Part 1. RAILROAD COMMISSION OF TEXAS

Chapter 3. OIL AND GAS DIVISION

16 TAC §3.80

The Railroad Commission of Texas adopts amendments to §3.80, relating to Commission Forms, Applications and Filing Requirements, with one change to the version published in the January 27, 2006, issue of the Texas Register (31 TexReg 450). The amendments add three new Railroad Commission Oil and Gas Division Forms to Table 1; the adopted change adds the effective date of "4/06" to the table on the rows for the three new OW forms. The new forms, which were also published in the January 27, 2006, issue of the Texas Register at 31 TexReg 597, are Form OW-1, entitled "Application for Authority to Conduct a Surface Inspection of Orphaned Oil or Gas Wells"; Form OW-2, entitled "Application for Certificate of Designation as the Operator of Orphaned Oil or Gas Wells"; and Form OW-3, entitled "Application for Payment for Reactivating or Plugging an Orphaned Oil or Gas Well." The Commission also deletes from Table 1 the entries for Forms P-1 and P-2, Producer's Monthly Report of Oil Wells and Producer's Monthly Report of Gas Wells, respectively.

The Commission has designed the new forms to meet the requirements established by those sections of House Bill (HB) 2161, enacted by the 79th Texas Legislature (Regular Session, 2005), relating to the Orphan Well Reduction Program and plugging of orphaned wells by surface estate owners. HB 2161, among other things, added to Chapter 89 of the Texas Natural Resources Code a new §89.047, relating to the Orphaned Well Reduction Program. This new section includes procedures, requirements, and incentives for a person to assume operatorship and regulatory responsibility for orphaned oil or gas wells. The new statutory provision requires that the Commission establish a program to allow approval of applications for authorization that would allow an operator to perform an inspection of a well site for consideration of assuming operatorship of an orphan well, to provide for payments from the state's Oil-Field Cleanup Fund (OFCUF) to "adopters" of orphaned wells, and to provide for the certification of a well as "orphan" for the purpose of a severance tax exemption and exemption from Oil-Field Cleanup Regulatory fees on production from "adopted" orphaned wells. This program became effective on January 1, 2006.

HB 2161 also added to Chapter 89 of the Texas Natural Resources Code new §89.048, which authorizes the Commission to reimburse from the Oil-Field Cleanup Fund a portion of costs incurred by surface estate owners who plug orphaned wells on their property. This new section also became effective on January 1, 2006.

New §89.048 of the Texas Natural Resources Code defines an "orphaned well" as a well for which the Commission has issued a permit, for which production of oil or gas or another activity under Commission jurisdiction has not been reported to the Commission for the preceding 12 months, and whose operator's Commission-approved P-5 Organizational Report has lapsed.

The Commission adopts new Form OW-1, Application for Authority to Conduct a Surface Inspection of Orphaned Oil or Gas Wells, which is designed to ensure that the eligibility and other requirements of Texas Natural Resources Code, §89.047(b), (c), (d), and (e) are met. A person considering assumption of operatorship and regulatory responsibility for orphaned wells would file Form OW-1 and any required attachments in order to nominate the wells and apply for authority to conduct a surface inspection to determine whether he/she wishes to be designated as the operator of the wells. Form OW-1 requires that the applicant and the wells proposed for nomination meet the eligibility and other requirements of §89.047. If the wells have not been nominated already and the operator applying for well nomination meets all eligibility requirements, the Commission will accept the nomination and issue confirmation of authority to conduct a surface inspection of the nominated wells. The authority would expire 30 calendar days from the date of Commission approval. Statutory conditions of the authority include compliance with certain notice requirements and limitations of this authority. At least three days before the date of the surface inspection, the applicant must deliver written notice to the owner of record of the surface estate and any occupant of the tract on which the well is located.

The Commission also requests that such notice be given to the appropriate Commission District Office. As required by Texas Natural Resources Code, §89.047(d), Form OW-1 states that the notice must include a copy of Commission-approved confirmation of authority to conduct a surface inspection; identify the orphaned wells; state the name, address, and telephone number of the operator; state the date the person intends to conduct the surface inspection; state the name of at least one representative of the person who will participate in the surface inspection; and state that the person intends to inspect the orphaned well in accordance with this section for the purpose of assessing the current status and viability of the well. These requirements will be satisfied by providing a copy of the completed and approved Form OW-1.

Form OW-1 also advises of the statutory limits placed by Texas Natural Resources Code, §89.047(e), on the authority to conduct a surface inspection. In conducting a surface inspection of the orphaned wells, the person may visually inspect the wells and all related equipment, tanks, and other facilities and may conduct noninvasive testing such as using a gauge to determine the pressure present at the wellhead but may not produce oil or gas from the wells, reenter the wells, pull tubing from or perform any other type of downhole work on the wells, conduct a salvage operation on the wells, or remove any tangible item from the well site or lease.

The Commission includes on Form OW-1 a notice to the applicant that issuance of the Confirmation to Conduct a Surface Inspection of Orphaned Wells does not guarantee that the Commission will designate the applicant as the operator of the referenced wells nor will it prevent transfer of the wells to an operator who has a good faith claim. The Commission must process any request for lease or well transfer (Form P-4) as those requests are received.

If after 30 days from the date of Commission approval of the authority to conduct a surface inspection or if after conducting the surface inspection the operator does not wish to be designated as the operator of the wells, the wells again would become eligible for nomination by another operator.

If an operator wishes to be designated as the operator of orphaned oil or gas wells under the Orphaned Well Reduction Program B whether or not the operator wishes to conduct a surface inspection of the orphaned wells B the operator must meet certain eligibility requirements and submit certain information and forms to the Commission. In order to be designated as the operator of orphaned wells under the Orphaned Well Reduction Program, the operator must be an operator in good standing and must have sufficient financial security in accordance with §3.78, relating to Fees and Financial Security Requirements, to cover the well or wells for which he wishes to be designated as operator. An operator in good standing is an operator who has a Commission-approved organization report; is the designated operator of at least one well within the Commission's jurisdiction; has filed with the Commission under Texas Natural Resources Code, §91.104, a bond, letter of credit, or cash deposit in an amount sufficient to qualify to operate one or more wells; and is not the subject of a Commission or court order regarding a violation of a Commission rule with which the operator has not complied or a complaint that has been docketed by the Commission alleging a violation of a Commission rule. In addition, if the well is subject to a Commission Final Order requiring plugging, the Commission must first conduct a hearing and enter a superceding order before the operator can be designated as the operator of the well.

If the operator meets all of the eligibility requirements, the operator may apply to the Commission for a Certificate of Designation as the Operator of Orphaned Oil or Gas Wells. The Commission adopts new Form OW-2, Application for Certificate of Designation as the Operator of Orphaned Oil or Gas Wells, for this purpose. Form OW-2 must be accompanied by a completed and signed Form P-4, Producer's Transportation Authority and Certificate of Compliance, in accordance with §3.58, relating to Oil, Gas, or Geothermal Resource Operator's Reports; if necessary, a completed and signed Form P-6, Request for Permission to Consolidate/Subdivide Leases, if the operator is not requesting designation as the operator of all wells on a lease; a factually supported claim based on a recognized legal theory to a continuing possessory right in the mineral estate accessed by the well, such as evidence of a current oil and gas lease or a recorded deed conveying a fee interest in the mineral estate; and a non-refundable fee in the amount of $250 for each well for which the operator wishes to be designated as the operator.

