry Inspection Act. New sec.221.14 also defines the condition of animals that may be slaughtered in custom slaughter facilities and prohibits entry of adulterated animals or carcasses, including carcasses from animals that died other than by slaughter. New sec.221.14 requires custom operators to develop written sanitation standard operating procedures (SSOP). The SSOPs are used to demonstrate that the custom operators know how to keep facilities and equipment clean during the operation. New sec.221.14 authorizes the use of tags to prohibit use of insanitary equipment, utensils, rooms or compartments, and adulterated carcasses, and specifies the insanitary conditions in which the tags may be used. New sec.221.14 requires the processor to prepare and handle products that may not be further cooked, in a manner that ensures the safety of the products. New sec.221.14 lists cooking temperatures that are considered to result in a safe product. A different process may be utilized when an owner specifically requests a different cooking process, but the owner must be advised by the processor of the potential hazards associated with undercooked meat products. New sec.221.14 requires the use of safe handling instructions for custom prepared products and provides several methods of disseminating the safe handling instructions. The requirements of the Federal Wholesome Meat Act are incorporated in new sec.221.14. New sec.221.14 prohibits the sale of heads or any other organ or part from custom slaughtered animals; establishes requirements concerning ingredients and other articles used in preparation of products; prohibits use of nitrates in bacon; and allows the use of nitrites in bacon and nitrites and nitrates in cured products other than bacon. The following comments were received concerning the proposed new section. Following each comment is the department's response and any resulting change(s). COMMENT: Concerning sec.221.14(b), one commenter was concerned that a Grant of Custom Exemption would no longer be required for custom processors of United States Department of Agriculture (USDA) or State inspected carcasses. RESPONSE: Retail meat markets do not operate under USDA or the department's Meat Safety Assurance Division (MSA) jurisdiction. They are regulated by the Food and Drug Administration (FDA). Under FDA rules, retail markets are allowed to process USDA or MSA inspected and passed meat and/or poultry for retail sale to the public. However, they must first obtain the appropriate license, thereby subjecting their business to inspection by the local health agency having jurisdiction or by the department's Retail Food or Manufactured Food Division. The department believes there is no need to require a separate permit for processing carcasses or parts that have been slaughtered under USDA or MSA inspection as long as the processing is done in a facility currently licensed by a food safety or public health agency. COMMENT: Two commenters were opposed to sec.221.14(a)(3) and sec.221.14(b)(3) requiring each custom establishment operator to develop, implement, and maintain SSOPs. The commenters felt that SSOPs created too much paperwork and that SSOPs were not necessary in custom establishments. RESPONSE: The department disagrees; SSOPs demonstrate that the custom operators know their operations and how to keep facilities and equipment clean. SSOPs reflect a commitment by custom operators to consistently control operations in the interest of public health. Custom establishments are inspected for sanitation much less frequently than are other meat and poultry establishments, and the operators must be committed to maintaining adequate sanitation. Effective SSOPs provide a system that ensures sanitary standards are maintained, and provide the documentation necessary to verify that the standards are being met. COMMENT: Two commenters felt that meat processed under custom exemption in compliance with these new rules would be satisfactory for donation or as an employee benefit. Section 221.14(a) and (b) limit the use of custom prepared products to exclusive use by the owner, in the household of the owner. RESPONSE: The department disagrees; animals that are slaughtered under custom exemption are exempt from ante-mortem and post-mortem inspection. The department believes that a person who intends to use the meat from a custom slaughtered animal to feed himself and or his family, will present only a healthy animal to a custom operator, therefore ante-mortem and post-mortem inspection by the department is not necessary. However, the department believes that a producer may be more likely to attempt to salvage an animal that is unhealthy, or otherwise unprofitable , if the producer does not intend to use the products from the custom slaughtered animal personally. Those in need of our charity are also entitled to our due diligence. Their health and well being is best served by having USDA or MSA inspection personnel assure the wholesomeness of donated meat and/or poultry products. COMMENT: Concerning sec.221.14(a)(21)(A), three commenters recommended allowing the use of heads or the meat from heads of animals slaughtered by gunshot if the projectile can be recovered or the meat salvaged by removing the meat from the skull with a knife. RESPONSE: The department disagrees; when a bullet to the head is used to stun an animal, the bullet as well as debris, including microorganisms and bone and bullet fragments, are carried into the skull and surrounding tissues. The mere recovery of the projectile does not adequately address the issue of product contamination and adulteration that resulted from the wound. Under current USDA regulations, sec.310.18(b): "Brains, cheek meat, and head trimmings from animals stunned by lead, sponge iron, or frangible bullets shall not be saved for use as human food..." The department believes that the consequences of ingesting lead, particularly by children, are serious enough to prohibit the use for food of heads from animals that are killed by gunshot to the head. COMMENT: Concerning sec.221.14(a)(19)(B) and sec.221.14(b)(19)(B), three commenters expressed concern that plant operators are solely responsible for notifying the customer whenever products are condemned. The commenters proposed requiring the department to furnish documentation regarding any products deemed unfit for human consumption or make the department inspection staff responsible for notifying the owner of the potential health risks and available for questions or comments from a customer whose products were condemned. RESPONSE: Animals presented for slaughter or carcasses presented for processing at a custom slaughter and/or processing establishment are exempt from inspection by the department. Slaughtering and/or processing only healthy, unadulterated animals and carcasses is the responsibility of the plant operator. The department does, however, have a responsibility to ensure that meat products prepared at custom establishments are protected from adulteration and will take action to avoid the cross contamination of wholesome products by products deemed to be unwholesome. The department will not condemn products, but will require the plant manager to remove unwholesome products from the premise. Since the products belong to the customer, the plant manager should give him/her the option of either voluntarily destroying the unwholesome products or removing them from the premise. Representatives of the department routinely answer consumer questions and will continue to do so with any citizen who has a question of them. The department agrees that documentation of the reason for applying a reject tag should be made available to the establishment operator and has included a requirement for the inspector to provide such written documentation. COMMENT: One commenter recommended changing sec.221.14(a)(2)(A) and sec.221.14(b)(2)(A) to require keeping records two years instead of three years as proposed. RESPONSE: The department agrees and has changed the time for keeping records to two years. COMMENT: One commenter was opposed to the requirement for custom operators to keep records required by sec.221.14(a)(2)(A) and sec.221.14(b)(2)(A). RESPONSE: The department disagrees; the Federal Meat Inspection Act (Act) requires that the state meat and poultry inspection law and rules be at least equal to the federal Act and rules. The federal rules governing meat inspection require keeping such records; therefore, the state rules must also require keeping the records. This provision is not a new provision, but rather is included in these new separate rules for custom operators. COMMENT: One commenter was opposed to sec.221.14(a)(14)(B) requiring a covered pen for livestock that are held at the slaughter plant overnight or through the day. The commenter stated that livestock are kept outdoors in the pastures. RESPONSE: The department disagrees; livestock in pastures are generally provided some type of shelter by the producer if natural shelters are not available. Livestock trapped in a small pen cannot escape the extremes of environmental elements such as the hot sun in the Texas summertime, or cold rain and wind in a Texas panhandle winter. The comments on the proposed rules received by the department during the comment period were submitted by the Texas Association of Meat Processors and individuals who generally expressed specific concerns, asked specific questions, or offered suggestions for changes. Minor editorial changes were made to correct grammatical errors in the proposed text. The new and amended sections are adopted under the Health and Safety Code, Chapter 433, sec.433.008, which provides the commissioner with the authority to adopt rules for the efficient execution of the Texas Meat and Poultry Inspection Act; and sec.12.001, which provides the Texas Board of Health with the authority to adopt rules for the performance of every duty imposed by law on the Texas Board of Health, the Texas Department of Health, and the Commissioner of Health. sec.21.14. Custom Slaughter and Processing. (a) Custom slaughter requirements. The requirements of this section shall apply to the custom slaughter by any person of livestock, as defined in sec.221.12 (b) of this title (relating to Meat and Poultry Inspection), delivered by or for the owner thereof for such slaughter, not for sale to the public and exclusively for use, in the household of such owner, by him and members of his household and nonpaying guests. The requirements of this section do not apply to hunter killed game animals, hunter killed exotic animals, and hunter killed feral swine, as defined in sec.221.12(b) of this title. (1) Animals for slaughter. No adulterated animals as defined in sec.221.12(b)(2) of this title shall be accepted for custom slaughter. Only healthy animals, exhibiting no abnormalities, may be accepted for custom slaughter at custom slaughter establishments. Unhealthy or unsound animals are those that exhibit any condition that is not normally expected to be exhibited by that species. (A) Examples of abnormal or unsound animals include, but are not limited to, animals that are not able to get up, or animals that have a missing or abnormal eye, swellings, rectal or vaginal prolapse, ocular or nasal discharge, a cough, or a limp. (B) Animals that have an obviously recent break of the lower leg (below the stifle or elbow) and are able to walk and stand are not considered to be unsound or unhealthy if no other abnormal conditions are noted. (2) Record keeping. (A) Operators of facilities conducting custom slaughter shall keep records for a period of two years, beginning on January 1 of the previous year plus the current year to date. (B) The records shall be available to Texas Department of Health (department) representatives on request. (C) Custom slaughter records shall contain the name, address, and telephone number of the owner of each animal presented, the date the animal was slaughtered, the species and brief description of the livestock. (D) Additional records that must be kept include records such as bills of sale, invoices, bills of lading, and receiving and shipping papers for transactions in which any livestock or carcass, meat or meat food product is purchased, sold, shipped, received, transported or otherwise handled by the custom slaughterer. (E) If the custom slaughter establishment also maintains a retail meat outlet, separate records as listed in subparagraph (D) of this paragraph, shall be maintained for each type of business conducted at the establishment. (3) Sanitary methods. Custom slaughter establishments shall be maintained in sanitary condition. Each custom slaughter establishment shall develop, implement, and maintain written standard operating procedures for sanitation (SSOP) in accordance with the following requirements. (A) The SSOP shall describe all procedures that a custom slaughter establishment will conduct daily, before, and during operations, sufficient to prevent direct contamination or adulteration of product(s). (B) The SSOP shall be signed and dated by the person with overall authority on- site. This signature shall signify that the establishment will implement the SSOP as specified and will maintain the SSOP in accordance with the requirements of this part. The SSOP shall be signed and dated upon initially implementing the SSOP and upon any modifications to the SSOP. (C) Procedures in the SSOP that are to be conducted prior to operations shall be identified as such, and shall address, at a minimum, the daily cleaning of food contact surfaces of facilities, equipment, and utensils. (D) The SSOP shall specify the frequency with which each procedure in the SSOP is to be conducted by the custom slaughterer and identify the employee(s) responsible for the implementation and maintenance of such procedure(s). (E) Each custom slaughter establishment shall conduct the pre-operational procedures in the SSOP before the start of operations, and shall conduct all other procedures as specified in the SSOP. (F) The owner or operator of the custom slaughter establishment shall monitor daily implementation of the SSOP. (G) The operator of the custom slaughter establishment shall evaluate the procedures contained in the SSOP to prevent direct contamination or adulteration of product(s) and shall revise the SSOP as necessary to keep the procedures effective and current with respect to changes in facilities, equipment, utensils, operations, or personnel. (H) The operator or owner of the custom slaughter establishment shall take appropriate corrective action(s) when either the establishment or department determines that the establishment's SSOP failed to prevent direct contamination or adulteration of product(s). Corrective actions include procedures to ensure appropriate disposition of product(s) that may be contaminated, restore sanitary conditions, and prevent the recurrence of direct contamination or adulteration of product(s), including appropriate reevaluation and modification of the SSOP. (I) Each custom slaughter establishment shall maintain daily records sufficient to document the implementation and monitoring of the SSOP and any corrective actions taken. The establishment employee(s) specified in the SSOP shall authenticate these records with his or her initials and the date. These records shall be maintained for at least six months and made available to a department representative upon request. All such records shall be maintained at the custom slaughter establishment. (4) Facilities. (A) The custom slaughter establishment shall maintain well distributed, sufficient light of good quality, and sufficient ventilation for all rooms and compartments to insure sanitary condition, as specified in the department's guideline titled "Construction Guide No. 1, Texas State Inspected Meat Packing Plants: A Guide to Construction and Layout," dated May 1995. (B) The guideline specified in subparagraph (A) of this paragraph is available from the Texas Department of Health, Meat Safety Assurance Division, 1100 West 49th Street, Austin, Texas 78756. (5) Drainage. The custom slaughter establishment shall maintain an efficient drainage and plumbing system for the establishment and premises, and all drains and gutters shall be properly installed with appropriate traps and vents. The establishment shall obtain a letter or certificate approving the sewer system from the agency having jurisdiction for sewerage treatment and disposal. (6) Water