If all requirements are met, the Commission will issue the Certificate of Designation as Operator of an Orphaned Well, in accordance with Texas Natural Resources Code, §89.047, by approving the Form OW-2.

An operator adopting orphaned wells from January 1, 2006, to December 31, 2007, may be eligible to receive certain benefits, such as a payment from the Oil-Field Cleanup Fund and/or an exemption from severance taxes (Tax Code, §202.060) and Oil-Field Cleanup Regulatory fees (Texas Natural Resources Code, §81.116 and §81.117) on future oil or gas production from the wells.

An operator who is designated as the operator of an orphaned oil or gas well (an operator who has received a Commission-approved Certificate of Designation as Operator of an Orphaned Well, in accordance with Texas Natural Resources Code, §89.047) may be entitled to a severance tax exemption. HB 2161 amended Chapter 202 of the Tax Code to provide a severance tax exemption from oil or gas produced from a reactivated orphaned well under the Orphaned Well Reduction Program.

The person responsible for paying the tax must apply to the Comptroller of Public Accounts (Comptroller). The statutes require that an application for a severance tax exemption include a copy of the certificate of designation as the operator of an orphaned well issued by the Commission and require that the Comptroller approve the application if the person demonstrates that the hydrocarbon production is eligible. The Comptroller may require a person applying for the tax exemption to provide any relevant information necessary and may establish procedures to comply with the new law. The exemption takes effect on the first day of the month following the month in which the Comptroller approves the application. Because the exemption is non-transferable, if the person to whom this certificate is issued ceases to be the operator of the well as shown by Commission records, the Commission will notify the Comptroller and the exemption will expire on the date the Comptroller receives the notice.

In addition, an operator who is designated as the operator of an orphaned oil or gas well (an operator who has received a Commission-approved Certificate of Designation as Operator of an Orphaned Well, in accordance with Texas Natural Resources Code, §89.047) may be entitled to a payment of $0.50 per foot of well depth if the operator plugs the well or reactivates the well. If the operator and the well meet the eligibility requirements, the operator may apply for payment. A well is considered to be in continuous active operation for purposes of payment if: (1) the well is a producing well (a well classified by the Commission as an oil or gas well in accordance with Commission rules) and the well has produced at least 10 barrels of oil or 100 mcf of gas per month for at least three consecutive months as shown in Commission records and as authorized by a permit issued by the Commission; or (2) the well is a service well and the well has been used for the disposal or injection of oil and gas wastes or another purpose related to the production of oil or gas for at least three consecutive months as shown in Commission records and as authorized by a permit issued by the Commission. The statutes define a "service well" as a well for which the Commission has issued a permit that is not a producing well, including an injection, disposal, or brine mining well.

A designated operator wishing to apply for the payment authorized under Texas Natural Resources Code, §89.047, will file with the Commission's Field Operations Section a completed and signed Form OW-3, Application for Payment for Reactivating or Plugging an Orphaned Oil or Gas Well, and any required attachments, including a copy of the Commission-approved certificate of designation as the operator of an orphaned well; and, if the well was plugged, Form W-3 (Plugging Record); if the well was produced, signed documentation proving that the well produced at least 10 barrels of oil or 100 mcf of gas per month for at least three consecutive months; or if the well was used as a service well, a copy of the injection/disposal/other well permit, a copy of the completion report, and signed documentation proving that the well was used as an injection or disposal or other service well for a period of at least three consecutive months.

In accordance with Texas Natural Resources Code, §89.047, the operator must be designated as the operator of the orphaned well on or after January 1, 2006, and on or before December 31, 2007, in order to be entitled to receive the payment under the Orphan Well Reduction Program. In addition, the statutes require that the Commission make payments to operators in the same order the Commission determines the operators to be entitled to the payments. Further, the aggregate amount of such payments in a state Fiscal Year (September 1 through August 31) may not exceed $500,000. And, as mentioned before, the payment is nontransferable; therefore, the Commission may make the payment only to the operator who was designated as the operator of the orphaned well. Finally, an operator may not receive more than one payment under that subsection for the same well or cumulative payments in an amount that exceeds the amount of the bond, letter of credit, or cash deposit the operator has filed with the Commission under Texas Natural Resources Code, §91.104.

HB 2161 also provides for civil penalties for filing a false application for the purpose of receiving a tax exemption and provides the Attorney General with the authority to recover a penalty.

As noted, HB 2161 also added to Chapter 89 of the Texas Natural Resources Code new §89.048, which authorizes reimbursement of a portion of the costs incurred by a surface estate owner for plugging or orphaned wells. A surface estate owner will complete and file new Form OW-3, Application for Payment for Reactivating or Plugging an Orphaned Oil or Gas Well, when applying for such reimbursement.

New Texas Natural Resources Code, §89.048, authorizes the Commission to reimburse the owner for the cost of plugging an orphaned well on the surface owner's property in an amount not to exceed 50 percent of the lesser of actual costs or the average cost incurred by Commission in the preceding 24 months in plugging similar wells. The new section authorizes the Commission to make such payments from the Oil-Field Cleanup Fund (OFCUF). Under Texas Natural Resources Code, §89.048, the surface estate owner must contract with a Commission-approved well plugger to plug an orphaned well on his/her property. The well plugger under contract must mail to the operator of record at least 30 days before plugging operations a notice of its intent to plug, assume responsibility for the physical operation and control of the well (file a one-signature Form P-4, Producer's Transportation Authority and Certificate of Compliance), file financial security to cover the well, and plug the well in compliance with Commission rules. Upon successful plugging of the well by the well plugger, the surface estate owner would submit to the Commission a completed and signed Form OW-3 and documentation of the plugging costs. The Commission will then reimburse the surface estate owner from the OFCUF for the lesser of 50 percent of the documented well-plugging costs or the average Commission costs for plugging a similar well in the same general area within the preceding 24 months.

The Commission also deletes from Table 1 the entries for Forms P-1 and P-2, Producer's Monthly Report of Oil Wells and Producer's Monthly Report of Gas Wells, respectively. These forms were replaced by Form PR, Monthly Production Report, on February 11, 2005.

The Commission received no comments on the proposed amendments or new forms.

The Commission adopts the amendments to §3.80 pursuant to Texas Natural Resources Code, §81.051 and §81.052, which give the Commission jurisdiction over all persons owning or engaged in drilling or operating oil or gas wells in Texas and the authority to adopt all necessary rules for governing and regulating persons and their operations under Commission jurisdiction; and Texas Natural Resources Code, §89.047 and §89.048, which establish the Orphaned Well Reduction Program, and which, with Texas Natural Resources Code, §91.112, authorize the Commission to make payments to surface estate owners who plug orphaned oil or gas wells on their property.