supply. (A) The water supply shall be ample, clean, and potable, with adequate facilities for its distribution in the plant and its protection against contamination and pollution. Every establishment shall make known the source of its water supply and shall afford the opportunity for inspection by a department representative of the water and storage facilities and the distribution system. Establishments using a public water supply shall obtain a letter from the servicing agent stating that the water is tested periodically to determine its potability and that the establishment is supplied water by said agency or company. Plant owners shall have the plant water supply tested annually, if using a public water supply, or semiannually if using a private water supply, and make the test reports available to the inspector. If the plant uses ice, the ice must be made with potable water meeting the requirements of this subparagraph for the water supply, including annual or semiannual testing. (B) Equipment using potable water, water faucets having an open-ended hose attached, or any other potential source of back-siphonage shall be so installed as to prevent back-siphonage into the potable water system, including installation of back-siphonage devices. (C) Nonpotable water is permitted only in those parts of the custom slaughter establishment where no edible product is handled or prepared. (D) Nonpotable water is not permitted for washing floors, areas, or equipment involved in trucking materials to and from edible product departments nor is it permitted in hog scalding vats, dehairing machines, or for cleanup of shackling pens, bleeding areas, or runways within the slaughtering department. (E) Nonpotable waterlines shall be clearly identified and shall not be cross- connected with the potable water supply unless this is necessary for fire protection and such connection is of a type with an adequate break to assure against accidental contamination, and is approved by local authorities. (F) Properly located facilities having other than hand operated faucets providing hot and cold water through a mixing valve shall be provided for cleansing and disinfecting utensils and hands of persons handling any product. (G) An ample supply of water at not less than 180 degrees Fahrenheit shall be furnished and used for the cleaning of equipment, floors, and walls which are subject to contamination by the dressing or handling of carcasses, viscera, or other parts. Whenever necessary to determine compliance with this requirement, conveniently located thermometers shall be installed by the operator to show the temperature of the water where it exits the wall fixture (generally a hose bib). In low volume custom slaughter establishments a disinfectant may be used in lieu of 180 degrees Fahrenheit water if prepared and used according to a written procedure, developed by the custom slaughterer specifying mixing methods, concentrations, contact time, need to rinse with clean water, and storage of mixed solutions. The use of disinfectant solutions must be shown to be safe and effective to the department representative. (H) Hot water for cleaning rooms and equipment other than those mentioned in subparagraph (G) of this paragraph shall be delivered under pressure to sufficient convenient outlets and shall be of such temperature as to accomplish a thorough cleanup. (7) Construction. The floors, walls, ceilings, partitions, posts, doors, and other parts of all structures shall be of such smooth and impervious materials, construction, and finish as will make them readily and thoroughly cleanable. The rooms and compartments used for edible product shall be separate and distinct from those used for inedible product. (8) Rails. Rails should be located and passageway space provided so that carcasses do not come in contact with posts, walls, and other fixed parts of the building, or with barrels, boxes, and other containers in the holding and operating areas. (9) Protection of products. (A) The rooms and compartments in which any product is prepared or handled shall be free from dust and from odors from dressing and toilet rooms, catch basins, hide cellars, inedible rooms, livestock pens or any other foreign source. (B) Carcasses and parts shall be protected from contamination from any source such as dust, dirt, or insects during storage, loading, or unloading at, and transportation from, custom slaughter establishments. Carcasses and parts must be protected from contamination during transport by being enclosed in packaging material or in a covered vehicle with tight fitting doors or other covering for all openings. (10) Rodent and pest control. (A) A rodent and pest control and surveillance program shall be implemented to exclude flies, rats, mice, and other vermin from custom slaughter establishments. The use of poisons for any purpose in rooms or compartments where any carcass is stored or handled is forbidden. The use of insecticides, rodenticide, and similar pest control substances in hide cellars, inedible product departments, outbuildings, or similar places, or in storerooms containing canned products may be used provided they have been approved by the U.S. Department of Agriculture (USDA). So-called rat viruses shall not be used in any part of an establishment or the premises of the custom slaughter establishments. (B) A list of approved pest control substances is available upon request from the Scientific Services, Meat and Poultry Inspection, Food Safety and Inspection Service, U.S. Department of Agriculture, Washington, D.C. 20250. (11) Dogs and cats not permitted. Dogs and cats shall be excluded from areas where animals are custom slaughtered; however, guard dogs may be permitted on the outer premises for security purposes. (12) Welfare facilities and accommodations; specific requirements. (A) Adequate welfare facilities and accommodations shall be furnished for the employees of the custom slaughter establishments. (B) Dressing rooms, rest rooms, toilets, and urinals shall be: (i) sufficient in number, ample in size, and conveniently located; (ii) properly ventilated, and meet all requirements of the regulations in this part as to sanitary construction and equipment; and (iii) separate from the rooms and compartments in which livestock are slaughtered, dressed, stored, or handled. (C) Acceptable sinks with other than hand operated faucets, including hot and cold running water, soap, towels, and trash receptacles shall be placed in or near toilet and urinal rooms and also at such other places in the establishment to assure cleanliness of all persons handling any product. (D) Toilet soil lines shall be separate from establishment drainage lines to a point outside the building and drainage from toilet bowls and urinals shall not be discharged into a grease catch basin. (13) Equipment and utensils. (A) Equipment and utensils used for slaughtering and dressing livestock or otherwise handling any edible product in any custom slaughter establishment shall be of such smooth and impervious material and construction as will facilitate their thorough cleaning and ensure cleanliness in the preparation and handling of all edible products to avoid adulteration of such products. (B) Scabbards and similar devices for the temporary retention of knives, steels, tiers, etc., by workers and others at custom slaughter establishments shall be constructed of rust-resistant metal or other impervious material, that may be readily cleaned, and shall be kept clean at all times. (C) When equipment or utensils proposed for use in slaughtering and dressing livestock is not listed in USDA's approved equipment list, the slaughterer shall demonstrate to a department representative that the equipment is easily and readily cleanable, suitable for its intended purpose, and does not cause contamination of meat or poultry products. (D) Receptacles used for handling inedible material shall be of such smooth and impervious material and construction that allows them to be easily cleaned, shall be maintained in a clean condition, and they shall be conspicuously and distinctively marked "INEDIBLE" and shall not be used for handling any edible product. (E) New or replacement equipment or machinery (including any replacement parts) brought onto the premises of any custom slaughter establishment shall not contain liquid polychlorinated biphenyls (PCBs) in concentrations above 50 parts per million by weight of the liquid medium. This provision applies to any and all equipment and machinery, and any replacement parts for such equipment and machinery. Totally enclosed capacitors containing less than three pounds of PCBs are exempted from this prohibition. (14) Humane treatment of animals. (A) Livestock pens, driveways, and ramps shall be maintained in good repair and free from sharp or protruding objects which may cause injury or pain to the animals. Loose boards, splintered or broken planking, and unnecessary openings where the head, feet, or legs of an animal may be injured shall be repaired. Floors of livestock pens, ramps, and driveways shall be constructed and maintained so as to provide good footing for livestock. (B) A covered pen sufficient to protect livestock from the adverse climatic conditions of the locale shall be required at those establishments that hold animals overnight or through the day. (C) Animals shall have access to water in all holding pens and, if held longer than 24 hours, access to feed. There shall be sufficient room in the holding pen for animals held overnight to lie down. (D) Livestock is to be humanely slaughtered. The slaughtering of livestock by using captive bolt stunners, electrical stunners, and shooting with firearms, are designated as humane methods of slaughtering. (i) The captive bolt stunners, electrical stunners, or delivery of a bullet or projectile shall be applied to the livestock in a manner so as to produce immediate unconsciousness in the animals before they are shackled, hoisted, thrown, cast, or cut. The animals shall be stunned in such a manner that they will be rendered unconscious with a minimum of excitement and discomfort. (ii) The driving of animals to the stunning area shall be done with a minimum of excitement and discomfort to the animals. Delivery of calm animals to the stunning area is essential since accurate placement of stunning equipment is difficult on nervous or injured animals. Electrical equipment shall be minimally used with the lowest effective voltage to drive animal to the stunning area. Pipes, sharp or pointed objects, and other items which would cause injury or unnecessary pain to the animal shall not be used to drive livestock. (iii) Immediately after the stunning blow is delivered, the animals shall be in a state of complete unconsciousness and remain in this condition throughout shackling, sticking, and bleeding. (iv) Stunning instruments must be maintained in good repair and available for inspection by a department representative. (v) Inhumane treatment of animals shall be prohibited and any observed inhumane treatment of animals shall be subject to the tagging provisions of paragraph (19)(C) of this subsection. (15) Rooms and compartments. Rooms, compartments, places, equipment, and utensils used for dressing or otherwise handling any carcass, and all other parts of the establishment, shall be kept clean and in sanitary condition. There shall be no handling or storing of materials that create an insanitary condition in rooms, compartments, or places where any livestock is dressed and carcass stored, or otherwise handled. (16) Operations, procedures, and clothing. (A) Operations and procedures involving the dressing, storing, or handling of any livestock carcass or parts thereof shall be strictly in accord with clean and sanitary methods prescribed in paragraph (3) of this subsection. (B) Rooms and compartments in which livestock are slaughtered shall be kept sufficiently free of steam and vapors. Walls, ceilings, and overhead structure of rooms and compartments in which animals are dressed and carcasses handled or stored shall be kept free from moisture to prevent dripping and contamination of product. (C) All tools, utensils, and equipment used in dressing carcasses shall be thoroughly cleansed and dipped in hot water having a minimum temperature of 180 degrees Fahrenheit or in a disinfectant used and prepared according to a written procedure, developed by the custom slaughterer specifying mixing methods, concentrations, contact time, the need to rinse with clean water, and storage of mixed solutions. The use of disinfectant solutions must be safe and effective. A list of approved disinfectants is available upon request from the Scientific Services, Meat and Poultry Inspection, Food Safety and Inspection Service, U.S. Department of Agriculture, Washington, D.C. 20250. (D) All persons that handle any product within the custom slaughter establishment shall keep their hands clean. All persons shall wash their hands after using toilet rooms or urinals before handling any product, tool, utensil, or equipment used in the preparation of product. (E) Aprons and other outer clothing worn by all persons that slaughter and dress animals shall be of material that is readily cleansed. Clean garments shall be worn at the start of each working day and the garments shall be changed during the day as required. Clean outer garments shall be stored in a manner that protects them from contamination during storage. (F) Employees are prohibited from tobacco usage in any form and practices such as spitting on whetstones, spitting on the floor, placing skewers, tags, or knives in their mouths, and inflating casings with air from the mouth are also prohibited. Contamination of product with perspiration, hair, cosmetics, medications, and similar substances shall be prevented. (G) No person slaughtering animals shall exhibit evidence of a communicable disease in the transmissible stage, nor be a carrier of any disease known to be transmissible through preparation or processing of food, nor be affected with sores, infected wounds, or with any other form of microbiological contaminants wherein the contaminants may be transferred to the product being handled. (17) Containers used for product; paper in contact with product. (A) To avoid contamination of product, containers shall be lined with suitable material of good quality before packing. (B) Containers and trucks, or other means of conveyance in which any carcass or part is transported to the owner shall be kept in a clean and sanitary condition. (C) Paper used for covering or lining containers and the cargo space of trucks, or other means of conveyance shall be of a kind which does not tear during use but remains intact and does not disintegrate when moistened by the product. (18) Inedible operating and storage rooms; outer premises. All operating and storage rooms and departments used for inedible materials shall be maintained in a sanitary condition. The outer premises including docks and areas where cars and vehicles are loaded, and the driveways, approaches, yards, pens, and alleys, shall have proper drainage and be kept in clean and orderly condition. All catch basins on the premises shall be of such construction and location and shall be given such attention as will ensure their being kept in a sanitary condition as to odors and cleanliness. Catch basins shall not be located in departments where animals are slaughtered and carcasses are handled or stored. The accumulation on the premises of any material in which flies may breed, such as hog hair, bones, paunch contents, or manure, is forbidden. (19) Tagging insanitary equipment, utensils, rooms, and carcasses. (A) A department representative, may attach a "Texas Rejected" tag to any equipment, utensil, room, or compartment at a custom slaughter establishment that a department representative determines is insanitary and is a health hazard. No equipment, utensil, room, or compartment so tagged shall again be used until untagged or released by a department representative. Such tag so attached shall not be removed by anyone other than a department representative. (B) A department representative that determines a carcass is adulterated, unfit for human food, is from an unhealthy or unsound animal, or could result in a health hazard, may attach a "Texas Retained" tag to the carcass and document the reason for attaching the tag on a form specified by the department and deliver the form to the operator of the establishment. The owner of the carcass shall be notified by the plant operator and advised of the potential health risk. The custom slaughterer shall ensure that the owner of the carcass either authorizes the voluntary destruction and denaturing of the carcass and all parts or agrees to remove the carcass from the custom slaughter establishment. (C) Inhumane treatment of animals that is observed by a department representative shall result in the attaching of a "Texas Rejected" tag to the deficient equipment, facility structure, or the stunning area causing the inhumane treatment. No equipment, area, or facility so tagged shall be used until untagged or released by the department representative. (20) Marking and labeling of custom prepared products. Carcasses and parts therefrom that are prepared on a custom basis shall be marked at the time of preparation with the term "Not for Sale" in letters at least three-eighths inch in height, and shall also be identified with the owner's name or a code that allows identification of the carcass or carcass part to its owner. Ink used for marking such products must be USDA approved for such purpose. Ink containing FD&C Violet No. 1 shall not be used. (21) Requirements concerning procedures. (A) Heads from animals slaughtered by gunshot to the head shall not be used for food purposes. Such heads shall be denatured in accordance with paragraph (23) of this subsection and placed into containers marked "INEDIBLE". Heads with gunshot wounds may be returned to the owner only after they have been freely slashed and adequately denatured to preclude their use for human food. (B) Cattle paunches and hog stomachs intended for use in the preparation of meat food products shall be emptied of their contents immediately upon removal from the carcass and thoroughly cleaned on all surfaces and parts. (C) Carcasses shall not be adulterated, as defined in sec.221.12(b)(2) of this title, when placed in coolers. (22) Requirements concerning ingredients. All ingredients and other articles used in the preparation of any carcass shall be clean, sound, healthful, wholesome, and will not result in the adulteration of the carcass. A letter of guaranty from the manufacturer stating that the ingredient or article is safe when used in contact with food shall be obtained by the custom slaughterer and made available upon request to the department representative. (23) Denaturing procedures. Carcasses, parts thereof, meat and meat food products that are adulterated and/or not returned to the owner shall be adequately denatured or decharacterized to preclude their use as human food. Before the denaturing agents are applied, carcasses and carcass parts shall be freely slashed or sectioned. The denaturing agent must be mixed with all of the carcasses or carcass parts to be denatured, and must be applied in such quantity and manner that it cannot easily and readily be removed by washing or soaking. A sufficient amount of the appropriate agent shall be used to give the material a distinctive color, odor, or taste so that such material cannot be confused with an article of human food. (b) Custom processing requirements. The requirements of this section shall apply to the custom processing by any person of uninspected livestock carcasses or parts, delivered by or for the owner thereof for such processing, not for sale to the public and exclusively for use, in the household of such owner, by him and members of his household and nonpaying guests. The requirements of this section shall not apply to processing hunter killed game animals, hunter killed exotic animals, and hunter killed feral swine as defined in sec.221.12(b) of this title. (1) Carcasses and parts for processing. No adulterated carcasses or parts as defined in sec.221.12(b)(2) of this title shall be accepted for custom processing. (2) Record keeping. (A) Operators of facilities conducting custom processing shall keep records for a period of two years, beginning on January 1 of the previous year plus the current year to date. (B) The records shall be available to the department representative on request. (C) Custom processing records shall contain the name, address, and telephone number of the owner of each carcass or parts presented, the date the carcass or parts were delivered, the species and amount. (D) Additional records such as bills of sale, invoices, bills of lading, and receiving and shipping papers for transactions in which any carcass, meat or meat food product is purchased, sold, shipped, received, transported or otherwise handled by the custom processor shall also be kept by the custom processor. (E) If the custom processing establishment also maintains a retail meat outlet, separate records, as listed in subparagraph (D) of this paragraph, shall be maintained for each type of business conducted at the establishment. (F) Temperature monitoring records shall be maintained by the custom processor, for heat treated or ready-to-eat products. These records shall include the temperature attained and time held during heating and the time and temperatures during the cool down process. (3) Sanitary methods. Custom processing establishments shall be maintained in sanitary condition. Each custom processing establishment shall develop, implement, and maintain written standard operating procedures for sanitation (SSOP) in accordance with the following requirements. (A) The SSOP shall describe all procedures a custom processor will conduct daily, before, and during operations, sufficient to prevent direct contamination or adulteration of product(s). (B) The SSOP shall be signed and dated by the person with overall authority on- site. This signature shall signify that the establishment will implement the SSOP as specified and will maintain the SSOP in accordance with the requirements of this part. The SSOP shall be signed and dated upon initially implementing the SSOP and upon any modifications to the SSOP. (C) Procedures in the SSOP that are to be conducted prior to operations shall be identified as such, and shall address, at a minimum, the daily cleaning of food contact surfaces of facilities, equipment, and utensils. (D) The SSOP shall specify the frequency with which each procedure in the SSOP is to be conducted by the custom processor and identify the employee(s) responsible for the implementation and maintenance of such procedure(s). (E) Each custom processing establishment shall conduct the pre-operational procedures in the SSOP before the start of operations, and shall conduct all other procedures as specified in the SSOP. (F) The owner or operator of the custom processing establishment shall monitor the daily implementation of the SSOP. (G) The operator of the custom processing establishment shall evaluate the procedures contained in the SSOP to prevent direct contamination or adulteration of product(s) and shall revise the SSOP as necessary to keep the procedures effective and current with respect to changes in facilities, equipment, utensils, operations, or personnel. (H) The operator of the custom processing establishment shall take appropriate corrective action(s) when either the establishment or department representative determines that the establishment's SSOP failed to prevent direct contamination or adulteration of product(s). Corrective actions include procedures to ensure appropriate disposition of product(s) that may be contaminated, restore sanitary conditions, and prevent the recurrence of direct contamination or adulteration of product(s), including appropriate reevaluation and modification of the SSOP. (I) Each custom processing establishment shall maintain daily records sufficient to document the implementation and monitoring of the SSOP and any corrective actions taken. The establishment employee(s) specified in the SSOP shall authenticate the record with his or her initials and the date. These records shall be maintained for at least six months and made available to a department representative upon request. All such records shall be maintained at the custom processing establishment. (4) Facilities. (A) The custom processing establishment shall maintain well distributed, sufficient light of good quality, and sufficient ventilation for all rooms and compartments to insure sanitary condition, as specified in the department's guideline titled "Construction Guide No. 1, Texas State Inspected Meat Packing Plants: A Guide to Construction and Layout," dated May 1995. (B) The guideline specified in subparagraph (A) of this paragraph is available from the Texas Department of Health, Meat Safety Assurance Division, 1100 West 49th Street, Austin, Texas 78756. (5) Drainage. The custom processing establishment shall maintain an efficient drainage and plumbing system for the establishment and premises, and all drains and gutters shall be properly installed with appropriate traps and vents. The establishment shall obtain a letter or certificate approving the sewer system from the agency having jurisdiction for sewerage treatment and disposal. (6) Water supply. (A) The water supply shall be ample, clean, and potable, with adequate facilities for its distribution in the plant and its protection against contamination and pollution. Every establishment shall make known the source of its water supply and shall afford the opportunity for inspection by a department representative of the water and storage facilities and the distribution system. Establishments using a public water supply shall obtain a letter from the servicing agent stating that the water is tested periodically to determine its potability and that the establishment is supplied water by said agency or company. Plant owners shall have the plant water supply tested annually, if using a public water supply, or semiannually if using a private water supply, and make the test reports available to the inspector. If the plant uses ice, the ice must be made with potable water meeting the requirements of this subparagraph for the water supply, including annual or semiannual testing. (B) Equipment using potable water, water faucets having an open-ended hose attached, or any other potential source of back-siphonage shall be so installed as to prevent back-siphonage into the potable water system, including installation of back-siphonage devices. (C) Nonpotable water is permitted only in those parts of official establishments where no edible product is handled or prepared. (D) Nonpotable water is not permitted for washing floors, areas, or equipment involved in trucking materials to and from edible product departments. (E) Nonpotable waterlines shall be clearly identified and shall not be cross- connected with the potable water supply unless this is necessary for fire protection and such connection is of a type with an adequate break to assure against accidental contamination, and is approved by local authorities. (F) Properly located facilities having other than hand operated faucets providing hot and cold water through a mixing valve shall be provided for cleansing and disinfecting utensils and hands of persons handling any product. (G) Hot water for cleaning rooms and equipment shall be delivered under pressure to sufficient convenient outlets and shall be of such temperature as to accomplish a thorough cleanup. (7) Construction. The floors, walls, ceilings, partitions, posts, doors, and other parts of all structures shall be of such smooth and impervious materials, construction, and finish as will make them readily and thoroughly cleanable. The rooms and compartments used for edible product shall be separate and distinct from those used for inedible product. (8) Rails. Rails should be located and passageway space provided so that carcasses do not come in contact with posts, walls, and other fixed parts of the building, or with barrels, boxes, and other containers in the holding and operating areas. Product shall not be placed or stored beneath carcasses in coolers or holding areas. (9) Protection of product. (A) Heat processed product shall be protected from contamination by raw product during preparation and storage. (B) The rooms and compartments in which any product is prepared or handled shall be free from dust and from odors from dressing and toilet rooms, catch basins, hide cellars, inedible rooms, livestock pens or any other foreign source. (10) Rodent and pest control. (A) A rodent and pest control and surveillance program, shall be implemented to exclude flies, rats, mice, and other vermin from custom processing establishments. The use of poisons for any purpose in rooms or compartments where any carcass stored or handled is forbidden. The use of insecticides, rodenticide, and similar pest control substances in inedible product departments, outbuildings, or similar places, or in storerooms containing canned products may be used provided they have been approved by the United States Department of Agriculture (USDA). So-called rat viruses shall not be used in any part of an establishment or the premises of the custom processing, establishments. (B) A list of approved pest control substances is available upon request from the Scientific Services, Meat and Poultry Inspection, Food Safety and Inspection Service, U.S. Department of Agriculture, Washington, D.C. 20250. (11) Dogs and cats not permitted. Dogs and cats shall be excluded from areas where animals are custom processed; however, guard dogs may be permitted on the outer premises for security purposes. (12) Welfare facilities and accommodations; specific requirements. (A) Adequate welfare facilities and accommodations shall be furnished for the employees of the custom processing establishments. (B) Dressing rooms, rest rooms, toilets, and urinals shall be: (i) sufficient in number, ample in size, and conveniently located; (ii) properly ventilated, and meet all requirements of the regulations in this part as to sanitary construction and equipment; and (iii) separate from the rooms and compartments in which livestock are slaughtered, dressed, stored, or handled. (C) Acceptable sinks with other than hand operated faucets, including hot and cold running water, soap, towels, and trash receptacles shall be placed in or near toilet and urinal rooms and also at such other places in the establishment to assure cleanliness of all persons handling any product. (D) Toilet soil lines shall be separate from establishment drainage lines to a point outside the building and drainage from toilet bowls and urinals shall not be discharged into a grease catch basin. (13) Equipment and utensils. (A) Equipment and utensils used for preparing or otherwise handling any edible product in any custom processing establishment shall be of such smooth and impervious material and construction as will facilitate their thorough cleaning and ensure cleanliness in the preparation and handling of all edible products to avoid adulteration of such products. (B) Scabbards and similar devices for the temporary retention of knives, steels, triers, etc., by workers and others at custom processing establishments shall be constructed of rust-resistant metal or other impervious material that may be readily cleaned, and shall be kept clean at all times. (C) When equipment or utensils proposed for use in preparing or handling product is not listed in USDA's approved equipment list, the custom processor shall demonstrate to a department representative that the equipment is easily and readily cleanable, suitable for its intended purpose, and does not cause contamination of meat or poultry products. (D) Receptacles used for handling inedible material shall be of such smooth and impervious material and construction that allows them to be easily cleaned, shall be maintained in a clean condition, and they shall be conspicuously and distinctively marked "INEDIBLE" and shall not be used for handling any edible product. (E) New or replacement equipment or machinery (including any replacement parts) brought onto the premises of any custom processing establishment shall not contain liquid polychlorinated biphenyls (PCBs) in concentrations above 50 parts per million by weight of the liquid medium. This provision applies to any and all equipment and machinery, and any replacement parts for such equipment and machinery. Totally enclosed capacitors containing less than three pounds of PCBs are exempted from this prohibition. (14) Rooms and compartments. Rooms, compartments, places, equipment, and utensils used for dressing or otherwise