Statutory authority: Texas Natural Resources Code, §§81.051, 81.052, 89.047, 89.048, and 91.112.

Cross-reference to statute: Texas Natural Resources Code, §§81.051, 81.052, 89.047, 89.048, and 91.112.

Issued in Austin, Texas, on March 14, 2006.

§3.80.Commission Oil and Gas Forms, Applications, and Filing Requirements.

(a) Forms. Forms required to be filed at the Commission shall be those prescribed by the Commission as listed in Table 1 of this subsection. A complete set of all Commission forms listed on Table 1 required to be filed at the Commission shall be kept by the Commission secretary and posted on the Commission's web site. Notice of any new or amended forms shall be issued by the Commission. For any required or discretionary filing, an organization may either file the prescribed form on paper or use any electronic filing process in accordance with subsections (e) or (f) of this section, as applicable. The Commission may at its discretion accept an earlier version of a prescribed form, provided that it contains all required information and meets the requirements of subsection (e)(3) of this section.

Figure: 16 TAC §3.80(a)

(b) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.

(1) Commission--The Railroad Commission of Texas.

(2) Electronic filing process--An electronic transmission to the Commission in a prescribed form and/or format authorized by the Commission and completed in accordance with Commission instructions.

(3) Form--A printed or typed paper document or electronic submission, including any necessary instructions, with blank spaces for insertion of required or requested specific information.

(4) Organization--Any person, firm, partnership, joint stock association, corporation, or other organization, domestic or foreign, operating wholly or partially within this state, acting as principal or agent for another, for the purpose of performing operations within the jurisdiction of the Commission.

(5) Position of ownership or control--A person holds a position of ownership or control in an organization if the person is:

(A) an officer or director of the organization;

(B) a general partner of the organization;

(C) the owner of an organization which is a sole proprietorship;

(D) the owner of more than a 25 percent ownership interest in the organization; or

(E) the designated trustee of the organization.

(6) Violation--Non-compliance with a statute, Commission rule, order, license, permit, or certificate relating to safety or the prevention or control of pollution.

(c) Organization eligibility. The Commission may not accept an organization report or an application for a permit, or approve a certificate of compliance if:

(1) the organization that submitted the report, application, or certificate violated a statute or Commission rule, order, license, certificate, or permit that relates to safety or the prevention or control of pollution; or

(2) any person who holds a position of ownership or control in the organization has, within the seven years preceding the date on which the report, application, or certificate is filed, held a position of ownership or control in another organization, and during that period of ownership or control the other organization violated a statute or Commission rule, order, license, permit, or certificate that relates to safety or the prevention or control of pollution.

(d) Violations. An organization has committed a violation if there is either a Commission order against an organization finding that the organization has committed a violation and all appeals have been exhausted or an agreed order entered into by the Commission and an organization relating to an alleged violation, and:

(1) the conditions that constituted the violation or alleged violation have not been corrected;

(2) all administrative, civil and criminal penalties, if any, relating to the violation or agreed settlement relating to an alleged violation have not been paid; or

(3) all reimbursements of costs and expenses, if any, assessed by the Commission relating to the violation or to the alleged violation have not been collected.

(e) Authorization and standards for electronic filing.

(1) An organization may file electronically any form listed on Table 1 for which the Commission has provided an electronic version, provided that the organization pays all required filing fees and complies with all requirements, including but not limited to security procedures, for electronic filing.

(2) The Commission deems an organization that files electronically or on whose behalf is filed electronically any form, as of the time of filing, to have knowledge of and to be responsible for the information filed on the form, pursuant to the statutory requirements, restrictions, and standards found in and pertaining to:

(A) Texas Natural Resources Code, Title 3 (oil and gas well drilling, production, and plugging);

(B) Texas Natural Resources Code, Title 5 (geothermal resources);

(C) Texas Natural Resources Code, Title 11 (hazardous liquids storage);

(D) Texas Utilities Code, Chapter 121, Subchapter I (sour gas pipeline facilities);

(E) Texas Water Code, §26.131 (discharge permits);

(F) Texas Water Code, Chapter 27 (class II injection and disposal wells and class III brine mining wells);

(G) Texas Water Code, Chapter 29 (oil and gas waste haulers);

(H) Texas Health and Safety Code, §401.415 (oil and gas naturally occurring radioactive material (NORM) waste); and

(I) Texas Administrative Code, Title 16, Chapter 3 (Oil and Gas Division) and Chapter 4 (Environmental Protection).

(3) All forms that an organization submits or that are submitted on behalf of an organization shall be transmitted in the manner prescribed by the Commission that is compatible with its software, equipment, and facilities.

(4) The Commission may provide notice electronically to an organization of, and may provide an organization the ability to confirm electronically, the Commission's receipt of a form submitted electronically by or on behalf of that organization.

(5) The Commission deems that the signature of an organization's authorized representative appears on each form submitted electronically by or on behalf of the organization, as if this signature actually appears, as of the time the form is submitted electronically to the Commission.

(6) The Commission holds each organization responsible, under the penalties prescribed in Texas Natural Resources Code, §91.143, for all forms, information, or data that an organization files or that are filed on its behalf. The Commission charges each organization with the obligation to review and correct, if necessary, all forms or data that an organization files or that are filed on its behalf.

(f) Other electronic transmissions. The Commission may at its discretion accept other documents or data electronically transmitted.

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.

Filed with the Office of the Secretary of State on March 14, 2006.

TRD-200601603

Mary Ross McDonald

Managing Director, Office of General Counsel

Railroad Commission of Texas

Effective date: April 3, 2006

Proposal publication date: January 27, 2006

For further information, please call: (512) 475-1295

16 TAC §7.7201

The Railroad Commission of Texas adopts new §7.7201, relating to the Natural Gas Pipeline Competition Study Advisory Committee, in new Subchapter I entitled "Natural Gas Pipeline Competition," without changes to the version published in the February 10, 2006, issue of the Texas Register (31 TexReg 789). Pursuant to the requirements of Texas Government Code, §§2110.001 - 2110.008, the new section creates the Natural Gas Pipeline Competition Study Advisory Committee of the Commission and establishes its duration; sets forth the purpose and tasks of the committee; prescribes the nomination and appointment process; and sets forth the mechanisms by which the committee reports to the Commission.

New §7.7201 creates the Natural Gas Pipeline Competition Study Advisory Committee, effective April 3, 2006, and abolishes it on December 31, 2006, unless the Commission amends the rule to change that date. The purpose of the committee is to give the Commission the benefit of the members' collective business, technical, and operating expertise and experience to help the Commission review competition in the Texas intrastate natural gas pipeline industry, assess the effect of current statutes and rules on competition, and develop recommendations for changes to statutes or rules that may be necessary. The Commission will not reimburse members for travel or other expenses related to service on the committee.