handling any carcass, and all other parts of the establishment, shall be kept clean and in sanitary condition. There shall be no handling or storing of materials that create an insanitary condition in rooms, compartments, or places where any meat or poultry product is prepared, or otherwise handled. (15) Operations, procedures, and clothing. (A) Operations and procedures involving preparation, storing, or handling of any product shall be strictly in accord with clean and sanitary methods prescribed in paragraph (3) of this subsection. (B) Rooms and compartments in which any product is prepared shall be kept sufficiently free of steam and vapors. Walls, ceilings, and overhead structure of rooms and compartments in which product is prepared, handled or stored shall be kept free from moisture to prevent dripping and contamination of product. (C) All tools, utensils, and equipment used in deboning carcasses or parts shall be thoroughly cleansed and dipped in hot water having a minimum temperature of 180 degrees Fahrenheit or in a disinfectant used and prepared according to a written procedure, developed by the custom processor specifying mixing methods, concentrations, contact time, the need to rinse with clean water, and storage of mixed solutions. The use of disinfectant solutions must be safe and effective. A list of approved disinfectants is available upon request from the Scientific Services, Meat and Poultry Inspection, Food Safety and Inspection Service, U.S. Department of Agriculture, Washington, D.C. 20250. (D) All persons that handle any product within the custom processing establishment shall keep their hands clean. All persons shall wash their hands after using toilet rooms or urinals before handling any product, tool, utensil, or equipment used in the preparation of product. (E) Aprons, frock, and other outer clothing worn by all persons that handle any product shall be of material that is readily cleansed. Clean garments shall be worn at the start of each working day and the garments shall be changed during the day as required. Clean outer garments shall be stored in a manner that protects them from contamination during storage. (F) Employees are prohibited from tobacco usage in any form and practices such as spitting on whetstones, spitting on the floor, placing skewers, tags, or knives in their mouths, and inflating casings with air from the mouth are also prohibited. Contamination of product with perspiration, hair, cosmetics, medications, and similar substances shall be prevented. (G) No person preparing or directly handling product shall exhibit evidence of a communicable disease in the transmissible stage, nor be a carrier of any disease known to be transmissible through preparation or processing of food, nor be affected with sores, infected wounds, or with any other form of microbiological contaminants wherein the contaminants may be transferred to the product being handled. (16) Protective handling of products. Products shall be protected from contamination from any source such as dust, dirt, or insects during storage, loading, or unloading at, and transportation from, custom processing establishments. (17) Containers used for product; paper in contact with product. (A) To avoid contamination of product, containers shall be lined with suitable material of good quality before packing. (B) Containers and trucks, or other means of conveyance in which any product is transported to the owner shall be kept in a clean and sanitary condition. (C) Boxes and any containers used as tote boxes shall be clean and stored off the floor in a manner that does not interfere with good sanitation. (18) Inedible operating and storage rooms; outer premises. All operating and storage rooms and departments used for inedible materials shall be maintained in a sanitary condition. The outer premises including docks and areas where cars and vehicles are loaded, and the driveways, yards, and alleys, shall have proper drainage and be kept in clean and orderly condition. All catch basins on the premises shall be of such construction and location and shall be given such attention as will ensure their being kept in a sanitary condition as to odors and cleanliness. Catch basins shall not be located in departments where any product is prepared, handled or stored. The accumulation on the premises of any material in which flies may breed is forbidden. (19) Tagging insanitary equipment, utensils, rooms, and carcasses. (A) A department representative, may attach a "Texas Rejected" tag to any equipment, utensil, room, or compartment at a custom processing establishment that a department representative determines is insanitary and is a health hazard. No equipment, utensil, room, or compartment so tagged shall again be used until untagged or released by a department representative. Such tag so attached shall not be removed by anyone other than an a department representative. (B) A department representative that determines a carcass is adulterated, unfit for human food, is from an unhealthy or unsound animal, or may be a health hazard, may attach a "Texas Retained" tag to the carcass and document the reason for attaching the tag on a form specified by the department and deliver the form to the operator of the establishment. The owner of the carcass shall be notified by the plant operator and advised of the potential health risk. The custom processor shall ensure that the owner of the carcass or parts either authorizes the voluntary destruction and denaturing of the carcass and all parts or agrees to remove the carcass from the custom processing establishment. Under no circumstances may the carcass be further processed at the establishment. (20) Marking and labeling of custom prepared products. (A) Products that are custom prepared must be packaged immediately after preparation and must be labeled with the term "Not For Sale" in lettering not less than three-eighths inch in height. Such custom prepared products or their containers shall also bear the owner's name and any additional labeling such as product cut or description. (B) Safe handling instructions shall accompany every customer's raw or not fully cooked products. The information shall be in lettering no smaller than one- sixteenth of an inch in size and may be placed on each product package, each tote box or bag containing packaged product, or given as a flyer to the customer with the product. The safe handling instructions shall include the following statements. (i) The rationale statement, i.e. "Some meat and meat products may contain bacteria that could cause illness if the product is mishandled or cooked improperly. For your protection, follow these safe handling instructions" shall be placed immediately after the heading and before the safe handling statements. (ii) Meat and poultry must be kept refrigerated or frozen. Thaw in refrigerator or microwave. However, any portion of this statement that is in conflict with the product's specific handling instructions may be omitted, e.g., instructions to cook without thawing. A graphic illustration of a refrigerator may be displayed next to this statement. (iii) Raw meat and poultry must be kept separate from other foods. Wash working surfaces including cutting boards, utensils, and hands after touching raw meat or poultry. A graphic illustration of soapy hands under a faucet may be displayed next to this statement. (iv) Meat and poultry must be cooked thoroughly. Ground meat products should be cooked to an internal temperature of 160 degrees Fahrenheit or until the juices run clear. Other meat products should be cooked so that the external temperature reaches 160 degrees Fahrenheit. A graphic illustration of a skillet may be displayed next to this statement. (v) Hot foods must be kept hot. Refrigerate leftovers immediately or discard. A graphic illustration of a thermometer may be displayed next to the statement. (21) Requirements concerning procedures. (A) Uninspected heads from custom slaughtered animals may not be sold or used in the preparation of meat food products unless prepared specifically for the owner of the animal for his personal use. (B) Heads for use in the preparation of meat food products shall be split and the bodies of the teeth, the turbinates and ethmoid bones, ear tubes, and horn butts removed, and the heads then thoroughly cleaned. (C) Bones and parts of bones shall be removed from product which is intended for chopping or grinding. (D) Kidneys for use in the preparation of meat food products shall first be freely sectioned and then thoroughly soaked and washed. (E) Clotted blood shall be removed from livestock hearts before they are used in the preparation of meat food products. (F) Product shall not be adulterated as defined in sec.221.12(b)(2) of this title when placed in coolers or freezers. (G) Frozen product may be defrosted in water or pickle in a manner that is not conducive to promoting bacterial growth or resulting in adulteration of the product. (22) Requirements concerning ingredients. (A) All ingredients and other articles used in the preparation of any product shall be clean, sound, healthful, wholesome, and otherwise such as to not result in adulteration of product. A letter of guaranty from the manufacturer stating that the ingredient or article is safe when used as an ingredient or in contact with food shall be obtained by the custom processor and made available upon request to the department representative. (B) Ingredients for use in any product may not contain any pesticide chemical or other residues in excess of levels permitted under the Federal Food, Drug, and Cosmetic Act. (23) Approval of substances for use. (A) No substance may be used in the preparation of any product unless it is an FDA approved food additive. (B) No product shall contain any substance which would render it adulterated. (C) Nitrates shall not be used in curing bacon. (i) Nitrites in the form of sodium nitrite may be used at 120 parts per million (ppm) ingoing (or in the form of potassium nitrite at 148 ppm ingoing) maximum for injected, massaged, or immersion cured bacon; and 550 ppm of sodium ascorbate or sodium erythorbate (isoascorbate) for injected, massaged, or immersion cured bacon may be used. (ii) Sodium or potassium nitrite may be used at 2 pounds to 100 gallons pickle at 10% pump level; 1 ounce to 100 pounds meat (dry cure). (iii) Sodium ascorbate or sodium erythorbate (isoascorbate) may be used at 87.5 ounces to 100 gallons pickle at 10% pump level; 7/8 ounces to 100 pounds meat; or 10% solution to surfaces of cut meat. (iv) Sodium nitrite shall not exceed 200 ppm ingoing or an equivalent amount of potassium nitrite (246 ppm ingoing) in dry cured bacon based on the actual or estimated skin-free green weight of the bacon belly. (D) When curing products other than bacon, nitrites, nitrates, or combination shall not result in more than 200 ppm of nitrite in the finished product. (i) Sodium or potassium nitrite may be used at 2 pounds to 100 gallons pickle at 10 % pump level; 1 ounce to 100 pounds meat (dry cure); or 1/4 ounce to 100 pounds chopped meat and/or meat byproduct. (ii) Sodium or potassium nitrate may be used at 7 pounds to 100 gallons pickle; 3 1/2 ounce to 100 pounds meat (dry cure); or 2 3/4 ounce to 100 pounds chopped meat. (Nitrates may not be used in bacon). (24) Prescribed treatment of heat-treated meat and poultry products. (A) All forms of fresh meat and poultry, including fresh unsmoked sausage and pork such as bacon and jowls are classified as products that are customarily well cooked in the home before being consumed. Therefore the treatment of such products for the destruction of pathogens is not required. (B) Meat and poultry products, that are not customarily cooked or may not be cooked before consumption because they have the appearance of being fully cooked, must not contain pathogens. (i) Heat-treated products and dry, semi-dry, and fermented sausages, that are less than three inches in diameter, are required to be heated to an internal temperature according to the following chart: Figure 1: 25 TAC sec.221.14(b)(24)(B)(i) (ii) Heat treated products and dry, semi-dry, and fermented sausages, that are more than three inches in diameter, are required to be heated to an internal temperature according to the following chart: Figure 2: 25 TAC sec.221.14(b)(24)(B)(ii) (iii) Heat treated products that must be stored under refrigerated temperatures must be cooled quickly to prevent bacterial growth. During cooling, the product's maximum internal temperature should not remain between 130 degrees Fahrenheit and 80 degrees Fahrenheit for more than 1 1/2 hours nor between 80 degrees Fahrenheit and 40 degrees Fahrenheit for more than 5 hours. Custom processors may slowly cool cured products in accordance with Food Safety and Inspection Service (FSIS) Directive 7110.3, Time/Temperature Guidelines for Cooling Heated Products. (I) The FSIS Directive 7110.3 may be reviewed at the department's central headquarters, Meat Safety Assurance Division, 1100 West 49th Street, Austin, Texas 78756, or any department Regional Meat Safety Assurance Division Office or upon request from the department Meat Safety Assurance inspector. (II) Copies of the FSIS Directive 7110.3 may be purchased from the Scientific Services, Meat and Poultry Inspection, Food Safety and Inspection Service, U.S. Department of Agriculture, Washington, D.C. 20250. (iv) Custom processors not utilizing a heating step as described in clauses (i), (ii), and (iii) of this subparagraph must submit an alternate procedure describing the method utilized in determining safety to a department representative. (v) Custom processors may produce heat-treated or ready-to-eat custom products, including chorizo, at temperatures other than those listed in clauses (i), (ii), and (iii) of this subparagraph when requested to do so by the owner of the product. The custom processor must obtain a signed statement from the owner of the product stating that the risks associated with eating under-cooked meat products are understood. (C) When necessary to comply with the requirements of this section, the smokehouses, drying rooms, and other compartments used in the treatment of meat and poultry products to destroy pathogens shall be suitably equipped, by the operator of the custom processing establishment with accurate automatic recording thermometers. (25) Denaturing procedures. Carcasses, parts thereof, meat and meat food products that are adulterated and/or not returned to the owner shall be adequately denatured or decharacterized to preclude their use as human food. Before the denaturing agents are applied, carcasses and carcass parts shall be freely slashed or sectioned. The denaturing agent must be mixed with all of the carcasses or carcass parts to be denatured, and must be applied in such quantity and manner that it cannot easily and readily be removed by washing or soaking. A sufficient amount of the appropriate agent shall be used to give the material a distinctive color, odor, or taste so that such material cannot be confused with an article of human food. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 28, 1997. TRD-9704299 Susan K. Steeg General Counsel Texas Department of Health Effective date: April 17, 1997 Proposal publication date: December 20, 1996 For further information, please call: (512) 458-7236 TITLE 37. PUBLIC SAFETY AND CORRECTIONS PART VI. Texas Department of Criminal Justice CHAPTER 152.Institutional Division SUBCHAPTER D.Other Rules 37 TAC sec.152.61 The Texas Department of Criminal Justice adopts new sec.152.61, concerning emergency response to non-agent private prisons/jails with changes to the proposed text as published in the December 27, 1996, issue of the Texas Register (21 TexReg 12528). The new section defines policies and procedures regarding the Texas Department of Criminal Justice (TDCJ) emergency response assistance to any privately operated or owned prison or jail in Texas which does not have a contract with the TDCJ to house TDCJ offenders but is faced with an event which may be a threat to public safety. The new section increases public safety due to the assistance TDCJ will render in the event of an emergency situation. One written comment (Executive Director, Commission on Jail Standards) and several oral comments to the same effect were received. The comment is a question about the applicability of the proposed rule: will it apply to facilities operated by private vendors on behalf of cities or counties, as opposed to those purely holding out-of-state inmates? The section is amended in response to require reporting of an emergency through the contracting county, add a minimum $1,000.00 administrative fee, and allow a waiver of any fee. The new section is adopted under Texas Government Code, sec.494.008 and sec.507.021, which gives limited law enforcement authority to designated TDCJ staff, and Government Code, sec.492.013, which grants rulemaking authority to the Board. sec.152.61.TDCJ Emergency Response To Non-Agent Private Prisons/Jails. (a) Definitions. The following words and terms, when used in this section, shall have the following meanings unless the context clearly indicates otherwise. (1) Assistance - TDCJ resources provided to non-agent private prisons or jails such as personnel, equipment, vehicles, horses, tracking dogs, and chemical agents. (2) Emergency Situation - An event determined by a law enforcement agency to present an immediate threat to public safety or to represent a potential threat to public safety if assistance is not received. The situation will generally involve multiple offenders, an escape, or a hostage situation. (3) Law Enforcement Agency - For purposes of this policy, a law enforcement agency is the Texas Department of Public Safety (DPS), including the Texas Rangers; a municipal police department; or a county sheriff's department. (4) Non-Agent Private Prison/Jail - Any privately operated or owned prison or jail in Texas which does not have a contract with the TDCJ to house TDCJ offenders. (5) TDCJ Facility - Any Institutional Division (ID) prison, secure residential Parole Division (PD) facility, or State Jail Division (SJ) facility operated by the TDCJ. Contractor-operated facilities are not included in this definition. (b) Policy. It is the policy of the TDCJ to render assistance to non-agent private prisons/jails only when a law enforcement agency has made a prior determination that an emergency situation exists and has concurred in the request to the TDCJ. (c) Procedures. (1) Approval of Request for Assistance. (A) If a non-agent private prison/jail believes that an emergency situation has arisen, it must immediately notify the nearest law enforcement agency in order to qualify for the TDCJ's assistance. In the case of a non-agent private prison/jail operating a facility holding county inmates, it must notify the county sheriff in order to qualify for TDCJ's assistance. (B) The law enforcement agency will then determine whether the situation is indeed an emergency situation as defined. If so, it will ask what scope of assistance is being requested and will consult with the non-agent private prison/jail concerning: (i) number and type of personnel needed; (ii) number and type of vehicles needed; (iii) amount and type of riot equipment needed; (iv) number and type of weapons needed (to include chemical weapons); (v) number of tracking dog teams; and (vi) number of horses. (C) With the concurrence of a Texas Ranger, a DPS sergeant or above, county sheriff, or municipal police chief, law enforcement agency staff may call the nearest TDCJ facility's Warden/Facility Administrator or Duty Warden/Facility Administrator to request assistance. TDCJ facilities may assist under these circumstances only when requested to do so by a law enforcement agency. The law enforcement agency must describe the assistance being requested and must agree to have a representative available to take an active role at the site of the emergency situation when the TDCJ team arrives. (D) Approval (i) The TDCJ Warden/Facility Administrator or Duty Warden/Facility Administrator will contact the appropriate Regional Director (ID), Assistant Director (SJ), or Director of Specialized Supervision (PD) for approval to render assistance. (ii) Once assistance is approved, the Warden/Facility Administrator or Duty Warden/Facility Administrator will, in conjunction with the appropriate Regional Director (ID), Assistant Director (SJ), or Director of Specialized Supervision (PD), determine what requested resources will be sent, based on their assessment of the information received as well as concurrent Agency needs. (2) Emergency Situation Procedures (A) The responding TDCJ facility will report the request and their response to the Emergency Action Center (EAC) in accordance with AD-02.15 procedures for a Level I incident and will take all follow-up actions as required by the directive. (B) Arrival at the Emergency Situation (i) Upon arrival at the scene of the emergency situation, the senior member of the TDCJ team will be briefed by the non-agent private prison/jail staff. (ii) The law enforcement agency representative will be present at the briefing. (iii) The senior member of the TDCJ team will have sole discretion as to which TDCJ resources will be deployed. (C) The senior member of the TDCJ team will be in charge of the TDCJ resources, to include personnel, at all times. (D) If the emergency situation requires the use of tracking dogs, the requirements of AD-03.26 will be followed. (3) The non-agent private prison/jail will be required to reimburse TDCJ for all assistance rendered, to include the cost of employees, equipment and supplies, as well as a minimum of $1,000.00 for administrative overhead expenses. The executive director of TDCJ may waive this requirement. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 26, 1997. TRD-9704190 Carl Reynolds General Counsel Texas Department of Criminal Justice Effective date: April 15, 1997 Proposal publication date: December 27, 1996 For further information, please call: (512) 463-9693 CHAPTER 153.Internal Inquiries SUBCHAPTER A.Investigations of Abuse, Neglect, or Exploitation in a Facility Operated by the Texas Department of Criminal Justice 37 TAC sec.sec.153.1-153.7 The Texas Department of Criminal Justice (department) adopts new sec.sec.153.1- 153.7, concerning investigations of reports of abuse, neglect, or exploitation of elderly or disabled persons. Sections 153.1, 153.3, 153.4, and 153.5 are adopted with changes to the proposed text as published in the January 24, 1997, issue of the Texas Register (22 TexReg 940). Sections 153.2, 153.6, and 153.7 are adopted without changes and therefore will not be republished. The new sections cover purpose; application; definitions; what constitutes abuse, neglect, and exploitation; reports and investigations; completion of investigations; confidentiality of investigative process and report; and facilities operated by the department. The new sections are adopted pursuant to the Human Resources Code, Chapter 48. The Human Resources Code, Chapter 48 was amended by Acts 1995, 74th Legislature, Chapter 303 (House Bill 1111, 1995). In accordance with these laws as amended, the department is required to investigate reports relating to abuse, neglect, or exploitation in facilities operated by or under contract with the department, and to adopt rules to be reviewed by the Health and Human Services Commission. The new sections enable uniformity in investigations of abuse, neglect, or exploitation performed by the department and compliance with the laws relating to such investigations. Several "internal" comments were received, from the Correctional Managed Health Care Committee, the Health Services Division, the Internal Affairs Division, and the Parole Division, all of which suggested that between their various operations (except Parole), the investigations discussed in the proposed rules are already amply covered. The sections have been amended in response as follows: clarification of the purpose and intent (sec.153.1); clarification of the definition of sexual abuse and abuse (sec.153.3 and sec.153.4(a) and (b)); the addition of a requirement to investigate if prior practice would have required it (sec.153.5(b)); and the addition of a specific reference to the Internal Affairs Division (sec.153.5(e)). The new sections are adopted under the Texas Government Code, sec.492.013, which grants rulemaking authority to the Board; and the Human Resources Code, sec.48.083, requiring rules relating to the investigation of abuse, exploitation, or neglect of an elderly or disabled person. sec.153.1.Purpose. The purpose of these sections is to define abuse, neglect or exploitation of an elderly or disabled person and describe procedures for reporting and investigating in accordance with the Human Resources Code, Chapter 48. These sections are not intended to supplant or interfere with: (1) existing TDCJ policies and procedures that protect abused, neglected, or exploited elderly or disabled persons; or (2) existing organizational roles and responsibilities regarding such policies and procedures. sec.153.3.Definitions. The following words and terms, when used in this subchapter, shall have the following meanings, unless the context clearly indicates otherwise. Agent - An individual not employed by a facility but working under the auspices of the facility, such as a volunteer, student, or consultant. Allegation - A report by a person believing or having knowledge that an elderly or disabled person has been or may be abused, neglected, or exploited in a facility. Caretaker - An owner, operator, manager, employee, or agent of a facility in which a patient or client is located. Client - A disabled person or elderly person receiving services in a facility. Clinical issues - Issues relating to unsafe practice by a licensed health care professional or a violation of a state law or rule relating to the licensure or practice of a licensed health care professional. Confirmed- A finding that an allegation of abuse, neglect, or exploitation is supported by the preponderance of the evidence. Department - The Texas Department of Criminal Justice. Disabled person - A person with a mental, physical, or developmental disability that substantially impairs the person's ability to provide adequately for the person's care or protection and who is either 18 years of age or older or who is under 18 years of age and has the disabilities of minority removed. Elderly person - A person 65 years of age or older. Facility - A facility which is operated by or under contract with the department. This term includes any owner, operator, manager, employee, or agent of a facility. Guardian - Anyone named as "guardian of the person" of an elderly person or disabled person by a probate court order. Inconclusive - A finding that an allegation of abuse, neglect, or exploitation leads to no conclusion or definite result due to a lack of witnesses or other relevant evidence. Intimidation - The act of controlling another person with fear or by threats. Non-serious physical injury- Any injury determined not to be serious by the examining physician. Examples of non-serious injury may include superficial laceration, contusion, or abrasion. Observable and material impairment - Discernible and substantial damage or deterioration. Patient- A disabled person or elderly person receiving health care services in a facility. Perpetrator - The person who has committed an act of abuse, neglect, or exploitation of an elderly or disabled person. Perpetrator unknown- The term used to describe an incidence in which abuse, neglect, or exploitation is confirmed but positive identification of the responsible person cannot be made and in which self injury has been eliminated as the cause. Preponderance of evidence - Evidence which is of greater weight or more convincing than the evidence to the contrary; evidence which as a whole shows that the fact to be proved is more probable than not. Reporter - The person filing a report of abuse, neglect, or exploitation; either the victim of alleged abuse, neglect, or exploitation or a third party filing a report on behalf of the alleged victim. Serious physical injury- An injury determined to be serious by the examining physician. Examples of serious injury may include fracture; dislocation of any joint; internal injury; any contusion larger than two and one-half inches in diameter; concussion; second or third degree burns; first degree scald burns involving hands, feet, face, or genitals; or multiple lacerations, contusions or abrasions. Sexual abuse - Any sexual activity, including any involuntary or non-consensual sexual conduct that would constitute an offense under the Penal Code, including sec.sec.21.08 (indecent exposure), 22.011 (sexual assault), 22.021 (aggravated sexual assault), or 39.03 (official oppression), involving a caretaker and a patient or client. Sexual activity includes but is not limited to kissing, hugging, stroking, or fondling with intent to arouse or gratify the sexual desire of any person; oral sex or sexual intercourse; and a request, suggestion or encouragement for the performance of sex. Unconfirmed - A finding that an allegation of abuse, neglect or exploitation is not supported by the preponderance of the evidence. Unfounded- A finding that an allegation of abuse, neglect, or exploitation is spurious or patently without factual basis. sec.153.4.Abuse, Neglect, and Exploitation Defined. (a) Abuse of an elderly or disabled person means the intentional, knowing, reckless, or negligent infliction of injury or intimidation with resulting physical or emotional harm or pain or mental anguish, or sexual abuse, including an unnecessary or excessive use of force or the inappropriate use of restraints or seclusion. (b) Abuse does not include: (1) the proper use of restraints or seclusion in accordance with federal or state laws or regulations, agency policies, or court order; (2) other actions taken in accordance with federal or state laws or regulations, agency policies, or court order; (3) actions an employee may reasonably believe to be immediately necessary to avoid imminent harm to self, patients or clients, or other individuals if such actions are limited only to those actions reasonably believed to be necessary under the existing circumstances; or (4) complaints related to the daily administrative operations of a facility (e.g., staffing ratios). (c) Neglect of an elderly or disabled person means the failure by the caretaker to provide the goods or services, including medical services, which are necessary to avoid physical or emotional harm or pain. (d) Exploitation of an elderly or disabled person means the illegal or improper act or process of a caretaker who has an ongoing relationship with the elderly or disabled person using the resources of an elderly or disabled person for monetary or personal benefit, profit, or gain. sec.153.5.Reports and Investigations. (a) The department shall investigate allegations received relating to the abuse, neglect, or exploitation of an elderly or disabled person in a facility. (b) The department will only investigate reports when: (1) the act is reported to have occurred in a facility and the victim was a patient or client of the facility; (2) the act occurred away from the facility but the facility was responsible for the supervision of the patient or client who was the victim at the time the act allegedly occurred; (3) the act is reported to have occurred in a facility and the alleged perpetrator was a caretaker of the facility; (4) the act occurred away from the facility but the facility was responsible for the supervision of the alleged perpetrator at the time the act occurred; or (5) the department would have investigated prior to the adoption of this section. (c) The department shall review each allegation and determine whether it is appropriate for the department to investigate the allegation. (1) If there is reason to suspect that the patient or client was abused, neglected, or exploited prior to admission to the department, the department shall refer the allegation to the Texas Department of Protective and Regulatory Services. (2) If the allegation involves the actions of a licensed health care professional, the department will determine whether the allegation involves clinical issues. (A) The department will pursue an investigation of the portion of an allegation which does not involve clinical issues. (B) If the allegation involves clinical issues, the allegation shall immediately be forwarded to the state agency which licenses the health care professional involved. The identity of a person reporting abuse or neglect must be blacked out or deidentified. (3) The department need not investigate an allegation that clearly does not involve abuse, neglect or exploitation of an elderly or disabled person in a facility. The department may refer the reporter to other agencies for assistance. (4) Injuries of unknown origin shall be investigated if the attending physician, after examining the patient, suspects that the injury is the result of abuse or neglect. (5) If an allegation involves the daily administrative operations of a facility and has not resulted in a specific case of abuse, neglect, or exploitation, such as the failure to maintain an adequate number of staff, the department need not investigate the matter under this section but may investigate the matter as a complaint investigation involving regulatory issues. (d) Allegations which cannot be investigated by the department pursuant to the Human Resources Code, Chapter 48 shall be referred to the Texas Department of Protective and Regulatory Services for appropriate investigation or action consistent with existing law. (e) The department shall make a thorough investigation 24 hours after receiving an allegation which has been reviewed and found appropriate to investigate. (1) The primary purpose shall be the protection of the elderly or disabled person. (2) If a report of serious physical injury or sexual abuse is received by the department from the Texas Department of Protective and Regulatory Services, the investigation shall be conducted jointly by the Internal Affairs Division with appropriate local law enforcement coordination if possible. The department shall document any instance in which a local law enforcement agency response is considered to be inadequate. (f) Anonymous allegations will be received and investigated following the same procedures that are used when the reporter is known. (g) An allegation relating to a patient or client who is in the facility where the act allegedly occurred at the time of the department's receipt of the allegation shall be given priority by the department in the scheduling of investigations. An allegation relating to a patient or client who is no longer in the facility shall be given secondary priority. (h) An investigation of abuse, neglect, or exploitation may occur in conjunction with other survey activities or complaint investigations relating to violations of federal or state laws or rules; however, the determination as to whether abuse, neglect, or exploitation has occurred or is likely to occur is a separate determination from regulatory matters and shall be made without regard as to whether law or rule violations or deficiencies are cited. (i) An investigation shall include: (1) an interview with the alleged victim, if appropriate; (2) an interview with the alleged perpetrator unless the investigator has already determined that there was no abuse, neglect, or exploitation or the risk of the same does not exist; and (3) consultation with persons thought to have knowledge of the circumstances. (j) An investigation shall address the issues set forth in the Human Resources Code, sec.48.038 (a), relating to elderly or disabled persons. (k) If during the course of the investigation it becomes apparent that the allegation is spurious or patently without factual basis, the investigation may be closed as unfounded with supervisory approval. The reason for this determination of being spurious or patently without factual basis, will be included in the report. (l) If during the course of the investigation it becomes apparent that abuse, neglect or exploitation has not occurred or is not likely to occur, the investigation may be closed as unfounded with supervisory approval. (m) If there is not a preponderance of the evidence to indicate that an allegation should be confirmed, due to lack of witnesses or other available evidence, a finding of inconclusive may be used with supervisory approval. (n) An investigative report shall indicate "perpetrator unknown" in those incidences where the preponderance of evidence exists to confirm abuse, neglect, or exploitation but positive identification of the person responsible cannot be determined and self injury has been eliminated as the cause. Evidence must exist that abuse, neglect, or exploitation has been committed for the term "perpetrator unknown" to be used. (o) An investigative report shall indicate "unconfirmed" when finding that an allegation of abuse, neglect, or exploitation is not supported by the preponderance of the evidence. (p) An investigative report shall indicate "confirmed" when finding that an allegation of abuse, neglect, or exploitation is supported by the preponderance of the evidence. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 26, 1997. TRD-9704191 Carl Reynolds General Counsel Texas Department of Criminal Justice Effective date: April 15, 1997 Proposal publication date: January 24, 1997 For further information, please call: (512) 463-9693 SUBCHAPTER B.Private Real Property Rights Preservation 37 TAC sec.153.20 The Texas Department of Criminal Justice adopts new sec.153.20 concerning private real property rights affected by governmental action without changes to the proposed text as published in the January 24, 1997, issue of the Texas Register (22 TexReg 943). The new section is adopted in order to establish procedures for determining whether private real property rights will be affected by a governmental action taken by Texas Department of Criminal Justice. The new section will heighten attention to potential impact on private real property. No comments were received regarding adoption of the new section. The new section is adopted under Government Code, sec.492.013, which gives the Board general rulemaking authority; and Chapter 2007, Government Code, the Private Real Property Preservation Act. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 26, 1997. TRD-9704192 Carl Reynolds General Counsel Texas Department of Criminal Justice Effective date: April 15, 1997 Proposal publication date: January 24, 1997 For further information, please call: (512) 463-9693 CHAPTER 163.Community Justice Assistance Division Standards The Texas Department of Criminal Justice - Community Justice Assistance Division (TDCJ-CJAD) adopts the repeal and new sec.163.39, concerning residential services without changes to the proposed text as published in the January 24, 1997, issue of the Texas Register (22 TexReg 945). The new standard is part of the recodification process for implementing extensive residential standards governing residential programs funded by TDCJ-CJAD. TDCJ-CJAD proposes either enhancements to already existing standards or enactment of new standards. Some of the residential standards provide for feasibility studies, public meetings, placement and discharge criteria, and the criteria for residential policies and procedures manual. The new section also provides for mission statements for residential programs, requirement of an employment coordinator in Restitution Centers, requirement to have one staff member, on duty, who is the same gender as the resident population, and ensuring that a facility that is part of or attached to a detention facility or a correctional institution, shall house facility offenders separately from the inmates. The new section also provides procedures on the use of force, safety, and emergency procedures, to include evacuation plans and drills, limitations of corrections actions, offenders rights, provisions for food service, to include that three meals (including two hot meals) are provided during each 24-hour period. The new section further provides for victim notification of the imminent release or recent escape of offenders convicted of family domestic violence. The standards also provide for religious programs and mail, telephone, and visitation. The section is being repealed and replaced as part of the recodification process required for implementing legislative mandates. The adoption of the new section is an effort to improve residential community supervision resulting in increased public safety. No comments were received regarding adoption of the repeal and new section. 37 TAC sec.163.39 The repeal is permitted by the Texas Government Code, sec.509.003 and sec.509.006, which gives CJAD and the Board of Criminal Justice authority to adopt reasonable rules establishing: (1) minimum standards for programs, community corrections facilities and other facilities, equipment, and other aspects of the operation of community supervision and corrections departments; (2) a list and description of core services that should be provided by each department, (3) methods for measuring the success of community supervision and corrections programs; and (4) a format for community justice plans. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 26, 1997. TRD-9704188 Carl Reynolds General Counsel Texas Department of Criminal Justice Effective date: April 15, 1997 Proposal publication date: January 24, 1997 For further information, please call: (512) 463-9693 37 TAC sec.163.39 The new section is permitted by Texas Government Code, sec.509.003 and sec.509.006, which gives CJAD and the Board of Criminal Justice authority to adopt reasonable rules establishing: (1) minimum standards for programs, community corrections facilities and other facilities, equipment, and other aspects of the operation of community supervision and corrections departments; (2) a list and description of core services that should be provided by each department, (3) methods for measuring the success of community supervision and corrections programs; and (4) a format for community justice plans. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 26, 1997. TRD-9704189 Carl Reynolds General Counsel Texas Department of Criminal Justice Effective date: April 15, 1997 Proposal publication date: January 24, 1997 For further information, please call: (512) 463-9693 37 TAC sec.163.42, sec.163.43 The Texas Board of Criminal Justice adopts amendments to sec.163.42, Substantial Noncompliance, and sec.163.43, Funding and Financial Management, to clarify the requirement, for CJAD compliance auditing purposes, that judges meet in compliance with the Open Meetings Act without changes to the proposed text as published in the January 24, 1997, issue of the Texas Register (22 TexReg 948). The effect of the adopted amendments is to link compliance with the meeting to finalize the CSCD budget, as required by sec.140.004, Local Government Code, so that only failure to hold that meeting in compliance with the Open Meetings Act would disqualify a CSCD for TDCJ-CJAD state aid, under sec.163.43(a)(1); such failure would also constitute an act of substantial noncompliance under sec.163.42, which could trigger the imposition of sanctions as authorized by the Government Code, sec.509.012. The amendment to sec.163.43, Funding and Financial Management, also states that the standard does not apply to CSCDs that can only legally be managed by one judge. This is intended to clarify the board's understanding that compliance with the Open Meetings Act, for CJAD purposes, does not have any meaning when the governing body in question consists of only one person. The wording is intended to foreclose the possibility of a group of judges who are legally entitled to govern the operation of a CSCD delegating that responsibility to a single judge and thereby avoid the Open Meetings requirement. The adopted amendments will enable the encouragement of open governmental action regarding the expenditure of state funds for community corrections programs. No comments were received regarding adoption of the amendments. The amendments are adopted under: Attorney General Opinion Number DM-395, which interprets the Open Meetings Act (Government Code, Chapter 551) to apply to judges in their governance of CSCDs; Government Code, sec.509.011 and sec.509.012, which govern the distribution of state aid and compliance with state standards, and sec.492.013, which gives the Board general rulemaking authority; and Local Government Code, sec.140.004, which requires an annual meeting to finalize a CSCD's budget. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 26, 1997. TRD-9704193 Carl Reynolds General Counsel Texas Department of Criminal Justice Effective date: April 15, 1997 Proposal publication date: January 24, 1997 For further information, please call: (512) 463-9693 TITLE 40. SOCIAL SERVICES AND ASSISTANCE PART VII. Texas Council on Purchasing from People with Disabilities CHAPTER 189. Purchases of Products and Services from People with Disabilities 40 TAC sec.189.1-189.18 The Texas Council on Purchasing from People with Disabilities (the "Council") adopts the repeal of sec.sec.189.1-189.18, concerning the purchase of products and services of the blind and severely disabled, without changes to the proposed text as published in the January 14, 1997, issue of the Texas Register (22 TexReg 729) This rule is being repealed in order to adopt new sec.sec.189.1- 189.12, which implement pertinent provisions of the amendments to Chapter 122 of the Texas Human Resources Code (the "Act") with respect to purchase of products and services from persons with disabilities. No comments were received regarding the adoption of the repeals. The repeals are adopted under the authority of V.T.C.A., Human Resources Code, sec.122.013 which enables the Council to promulgate rules for the implementation, extension, administration, or improvement of the program. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 27, 1997. TRD-9704302 Cynthia J. Hill Legal Counsel Texas Council on Purchasing from People with Disabilities Effective date: April 21, 1997 Proposal publication date: January 14, 1997 For further information, please call: (512) 463-6422 40 TAC sec.189.1-189.12 The Texas Council on Purchasing from People with Disabilities (the "Council") adopts new sec.sec.189.1-189.12, concerning the purchases of products and services from people with disabilities without changes to the proposed text as published in the January 14, 1997, issue of the Texas Register (22 TexReg 730). The new rules will implement pertinent provisions of the amendments to Chapter 122, Human Resources Code (the "act"), with respect to purchases of products and services from persons with disabilities and the conduct of the Council's business. A public hearing was held at the William P. Clements Building, Committee Room 5, 300 West 15th Street, Austin, Texas on February 6, 1997. Commenters at the public hearing represented the Texas Industries for the Blind and Handicapped (the "TIBH"). At the hearing, TIBH reiterated its written comments on the rules as follows: Section 189.7(e): The Central Nonprofit Agency could better serve persons with disabilities, the State Use Program, and strengthen its planning and operations by receiving a contract from the Texas Council of twenty-four or more months, rather than the relatively short twelve-month contract proposed. Section 189.10(d): It would be more productive for any complaint received against the CNA, a CRP, the Council, or anyone else initially to be screened by referral to a Council subcommittee to attempt to mediate or resolve the complaint. The Council, of course, would retain ultimate authority to dispose of a complaint. A formal dispute resolution mechanism was in place with the previous Committee. The following are the reasons why the Council disagrees with party statements and written comments: Section 189.7(e): The Council considered the contract period in question for an extensive amount of time before offering the proposed rule and agreed that a twelve month contract period, with a provision to extend up to an additional twelve month period, but not to exceed a total contract period of twenty-four months, suits the Council's goals of maintaining contract control and should remain as printed in the Texas Register. Section 189.10(d): The Council indicated that sec.189.10(a) does have a mechanism in place for the Chairman of the Council to refer complaints to the subcommittee of his/her choice and sec.189.10(d) indicates the subcommittee chosen does not have the authority to bring complaints to complete resolution but present recommendation to the Council which in turn will make its decision at a public meeting. Therefore, a complete reading of sec.189.10 satisfies the concern noted by TIBH. All comments submitted were fully considered by the Council. The new rules are adopted under the authority of V.T.C.A., Human Resources Code, sec.122.013 which enables the Council to promulgate rules for the implementation, extension, administration, or improvement of the program. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on March 27, 1997. TRD-9704303 Cynthia J. Hill Legal Counsel Texas Council on Purchasing from People with Disabilities Effective date: April 21, 1997 Proposal publication date: January 14, 1997 For further information, please call: (512) 463-6422 TITLE 43. TRANSPORTATION PART I. Texas Department of Transportation CHAPTER 9.Contract Management SUBCHAPTER D.Business Opportunity Programs 43 TAC sec.sec.9.50-9.61 The Texas Department of Transportation adopts new sec.sec.9.50-9.61, concerning the department's business opportunity programs. Sections 9.54 and 9.58 are adopted with changes to the proposed text as published in the February 11, 1997, issue of the Texas Register (22 TexReg 1609). Sections 9.50-9.53, 9.55-9.57 and 9.59-9.61 are adopted without changes and will not be republished. Government Code, Chapter 2161, Transportation Code, sec.201.702, and Title 49, Code of Federal Regulations, Part 23, provide for a Disadvantaged Business Enterprise (DBE) Program on contracts that are funded in whole or in part with federal funds, and for a Historically Underutilized Business (HUB) Program for contracts that are funded entirely with state or local funds. Section 9.50 explains that the purpose of the subchapter is to establish policies and procedures implementing the department's DBE and HUB programs and for resolving complaints relating to these programs. Section 9.51 defines words and terms used in this subchapter. Section 9.52 provides that it is the department's policy to ensure that DBEs and HUBs have the maximum opportunity to participate in the performance of contracts and subcontracts and to prohibit discrimination on the basis of race color, national origin, or gender in the award and performance of contracts. Section 9.53 explains which contracts and purchases the DBE and HUB programs apply to. Section 9.54 provides that the department will establish DBE and HUB goals, and describes the procedures for establishing annual goals and the criteria for assigning participation goals for individual contracts. Section 9.55 provides that the department will make a good faith effort to meet or exceed the annual DBE/HUB goals, requires that the contractor document the efforts taken in good faith to obtain DBE/HUB participation, and specifies the types of efforts the department will consider as evidence of good faith attempts to obtain DBE/HUB participation. Section 9.56 describes the department's procedures for certifying a firm as a DBE, including specific standards used for certification. This section also outlines various certification categories of businesses/owners, on-site review of businesses for certification purposes, certification renewal procedures, steps for third-party actions, and procedures for requesting an eligibility conference. Section 9.56 also provides that the department will maintain a directory of certified DBEs. Section 9.57 provides that the General Services Commission (GSC) certifies businesses as HUBs and references GSC certification procedures. This section also specifies that the department will submit information regarding DBEs who qualify as HUBs to GSC for certification and recognizes that GSC maintains a directory of certified HUBs. Section 9.58 provides for DBE/HUB contract provisions, including program requirements for contracts with an assigned goal, and specifies that a contract without a goal will include a provision encouraging the use of DBEs and HUBs. This section provides for department monitoring of contractor compliance, requires DBE/HUB commitments and reports, and provides for credit of certain contractor expenditures. It specifies the type of function a DBE/HUB must perform, establishes the percentage a DBE/HUB contractor or subcontractor may subcontract, prohibits a contractor from furnishing work crews or equipment to a DBE/HUB without prior authorization from the department, and requires that the contractor not create unnecessary barriers to DBE/HUB performance. This section also specifies when a contractor may substitute a DBE/HUB firm originally authorized, the retention period for contractor records, a process for the contractor to respond to a finding of noncompliance with DBE/HUB contract provisions, and sanctions for noncompliance. This section permits a contractor to appeal a sanction to the Business Appeals committee. Section 9.59 provides for filing a complaint related to a federally funded contract with the U.S. Department of Transportation in certain circumstances, provides that a claim by a prime contractor for additional compensation or time extension will be heard in accordance with sec.9.2, provides a complaint process for a Bidder/Proposer that was not selected for a department contract, establishes a complaint process for an aggrieved firm or person who believes that the person or firm, another person, or any specific class of individuals to be subject to a violation of the DBE/HUB program, and provides that if a bidder/proposer or a complainant is not satisfied with the department response, the aggrieved party may request an investigation or file an appeal with the U.S. Department of Transportation. Section 9.60 specifies the procedures by which the department will investigate a complaint filed by a person or business aggrieved by a finding, response, or determination resulting from any protest, complaint or dispute under sec.9.59 of this title (relating to Business Complaints). This section also provides for an appeal of the final determination to the Business Appeal Committee (BAC) in certain circumstances. Section 9.61 specifies in what circumstances a third party or firm may file an appeal with the U.S. Department of Transportation, specifies the requirements of any appeal, and provides that the U.S. Department of Transportation appeal process is final. This section also provides that the BAC will hear certain appeals relating to sanctions and contract complaints pursuant to sec.sec.9.58- 9.59. On February 25, 1997, a public hearing was held to receive comments, views, or testimony concerning the proposed new sections relating to Business Opportunity Programs. Vega Power Resources, Inc. indicated that it was against the new sections. Comment: The commenter stated that the commercially useful function requirements hinder material suppliers. He stated that he purchases the products from refiners and resells it to the contractors negotiating with the different truckers to deliver it. Sometimes he has to pay for the product before he gets paid by the contractor. Since his services are considered a brokerage, and the amount of DBE credit allowed for those services is relegated from the 60% allowed for nonmanufacturing material suppliers (regular dealers) to five percent, contractors will no longer do business with his firm. He stated that his business has been put in the position where he has to either buy trucks or lease trucks on a long-term basis because the commercially useful function requirement prevents him from hiring trucks on a job by job basis. This not a viable option because the entire highway bid letting is done on a job-specific basis. When a prime contractor gets a job, it gathers its resources, puts its equipment together, hires the subcontractors, and makes all the arrangements necessary to do that job. Once the job is over, the contractor terminates all contracts for equipment, subcontractors, etc., and waits for another job. The commenter asked that the DBEs be permitted to operate like the prime contractors. He stated that another alternative, hiring owner-operators who own and drive one truck, puts his operation at risk because he cannot rely on them to be available. He stated that the common carrier system would be reliable for moving his products because they have multiple vehicles. Response: The criteria for the DBE program are derived from the federal DBE regulations. The department does not have the authority to alter the federal criteria. Title 49, CFR Part 23, states a contractor may count toward its goal 60% of expenditures for materials and supplies required under a contract, and 100% of expenditures to a manufacturer. A regular dealer in such bulk items as steel, cement, gravel, stone, and petroleum products need not keep such products in stock, if it owns or operates distribution equipment. Brokers and packagers are not be regarded as manufacturers or regular dealers. A firm that does not meet the requirements of a regular dealer but does provide a service in the procurement of materials or supplies remains eligible for the DBE Program. However, the contractor is credited with the fees or commissions charged for providing those services. The department has revised sec.9.54(2)(B) to authorize the department, instead of the commission, to establish HUB goals for individual contracts as is current practice. The term "commission" was inadvertently used. In sec.9.58(d)(1), "After the award of a contract" has been changed to "Within the time specified in the contract/proposal" in reference to DBE/HUB commitments. This change will take into consideration that there are different types of contracts awarded within the department and allows for the appropriate time frame for submittal of the commitment information based on the type of contract. The new sections are adopted under Transportation Code, sec.201.101, which provides the Texas Transportation Commission with the authority to promulgate rules for the conduct of the work of the Texas Department of Transportation; Government Code, Chapter 2161, which provides for a Historically Underutilized Business Program for contracts that are funded entirely with state funds; and Transportation Code, sec.201.702, which provides for a Disadvantaged Business Enterprise Program. sec.9.54.DBE/HUB Goals. The department will periodically establish overall annual DBE and HUB participation goals. The goals will be published in the Texas Register and other media as appropriate. Individual contract goals will be established to achieve the overall goal. (1) Annual goals. (A) DBE goals. Each year the department will establish an agency DBE goal developed after a review of results of previous efforts to contract with DBEs, an estimate of the number and types of contracts to be awarded in the next federal fiscal year, and a projection of the availability of DBEs to compete for contracts. The annual goal will be consistent with the federal requirements of the U.S. Department of Transportation, and compatible with other applicable state and federal laws. (B) HUB goals. The department will periodically establish agency HUB contracting goals consistent with GSC goals set forth at Title 1, Texas Administrative Code, sec.111.13 (relating to Annual Procurement Utilization Goals). (2) Contract goals. Individual contracts having the potential for DBE/HUB participation are assigned participation goals based on the availability of qualified DBE/HUBs, work site location, dollar value of the contract, and type of work items specified in the contract. (A) DBE goals. The department will assign individual contract goals for DBE participation in highway improvements, building construction and maintenance, professional services, aviation, public transportation, private consultant services, and purchasing contracts. (B) HUB goals. Pursuant to Title 1, Texas Administrative Code, sec.111.13 (relating to Annual Procurement Utilization Goals), the department will establish HUB goals for individual contracts. sec.9.58.Contract Compliance. (a) Contract provision. Department contracts involving the expenditure of funds will include a contract provision addressing DBE or HUB requirements. (1) A contract with a goal assigned will include a provision which sets forth program requirements for the type of contract receiving the goal, including, but not limited to, the department's DBE/HUB policy, the DBE/HUB contract goal, good faith efforts, honoring commitments, DBE/HUB substitutions, nondiscrimination, crediting procedures, commercially useful function, contract modifications, reporting requirements, maintenance of records, compliance procedures, enforcement, and sanctions for noncompliance with the terms of the contract provision. (2) A contract without a goal assigned will include provisions; (A) encouraging the use of minority, disadvantaged, and historically underutilized business enterprises in subcontracting activities; and (B) prohibiting discrimination. (b) Monitoring. The department will monitor contractor compliance by: (1) reviewing contractor reports; and (2) making on-site visits to the project or the offices of a contractor or subcontractor. (c) Contractor representative. A contractor receiving a contract with an assigned goal must designate an employee to serve as a DBE/HUB contact person during the contract, and must inform the department of the representative's name, title, and telephone number no later than five days after the contract is signed. The DBE/HUB representative is responsible for submitting reports, maintaining records, and documenting good faith efforts to use DBE/HUBs pursuant to sec.9.55 of this title (relating to Good Faith Effort). (d) Commitments. The following requirements must be satisfied by the contractor unless the contractor is a DBE/HUB. (1) Within the time specified in the contract\proposal, the contractor must furnish a list of commitments made to certified DBE/HUBs to meet the contract goal along with a commitment agreement containing the original signatures of the contractor and the proposed DBE/HUB which includes, but is not limited to: (A) a statement that the contractor intends to provide the DBE/HUB the opportunity to perform the subcontract; (B) the items of work to be performed; (C) the quantities of work or material; (D) the unit measure, unit price, and total cost for each item; (E) the total amount of the DBE/HUB commitment; and (F) if the commitment involves a DBE/HUB material supplier, an explanation of the function to be performed and a description of any arrangements, including joint check agreements, made with other material suppliers, manufacturers, distributors, hauling firms, or freight companies. (2) The contractor must document good faith efforts taken to meet the goal in accordance with: (A) Section 9.55 of this title (relating to Good Faith Efforts); and (B) applicable contract provisions. (e) Reporting. Each contractor receiving a contract with an assigned goal must submit the following reports. (1) The contractor must submit periodic reports at intervals specified in the contract using a report form acceptable to the department that includes, but is not limited to, identification of the DBE/HUB by name and vendor number, and showing the actual amount paid to the DBE/HUB. The report must be submitted even if no payments were made during the period being reported. When required by the department, the contractor must attach proof of payment including, but not limited to, copies of canceled checks. (2) The contractor must submit a final report in accordance with the contract, using a form acceptable to the department which shows: (A) the total paid to each DBE/HUB; and (B) if the contract goal is not met, a description of good faith efforts taken in accordance with: (C) Section 9.55 of this title (relating to Good Faith Efforts); and (D) applicable contract provisions. (f) Credit for expenditures. (1) Full credit for federal aid contracts. A contractor awarded a federal aid contract will receive credit for all payments made to a DBE firm certified in accordance with sec.9.56 of this title (concerning DBE certification) unless: (A) a DBE firm is paid but does not assume contractual responsibility for providing the goods or performing the services; (B) a DBE firm does not perform a commercially useful function as set forth in subsection (g)(1) of this section; (C) a contractor makes payment directly to a material supplier for the cost of materials or supplies used by a DBE subcontractor unless the payment is made with a joint check to the DBE subcontractor and the material supplier in accordance with an invoice submitted by the material supplier; (D) a contractor deducts payment of the cost of materials used by a DBE subcontractor or the cost of leased or rented equipment used by the DBE/HUB from an invoice submitted by the DBE; (E) a payment is made: (i) to a DBE that cannot be linked by an invoice or canceled check to the contract under which credit is claimed; (ii) to a broker