The Commission received one comment on the proposed new rule. R.J. Covington Consulting filed comments on behalf of Texas Independent Energy. Texas Independent Energy, LP (a Delaware limited partnership) and subsidiaries (TIE) is an indirect wholly owned subsidiary of Public Service Enterprise Group, Incorporated. The Partnership was formed in March 1999, and holds a 100 percent ownership interest in Guadalupe Power Partners, LP, and Odessa-Ector Power Partners, L.P., which develop, construct and operate merchant electric power plants in Texas.

TIE participated in the RRC's recent workshops organized to gather firsthand information from market participants on abusive discriminatory practices that impact fair competition on the Texas intrastate pipeline system. TIE understands that the advisory committee will incorporate the information gathered at these workshops to review competition in the Texas intrastate pipeline industry, assess the effect of current statutes and rules on such competition, and develop recommendations for changes to statutes or rules that may be necessary to assure fair competition.

TIE commented that it has experienced anti-competitive practices by Texas intrastate pipelines, and has discussed some of these issues at the RRC's workshops. As an electric generator, TIE and others like it face unique challenges in meeting the variable demand for electricity at a reasonable cost for consumers in Texas. Problems TIE identified relate to inadequate access to information, insufficient recourse in contract disputes, and ineffective oversight of pipeline practices all affect the competitive operation of its power plants.

TIE's comment therefore draws attention to §7.7201(d) of the proposed rule regarding nominations for committee membership. TIE recognizes the authority of the Commission to nominate and appoint members to the committee that the individual Commissioners believe will best advise them on matters related to pipeline competition. However, TIE urges the Commission to consider committee members that can effectively articulate the important and unique issues faced by shippers such as power generators. While natural gas producers and pipeline operators were widely represented at the RRC's workshops, it was clear that the competitive issues impacting power generators as consumers of natural gas are not necessarily represented by either of these other market participants. In fact, TIE found itself aligned alternatively with producers or pipelines on different issues. In TIE's view, this reinforces the need for the committee membership to reflect the broader perspective of other affected parties and, specifically, power generators.

The Commission appreciates TIE's support of the creation of the advisory committee, TIE's participation in the workshops, and its assistance in providing information about the Texas intrastate natural gas pipeline industry. Because TIE's comments do not address the wording or structure of the rule, the Commission makes no changes to new §7.7201 based on TIE's comments. Nevertheless, TIE's comments will be considered as the Commission appoints the members of the advisory committee created pursuant to new §7.7201.

The Commission adopts the new section under Texas Natural Resources Code, §81.052, which gives the Commission the authority to adopt all rules necessary for governing and regulating persons and their operations under the jurisdiction of the Commission; Article VI, Railroad Commission, Section 16, Appropriations Act, 2006-2007 Biennium, 79th Legislature, Regular Session, 2005, which requires the Commission to conduct a study that determines the extent to which competition exists in the Texas natural gas pipeline industry; Texas Government Code, §2001.031, which authorizes the Commission to appoint advisory committees to advise the Commission about contemplated rulemaking; and Texas Government Code, §§2110.001 - 2110.008, which mandate specific requirements for state agency advisory committees.

Article VI, Railroad Commission, Section 16, Appropriations Act, 2006-2007 Biennium, 79th Legislature, Regular Session, 2005, Texas Government Code, §2001.031, and Texas Government Code, §§2110.001 - 2110.008, are affected by the new section.

Statutory authority: Texas Natural Resources Code, §81.052; Article VI, Railroad Commission, Section 16, Appropriations Act, 2006-2007 Biennium, 79th Legislature, Regular Session, 2005; and Texas Government Code, §2001.031, and §§2110.001 - 2110.008.

Cross-reference to statutes: Texas Natural Resources Code, §81.052; Article VI, Railroad Commission, Section 16, Appropriations Act, 2006-2007 Biennium, 79th Legislature, Regular Session, 2005; and Texas Government Code, §2001.031, and §§2110.001 - 2110.008.

Issued in Austin, Texas, on March 14, 2006.

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.

Filed with the Office of the Secretary of State on March 14, 2006.

TRD-200601602

Mary Ross McDonald

Managing Director, Office of General Counsel

Railroad Commission of Texas

Effective date: April 3, 2006

Proposal publication date: February 10, 2006

For further information, please call: (512) 475-1295

Chapter 401. ADMINISTRATION OF STATE LOTTERY ACT

Subchapter D. LOTTERY GAME RULES

16 TAC §401.305

The Texas Lottery Commission (Commission) adopts the repeal of rule 16 TAC §401.305, relating to the Lotto Texas online game, without change as published in the December 9, 2005, issue of the Texas Register (30 TexReg 8249).

The repeal is adopted concurrently with the adoption of a new Lotto Texas on-line game rule at 16 TAC §401.305. The Commission is repealing the old rule, rather than adopting amendments to the existing rule, to change the structure of the rule so that the rule is easier to understand.

The Commission received no comments on the repeal of §401.305.

The repeal is adopted under Government Code, §466.015 which authorizes the Commission to adopt all rules necessary to administer the State Lottery Act and to adopt rules governing the establishment and operation of the lottery, and under Government Code, §467.102, which authorizes the Commission to adopt rules for the enforcement and administration of the laws under the Commission's jurisdiction.

The repeal implements Government Code, Chapter 466.

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.

Filed with the Office of the Secretary of State on March 16, 2006.

TRD-200601681

Kimberly L. Kiplin

General Counsel

Texas Lottery Commission

Effective date: April 23, 2006

Proposal publication date: December 9, 2005

For further information, please call: (512) 344-5113

16 TAC §401.305

The Texas Lottery Commission (Commission) adopts new rule 16 TAC §401.305 relating to the Lotto Texas online game. The Commission adopts the rule with changes to the proposed text as published in the December 9, 2005, issue of the Texas Register (30 TexReg 8252).

The rule as adopted changes the proposed text of subsection (c)(3) to clarify the distinction between completing a playboard and purchasing a play. The rule as adopted adds subsection (f)(8) to clarify that there will be no further allocations to a Lotto Texas prize reserve fund. The rule as adopted changes the proposed text of subsection (f)(4)(B) to clarify that funds allocated to the Lotto Texas prize reserve fund will be depleted before other funds will be used to pay the fourth prize in a situation in which the total amount of the fourth prize for a drawing exceeds the amount of Lotto Texas ticket sales allocated for the fourth prize. In response to public comment, the rule as adopted changes the proposed text of subsections (f)(2)(C) and (f)(3)(C), to provide that second and third prize payments will be rounded to the nearest whole dollar, rather than being rounded down to the nearest whole dollar amount. The new rule is adopted concurrently with the adoption of the repeal of the existing 16 TAC §401.305. The Commission is adopting a new rule, rather than adopting amendments to the existing rule, to change the structure of the rule so that the rule is easier to understand. Hereinafter, the term "new Lotto Texas rule" refers to the rule adopted by this action and made effective on April 23, 2006. The term "current Lotto Texas rule" refers to the rule in effect until April 23, 2006.

BACKGROUND AND PURPOSE

In May 2003 the Commission changed the Lotto Texas game from a game with a 6-of-54 matrix to a game with a 5-of-44 matrix and a separate 1-of-44 bonus ball matrix. After that change, there was a decline in sales of Lotto Texas tickets.

In May 2005 the Commission conducted studies regarding the Lotto Texas game in McAllen, Dallas and Houston. Participants responded to specific questions on a questionnaire and also participated in moderated discussions about participants' likes and dislikes in connection with the current Lotto Texas game and in connection with possible changes to the game. The Commission posted a link to the questionnaire on its website to provide an opportunity for players throughout the state to participate in the studies. The studies indicated that players generally disliked the bonus ball and preferred a game in which they selected six numbers from a single matrix. Although the studies indicated that players would prefer a game without a bonus ball, the studies were inconclusive as to whether eliminating the bonus ball would lead to higher sales of Lotto Texas tickets. Participants also expressed the view that the 1-in-47,784,352 odds of winning the jackpot were too high.

The new Lotto Texas rule changes the current Lotto Texas rule by eliminating the separate bonus ball matrix. Subsections (b)(1) and (d)(2) of the new rule provide for a single 6-of-54 matrix. Under the new rule there will be a 1-in-25,827,165 chance that a play will match the six numbers drawn in a drawing. A return to a 6-of-54 matrix will allow Commission staff to respond to player dissatisfaction with the bonus ball and to carefully monitor sales to determine if sales improve with the elimination of the bonus ball. Staff will evaluate sales to determine what changes may need to be made to the game in the future.

The new Lotto Texas rule changes the current Lotto Texas rule by setting out a prize structure that corresponds to the new matrix. See section (f). The current Lotto Texas rule sets out a prize structure that provides for prizes for the following matches: five of 44 and the bonus ball; five of 44 and not the bonus ball; four of 44 and the bonus ball; four of 44 and not the bonus ball; three of 44 and the bonus ball; three of 44 and not the bonus ball; two of 44 and the bonus ball; and one of 44 and the bonus ball. The new rule sets out a prize structure that provides prizes for matching three, four, five or six of the six numbers drawn. In connection with each draw, 40.47 percent of the proceeds from Lotto Texas ticket sales will be allocated to the 6-of-6 (jackpot) prize. The jackpot amount is to be divided evenly among all jackpot winners. If there is no winner, the amount allocated for the jackpot prize will become part of the jackpot prize for the next draw. The jackpot prize will be the greater of the total allocations from Lotto Texas ticket sales or the amount advertised. If the total allocations from Lotto Texas ticket sales are insufficient to pay an advertised jackpot, the Commission will first use the Lotto Texas prize reserve fund and then any other available source of funds. In connection with each draw, 2.23 percent of the proceeds from Lotto Texas ticket sales will be allocated to the 5-of-6 (second) prize. The allocation is to be divided evenly among all winners at that level. Prizes will be rounded to the nearest dollar. Any part of the second prize for a drawing that is not paid in prizes will be carried forward and will become part of the second prize for the next drawing. In connection with each draw, 3.28 percent of the percentage of the proceeds from Lotto Texas ticket sales will be allocated to the 4-of-6 (third) prize. The allocation is to be divided evenly among all winners at that level. Prizes will be rounded to the nearest dollar. Any part of the third prize for a drawing that is not paid in prizes will be carried forward and will become part of the third prize for the next drawing. The 3-of-6 (fourth) prize is $3, and 4.02 percent of Lotto Texas ticket sales is allocated for the fourth prize. If that allocation is insufficient in connection with a particular draw, the Commission will first use the Lotto Texas prize reserve fund and then any other available source of funds.

The new Lotto Texas rule will change the current Lotto Texas rule by eliminating the concept of "prize pool." The current Lotto Texas rule allocates a percentage of Lotto Texas ticket sales to a "prize pool" and then allocates a percentage of the "prize pool" to each prize level. The new rule eliminates the concept of "prize pool" and simply allocates a percentage of Lotto Texas tickets sales to each prize level. Commission rules define the term "prize pool" as the percentage of ticket sales that is allocated to prizes for a particular draw period. See 16 TAC §401.301(43). The concept is not applicable in a game in which the amount of sales devoted to prizes in connection with a drawing varies over time because of guaranteed prizes. Also, the new Lotto Texas rule allows the Commission to draw on sources other than Lotto Texas ticket sales to fund prizes. For those reasons, the concept of "prize pool" as a percentage of sales is inapplicable to the new Lotto Texas rule.

The new Lotto Texas rule will change the current Lotto Texas rule by not allocating a percentage of proceeds from Lotto Texas ticket sales to a prize reserve fund. Previous versions of the Lotto Texas rule have allocated a portion of sales to a Lotto Texas prize reserve fund. The Commission has determined that this is an unnecessary accounting mechanism because the State Lottery Account is available for the payment of prizes for any game and there is therefore no need to segregate proceeds by game.

The new Lotto Texas rule will change the current Lotto Texas rule by providing for rounding to the nearest whole dollar amount, rather then rounding down to the nearest whole dollar amount.

As published in the Texas Register on December 9, 2005, paragraph (c)(3) of the proposed rule provided, "A player may use a single playslip to purchase up to five plays." As adopted, paragraph (c)(3) provides, "A player may complete up to five playboards on a single playslip." The change was made to make the use of the term "play" consistent with the definition of the term in the new rule.

PUBLIC COMMENT

The Texas Lottery Commission held a public comment hearing at 10 a.m. on Monday, December 19, in the Commission auditorium at 611 E. Sixth Street, Austin, Texas, to receive comment on the proposed Lotto Texas rule published on December 9, 2005, and the proposed repeal of 16 TAC §401.305, as well as on other proposed rules, rule repeals, and rule amendments not adopted by this action. One person, Dawn Nettles, appeared to provide comments in opposition to the rule as published in the Texas Register on December 9, 2005. Ms. Nettles stated that the proposed game was certain to fail, particularly because the allocations to lower-tier prizes were too low. She noted that she had opposed two previous versions of Lotto Texas with a 6-of-54 matrix and that the lower-tier prize allocations in that version of the game were better than the lower-tier prize allocations in the proposed rule. Ms. Nettles restated her objections to the proposed rule in a poll posted on her website. She later forwarded to the Commission by fax more than 950 of the responses she had received to the poll.

In addition to the written comments forwarded by fax by Ms. Nettles, the Commission received more than 450 written comments through the Commission website and through the mail. One group, Lottery Dynamics, Inc., generally supported the new Lotto Texas rule, but made suggestions for language that would give the Commission more flexibility in making future enhancements to the game.

Many comments were the same as or similar to other comments. The following descriptions of comments and responses to comments may apply to a number of separate but similar comments, including the comments Ms. Nettles made at the public comment hearing and the comments from her website poll.

The comments included general support for the elimination of the bonus ball feature of the Lotto Texas game.

Some people opposed any change to the game. The Commission disagrees. Commission research has shown that the bonus ball is unpopular with players. No change was made in response to these comments.