or a firm with a brokering-type operation; (iii) to a DBE manufacturer for a product purchased for the project and not manufactured by the DBE manufacturer; (iv) to a DBE trucking firm that does not perform 30% of the contract with trucks owned or leased on a long term basis or with owner-operators, and does not furnish operators, fuel, maintenance and insurance for the owned or leased trucks; (v) for the amount of materials and supplies required on a job site, when the hauler, trucker, or delivery service is not also a manufacturer of or a regular dealer in the materials and supplies; or (vi) for a bona fide service, such as professional, technical, consultant, or managerial services, and assistance in the procurement of essential personnel, facilities, equipment, materials, or supplies required for performance of the contract (The credit is reduced to the amount of the fee or commission charged provided the fee or commission does not exceed that customarily allowed for similar services); or (2) Partial credit for federal aid contracts. A contractor awarded a federal aid contract will receive: (A) 60% for payment to a regular dealer; (B) the percentage of DBE ownership in the joint venture for payment to a joint venture; or (C) the amount of any fee or commission charged for providing any bonds or insurance specifically required for the performance of the contract, provided that the fee or commission does not exceed that customarily allowed for such fee or commission. (3) Non-federal aid contracts. A contractor will receive credit for all payments actually made to a HUB for work performed and costs incurred in accordance with the contract with the following exceptions and/or stipulations and only if the arrangement is consistent with standard industry practice. (A) Payments: (i) to brokers or firms with a brokering-type operation will be credited only for the amount of the commission; (ii) to a joint venture will not be credited unless all partners in the joint venture are HUBs; (iii) to a HUB subcontractor who has subcontracted a portion of the work required under the subcontract will not be credited unless the HUB performs a commercially useful function; (iv) to a HUB firm will not be credited if the firm does not provide the goods or perform the services paid for; (v) made by a contractor directly to a material supplier for the cost of materials or supplies used by a HUB subcontractor will not be credited unless payment is made, from an invoice submitted by the supplier, with a joint check to the supplier and HUB; (vi) made to a HUB supplier not directly involved in the manufacture or distribution of the supplies or materials or who does not otherwise warehouse and ship the supplies will not be credited; or (vii) made to a HUB that cannot be linked by an invoice or canceled check to the contract under which credit is claimed will not be credited. (B) Deductions made by a contractor for the cost of materials used by a HUB subcontractor or the cost of leased or rented equipment used by the HUB from an invoice submitted by the HUB will not be credited. (4) The department may request a contractor to furnish proof of payment made to a DBE/HUB firm including, but not limited to, canceled checks to substantiate expenditures. (5) A contractor must not withhold or reduce payments to any DBE/HUB firm without a reason that is accepted as standard industry practice. (g) Performance. A DBE/HUB contractor or subcontractor must comply with the terms of the contract or subcontract for which it was selected. Work products, services, and commodities must meet contract specifications whether performed by a contractor or subcontractor. (1) Commercially useful function. (A) DBE subcontractors must perform a commercially useful function required in the contract in order for payments to be credited toward meeting the contract goal. A DBE performs a commercially useful function when it: (i) is responsible for a distinct element of the work of a contract; and (ii) actually manages, supervises, and controls the materials, equipment, employees, and all other business obligations attendant to the satisfactory completion of contracted work. (B) The department may conduct an on-site review of a DBE/HUB's performance to determine that it is performing a commercially useful function as part of its routine monitoring program or in response to information or allegations that the DBE is not performing a commercially useful function. (C) If the department determines that a DBE/HUB firm is not performing a commercially useful function under the contract, the department may: (i) suspend the DBE/HUB firm from the DBE/HUB program for a period to be determined by the department; (ii) deny all credit if the prime contractor did the work itself or directed another company to do the work, or deny credit from the time the department determined and notified the prime contractor that the DBE/HUB did not perform a commercially useful function; (iii) review DBE certification; and (iv) revoke DBE certification if an eligibility review indicates that the firm does not meet the standard as described in sec.9.56 of this title (relating to DBE Certification). (D) A DBE may appeal the department's determination to U.S. Department of Transportation pursuant to 49 CFR sec.23.47. (2) Subcontracting. (A) A DBE contractor or subcontractor may subcontract no more than 70% of a federal aid contract. The DBE shall perform not less than 30% of the value of the contract work with: (i) assistance of employees employed and paid directly by the DBE; and (ii) equipment owned or rented directly by the DBE. (B) A HUB prime contractor must perform at least 25% of a nonfederal aid contract with its employees (as defined by the Internal Revenue Service). A HUB prime contractor may subcontract the remaining 75% of the contract to a HUB or non-HUB firm. (C) A HUB subcontractor may subcontract 75% of a nonfederal aid contract as long as the HUB subcontractor performs a commercially useful function. If the subcontractor uses an employee leasing firm for the purpose of providing salary and benefit administration, the employees must in all other respects be supervised and perform on the job as if they were employees of the subcontractor. (D) A contractor may not furnish work crews or equipment to a DBE/HUB subcontractor. (i) A DBE may lease equipment consistent with standard industry practice. A DBE may lease equipment from the prime contractor provided a rental agreement, separate from the subcontract specifying the terms of the lease arrangement, is approved by the department prior to the DBE starting the work. If the equipment is of a specialized nature, the lease may include the operator. If the practice is generally acceptable within the industry, the operator may remain on the lessor's payroll. The operation of the equipment shall be subject to the full control of the DBE, for a short term, and involve a specialized piece of heavy equipment readily available at the job site. (ii) For equipment that is not specialized, the DBE shall provide the operator and be responsible for all payroll and labor compliance requirements. (3) Maximum opportunity. A contractor must allow a DBE/HUB maximum opportunity to perform the work by not creating unnecessary barriers or artificial requirements for the purpose of hindering a DBE/HUB's performance under the contract such as, but not limited to: (A) inadequate notice to perform work; (B) failure to make timely payments; and (C) failure to prepare the worksite on schedule. (h) Substitutions. A contractor must request approval from the department to subcontract with a DBE/HUB firm other than the firm originally authorized. (1) A contractor must provide written justification for a request to substitute a DBE/HUB firm, including, but not limited to, demonstrating that the original firm is unable or unwilling to carry out the terms of the subcontract. (2) The department will contact the DBE/HUB to be displaced and other parties as needed to determine if the DBE/HUB firm to be displaced is willing and able to carry out the terms of the contract. (A) The term "unable" includes, but is not limited to: (i) a firm that does not have the resources and expertise to finish the project; (ii) a firm that substantially increases the time to complete the project causing liquidated damages; or (iii) a firm that creates a safety hazard. (B) If the displaced firm is unwilling or unable to carry out the terms of the subcontract, the department will notify the contractor in writing within five working days of the request of its consent to the substitution, and the contractor must make a good faith effort to substitute another certified DBE/HUB firm for the one being displaced if the cancellation of the DBE/HUB subcontract results in the prime not meeting the goal. (3) Any party aggrieved by the determination effecting the substitution of subcontractors may avail itself of the complaint procedures under sec.9.59 of this title (relating to Complaints). (i) Records. A contractor must retain all records specified in the contract provisions for three years after final payment is made under the contract, or until any investigation, audit, examination, or other review undertaken during the three years is completed. The records must be made available to representatives of the department and other agencies for inspection, audit, examination, investigation, or other review at all reasonable times during the retention period. (j) Compliance conference. The following process is made available to the contractor whenever a finding of noncompliance with DBE/HUB special provisions is made by the department. A contractor involved in a violation may be given an opportunity to remedy the violation before the department issues sanctions. (1) A letter will be sent to the contractor notifying the contractor that it is not in compliance with the DBE/HUB special provision in the contract. (2) The contractor may respond in writing. If the written response does not resolve the issues, the department will invite the contractor to attend an informal compliance conference, within 15 calendar days from the date of the written response, to discuss the issues. (3) The contractor will be given 15 calendar days from the date of the conference to submit additional information to resolve the issues. (4) The department will make a final determination regarding compliance within 15 calendar days from the conference or receipt of any additional information. (5) If a determination of noncompliance has been made by the department, a contractor will be given an opportunity to submit a voluntary written corrective action plan to correct the violations. (6) When a contractor fails to take corrective actions, the department may issue a notice to the contractor to show cause for noncompliance and why enforcement proceedings should not be instituted. (7) The department may impose sanctions, pursuant to subsection (k) of this section, for failure to show cause why enforcement proceedings should not be instituted. (k) Sanctions. (1) The department may issue sanctions to a contractor that does not comply with contract requirements. (2) If a successful bidder for a highway improvement contract does not furnish the required DBE/HUB commitment information during the time period specified in the DBE/HUB special provision, the department may declare the contractor to be in default and retain the proposal guaranty as liquidated damages in accordance with sec.9.18 of this title (relating to After Contract Award). (3) The department will impose sanctions if the contractor: (A) is found to have discriminated against a DBE/HUB firm; (B) has failed to meet the contract DBE/HUB goal and has failed to demonstrate a good faith effort to meet the goal; (C) DBE/HUB commitments were not kept; or (D) DBE/HUB firms were not given the maximum opportunity to perform under a subcontract. (4) The department may impose any of the following sanctions: (A) letter of reprimand; (B) liquidated damages computed up to the amount of goal dollars not met; (C) contract termination; and/or (D) other remedies available by law. (5) Factors to be considered in issuing sanctions may include, but are not limited to: (A) the magnitude and the type of the offense; (B) the degree of the contractor's culpability; (C) any steps taken to rectify the situation; (D) the contractor's record of performance on other projects including, but not limited to: (i) annual DBE/HUB participation over DBE/HUB goals; (ii) annual DBE/HUB participation on projects without goals or payment incentives; (iii) number of complaints the department has received from DBEs/HUBs; and (iv) the number of times the contractor has been previously sanctioned by the department pursuant to this section; and (E) whether a contractor falsified, misrepresented, or withheld information. (6) A contractor may appeal the department's sanction to the Business Appeals committee pursuant to sec.9.61 of this title (relating to Appeals). This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 1, 1997. TRD-9704362 Bob Jackson Deputy General Counsel Texas Department of Transportation Effective date: April 21, 1997 Proposal publication date: February 11, 1997 For further information, please call: (512) 463-8630 CHAPTER 21.Right of Way SUBCHAPTER C.Utility Accommodation 43 TAC sec.21.35 The Texas Department of Transportation adopts an amendment to sec.21.35, concerning utility accommodation, with changes to the proposed text as published in the January 3, 1997, issue of the Texas Register (22 TexReg 41). Section 21.35 presently allows for exceptions to any design, location, or methods of installation provisions contained in sec.sec.21.31-21.56, relating to utility accommodation, to be authorized by the bridge engineer, chief engineer of highway design, or chief engineer of maintenance and operations. Section 21.35 also presently allows for exceptions to forms used and/or for property rights issues pursuant to such utility accommodation to be authorized by the right of way engineer and/or chief engineer of maintenance and operations. As the department's Right of Way Division functions are the central focus of all utility accommodation activities and to update the titles of responsible department personnel, sec.21.35 is amended to place the authority for approving all such exception requests with the Right of Way Division Director. This section is also amended to provide for certification by the District Director of Transportation Planning and Development, who has authority over the right of way functions of the district in which the affected state highway right of way is located, that the exception request meets all documentation and justification requirements. No comments were received on the proposed amendments. However, for clarification the department adopts the amendment with a change in the first sentence to specifically cite sec.21.48 as an exception to sec.21.35. The amendment is adopted under Transportation Code, sec.201.101, which provides the Texas Transportation Commission with the authority to promulgate rules for the conduct of the work of the Texas Department of Transportation. sec.21.35.Exceptions. Except as provided in sec.21.48 (relating to Traffic Structures), exceptions to any design, location, or methods of installation provisions contained in these sections relating to utility accommodation shall be certified by the District Director of Transportation Planning and Development and authorized by the Right of Way Division Director using the form entitled "Certification for Utility Accommodation". Exceptions for form(s) and/or property rights may be authorized by the Right of Way Division Director. Requests for exceptions will be considered only where it is shown that extreme hardship and/or unusual conditions provide justification and where alternate measures can be prescribed in keeping with the intent of these sections. All requests for such exceptions shall be fully documented with design data, cost comparisons, and other information that may be pertinent. This agency hereby certifies that the adoption has been reviewed by legal counsel and found to be a valid exercise of the agency's legal authority. Issued in Austin, Texas, on April 1, 1997. TRD-9704361 Bob Jackson Deputy General Counsel Texas Department of Transportation Effective date: April 21, 1997 Proposal publication date: January 3, 1997 For further information, please call: (512) 463-8630