Many people suggested that the game should have a matrix other than 6 of 54, with odds more favorable to players. People suggested various matrices, but many people suggested the matrix should be 6 of 50. The Commission does not agree. The Commission must take many factors into consideration when developing a game matrix. It is important for the Commission to balance overall odds, jackpot odds, prize structure and payout, and potential jackpot growth in order to have a financially successful game and to maintain player interest. After evaluating different options, the Commission has concluded that a 6-of-54 matrix is the most appropriate matrix at this time. No change was made in response to these comments.

Many people commented that the prizes other than jackpot prizes ("lower-tier prizes") are too low. Some people said the game should have the same lower-tier prizes as the previous 6-of-54 Lotto Texas game. A number of people specifically said that the fourth prize should be $5 rather than $3. The Commission does not agree. Players expressed a preference for better odds of winning the jackpot prize. In order to maintain a game with attractively high jackpots, the proposed 6-of-54 matrix allocates a larger percentage of the sales to the jackpot prize category than did the previous 6-of-54 game, which existed from July 2000 through May 2003. In order to increase prize allocations for lower-tier prizes, a larger percentage of sales would have to be allocated to these prize tiers with less allocated to the jackpot tier. The Commission has concluded that allocating a sufficient percentage of sales to the jackpot prize tier to ensure jackpot growth and eliminating the bonus ball are the changes most likely to keep and attract players. No change was made in response to these comments.

Many people made suggestions for changing the prize structure by, for example, including a prize for matching two of the six winning numbers; eliminating the prizes for matching three or four of the six winning numbers; capping the jackpot; awarding the jackpot allocation to lower-level winners if there is no jackpot winner for a particular draw; establishing a fixed jackpot; spreading out the jackpot; continuing a draw until there is a jackpot winner; allocating more money to the jackpot; allocating less money to the jackpot; setting a minimum jackpot; increasing starting jackpots; structuring the game to have lower jackpots and more winners; having a weekly jackpot winner; setting out a fixed rate of jackpot increases; or concentrating less on the jackpot amount. Some people opposed the fact that overall odds for winning a prize under the new Lotto Texas rule were less favorable to the players than the odds under previous versions of Lotto Texas. The Commission agrees that there are a number of possible prize structures and that it is important for the Commission to consider many different possibilities. Based on its research, however, the Commission has concluded that a prize structure with improved odds of winning a large jackpot is the appropriate prize structure at this time. The Commission will continue to research and evaluate various ideas for structuring prizes. No change was made in response to these comments.

Many people stated that the Commission should reinstate the original Lotto Texas rule. The Commission disagrees. The Commission has concluded that, at this time, the game set out in the new Lotto Texas rule has the appropriate combination of features. No change was made in response to these comments.

Some people commented that there should be no guaranteed prizes and that all prizes should be pari-mutuel. There are a number of ways to structure prizes for lottery games. The new Lotto Texas rule provides for a guaranteed $3 prize at the fourth-prize level. Retailers frequently pay this prize, and it places less burden on retailers to know that this frequent prize will always be a certain amount. Also, the guaranteed fourth prize establishes a base level prize amount so that players know the minimum prize. At the jackpot level, the rule guarantees that the jackpot prize will be no less than the advertised amount. Advertising jackpots is important to generating interest in and sales for the game, and the new Lotto Texas rule guarantees that players can be assured that the jackpot prize will be no less than the advertised amount. No change was made in response to these comments.

Some people opposed pari-mutuel prizes or said that prizes other than the fourth prize should be for a guaranteed amount. The Commission disagrees. The new Lotto Texas rule provides for guaranteed prizes in some circumstances, but the Commission has concluded that guaranteeing prizes at all levels in the Lotto Texas game creates an unacceptable level of uncertainty about prize liability. No change was made in response to these comments.

Some people stated that the "prize pool" should be set out in the rule. Commission rules define the term "prize pool" as the percentage of ticket sales that is allocated to prizes for a particular draw period. 16 TAC §401.301(43). The concept is not applicable in a game in which the amount of sales devoted to prizes varies over time because of guaranteed prizes. Under the new Lotto Texas rule the Commission may draw on sources other than ticket sales to fund prizes. For that reason the concept of "prize pool" as a percentage of sales is inapplicable. Although the rule does not allocate a percentage of ticket sales for prize payments in connection with each individual drawing, the agency's independent statistician has determined that over the course of a year the payout for Lotto Texas should be at least 50 percent. No change was made in response to these comments.

Some people commented that there should be a guarantee that in connection with each draw that 50 percent of ticket sales will be allocated to prizes and that no money allocated to lower-tier prizes should be carried forward to the next draw. The Commission disagrees. Because the fourth prize is a fixed prize, the percentage of sales allocated to prizes in connection with each draw will vary. The agency's independent statistician has determined, however, that over the course of a year, the payout for Lotto Texas should be at least 50 percent. No change was made in response to these comments.

Some people suggested that more than 50 percent of sales should be allocated to prizes. Over the course of a year, the payout for Lotto Texas should be at least 50 percent. The Commission has concluded that the projected prize payout strikes the appropriate balance between making the game appealing to players and generating funds for the Foundation School Fund. No change was made in response to these comments.

Some people stated that prize payments should be not rounded down to the nearest whole dollar, and that either there should be no rounding, or prizes should be rounded up or down to the nearest dollar, not down to the nearest dollar. The Commission agrees with this comment. The rule as adopted provides for rounding to the nearest whole dollar amount.

One comment was that the time of Lotto Texas drawings should be changed. The new Lotto Texas rule does not change the substance of the provision in the current rule regarding time of drawings. Time of drawings was not a focus of this rulemaking process. The Commission will continue to examine features of Lotto Texas that were not addressed in the current rulemaking process. No change was made in response to these comments.

Some people stated that players should not be required to select a payment option at the time of ticket purchase. The new Lotto Texas rule does not change the substance of the provisions in the current rule regarding jackpot payment options. Selection of jackpot payment options was not a focus of the current rulemaking process. The Commission is researching this issue, however, and may address this issue in a future rulemaking process. No change was made in response to these comments.

One comment was that the ticket price should be 50 cents. The new Lotto Texas rule does not change the price of a Lotto Texas ticket. The Commission will continue to examine features of Lotto Texas that were not addressed in the current rulemaking process. There is a 50-cent ticket available in the Pick 3 game. No change was made in response to these comments.

One comment was that multi-draw purchases for a full year should be allowed. The new Lotto Texas rule does not change the number of draws for which multi-draw purchase is available. The Commission will continue to examine features of Lotto Texas that were not addressed in the current rulemaking process. No change was made in response to these comments.

One comment was that the Commission should add a multiplier feature to Lotto Texas. The addition of a multiplier feature was not a focus of this rulemaking process. The Commission will continue to examine features of Lotto Texas that were not addressed in the current rulemaking process. No change was made in response to these comments.

One comment was that there should be a prize for selecting the bonus ball. The Commission does not agree. Players expressed a strong preference for eliminating the bonus ball altogether. No change was made in response to this comment.

Lottery Dynamics, Inc., commented that the jackpot should be defined in terms of a "base game jackpot prize" to give the Commission flexibility in adding future enhancements to the game. This concept was not a focus of this rulemaking process. The Commission will continue to examine features of Lotto Texas that were not addressed in the current rulemaking process. No change was made in response to these comments.

Some people said that the Lotto Texas rule should include details on how the Commission calculates the amount a jackpot winner actually receives. In section (f), the rule sets out the basis on which the Commission calculates the amount a jackpot winner actually receives. Apparently the people who made this comment were expressing a desire that the rule include detail about how the Commission obtains information regarding investment of proceeds from ticket sales to fund 25 annual payments. This concept was not a focus of this rulemaking process. The Commission will continue to examine features of Lotto Texas that were not addressed in the current rulemaking process. No change was made in response to these comments.

Some people said that the Commission changed games too frequently. Some people stated that changes were too costly to the state. The Commission disagrees. The Commission has changed the Lotto Texas matrix only three times since its inception in November 1992. The Commission believes it is important to make game changes when appropriate to maintain or develop player interest and ticket sales. The Commission attributes the continued success of the instant ticket games to changes that keep the games fresh and help maintain player interest. No change was made in response to these comments.

One comment was that the Commission should post the number of tickets sold for each drawing. This concept was not a focus of this rulemaking process. The Commission will continue to examine features of Lotto Texas that were not addressed in the current rulemaking process. No change was made in response to these comments.

One comment was that the overall odds of winning a prize cannot be better than the odds of winning any particular prize. The Commission disagrees. The overall odds of winning any prize are smaller than the odds of winning a particular prize. For example, in a 6-of-54 lottery, the odds of matching at least 3 of 54 numbers (overall odds) are smaller than the odds of matching exactly 3 out of 54 (odds of winning a fourth prize). No change was made in response to these comments.

Some people interpreted the new Lotto Texas rule to mean that the third prize would be greater than the second prize. This is a misunderstanding of the rule. The percentage of ticket sales allocated to the third-prize level is greater than the percentage of ticket sales allocated the second-prize level because there are likely to be significantly more winners at the third-prize level. No change was made in response to these comments.

The comments also included comments about lottery games other then Lotto Texas; comments about Commission advertising; comments about drawing procedures and equipment, computerized drawings, holiday bonus drawings, and televising drawings; a comment recommending an independent players advocate; a comment recommending paying a larger percentage of sales to retailers; comments praising or criticizing lottery games in other states or countries; comments about legalizing casino gambling; negative comments about Commission personnel; negative comments about and suggestions for improving the quality of Commission management; assertions that the Commission is deceitful or dishonest and should avoid further scandal; comments that the Commission does not make adequate information available to the public; comments recommending thorough background checks of all people running lottery games; negative comments about other state agencies, specific politicians, specific political parties, or politicians in general; comments expressing a belief that the Commission should contract with Texas businesses; comments suggesting that ticket security should be improved; recommendations regarding a new executive director for the Commission; concerns that lottery revenue is not supporting schools or otherwise being used as expected; comments expressing a desire for better information about lottery sales and about how lottery revenue is being used; preferences for how lottery revenue should be used; a suggestion that Lotto Texas should be eliminated entirely; comments expressing a preference that state-run lottery games be eliminated altogether; comments expressing concerns that winners were unfairly concentrated in certain parts of the state; complaints that in the past the Commission has not listened to what players want; complaints about previous rule changes; reminders about comments opposing previous rule changes; complaints that the lottery is no longer fun; complaints that lottery games are not fair; comments speculating that lottery games are rigged; comments indicating a preference for simplicity or transparency in rules; complaints about taxes on lottery winnings; comments expressing dissatisfaction with the fact that a payment of the present cash value jackpot is less than the total amount paid out in annual installments; comments expressing concern that Texas schools still have problems despite the existence of the lottery; comments advocating maximizing the amount of money that goes to education; comments expressing a desire for procedures under which players vote or otherwise establish game rules; complaints about the slow rate of jackpot growth in the recent past; complaints that games are not fair; complaints that there are too many lottery games; comments that only Texans or U.S. citizens should be allowed to play Texas lottery games; a comment expressing a desire for a longer period of time in which to claim a prize; a comment that employees of stores that sell lottery tickets should not be allowed to purchase lottery tickets; and other comments that did not address provisions of the Lotto Texas rule. These matters were not the focus of this rulemaking process. The Commission will continue to evaluate its performance in all areas in which it has authority to act. No change was made in response to these comments.

At a Commission meeting on February 27, 2006, the Commission solicited additional public comments from Ms. Nettles as well as from Ramon Rivera of GTECH Corporation. Both of them addressed matters that had been previously raised in public comment. In addition, Ms. Nettles suggested the possibility of lower starting jackpots or rolling the jackpot in smaller increments. The new Lotto Texas rule does not address either of these issues. No change was made in response to these comments.

LEGAL CERTIFICATION

The new section is adopted under Government Code, §466.015, which authorizes the Commission to adopt all rules necessary to administer the State Lottery Act and to adopt rules governing the establishment and operation of the lottery, and under Government Code §467.012, which authorizes the Commission to adopt rules for the enforcement and administration of the laws under the Commission's jurisdiction.

STATUTORY AUTHORITY

The new rule implements Government Code, Chapter 466.

§401.305."Lotto Texas" On-Line Game Rule.

(a) Lotto Texas. The executive director is authorized to conduct a game known as "Lotto Texas." The executive director may issue further directives for the conduct of Lotto Texas that are consistent with this rule. In the case of conflict, this rule takes precedence over §401.304 of this title (relating to On-Line Game Rules (General)).

(b) Definitions. When used in this rule, the following words and terms shall have the following meanings, unless the context clearly indicates otherwise.

(1) Play--The selection of six different numbers from 1 through 54 for one opportunity to win in Lotto Texas and the purchase of a ticket evidencing that selection.

(2) Playboard--A field of 54 numbers on a playslip for use in selecting numbers for a Lotto Texas play.

(3) Playslip--An optically readable card issued by the commission for use in selecting numbers for one or more Lotto Texas plays.

(4) Roll cycle--A series of drawings that ends when there is a drawing for which one or more tickets are sold that match the six numbers drawn in the drawing. A new roll cycle begins with the next drawing after a drawing for which one or more jackpot tickets are sold that match the six numbers drawn in the drawing.

(c) Plays and tickets

(1) A ticket may be sold only by an on-line retailer and only at the location listed on the retailer's license. A ticket sold by a person other than an on-line retailer is not valid.

(2) The price of a play is $1.

(3) A player may complete up to five playboards on a single playslip.

(4) A player may use a single playslip to purchase the same play(s) for up to 10 consecutive drawings, to begin with the next drawing after the purchase.

(5) A person may select numbers for a play either:

(A) by using a self-service terminal;

(B) by using a playslip to select numbers;

(C) by requesting a retailer to use Quick Pick to select numbers; or

(D) by requesting a retailer to manually enter numbers.

(6) Playslips must be completed manually. A ticket generated from a playslip that was not completed manually is not valid.

(7) An on-line retailer may accept a request to manually enter selections or to make quick-pick selections only if the request is made in person.

(8) At the time of making a play, a person may select the option for payment of the cash value of a share of the jackpot if the play is a winning play.

(9) An on-line retailer shall issue a ticket as evidence of one or more plays. A ticket must show the numbers selected for each play, the number of plays, the draw date(s) for which the plays were purchased, the jackpot payment option, and the security and transaction serial numbers. Tickets must be printed on official Texas Lottery paper stock.

(10) A playslip has no monetary value and is not evidence of a play.

(11) The purchaser is responsible for verifying the accuracy of the numbers and other selections shown on a ticket.

(12) The commission shall establish a time period before each drawing during which tickets may not be sold.

(13) An unsigned winning ticket is payable to the holder or bearer of the ticket if the ticket meets all applicable validation requirements.

(d) Drawings

(1) Lotto Texas drawings shall be held each week on Wednesday and Saturday at 10:12 p.m., central time. The executive director may change the drawing schedule, if necessary.

(2) Six different numbers from 1 through 54 shall be drawn at each Lotto Texas drawing.

(3) Numbers drawn must be certified by the commission in accordance with the commission's drawing procedures.

(4) The numbers selected in a drawing shall be used to determine all winners for that drawing.

(5) Each drawing shall be witnessed by an independent certified public accountant. All drawing equipment used shall be examined by a commission drawings representative and the independent certified public accountant immediately before each drawing and immediately after each drawing.

(e) Advertised jackpots. For each drawing, the commission shall approve a jackpot amount to be advertised. The advertised amount shall be an amount payable in 25 annual installments. To the extent that advertised amount is based on projected sales, the projections shall be fair and reasonable. The commission may approve an increase in the amount of the jackpot originally advertised for a drawing if the increase is supported by reasonable sales projections.

(f) Prizes

(1) Jackpot prize (first prize).

(A) A person who holds a valid ticket for a play matching (in any order) the six numbers drawn in a drawing is entitled to a share of the jackpot prize (first prize) for the drawing.

(B) The jackpot prize for a drawing is the greater of

(i) 40.47 percent of the proceeds from Lotto Texas ticket sales for all drawings in the roll cycle and any earnings on an investment of all or part of the proceeds from ticket sales, paid in 25 annual installments; or

(ii) The amount advertised in accordance with subsection (e) of this section as the estimated jackpot for the drawing, paid in 25 annual installments.

(C) Except as provided by subparagraph (F) of this paragraph, a person who is entitled to a share of a jackpot prize and who did not opt to receive the cash value of the jackpot prize shall receive payment in 25 annual installments.

(D) The first installment payment shall be made upon completion of commission validation procedures. The subsequent 24 installment payments shall be made annually on the 15th day of the month in which the applicable drawing occurred.

(E) The second through 24th installment payments shall be in equal amounts. The first installment payment may be equal to or higher than the subsequent installment payments.

(F) If a person would otherwise receive total installment payments of $2 million or less, the commission shall pay the person, upon completion of all validation procedures, a single payment in the amount of the cash value of those total installment payments. The cash value is the cost on the first business day after the applicable drawing of funding those installment payments.

(G) A person who is entitled to a share of the jackpot and who selected the cash value option shall receive the greater of the following two amounts:

(i) a share of 40.47 percent of total sales for the roll cycle; or

(ii) the cost on the day after the drawing of funding a share of installment payments under subparagraph (B)(ii) of this paragraph.

(H) A payment under subparagraph (G) of this paragraph shall be made upon completion of commission validation procedures.

(I) Any investment necessary to fund a jackpot prize shall be made on the first business day after a drawing for which one or more tickets were sold that match the six numbers drawn in the drawing.

(J) A claim for a jackpot prize must be presented at the Austin claim center.

(K) If sales proceeds and the Lotto Texas prize reserve fund are not sufficient to pay a jackpot prize, the commission shall use funds from other authorized sources, including the State Lottery Account as identified in Government Code, §466.355.

(2) Second prize.

(A) A person who holds a valid ticket for a play matching (in any order) five of the six numbers drawn in a drawing is entitled to a share of the second prize for that drawing.

(B) The second prize consists of 2.23 percent of the proceeds from Lotto Texas ticket sales for the drawing and any amounts carried forward under subparagraph (D) of this paragraph.

(C) A payment made to a person for a share of the second prize for a drawing shall be rounded to the closest whole dollar amount. An amount of fifty cents shall be rounded up to the nearest whole dollar amount.

(D) Any part of the second prize for a drawing that is not paid in prizes shall be carried forward and shall become part of the second prize for the next drawing.

(3) Third prize.

(A) A person who holds a valid ticket for a play matching (in any order) four of the six numbers drawn in a drawing is entitled to a share of the third prize for that drawing.

(B) The third prize consists of 3.28 percent of the proceeds from ticket sales for the drawing and any amounts carried forward under subparagraphs (C) and (D) of this paragraph.

(C) A payment made to a person for a share of the third prize for a drawing shall be rounded to the closest whole dollar amount. An amount of exactly fifty cents shall be rounded up to the nearest whole dollar amount.

(D) Any part of the third prize for a drawing that is not paid in prizes shall be carried forward and shall become part of the third prize for the next drawing.

(4) Fourth prize.

(A) A person who holds a valid ticket for a play matching (in any order) three of the six numbers drawn in a drawing is entitled to a guaranteed prize of $3.

(B) If 4.02 of proceeds from Lotto Texas ticket sales and the Lotto Texas prize reserve fund are not sufficient to pay all fourth prizes for a draw, the commission shall use funds from other authorized sources, including the State Lottery Account as identified in Government Code, §466.355.

(C) To the extent that the total amount of fourth prizes for a drawing is less than 4.02 percent of the proceeds from ticket sales of for the drawing, the difference shall be carried forward to fund future fourth prize payments.

(5) A person may win only one prize per play per drawing. A player who holds a valid ticket for a winning play is entitled to the highest prize for that play.

(6) A share of a prize is determined by dividing the prize by the number of winning plays for that prize.

(7) Jackpot payment amounts are calculated on the first business day after the applicable drawing. A claimant is not entitled to interest or other earnings on those amounts, regardless of when the claim is actually presented and regardless of the dates on which payments are made.

(8) There will be no allocations from Lotto Texas ticket sales to the Lotto Texas prize reserve fund.

(g) Jackpot information on Commission website

(1) After the commission has approved an advertised estimated jackpot under subsection (e) of this section, the commission shall post the following information on the agency website:

(A) the amount of ticket sales, if any, for previous drawings in the roll cycle;

(B) the amount of projected ticket sales for the upcoming drawing;

(C) investment information used to determine the advertised estimated jackpot; and

(D) other information used to determine the advertised estimated jackpot.

(2) After the commission determines that one or more tickets have been sold that match the six numbers drawn in a drawing, the commission shall post on the agency website information used to calculate the jackpot prize.

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.

Filed with the Office of the Secretary of State on March 16, 2006.

TRD-200601680

Kimberly L. Kiplin

General Counsel

Texas Lottery Commission

Effective date: April 23, 2006

Proposal publication date: December 9, 2005

For further information, please call: (512) 344-5113